Mrunal’s Economy for UPSC Prelims-2024-25 (PCB10-RAFTAAR)

10 🏛🏛BRIEF INFO ABOUT THE COURSE (PCB10-RAFTAAR)

- UPSC Syllabus, Strategy, Booklist, Cut-off: https://mrunal.org/syllabus
- Economy: how much I’ll teach, what books do you’ve to read on your own etc.
https://mrunal.org/pcb10
- Basically this PCB10-Raftaar Course deals only with Prelims-Specific Economy.
- This is NOT Mains Economy. Not Microeconomics. (separate courses for it, u don’t have to pay
extra, it’s part of your Netflix/Unacademy subscription). More explained in Lecture#1
- Only for serious competitive exam mindset candidates shd attend this. Timepass Babushone/
Faaltu-ki-PHD krnewalle, harr baat pe 🚩🚩Zhandaa-uthaane-walle (those with habit of making
mountain out of molehills) should avoid my courses.
Old Students (PCB1to9) NEED NOT Sit again. They should see FREE UPDATE next year [Win24].

10.2.1 🏛🏛🏛🏛 What has UPSC asked from Economy in recent years?
Prelims P1 (GS 100 🔠🔠❓MCQs) Mains GSM-1-2-3 (750 Marks)
6 Pillars of
Utility in exam

2023*
economy
2018

2019

2020

2021

2022

2023

2018

2019

2020

2021

2022
💳💳1_Money
Banking, Most useful in Prelims but
7 7 9 6 8 7 0 0 15 15 0
Finance & less in Mains
Insurance
🍋🍋2_Budget,
Second lowest utility after
FC, GST, 4 1 1 1 3 1 25 25 15 20 0
5_Infra
FRBM
💱💱3_Intl_Tr Third lowest utility after
4 7 7 2 4 3 30 0 15 15 0
ade, BoP 2_Budget.
🛒🛒4_Sectors,
GDP,
Useful for both prelims and
Inflation, 3 8 5 5 4 4 50 65 55 60 85
Mains.
Microecono
mics
Lowest utility among 6
🏗🏗5_Infra 1 3 1 0 2 4 15 15 15 30 20
pillars.
Less in prelims but more in
�6_HRD 6 2 0 0 0 2 60 75 85 45 20
Mains.
25 28 23 14 21 21 180 180 200 185 125
Total
Qs Qs Qs Qs Qs Qs m m m m m
�*FAQ: Why 2023-Mains column EMPTY? Ans. Handout updated on 5th Sept 2023. But, Mains
starts on 15th Sept.

💸💸Economy Pillar #1-A1) Money: Barter to Bitcoin

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 Table of Contents

10 🏛🏛Brief Info about the course (PCB10-Raftaar)............................................................................ 1

10.2.1 🏛🏛🏛🏛 What has UPSC asked from Economy in recent years? .................................................................... 1

10.3 �� Barter system & its disadvantages: (व�ु �व�नमय प्रणाली) ............................................................... 4

10.4 �Money: Functions of (पैसे के कायर्) ..................................................................................................... 5

10.5 � Money: Evolution & Types (मुद्रा क� उ�ां�त व् प्रकार) ............................................................................. 5

10.5.1 �Commodity Money / व�ु मुद्रा (Intrinsic value: अंतभूर्त मू�? Yes) ................................................................. 5

10.5.2 �Metallic Money / धातु मुद्रा (Intrinsic value? Yes) ........................................................................................ 5

10.5.3 � Metallic Money → Full Bodied vs Token Coins ................................................................................... 6
10.5.4 Intrinsic value of a coin? (अंतभूर्त मू�) ................................................................................................................ 6
10.5.5 �Paper Money / कागजी मुद्रा (Intrinsic Value? No) ........................................................................................ 6
10.5.6 ��Legal Tender (वैधा�नक �न�वदा) .................................................................................................................... 7
10.5.7 ��Legal Tender (वैधा�नक �न�वदा)- Limited and Unlimited .......................................................................... 9
10.5.8 ��RBI’s App to help the blind identify currency notes ..................................................................... 10
10.5.9 � Currency related General Knowledge: ................................................................................................. 10
10.5.10 � “I promise to pay the bearer…”: Meaning of this promise? .............................................................. 10

10.6 � Demonetization of Fiat Money (�वमुद्रीकरण: Previously 1946, 1978) ........................................... 11

10.7 � ₹2000 WITHDRAWN but continued as legal tender .............................................................. 11

10.7.1 � ₹2000 NOT DEMONETIZED but WITHDRAWN from circulation .............................................. 11
10.7.2 � ₹ 2000 withdrawn- WHY? (�ों चलन से हटाया गया) ........................................................................................ 12

10.8 ���� Redenomination: Iran’s Toman Currency ............................................................. 12

10.9 ��Bank Money / Deposit Money.............................................................................................. 12

10.9.1 �� Paper orders: Cheque, Demand Draft (DD).................................................................................. 12
10.9.2 �DD and Overdraft .................................................................................................................................... 13
10.9.3 �� Cheque → NPCi’s Cheque Truncation System (CTS) & Positive Pay Mechanism ................. 13

10.10 ��� Electronic Orders / Digital payment ........................................................................ 14

10.10.1 ��CBS ( full form: Core Banking Solution /system) .......................................................................... 14
10.10.2 ��RBI’s Next Generation Treasury Application (NGTA), 2020-Oct .............................................. 14
10.10.3 LPSS- lightweight payment and settlement system .................................................................................... 16

10.11 � National Payment Corporation of India(NPCi) .................................................................. 16

10.12 � NPCI → UPI (Unified Payment Interface) ........................................................................ 17

10.12.1 UPI: Push vs Pull Transactions.................................................................................................................... 17

10.13 � NPCI → UPI → 123PAY for FeaturePhones .................................................................... 18

10.13.1 UPI observations by �Economic Survey-ES-2023 ................................................................................. 18
10.13.2 UPI single-block-and-multiple-debits functionality (2022-Dec) ............................................................. 19
10.13.3 UPI-Lite (on-device wallet) .......................................................................................................................... 19

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 10.13.4 �UPI-Lite + NFC = Offline Retail Payment / Tap-and-pay .................................................................. 19
10.13.5 Conversational payments in UPI ................................................................................................................ 20
10.13.6 UPI facility to foreign tourists coming to India (2023).............................................................................. 20
10.13.7 � NPCI → UPI BHIM Full form: Bharat Interface for Money (2016) ............................................... 21

10.14 � NPCI → Rupay Card Payment Gateway (2012) ................................................................ 21

10.14.1 � NPCI other notable initiatives ............................................................................................................... 21
10.14.2 NACH-ABPS : Hybrid / Mixed mode in MGNREGA ............................................................................... 22

10.15 Pre-sanctioned credit line ........................................................................................................... 23

10.15.1 UPI: Pre-sanctioned credit line/Overdraft in UPI (2023-Apr) ................................................................. 23
10.15.2 UPI: Benefits of UPI-overdraft facility? ...................................................................................................... 24
10.15.3 UPI: Interoperable Card-less Cash Withdrawal (ICCW) .......................................................................... 24
10.15.4 UPI: QR Code based Coin Vending Machine using UPI (2023-Feb) ...................................................... 24

10.16 ��� DBT → E-Rupi by NPCi (2021) ............................................................................... 25

10.16.1 e-RUPI vouchers: scope expanded (2023-June) ......................................................................................... 25
10.16.2 ����Interoperability Problem (इं टरऑपरे�ब�लटी) ................................................................................ 26

10.17 ��QR Codes: compulsory to implement UPI/Bharat QR from 2022 ................................ 26

10.17.1 ��rMQR (Rectangular Micro QR Code) ............................................................................................. 26
10.17.2 � Card Types based on Security Features: (सुर�ा प्रणाली के िहसाब से काडर् के प्रकार) ................................................. 27

10.18 � Credit & Debit Cards (also called ‘Plastic Money’) ............................................................ 27
10.18.1 � � Card Tokenization (from 1/Oct/2022).......................................................................................... 28
10.18.2 � CVC Less transactions............................................................................................................................ 29
10.18.3 � � National Common Mobility Card (NCMC, 2019) ...................................................................... 29
10.18.4 � � FASTag for paying toll fees at highways (2017) ........................................................................... 29

10.19 � MDR: Full form: Merchant Discount Rate (�ापा�रक छू ट दर) ..................................................... 30
10.19.1 � MDR Subsidy by MEITY ....................................................................................................................... 30

10.20 Interchange fee by NPCi (2023-March) ...................................................................................... 31

10.20.1 � � ATM and its Types .......................................................................................................................... 32

10.21 ��� � Measures to promote Cashless Economy .......................................................... 32

10.21.1 � �� Payments Infrastructure Development Fund (PIDF) 2020-Jun ............................................ 32

10.22 Global Money Transfer................................................................................................................ 32

10.22.1 India-UAE: LCSS: UPI-IPP linkage (2023-Aug) ........................................................................................ 32
10.22.2 Nostro-Vostro / Rupee-Ruble / Rupee-Rial Agreement?.......................................................................... 33
10.22.3 RUPAY Cards- International acceptance .................................................................................................... 33
10.22.4 �Financial Messaging Systems: SWIFT- Russia gets banned................................................................ 33

10.23 ��� Payment System Operators? .................................................................................... 34

10.23.1 �New Umbrella Entity (NUE) for Retail Payments System (2019)...................................................... 34
10.23.2 � Third Party Application Providers (TPAPs): Google Pay, Whatsapp Pay ....................................... 35

10.24 � � Digital Payment Regulatory bodies (�नयं त्रण सं �ाएँ ) ............................................................ 35

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 10.24.1 � � Digital Transactions Ombudsman (DTO-2019).......................................................................... 35
10.24.2 � RBI: BPSS (Statutory body).................................................................................................................... 35
10.24.3 �Payment Regulatory Board (PRB) ......................................................................................................... 35

10.25 � Digital Payment related Index / Competitions/Reports by RBI ......................................... 36

10.26 �� Crypto-Currency & Blockchain Technology ................................................................. 36

10.26.1 �Hot Wallet vs Cold Wallet ...................................................................................................................... 37
10.26.2 ��:Crypto-Winter in Bitcoin Prices (भाव �गरा अब उठ निह रहा है) ................................................................... 37
10.26.3 ��: Crypto-scams - Recent Global Scams ........................................................................................... 37
10.26.4 ��:Crypto currency observations by �EcoSurvey’23 ..................................................................... 38
10.26.5 ��: Cryptocurrency Profit pe 30% Tax and 1% TDS in ��Budget-2022 ................................. 38

10.27 ��� Cryptocurrency Banned in other nations? .............................................................. 38

10.27.1 Crypto currencies as legal tender is in some countries .............................................................................. 38

10.28 ��: Cryptocurrency Permitted in Other Nations/Groups .................................................. 39

10.29 ��� Cryptocurrency → global regulations .................................................................... 39

10.29.1 Global Regulations → MICA regulation by EU (2023) ............................................................................ 39
10.29.2 Global Regulations → CARF Framework by OECD (2022) .................................................................... 39

10.30 ��� Cryptocurrency → Stable-coins .............................................................................. 39

10.31 World Coin Project (2021–22) .................................................................................................... 40

10.32 ��� Central Bank Digital Currency (CBDC) .................................................................. 40

10.32.1 ���=�
��Benefits of CBDC (क� द्रीय ब�क िड�जटल मुद्रा के फायदे) .................................................................. 41
10.32.2 ���= ��Challenges of CBDC (चुनौ�तयां) ...................................................................................... 42
10.32.3 E-Rupee vs E-Rupi ......................................................................................................................................... 42

10.33 �≠ � Non-fungible token (NFT: ग़ैर-फ़ं जीबल टोकन) ..................................................................... 42

10.33.1 �=�
(� �+�
�+�
�+�
�) Fungibility: Meaning? ..................................................................................... 43
10.33.2 � Non-fungible token (NFT: ग़ैर-फ़ं जीबल टोकन) ............................................................................................... 43
10.33.3 ��NFT-Charms? (आकषर्ण) ......................................................................................................................... 43
10.33.4 ��NFT-Challenges: (चुनौ�तयां) ..................................................................................................................... 44
10.33.5 � Mains Answer Writing ........................................................................................................................... 44

10.3 🍅🍅🍅🍅 BARTER SYSTEM & ITS DISADVANTAGES: (व�ु �व�नमय प्रणाली)

Barter system was introduced by Mesopotamian tribes. It has following challenges: (चुनौ�तया )
- 😰😰Double co-incidence of Wants (आव�कताओ का दोहरा सं योग नहीं होगा तो �ापार असं भव).
- 😰😰Search Cost & Transaction cost is high. (सही दाम पर चीज ढूँ ढने व लेनदेन क� लागत बढ़ जाती है)

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- 😰😰Storage of perishable commodities is difficult, results in loss of value. (नाशवान व�ुओ का मू�हास)
- 😰😰Doesn’t encourage specialization and division of labour (श्रम �वभाजन को प्रो�ािहत नहीं करता).

10.4 📏📏MONEY: FUNCTIONS OF (पैसे के कायर्)

Primary:2 functions[प्राथ�मक] Secondary(S-T-D) 3functions [सहायक कायर्] Contingent 3functions [प्रासं �गक कायर्]
1. 📏📏Measure of 1. 🐷🐷🐷🐷Store of Value (मू� का 1. Basis of credit system,
Value: gm=wt, सं चय) Financial markets (share,
ml=vol, ₹=value (मू� bond etc.: More in
2. 🚛🚛Transfer of Value (मू� का
का मापक). 📑📑Pillar#1C-sharemarket)
�ानांतरण). Soldier in Kashmir to
2. 🛒🛒Medium of �व�ीय बाजार का आधार है पैसा
parents in Kanyakumari
Exchange: Buy & Sell
3. ⏰Deferred Payments (��गत 2. Employing factor of
goods and services
भुगतानो का मानक). E.g. Buy production i.e. Land, Labour,
using money as the
iphone12 @₹3177 only per Capital (More in
‘medium’. (�व�नमय का
मा�म). month x 36 months’ Equated 📑📑Pillar#4C) उ�ादन के कारक
Monthly Installments (EMIs) जुटाने म� मदद करता है है पैसा
= ₹1,14,372. Actual price is 3. Creation & Redistribution of
₹79,900, but ₹34,472 extra National Income via
Interest.(�ाज पर िक�ों म� खरीदारी taxation. (📑📑Pillar#2) अमीरों पे
सं भव) �ादा कर वसूल के रा��ीय आय के
पुन:�वतरण करने म� मदद
10.5 💵💵 MONEY: EVOLUTION & TYPES (मुद्रा क� उ�ां�त व् प्रकार)
Paper /Token /
Commodity Metallic Bank Money,
Representative / Crypto Currency
Money Money Deposit Money
Fiat Money

10.5.1 🥜🥜Commodity Money / व�ु मुद्रा (Intrinsic value: अंतभूर्त मू�? Yes)
⇒ Iron Nails, Bear Pelts, Cocoa Beans, Whale Teeth, Gold Nuggets
⇒ Problems? Perishable, not uniform, not pure, foreigners may not accept.
नाशवान, एकसमान नहीं, शुद्ध नहीं, अ�ीकार भी कर सकते है.

10.5.2 🥇🥇Metallic Money / धातु मुद्रा (Intrinsic value? Yes)

⇒ Traders & Kings stamped their marks on gold nuggets for uniformity & trust. (सोने पर अपना
�च�/छाप लगा देते – तािक लोगों को उसक� शुद्धता पे यक़�न हो)
⇒ Indo Greek kings & Kushana kings issued gold coins, but Gupta Gold coins most spectacular-
king is playing Veena, shooting animals, standing with wife.(इन राजाओने सोने के �स�े �नकाले थे)
⇒ Delhi Sultanate Kings: Silver Tanka. Sher Shah Suri Rupiyah silver coin. Akbar: Muhr.
� Further SELF STUDY: History of Indian coins from History Lecture/Notes.

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10.5.3 💪💪 Metallic Money → Full Bodied vs Token Coins
Table 1: Types of Coins

Gupta Coin: ~8 gm GOLD 50 paisa modern coin: ~4 gm steel

💪💪 Full Bodied Coins Token Coins (प्रतीकका�क)
Intrinsic Value (अंतभूर्त मू�) is Equal to or MORE LESS. (धातु एकदम स�ी वाली इ�ेमाल करते ह� या ब�त ही कम
than its Face Value (अंिकत मू�) वजन क� धातु इ�ेमाल करते ह�)
Challenge? ⇒ 1330s: Tughlaq's Token coin
⇒ Debasement: ⏬decreasing the amount of experimentation = #EPICFAIL (Why?
metal in coins. Usually happens when Prepare in History subject).
king’s rule gets weak/poor e.g. Aurangzeb, ⇒ Modern Indian coins are token coins.
Roman Kings. �स�े म� धातु क� मात्रा को कम िकया Cupronickel metal used to discourage
जाए तब लोगों का उस राजा के शासन से �व�ास कम होने melting.
लगता है ⇒ Coinage Act 2011 prohibits melting of
coins. (�स�ा �पघलाना एक अपराध है)

10.5.4 💍💍📔📔Intrinsic value of a coin? (अंतभूर्त मू�)

PRECIOUS METAL COINS (धातु के �स�े ) PAPER CURRENCY (काग़ज़ी मुद्रा/नोट)
Metal has INTRINSIC VALUE i.e. Metallic You can't use currency-note's paper as a
money =Use it as "money", or you can melt the notebook or diary.
metal → use that metal for making jewellery / So currency notes have no intrinsic value. (उसके
weapons because metal itself has its value / कागज का उपयो�गता कु छ नहीं है, �ोिक उसपे छपाई कर दी है.)
usages. (उस मुद्रा क� धातु �पघला कर कु छ और चीजे भी बना
सकते है. �ोिक धातु का अपना : अंतभूर्त मू� / उपयो�गता है.)

10.5.5 💵💵Paper Money / कागजी मुद्रा (Intrinsic Value? No)

Fiat money (वैधा�नक मुद्रा): It MUST fulfil two conditions SIMULTANEOUSLY: दो शत� का एकसाथ पालन :
1. It MUST BE in the form of Physical Currency Coin / Physical Currency Notes / VirtualCoin/
DigitalCoin/ CryptoCoin which can measure value AND simultaneously और साथ ही साथ
2. It MUST BE issued by the order of a King / Queen / Government / Central Bank.
⇒ Govt issues all coins upto ₹ 1,000, using powers of powers of Coinage Act 2011.
⇒ Presently, govt issues Rs.50 paisa to Rs.20 coins.
⇒ Rs.20 coin: 12-sided Polygon shape (Dodecagon आकार: बारह बाजुओ वाला चतु�ोण है)
⇒ ₹ 1 Note signed by Finance Secretary (�व� स�चव)
⇒ ₹ 1 note doesn’t contain “I promise to pay bearer…”

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 ⇒ RBI issues: Currency notes other than ₹ 1 Note under RBI Act 1934.
⇒ Currency notes have Governor’s sign: “I promise to pay bearer…”

😤😤 FAQ: why is it like this!!!??? WHY CAN’T RBI ISSUE BOTH coins & currency notes!!?
Ans. Send your suggestion to PM, to merge above two laws. Until it’s implemented, remember table
for passing exam. प्रधानमं त्री को कागज �लखो- दोनों कानूनों का एक�करण करने के �लए. जब तक वह नहीं होता तो इस handout को रटो।
10.5.6 💵💵⚖Legal Tender (वैधा�नक �न�वदा)

To become a ‘legal tender’, a given coin/currency MUST fulfil two conditions SIMULTANEOUSLY:
एक साथ दो शत� को पूरा करना होगा.
1. It must be a FIAT MONEY (जो हमने ऊपर के से�न म� पढ़ा). AND SIMULTENOUSLY और साथ ही साथ
2. It must be legally valid for all debts & transactions throughout the country. Other party can’t
refuse to accept. (लेनदार उसको अ�ीकार नहीं कर सकता)
Table 2: fiat money and legal tender in India
A) Is it in form D) At present, is it E) Is it
C) Result: Is it
of a physical B) Is it issued by legally valid for LEGAL
Fiat money?
coin OR physical Central Bank / transaction in Tender in
ITEM (YES If Both
Note OR Digital Govt / King / India as per India (Yes, IF
Cell A+B give
Coin that can Queen Coinage Act or C+D give
✅+✅)
measure ‘value’? RBI Act? ✅+✅)
₹ Indian Rupee:
Coins & Notes, CBDC ✅ ✅ ✅ ✅ ✅
Demonetized
(�वमुद्रीकृ त) ₹500,₹1000 ✅ ✅ ✅ ✋ ✋

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 A) Is it in form D) At present, is it E) Is it
C) Result: Is it
of a physical B) Is it issued by legally valid for LEGAL
Fiat money?
coin OR physical Central Bank / transaction in Tender in
ITEM (YES If Both
Note OR Digital Govt / King / India as per India (Yes, IF
Cell A+B give
Coin that can Queen Coinage Act or C+D give
✅+✅)
measure ‘value’? RBI Act? ✅+✅)
Dollar$, Yuan, Yen,
Euro etc ✅ ✅ ✅ ✋ ✋
G-Sec, T-Bill
(what is this-Ans. ✋ ✅ ✋ ✋ ✋
explained in video)
Shares, Bonds, DD,
Cheque, ATM, Cards,
Kirana coin, Casino ✋ ✋ ✋ ✋ ✋
coin, Filmstar-Notes
Marshall Island: SOV
Venezuela: Petro coin ✅ ✅ ✅ ✋ ✋

Bitcoins ✅ ✋ ✋ ✋## ✋
⇒ Bitcoin is not a Fiat money, yet it is legal tender in El-Salvador nation. But it is an exception.
##

(�बट-कोइन का अल-सा�ाडोर देश म� वेध�नक �न�वदा होना के वल एक अपवाद है, वो पूरी दू �नया के �लए �नयम/�ा�ा नहीं है।)
⇒ Commemorative Coins = Fiat money yes but not legal tender unless notified by
RBI/Government to be used as legal tenders. (�ृ�त�च� �प �स�े - सामा� भुगतान म� इ�ेमाल निह हो सकते,
�सवाय के सरकार/आरबीआई उसक� अनुम�त दे।)
� FAQ: we can use cheque / credit card to pay fees. So, why are they not fiat money/legal tender?

� FAQ: I did not understand this thing and/or I want to engage in intellectual debate why “X”
thing is legal tender? Ans. Please watch lecture’s recorded video again at 1X speed, more peacefully.

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10.5.7 💵💵⚖Legal Tender (वैधा�नक �न�वदा)- Limited and Unlimited
Table 3: Fiat Money: Two types of legal tenders
A) 🚯🚯Limited legal tenders B) ∞ Unlimited legal tenders:
(सी�मत वैधा�नक �न�वदा) (असी�मत वैधा�नक �न�वदा)

Recipient can refuse accepting payment beyond a No such restriction.**

limit (एक हद से �ादा छू टटे पेसे �ीकारने से सामने वाला मना कर
सकता है)
⇒ Coinage Act 2011 ⇒ RBI Act 1934 - Section 26: Every bank
⇒ Paper Note: Rs. 1 (एक �पए क� काग़ज़ी नोट) note is legal tender in India.
⇒ Coins Rs. 1 / above → upto Rs.1000 ⇒ They can be used for settling any amount
⇒ Coins 50 paisa x 20 coins → upto Rs.10 of debt in India**, lender can’t refuse to
⇒ Below 50 paisa coins are withdrawn (in 2011) accept it.
So, 10 paisa, 25 paisa are ✋not legal tenders.
(10 पैसा और 25 पैसा वैधा�नक �न�वदा नहीं है। 50 पैसा
वैधा�नक �न�वदा है)
**Although in real life, Finance Act 2017: “Cash transactions for less than Rs.2 lakh only. Beyond that
use Cheque, DD, NEFT etc. else penalty.” This rule is to discourage tax-evasion / black money. For
more Ref: 📑📑Pillar#2. But for MCQs, simply accept that bank notes = unlimited legal tenders. हालांिक
वा��वक जीवन म� काले धन / करचोरी को रोकने के �लए नगदी लेनदेन पर कु छ सीमा के बाद रोक है, िक�ु MCQ के �लए �ीकार लो क�

🚩🚩� FAQ# my shopkeeper doesn’t accept 50 paisa. Then how it is legal tender? मेरा दुकानदार नहीं लेता
50 पैसा का �स�ा। तो आप कै से कह सकते है वो वैधा�नक �न�वदा है?

Ans. as per RBI notification, 50 paisa is legal tender. So, accept it for MCQ & move to next topic.
Further, feel free to file police case against shopkeeper, if you have plenty of free time/outrage for it.

🔠🔠❓MCQ: Which correctly describes the meaning of legal tender money? (Pre-2018)
(a) The money which is tendered in courts of law to defray the fee of legal cases
(b) The money which a creditor is under compulsion to accept in settlement of his claims
(c) The bank money in the form of cheques, drafts, bills of exchange, etc.
(d) The metallic money in circulation in a country
🔠🔠❓MCQ: Consider the following statements (Asked in UPSC-CDS-2011-II)
1. In India the minimum denomination coin acceptable for transaction is 50 paise.
2. Coins below 50 praise is not a legal tender for payment.
Which of the statements given above is/are correct?
(a) Only 1 (b) Only 2 (c) Both 1 and 2 (d) Neither 1 nor 2

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10.5.8 ��RBI’s App to help the blind identify currency notes
80 lakh people in India are blind (नेत्रहीन). To help them identify currency notes:
⇒ Old series of Gandhi notes have square (50), triangle (100) shaped markings.
⇒ New series of Gandhi notes have bleed lines, raised printing of Gandhi etc.
⇒ But, so many varieties of notes, difficult for VH persons to remember size & shapes so,
2020-Jan: RBI launched ‘Mobile Aided Note Identifier (=MANI)’ App.
⇒ Mobile camera scan & identifies the note (Even if it’s half folded), gives audio notification in
Hindi/English, also works offline
⇒ But can’t validate whether note is genuine or fake (Counterfeit जाली नोट नहीं पकड़ सकता यह ऐप),
⇒ If a user is both blind and deaf, the app will tell him by giving vibrations.(मोबाइल कं पन)

10.5.9 💵💵 Currency related General Knowledge:

Which note has what colour, which note has Red Fort / Sun Temple photo etc? General Knowledge
�Less important for UPSC-exams, more IMP for Non-UPSC Exams. So I’m removing it from
Raftaar-Handout. You can learn such general knowledge from https://paisaboltahai.rbi.org.in/

New rupee ₹: selected through a competition by Dept of Economic Affairs in 2010. Designed by
symbol D.Udaya Kumar, a Professor @IIT Guwahati.
Nation - Lion Emblem: Sarnath Pillar, Uttar Pradesh से �लया गया है
Symbol - “Satyamev Jayate”: slogan from Mundaka Upanishad से �लया गया है
Languages While Constitution’s 8th Schedule has 22 languages, but currency note has only 17.
(15 on Reverse + Hindi & English on frontside (obverse) = 17)
🤯🤯FAQ: Why it is like this? Ans. Either some Indian languages have similar fonts
and/or send suggestion to RBI.
Museum Budget-2020: a museum on numismatics and trade (�स�ाशा� और �ापार का सं ग्रहालय) will
be built at the historic ‘Old Mint Building’ in Kolkata .

10.5.10 💵💵 “I promise to pay the bearer…”: Meaning of this promise?

Colonia era: Promised to convert into full bodied gold or silver bars / coins worth
the equal value in weight. E.g. 1 US Dollar = ~14 grams of gold. 1 British pound =
~73 grams of gold.
(�in my handout ‘~’ means ‘approximate’)

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⇒ Modern era: Conversion into other Bank notes and “token coins” of equal face value. ₹ 2000 =
500 x 4 Nos.= 100 x 20 Nos etc.
⇒ Not inflation adjusted value. Not linked with weight of gold or silver.
⇒ Currency note is zero interest, anonymous bearer bond / Promissory Note.

10.6 💵💵 DEMONETIZATION OF FIAT MONEY (�वमुद्रीकरण: PREVIOUSLY 1946, 1978)

Definition? Demonetization means the REMOVAL of legal tender status of currency notes. (िकसी मुद्रा
क� वैधा�नक-�न�वदा के दज�/ क़ानूनन वैधता को रद्द करना- उसे �वमुद्रीकरण या नोटबं दी कहते ह�)
⇒ 8/Nov/2016: Finance Ministry → Dept of Economic Affairs → notification to ban the
“Specified Bank Notes” (SBN) of Mahatma Gandhi series ₹ 500 and 1000.
⇒ Specified Bank Notes (Cessation of Liabilities) Act 2017= RBI not required to honor “I promise
to pay…”.
⇒ Banned notes (500,1000) can’t be kept except for research or numismatics-hobby or museum-
and that too in limited amount! More in 📑📑pillar#2: taxation → black money.
⇒ SC Judgement on Demonetization ? Ans. REFER📑📑pillar#2: taxation → black money.

10.7 💵💵 ₹2000 WITHDRAWN BUT CONTINUED AS LEGAL TENDER

2016-Nov: RBI introduced ₹2000 note, to meet the currency requirement of the economy in an faster
manner after demonetisation of ₹500 and ₹1000 (नोटों क� िक�त पूरा करने के �लए इसको छापा जा रहा था)

- 2018–19: printing of ₹2000 banknotes was stopped.

- 2023-May-23rd: RBI asked people to either any of the following thing by two things
30/Sept/2023.
Option at Bank Limit
Deposit this note in your bank account no limit. Whatever money you have you
अपने ब�क खाते म� जमा करवादो can deposit- 2 lakh, 2 crore doesn’t matter
Exchange ₹2000 note with other notes e.g. ₹20,000/- per visit
100/200/500 बदलवा दो

10.7.1 💵💵 ₹2000 NOT DEMONETIZED but WITHDRAWN from circulation

(इसका �वमुद्रीकरण नहीं �आ. बस चलन म� इसे हटा िदया गया है)

- 2023-June: Reporter asked : Will the RBI withdraw the legal tender of ₹2000 note after September
30?
- RBI Governor Shaktikanta Das replied: “There is no such idea.” That means
Question interpretation
is ₹2000 fiat money? Yes
is ₹2000 legal tender? Yes
is ₹2000 in withdrawn from circulation? Yes
is ₹2000 DEMONETIZED? NOT YET.

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10.7.2 💵💵 ₹ 2000 withdrawn- WHY? (�ों चलन से हटाया गया)
We will only prepare the official reasons given by the RBI.

 2000 Notes were issued as a temporary measure to address shortage of currency. Now there is
adequate supply of other currency notes e.g. 100/200/500.
 This note is not commonly used for transactions. (वैसे भी भुगतान म� इसका उपयोग कम ही होता है)
 RBIs clean note policy: to ensure availability of good quality banknotes to the members of public.
 2000 note’s paper has a lifespan of 4–5 yrs. Since most of these notes were printed in 2016–2017.
So by 2022–23 its paper quality may start to deteriorate. (चार पांच वष� म� कागज वैसे भी खराब हो जाता है)
 THERE IS NO MENTION of fighting black money/ corruption / fake notes by ISI-Dawood in
RBI press release.

10.8 🤫🤫💸💸👜👜🥚🥚 REDENOMINATION: IRAN’S TOMAN CURRENCY

⇒ Removed for #RAFTAAR. Those who want to waste time/satisfy curiosity can learn it from last
course (PCB6) at https://unacademy.com/course/mrunals-economy-course-for-upsc-prelims-
mains-2022-52/I1OWWV6Y (मेरे को अब ये परी�ा के नज�रये से ब�त काम का नहीं लगता, इस�लए टॉ�पक हटा िदया है)
Paper /Token /
Commodity Metallic Bank Money,
Representative / Crypto Currency
Money Money Deposit Money
Fiat Money

10.9 🐷🐷🔖🔖BANK MONEY / DEPOSIT MONEY

10.9.1 🐷🐷🔖🔖 Paper orders: Cheque, Demand Draft (DD)

Law Viceroy Ripon’s Negotiable Instruments Act, 1881: Primary Objective? Cheque
dishonor & forgery (परक्रा� �लखत अ�ध�नयम: ब�क खाते मे अप्रा� रकम के चलते चेक अ�ीकार होना/जालसाजी के
�ख़लाफ़ क़ानून).
Cheque - THREE parties in a cheque: 1) Drawer (Sender), 2) Drawee (Bank), 3) Payee
(Recipient)
- Types of cheques: 1) Stale: Not withdrawn in 3 months (3 महीनों म� नहीं डाला तो
बासी/अ�ीकायर् होगा), 2) Post-dated: After a specific date, 3) Ante-Dated: notimp for
IAS exam.
- Open / bearer cheque: No ‘crossing’. Anyone can encash.
IFSC IFSC code: Indian Financial System Code- 11 alphanumeric numbers to identify the
bank branch, just like PINCODE identifies an area. (कौन सी ब�क ब्रांच है उसे �च��त करता है)
MICR MICR code: Magnetic Ink Character Recognition. 9 digits code written in Iron Oxide
ink for automated clearance. (चु�क�य �ाही से चेक के न�र को जाँचने के �लए।)

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10.9.2 🔖🔖DD and Overdraft

- Overdraft: When person has insufficient bank balance, still he may withdraw money from his
account (as a loan). Such facility is called Overdraft. Pradhan Mantri Jan-Dhan account has
Overdraft upto Rs 10,000/- with certain conditions. (More in Pillar1D: Financial Inclusion).
o Overdraft is mainly for short-term operating expenses. (अ�ाई �प से लघु अव�ध के �लए कजर्)
o Loans is mainly for longer term higher value expenses. (दीघर् अव�ध के �लए मोटी रकम का कजर् लेना)
10.9.3 🐷🐷🔖🔖 Cheque → NPCi’s Cheque Truncation System (CTS) & Positive Pay Mechanism

NPCi’s Mechanism Benefit (first SEE THE DIAGRAM)

Cheque Truncation If SBI sent the copy of cheque in post/courier = more time wasted.
System (CTS) CTS IS FASTER because SBI sending scanned image online.

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 Positive Pay If Mrunal (recipient) manipulated the cheque numbers e.g. using magic-
Mechanism marker/eraser to write ₹5,00,000 in place of ₹50,000 YET Roman
(Sender) will be protected because both images will not match → then
cheque will be rejected by his bank.
⇒ �FAQ: I still DID NOT understand this. Ans. Watch The video lecture.
⇒ 🤔🤔FAQ: I’ve 500 counter arguments about how James Bond villain can misuse it? Ans. NOT
IMP.#RAFTAAR.

10.10🐷🐷💸💸💸💸 ELECTRONIC ORDERS / DIGITAL PAYMENT

Payment & Settlement System Act 2007 empowers RBI to regulate card payment, e-payment related
products and services. (भुगतान और �नपटान प्रणाली अ�ध�नयम 2007)

10.10.1 💸💸💸💸CBS ( full form: Core Banking Solution /system)

⇒ It is a banking software with web-platform for centralized data management & branch-less
banking. E.g. Finacle software; BanCS software; E-Kuber (used in RBI)

🚩🚩🚩🎓🎓 FAQ I didn’t understand this. Ans. Watch lecture, sufficiently explained in it.
🚩🚩🚩🎓🎓 FAQ: What is the difference between Core Banking Solution (CBS) versus Core Banking
System (CBS)? Ans. Fundamentally it is the same thing. Dictionary word difference/legal
pedantry/academic pedantry/hairsplittery= notimp4exam. #🕰🕰थोड़ा-पढ़ो-आगे-बढ़ो

10.10.2 💸💸💸💸RBI’s Next Generation Treasury Application (NGTA), 2020-Oct

Deleting from handout. Because yet to be implemented. This topic didn’t develop much after 2020.

🔠🔠❓MCQ: The term ‘Core Banking Solutions’ correct term? (UPSC Prelims-2016)
1. It is a networking of a bank’s branches which enables customers to operate their accounts
regardless of where they open their accounts.
2. It is an effort to increase RBI’s control over commercial banks through computerization.
3. It is a detailed procedure by which a bank with huge non-performing assets is taken over by
another bank.
Answer Codes: (a) 1 only (b) 2 and 3 only (c) 1 and 3 only (d) 1, 2 and 3

Table 4: Digital Payment Systems- transaction limits may differ, depending on banks
RBI's centralised payment systems (CPS)## NPCi’s IMPS
⏰RBI’s NEFT:
RBI’s RTGS: Real Time Immediate
� Type National Electronic
Gross Settlement Payment Service
Funds Transfer
💸💸 Transfer Min ₹2 lakh to ₹2000 ₹ 1 to maximum
upto ₹10 lakhs (SBI).
Amount crores (SBI). ₹5 lakhs

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 RBI's centralised payment systems (CPS)## NPCi’s IMPS

Bizmen wanting high

� Target Ordinary retail customers (आम जनता के छोटे भुगतानों
value transactions
customers के �लए है)
instantly
- Settles net amount
🚛🚛 Settlement 🤩🤩Instant settlement 🤩🤩Instant
between banks at
mechanism (झटपट/ तुरंत �नपटारा) settlement
interval of 30 min.
BEFORE: only weekday BEFORE: only weekday
office hours. office hours. 24/7 on all days
⏰ Timing
After RBI reforms After RBI reforms (िदन रात अ�वरल �प से)
24/7. 24/7.
BEFORE: fee + GST Tax**
💰💰 Fees fee + GST#
After RBI Reforms: Rs.0
- BEFORE-2021: Only Banks can provide this Banks + Prepaid
facility Payment
� Who can - 2021: RBI announces that non-bank entities can Instrument (PPI)/
provide this also become members of centralized payment / mobile-wallet
facility? systems (CPS = NEFT & RTGS). companies like
- So, in future, Amazonpay, PhonePe etc could also Phonepe,
directly allow this Mobikwik etc.
⇒ # Although some banks don’t charge IMPS fees for transactions upto ₹ ”X”/- (EXACT Fig
NOTIMP)
⇒ ##
FAQ: 🚩🚩🚩🎓🎓 Why doesn’t RBI Merge RTGS & NEFT? Ans. RBI may have some technical
operational reasons for it. RBI never bothered to disclose it in some big press release or
newspaper headline. So I never bothered to do James-Bond Google search/PHD on it. Because it
is an inefficient way of preparing for UPSC. Nonetheless, if u feel morally-outraged then send
suggestion to RBI Governor. Until implemented, prepare things as given in handout. Also, Plz
change your ‘approach’ towards preparation of competitive exam. PHD-walli academic curiosity
is of no use.
� Mrunal comments before next section: In the digital wallet apps → companies introduce new features & RBI
introduces new technical norms on daily basis. We are not here to write a MBA research paper on their business-
model & RBI regulations. Q.“sir u said x thing can’t be done in phonepe App but now it can be done…as per my
experience!! Ans. I’ve given simple illustration to explain thing. They keep adding new features in the App. UPSC
asking only general broad MCQs from this. #🕰🕰थोड़ा-पढ़ो-आगे-बढ़ो

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10.10.3 LPSS- lightweight payment and settlement system

- RBI’s (emergency/backup) alternative to NEFT, RTGS and IMPS/UPI.

- To provide a temporary & portable solution during natural disasters and war. (प्राकृ �तक आपदा या युद्ध
के चलते बाक� प्रणा�लयाँ बं द हो जाए तो अ�ायी �प से इसको इ�ेमाल कर सकते)
- Can be operated from anywhere by a bare minimum staff. How it works, what are the features?
NOTIMP.

10.11� NATIONAL PAYMENT CORPORATION OF INDIA(NPCI)

⇒ 2008: NPCi is registered under Company Act as a “Not for Profit Company”. (मुनाफा रिहत कं पनी)
⇒ Originally it was founded by 10 banks with ₹ 100cr capital. Later on in 2020: Paytm, PhonePe,
Amazon Pay etc also became shareholders of NPCi (ये सब शेयर धारकों ने पूंजी डालकर इस कं पनी को बनाया है)
⇒ Objective? cost-effective payment solutions / technology for Banks. (�रयायती लागत पर ब�िकंग टे�ोलॉजी)
⇒ Its UPI-BHIM app & other mechanisms also help in financial inclusion of villagers & poors by
expanding the reach of banking network. (गरीबों / गाँववालों के �व�ीय समोवेशन म� मदद के �लए अलग अलग
तकनीक� आ�व�ार िकए है) ✅More abt financial inclusion in 📑📑Pillar# 1D.

� MCQ-EPFO-2023: Consider the following statements:

- Statement I: In India, the RTGS and NEFT payment systems are owned and operated by
National Payment Corporation of India (NPCI).
- Statement II: National Payment Corporation of India is an entity promoted (=owned) by banks.
Which of the following is correct in respect of the above statements?
a) Both statement I and statement II are correct and statement II is the correct explanation for
statement I
b) Both statement I and statement II are correct and statement II is not the correct explanation for
statement I
c) Statement I is correct but statement II is incorrect (D) Statement I is incorrect but statement II is
correct

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Above is not hundred percent technically correct explanation, but it is just to help you visualise the
concept.

10.12� 🤳🤳NPCI → UPI (UNIFIED PAYMENT INTERFACE)

It is a technology for building digital payment apps based on IMPS with following features:

⇒ QR Scan & Pay to merchants.

⇒ You can link bank account for direct transfer of money without storing money in ‘wallet’ first.
(unlike AmazonPay / Mobikwick etc)
⇒ Such app can have Push transaction (e.g. Remittance to family), Pull Transaction (e.g. monthly
bill deduction by Electricity Co.) or even Bill sharing among friends.
⇒ Examples of UPI based app: SBI’s SBIBuddy/Yono, Axis Bank’s AxisPay and NPCi’s BHIM.
⇒ UPI 2.0 (2018): Upgraded version of UPI. What are its new features? How is it different than
UPI 1.0? Ans. NOTIMP #RAFTAAR 🏎🏎🐢🐢
⇒ NPCI has been signing agreements with organisations in Bhutan, Nepal, Singapore, Europe etc.
so that directly Indian tourists in those foreign countries can directly spend the money from
their Indian bank account by using UPI-Based Apps. How? Ans. NOTIMP #RAFTAAR 🏎🏎🐢🐢

10.12.1 🤌🤌 UPI: Push vs Pull Transactions

UPI based apps allow for both 👉👉Push transactions and 👉👉Push transactions.

👉👉Push transactions �Pull transaction

�Push = when u send money by your own �Pull transaction = when you have given
discretion(मज़�) e.g. sending money to a command that every month electricity
relative/friend based on your mood. company should cut the money from my bank

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 👉👉Push transactions �Pull transaction
account → company will pull money without
requiring u to push/click buttons every month.
🚩🚩�FAQ: Beyond that, whether “X” thing is push/pull?= Ans. NOTIMP #RAFTAAR ��

10.13� 🤳🤳NPCI → UPI → 123PAY FOR FEATUREPHONES

Figure 1: बेटी मेरे नोिकया के non-smart phone पे UPI आसानी से कै से इ�ेमाल क�ँ ?

⇒ If user doesn’t have a smartphone. If he has a Basicphone/Featurephone- with number pads:-

still he can use UPI using USSD (Unstructured Supplementary Service Data) code (99#).
⇒ However this feature was very cumbersome. It was not very popular among the people. (�ाटर्फ़ोन म�
तो UPI आधा�रत ढेर सारी ए� ह� िक�ु बे�जक/फ़�चर फ़ोन म� UPI द्वारा पैसों का लेन देन काफ़� जिटल और क�न� िक़� का था.
इस�लए ग़रीब लोग इसे इ�ेमाल निह करते थे। �रज़वर् ब�क और NPCI ने �मलकर नई मुिहम/ �ेटफ़ॉमर् बनाया ‘123PAY’)
So, 2022-March: RBI launched a new UPI platform named 123PAY (with help of NPCI) to give more
UPI-payment options for Featurephones/Basicphones such as-

- 1) USSD – (This was already available.)

- 2) Interactive voice response or (IVR)
- 3) missed call-based payments - user sends a missed call and then system calls him back in IVR
mode (ग़रीब आदमी �मस्ड कॉल देता है तो सामने से उसे �चा�लत फ़ोन कॉल आएगा जहाँ वो �रकॉड�ड आवाज़ द्वारा िदए गए
सूचनाओं के िहसाब से अलग अलग नं बर दबाकर पैसों का भुगतान कर सकता है।)
- 4) proximity sound-based payments -allow transactions using sound waves for contactless
payments to other phones. (��न आधा�रत �शर्-हीन भुगतान)
- 5) easier utility bill payment (gas, electricity etc) via feature phone
- 6) user need to link the bank account with feature phone. → Money transfer, check account
balances, pay utility bills, recharge FAST Tags of their vehicles etc
- 7) New app for Featurephone
Benefit? 😍😍⏫ Digital payment among the poor people who do not have smart phones but have
feature phones. (ग़रीब लोग �जनके पास महँ गा वाला �ाटर्फ़ोन नहीं है वे भी िड�जटल भुगतान कर पाएं गे.)

10.13.1 UPI observations by 📙📙Economic Survey-ES-2023

Year Total No. of Digital Transactions (Crores) UPI’s Share of Digital Transactions
FY19 3,100 17%
FY20 4,600 27%

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 FY22 8,840 52%
 total number of digital transactions steadily increased in the last three years.
 % share of UPI in the total digital transactions also steadily increased in the last three years.
यूपीआई द्वारा �ड�जटल भुगतान म� काफ� बढ़ोतरी �ई है और यह सब ब�त महान है ऐसा आ�थक सव��ण ने पाया.

10.13.2 UPI single-block-and-multiple-debits functionality (2022-Dec)

Not important for the scope of exam / poor cost:benefit in spending time over this topic... after
observing the previous years papers.

10.13.3 UPI-Lite (on-device wallet)

User adds money from his bank account to his UPI Lite wallet on his mobile App. (e.g. Google Pay
App, BHIM App)

Usage (NUMBER NOT VERY IMP) UPI-LITE Limit as of 01/Sep/23

Max. Limit PER transaction ₹500
Max. Balance / storage capacity of wallet ₹2,000
Max. TOTAL transaction within 24 HRS (i.e. by adding new ₹4,000
money in wallet repeatedly after previous balance is finished.
तािक एसा दु�पयोग ना हो क� हेकर २-२००० हज़ार ख़ाली करके िफर भरता रहेगा और पीिड़त
का बड़ा नुक़सान हो जाए।)
� Benefits of UPI-Lite wallet?

- 🤩🤩Faster. Because No need to provide UPI-PIN number during transaction.

- 🤩🤩Less chances of transaction failure- even if sender’s bank server is facing technical issues.

10.13.4 �UPI-Lite + NFC = Offline Retail Payment / Tap-and-pay

RBI aims to implement Near Field Communication (NFC) in ‘UPI-LITE’. For following benefits

- 1) off-line transaction will be possible. Helps in villages with poor internet connectivity.
- 2) contactless / Tap and Pay facility / touch and pay facility by touching your mobile with
merchant’s device.
- 3) More faster / error-free transaction.

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- �FAQ1: What is NFC? Ans. Refer Sci-Tech material. E.g. in USA, u can tap Apple smartwatch
with coffeeshop’s POS-device to pay money.
- �FAQ2: UPI developed by NPCi. Then why is RBI making all these announcements? Ans.
Because RBI is the regulator of such all digital payment technologies. उनके आशीवार्द के �बना नहीं हो
सकता।

10.13.5 💬💬 Conversational payments in UPI

- It will help users to chat/converse with AI-powered systems to make payments.
- e.g. similar to how Smart speakers function: ‘Hey Siri/Alexa/Google remind me to buy milk on X
date.’.
- you can similar payment such a instruction via TEXT or voice note to UPI system.
- How it works? Ans. Wait till the official features release.
Benefit?

- 🤩🤩Voice command more convenient for blind users.

- 🤩🤩Text based chat can happen within shopping site. No need to redirect to third-party payment
Gateway website like CCBill, CCAvenue, Razerpay, etc. = more secure / efficient.

10.13.6 UPI facility to foreign tourists coming to India (2023)

�वदेशी ��� भारत म� ब�क खाता खोलकर यूपीआई वाली मोबाइल ऐप द्वारा भारत म� खरीदारी कर सके ऐसे �रजवर् ब�क कदम उठा
रहा है.
BEFORE From 2023
if such non-resident/foreigner came to India, he could not do This facility made available to
shopping using UPI money transfer from their NRE/NRO** G20 nations ke tourists coming
bank account, to India.
** Non-Resident Indians/foreigners can open bank accounts in Indian banks. Such accounts are
known as NRE/NRO/FCNR (Foreign Currency Non-Resident Account). NRE/NRO/FCNR=
internal difference is not imp. For our exam.

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10.13.7 � 🤳🤳NPCI → UPI BHIM Full form: Bharat Interface for Money (2016)
⇒ Money transfer app designed by NPCi. It works on Android, iOS/Apple mobiles as an APP,
⇒ Works even on non-smart (=basic feature) phones using *99# USSD- Unstructured
Supplementary Service Data.
⇒ Bank to bank / peer to peer transaction using mobile phone (xyz@upi). No need to install
multiple apps for each bank account (SBIBuddy, AxisPay etc) just one BHIM app to use all such
bank accounts. App has 3 factor authentication system.
⇒ Your money stays in bank account and earns interest. It’s not stored in ‘wallet outside your bank
account’ as it happens in Mobikwick, Phonepe etc. (PS: in later stage, PhonePe etc private apps
also included UPI type mechanism so storing money in ‘wallet’ became optional but we need not
engage in Hairsplittery/PHD.)
⇒ No cards involved so no MDR or such hidden charges.

10.14� 💳💳 NPCI → RUPAY CARD PAYMENT GATEWAY (2012)

⇒ Rupee + Payment = RuPay card is world’s 7th payment gateway similar to Mastercard, Visacard,
China’s Union Pay. Rupay charges less fees than other companies.
⇒ Works in 3 channels: 1) ATM, 2) Point of Sale Device (PoS/card reader machine), 3) Online
portals.
⇒ Rupay debit card given free with PMJDY (Jan Dhan) Bank account (Refer Pill#1D).
⇒ Rupay has signed collaboration agreements with some digital payments companies in Singapore,
Japan etc. So, it may be used in those countries. But presently Rupay is not having the widest
reach across all the countries unlike MasterCard and Visa.

10.14.1 � NPCI other notable initiatives

Table 5: NPCi has built following mechanisms / platforms / systems / apps:
- Bharat Bill Payment system for monthly payments of utility bills
BBPS & UPMS
(gas, electricity etc.)

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 - 2022-Jan: NPCi ‘s daughter/subsidiary company Bharat BillPay Ltd.
Company → launched a Unified Presentment Management System
(UPMS) → but technical stuff. NOTIMP4 exam
😤😤FAQ: How is BBPS vs UPMS similar or different? Ans. NOT IMP 4
Exam. These are one-liner GK. Not PHD thesis topics!
NFS National Financial switch. This technology runs the ATM network
CTS Cheque Truncation System (2010) learned in previous section.
NETC ⇒ National Electronic Toll Collection provides technology support to
the FASTag toll collection. (राजमागर् पर पथकर वसूलने के �लए)
PAI chatbot Artificial Intelligence (AI) based chatbot to reply to people’s online
queries about NPCI’s products like FASTag, RuPay, UPI, AePS etc.
DigiSaathi Helpline RBI launched with help of NPCi. - for digital payment & card payments
Number (14431) problems. The No. is 1800 891 3333 (not imp4exam but personal use)
DakPay (2020) Payment App by Department of Post and its India Post Payments Bank
BharatQR(2016) Given in next section of this handout. Scroll down
E-Rupi (2021) Given in next section of this handout. Scroll down

10.14.2 NACH-ABPS : Hybrid / Mixed mode in MGNREGA

Both these technologies developed by NPCi.

National Automated Clearing House for bulk monthly payments of utility

bills, dividends, salaries, pension / insurance premiums etc.
NACH
😤😤FAQ: How is BBPS vs UPMS vs NACH similar or different? Ans. NOT
IMP 4 Exam. These are one-liner GK. Not PHD thesis topics!
AEPS: Aadhar ⇒ Useful for Direct Benefit Transfer (DBT: प्र�� ह�ांत�रत लाभ) into
Enabled Payment beneficiary’s account for MNREGA wages, LPG subsidy, scholarship etc.
System 📑📑More in Pill#6
------
⇒ It’s also required for Bankmitra-MicroATM system.

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 Aadhaar-based 😤😤FAQ: difference between Aadhaar Enabled Payment system (AEPS) VS
Payment System Aadhaar-based Payment System (ABPS)? Ans. NOTIMP. It is enough to
(ABPS) know, these are related to money transfer to bank account linked with
Aadhar number.

- Mahatma Gandhi National Rural Employment Guarantee Act, 2005: Rural development
Ministry provides 100 days work to villagers. (Ref: Pillar#6 for more)
- Presently both NACH and ABPS methods used for giving salaries to MGNREGA workers. Thus,
it’s called Mixed payment mode/hybrid mode for MGNREGA wages.
- Government wants to shift completely to ABPS method. But due to operational and technical
issues, deadline keeps getting delayed. So, topic remains in negative news.

10.15PRE-SANCTIONED CREDIT LINE

When a banker allows an account holder to borrow upto a predetermined amount of money, without
having to apply for a loan, it is called Pre-Sanctioned Credit Line. (इसका िहदं ी करने का मतलब नहीं है. मु� परी�ा म�
इस प्रकार क� चीज� नहीं पूछते)

10.15.1 UPI: Pre-sanctioned credit line/Overdraft in UPI (2023-Apr)

- RBI allowed Pre-Sanctioned Credit Line / overdraft facility extended to UPI. (यूपीआइ म� ओवर ड�ा�
क� सु�वधा)

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- So, even if a person does not have balance in his bank account, still he can PAY using UPI while
shopping. (and then later, when he gets the salary/pension/income deposited in his bank
account, then the banker will recover the principal and interest.)

10.15.2 UPI: Benefits of UPI-overdraft facility?

- Help customers in “Buy now pay later (BNPL)” format of shopping. (Ref: Pillar#1B1 for more)
- Poor people require small small amount of money/loans during last weeks of a month. They
cannot travel to the city’s bank branch for the paperwork and banker may take many days to
pass application. Consequently, poor villagers borrow from the local moneylender/Shroff/Baniya
at high interest rate. UPI-Overdraft can help overcoming this to some extend. = helps in
Financial inclusion of the poor. (गरीबों के �व�ीय समावेशन म� मदद)

10.15.3 UPI: Interoperable Card-less Cash Withdrawal (ICCW)

- (ATM मशीन म� �बना CARD डाले, मोबाइल ऐप के ज़�रए पैसा �नकाला जा सके ऐसी सु�वधा)
- Benefit? If physical card not inserted in ATM machine → ⏬ dangers of card cloning, etc
scams.
�FAQ: How does it work? My bank not giving this facility?! Ans. 1 line word association for MCQ
is enough.

10.15.4 UPI: QR Code based Coin Vending Machine using UPI (2023-Feb)

Traditionally New experiment by RBI in 2023

insert paper-note to get coin � transfer money from bank account via UPI
scan QR code�
�to get coins from machine
कागदी नोट �मशीन म� डालकर छु ट्टे अपने ब�क खाते से UPI/QR-code द्वारा पैसा कटवाके बदले म� मशीन से छु ट्टे पैसे
पैसे �नकालो �नकालो

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10.16�💸💸💸💸 DBT → E-RUPI BY NPCI (2021)
- (Origin) E-rupi is an SMS /QR Code based Prepaid Cashless Electronic Voucher created by
National Payment Corporation of India (NPCI) using its UPI Platform. [�ूआर कोड आधा�रत प्रीपेड
नगदीरिहत इले��ॉ�नक रसीद �जसे भारतीय रा��ीय भुगतान �नगम (एनपीसीआई) ने अपने यूपीआई �ेटफॉमर् का उपयोग कर बनाया]
- It is also supported by finance ministries Department of Financial Services and Health ministry’s
National Health Authority (NHA) [�व� मं त्रालय के �व�ीय सेवा �वभाग और �ा� मं त्रालय के रा�ी� य �ा�
प्रा�धकरण ने भी इसक� मदद क� है]
- Can be used to provide 1) Food for mother, child, poor families under various schemes. 1)
Medicines for TB, Corona etc. 3) Fertilizer subsidies for farmers [खाद्य दवाइयां उवर्रक क� स��डी]
- Even private sector companies can issue it for 1] employees e.g. Gym membership, golf club
membership, hotel tourism travel. 2] use it for Corporate Social Responsibility (CSR) programs
(What is CSR? Ans. Big companies have to spend a portion of their profit for social service. Ref
Pillar#1C2). [�नजी कं प�नयां भी कमर्चा�रयों को �व�वध चीजों के �लए दे सकती ह�. कारपोरेट सामा�जक दा�य� अदायगी म� भी
इसका इ�ेमाल हो सकता है]

- Following reforms taken in E-Rupi in 2022-Feb

BEFORE After
maximum storage limit ₹10,000 per code ₹1 lakh (मह�म इतना पैसा सं ग्रिहत कर सकते ह�)
code can be used one-time/ single-time ⇒ Code can be used more than once /multi-use -
only. (कोड के वल एक-बार इ�ेमाल हो सकता था) until the amount of the voucher is completely
exhausted/redeemed).
⇒ e.g. Out of ₹1 lakh → ₹10,000 paid to furniture
store, ₹20,000 paid to electric-store etc.

10.16.1 e-RUPI vouchers: scope expanded (2023-June)

Before after 2023-June
Who can Buy E-Rupi Government & 1) Government, Companies AND
codes/vouchers? Companies 2) now Individual persons can also buy it (e.g. for
gifting to their maid/driver etc.)
Who can SELL E-Rupi only Banks can 1) Banks AND
codes/vouchers? sell 2) Non-bank Prepaid Payment Instrument (PPI)
e.g. AmazonPay, Mobikwick etc.

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�FAQ: I still didn't understand this! Watch this Youtube Short-
https://youtube.com/shorts/1qoqwvDgbLA?si=VO_aJiHdzisJVCVL

10.16.2 💸💸💸��Interoperability Problem (इंटरऑपरे�ब�लटी)

🚩🚩🚩FAQ: What are those technical Rules to improve interoperability? NOTIMP #RAFTAAR.

10.17�💸💸QR CODES: COMPULSORY TO IMPLEMENT UPI/BHARAT QR FROM 2022

- 1990s: 2 dimensional (2D) Quick Response (QR) Code system developed in Japan.
- Indian E-payment systems function on 3 types of QR Codes, namely,
Table 6: ✋Difference between UPI QR vs Bharat QR? NOT.IMP.4.EXAM ⏳📚📚थोड़ा-पढ़ो-आगे-बढ़ो
Proprietary QR ⇒ e.g. Paytm or PhonePe ke exclusive QR codes.
code ⇒ 😰😰Problem? Other companies’ app may not be able to scan and pay it.
⇒ So, RBI has prohibited companies from launching any new
proprietary QR code.

UPI QR code Generated by UPI app of NPCi. 🤩🤩It can be scanned by all Apps which are
developed using UPI technology.
Bharat QR code Developed by NPCi with help of Visa and Mastercard. 🤩🤩It can be
scanned by all Apps which are developed using UPI technology.
⇒ RBI has ordered all the Payment System Operators (PSOs e.g. Paytm, PhonePe, MobiKwik,
Google Pay etc) to shift to UPI QR or Bharat QR by March 31, 2022.
⇒ 🤩🤩Benefit? All Payment apps will be able to scan these QR codes → 'interoperability'.

10.17.1 �💸💸rMQR (Rectangular Micro QR Code)

⇒ 1990s: JAPANESE ENGINEER Masahiro Hara, designed the square QR code

⇒ Now he’s working on rMQR (rectangular QR code).

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⇒ rMQR can be printed in narrow spaces
⇒ rMQR has same scanning speed are normal square shaped QR code.
10.17.2 💳💳 Card Types based on Security Features: (सुर�ा प्रणाली के िहसाब से काडर् के प्रकार)

HomeWork: Read about RFID & NFC from Sci-Tech book/internet.

10.18💳💳 CREDIT & DEBIT CARDS (ALSO CALLED ‘PLASTIC MONEY’)

Table 7: 💳💳 Card Types based on Payment modality

1) Credit Card (कजर् पे शॉ�पंग) 2) Debit Card (अपने ब�क बचत का पैसा इ�ेमाल करो)
If Credit card used for withdrawing money Debit card can be used to withdraw ₹ ₹ from
from ATM, then it’s a type of ‘borrowing’, so, ATM from your existing bank balance.
bank levies interest rate. So, it’s not ‘borrowing’.

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 1) Credit Card (कजर् पे शॉ�पंग) 2) Debit Card (अपने ब�क बचत का पैसा इ�ेमाल करो)
Credit card vs Overdraft? Debit card vs Overdraft?
1. Credit cards = for shopping. You carry card You should be intelligent enough to self-
in your pocket. Bank may give u some understand that much. �श�क हर चीज क� �ून फ�िडंग
reward-points/gifts if you spend “₹.X” per करेगा/च�च से �खलाएं वह �वद्याथ� के मान�सक �वकास के �लए अ��
year बात नहीं
2. - for overdraft= you have to manually visit
the bank branch, fillup form. It’s not in the
form of a ‘card’. Doesn’t give u points/gifts.
✋Further difference
not.imp.not.here.for.IBPS-exam
⇒ 3) Hybrid Card / Duo Card: Single card with two chips for 1) credit card and 2) debit card. So,
you don’t have to carry two separate cards. E.g. Indusbank Hybrid card. एक ही काडर् म� दोनों का मजा🤩🤩
⇒ 4) Pre-paid card: It’s a subtype of debit card. Debit card is linked to a given bank account. But
Pre-paid card can be bought even without having account in the given bank e.g. IRCTC’s UBI
Prepaid Card which can be used for buying rail tickets, meals etc. support provided by Union
Bank of India (UBI) and NPCi’s Rupay gateway. (इस काडर् को पैसा देके खरीदना पड़ता है। ब�क खाता होना ज�री
नहीं )
🚩🚩🚩FAQ: Other technical benefits / MDR challenge / BizGK / PHD-doubts / real life implications
= not imp.

10.18.1 💳💳 📧📧 Card Tokenization (from 1/Oct/2022)

⇒ Tokenisation = creates a set of numbers called ‘token’ to replace/hide the sensitive card data
such as the 16-digit account number, expiry date and security code. (हैिकंग से बचने वा�े असली काडर्
नं बर क� जगह टोकन/का��नक-नं बर बनाकर दे दो एसी बात है। तािक �वक्रेता का आपके काडर् क� गु� जानकारी �मले नहीं)
⇒ This ensures your card information is not disclosed to merchant website= protection from
hacking.
⇒ Card owner can generate Tokenization through visiting card-issuer’s/banker’s website/App
through laptops, desktops, tablet, wearables (smartwatch) etc.
⇒ From 1/10/2022, this became effective.

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 Figure 2: थ�ड़ से डर नहीं लगता, Identity theft se lagtaa hai!

10.18.2 💳💳 CVC Less transactions

⇒ Normally, during online-transaction, customer has to enter Cardholder Verification Code
(CVC) EVERYTIME when making payment.
⇒ but after the RBI’s tokenisation norms, this may not be required every time.
⇒ Related topic: WHAT IS Mastercard company’s CVC less transactions? Ans. This much Real life
Business general knowledge is not required for exam.

10.18.3 💳💳 🚕🚕 National Common Mobility Card (NCMC, 2019)

‘One Nation One Card Model’ by Ministry of Housing & Urban Affairs (MoHUA) with the help of
NPCi, Bharat Electronics Limited (BEL Company), and some banks. It’s basically a card u can use to
buy train/bus tickets etc. Outdated for 2023-24 so Deleting for RAFTAAR.

10.18.4 💳💳 🚕🚕 FASTag for paying toll fees at highways (2017)

FASTags are prepaid rechargeable tags that allow for automatic toll
collection at electronic toll collection gates Radio-frequency
Identification (RFID) technology.

⇒ 2017: National Highways Authority of India (NHAI, a statutory body under Highway ministry)
launched 2 mobile apps MyFASTag and FASTag Partner to facilitate Electronic Toll Collection
(इले��ॉ�नक मा�म से पथकर/टोल वसूली के �लए रा��ीय राजमागर् प्रा�धकरण द्वारा अलग अलग एप बनवाए गए ह�).
⇒ NPCi’s has developed National Electronic Toll Collection (NETC) technology to aid this.

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⇒ Persons loads up ₹ ₹ in his mobile app → actives RFID tag in his car → when it passes through
highway toll-booth, the money is automatically deducted. (गाडी टोल नाके से गुजरेगी अपने आप पैसा कट
जाएगा)
⇒ 🤩🤩Benefit? faster traffic movement, tracking stolen cars.
⇒ From 2021, it became mandatory for all vehicles passing through tolls to have FASTags. Vehicles
without FASTags will have pay up more fees/toll at the gates. (ये लगाना अ�नवायर् �आ, अ�था �ादा फ�स)

10.19💳💳 MDR: FULL FORM: MERCHANT DISCOUNT RATE (�ापा�रक छू ट दर)

⇒ MDR is the fees that a merchant must pay to his (acquirer) bank for every credit / debit card
transaction.
⇒ MDR fees is shared among 3 parties 1) customer’s card issuing bank 2) merchant’s acquiring
bank 3) payment gateway provider. (तीन प�ों म� इस फ�स को बांटा जाता है)
⇒ MDR hurts merchants’ profit margin, discourages them from adopting Point of Sale (PoS)
terminals (=card swiping machine) → obstacle to digital economy. (�ापारी के मुनाफे पर असर होता है
इस�लए वह काडर् मशीन अपनाने म� उदासीनता िदखाते है। )
Table 8: Steps taken to address MDR issue
RBI ⇒ 2017: Imposed ceilings on MDR fees i.e. MDR can’t be more than “x%” of the
transaction amount. (�रज़वर् ब�क द्वारा तय सीमा से �ादा फ�स नहीं मांग सकते)
Budget ⇒ It imposed some technical rules to help companies. I’m deleting it because old
2019 /faded news, mostly technical.

10.19.1 💳💳 MDR Subsidy by MEITY

In above photo, MDR fees % is not actual number but for illustration/example.

🔠🔠❓MCQ. Which one of the following best describes the term “Merchant Discount Rate”
sometimes seen in news ? (Pre18 Set-D)
A. The incentive given by a bank to a merchant for accepting payments through debit cards
pertaining to that bank.
B. The amount paid back by banks to their customers when they use debit cards for financial
transactions for purchasing goods or services.

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C. The charge to a merchant by a bank for accepting payments from his customers through the
bank’s cards.
D. The incentive given by the Government, to merchants for promoting digital payments by their
customers through Point of Sale (PoS) machines and debit cards.

Instrument UPI NPCI's Rupay NPCI's Rupay Credit Card

Debit Card Mastercard/Visa’s Debit/Debit card etc
MDR % on transaction value 0% 0% “x”% (NOT ZERO)
⇒ 😥😥 So, if a banker promotes Rupay debit card / UPI App → Banker will not earn MDR fees. So
bankers promote MasterCard & Visacard to their customers and merchants (instead of
Rupay/UPI). (ब�कर को मज़ा नहीं आता �ोंिक उसे डे�बट काडर् व यूपीआई एप म� MDR क� फ़�स निह �मलेगी।)
⇒ So, 2021-Dec: MEITY (Ministry of Electronics & Information Technology) announced up to
₹2,000 MDR Subsidy to Merchant's Bank for RuPay debit cards transactions and UPI
transactions.# (तो सरकार ने ब�करों को बोला क� तुमको मज़ा िदलवाने के �लए MDR नुक़सान के एवज़ म� स��डी द�गे)
⇒ 😍😍 this will encourage digital payment especially in small towns / rural areas (िड�जटल भुगतान ऊपर
लगने वाले मरच� िड�ाउं ट रेट पर सरकार द्वारा स��डी दी जाएगी यिद भुगतान �पये डे�बट काडर् या UPI द्वारा हो रहा है)
⇒ 😥😥 Foreign Players like MasterCard and Visacard are opposed to Indian govt’s preferential
treatment given to India's Rupay. (“�पे” को �मल रही एसी �रयायतों से �वदेशी काडर् कं प�नया नाराज़ है)
🚩🚩🚩🎓🎓 FAQ: "I've 500 jaat ke PHD doubts & counter arguments about this MDR subsidy" Ans.
Plz waste your precious time reading egazette.nic.in/WriteReadData/2021/231960.pdf
10.20INTERCHANGE FEE BY NPCI (2023-MARCH)

Note: There are many more terms and conditions to this, but we will not waste time in PHD.

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10.20.1 💳💳 🏧🏧 ATM and its Types

⇒ Automated Teller Machine (ATM) allow bank customer to withdraw money or check balance
without visiting any branch of a bank. (�चा�लत �प से नकदी मुद्रा देने वाला यां�त्रक िड�ा)
⇒ ATM network works on NPCi’s NFS (National Financial Switch) technology.
Bank label Bank itself owns and operates the ATM network.
Brown label Bank owns but operations outsourced (cash refilling truck, guard)
⇒ Note: Some books offer different definition, but I’ve taken above definition
from Economic Times Article 2015.(कु छ िकताबों म� �ा�ा अलग है म�ने इधर से ली है)
White label - Non-Bank owns & operates. E.g. Muthoot Finance, Tata Comm, Prism
- 🚩🚩🚩FAQ: What is on-tap licensing system for White-label ATM? Ans.
Outdated topic for 2023.
Micro-ATM Bankmitra manually makes entries of deposit and withdrawal for customer. He
uses handheld device for using card & Aadhar biometrics. NPCi’s AEPS
technology gives backend technological support.

10.21💸💸💸💸💸 📈📈 MEASURES TO PROMOTE CASHLESS ECONOMY

- 2019: RBI setup Nandan Nilekani committee.
- Budget imposed limits and restrictions on cash transactions (more in Pillar2:Black Money)
- + many small small things for Mains Exam. Ignored here for #RAFTAAR-Prelims.

10.21.1 � 💳💳💳💳 Payments Infrastructure Development Fund (PIDF) 2020-Jun

⇒ ₹250cr from RBI + ₹250 cr from (Banks and Card Gateway Operators) → ₹500 cr fund setup.
⇒ Objective? Provide funding/ subsidy to encourage merchants in the small towns, villages and
North Eastern states to adopt point-of-sale (PoS) card swiping machines.
भुगतान इं फ्रा���र के �लए �न�ध/कोष: गांव, छोटे शहरों और उ�र-पूव� इलाकों म� �ापा�रयों को काडर् मशीन अपनाने के �लए मदद

10.22🌐🌐🤝🤝GLOBAL MONEY TRANSFER

10.22.1 India-UAE: LCSS: UPI-IPP linkage (2023-Aug)

- 2023: Central banks of India and UAE signed Local Currency Settlement System (LCSS)
agreement.
- This will allow importers/exporters/investors/tourists to pay in their respective domestic
currencies i.e. in Indian rupee (INR) and the UAE Dirham (AED). (Without using Dollars.)
- Both nations also trying UPI-IPP linkage for easier Local Currency Settlement System (LCSS).

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 Country → India UAE
Mobile based Fast Payment Systems Instant Payment Platform
UPI
(FPSs) → (IPP)
� More about currency exchange in (Ref: Pillar#3 Currency Exchange)

10.22.2 Nostro-Vostro / Rupee-Ruble / Rupee-Rial Agreement?

(Ref: Pillar#3: international trade / currency exchange)

10.22.3 RUPAY Cards- International acceptance

2023-June: RBI allowed international use of RuPay cards. That means an Indian travellers in use
them abroad for ATM money withdrawal and shopping. (subject to terms and conditions)

10.22.4 💸💸📞📞Financial Messaging Systems: SWIFT- Russia gets banned

Globally (वै��क �र पे पैसा भेजना हो) Within India (भारत के भीतर ही पैसा भेजना हो!)
Society for Worldwide Interbank Structured Financial Messaging System (SFMS)
financial telecommunication (SWIFT)
By a Cooperative organization in designed by Tata Consultancy Services (TCS) for
Belgium’s La Hulpe city (1973). IDRBT (=Research arm of RBI)

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 Globally (वै��क �र पे पैसा भेजना हो) Within India (भारत के भीतर ही पैसा भेजना हो!)
To serve the messaging function for to serve the messaging function in NEFT, RTGS, and
Banks, NBFCs & brokers who may / may other inter-bank, intra-bank e-transactions
not have direct bank relations / platforms within India.
settlement systems with each other due to
international borders.
😥😥 Nations banned from SWIFT: 1) Iran (Capital Tehran) 2) 2022: Russia got ban, after invading
Ukraine. This will make it very difficult for the Russian banks/ NBFCs /businessmen to send and
receive money internationally (यूक्रेन-आक्रमण के �ख़लाफ़ �स को ��फ़्ट-�व�ीय सं देश प्रणाली से प्र�तबं �धत िकया गया है �जसके चलते
�सी ब�क �व�ीय सं �ान और उद्योगप�तयों को अंतररा�ी� य �र पर पैसों के लेन म� िद�त� आएं गी।)

10.23�📜📜📜📜 PAYMENT SYSTEM OPERATORS?

Payment and Settlement Systems Act, 2007: RBI gives license to Payment System Operators (PSOs).
Type of PSO Examples
Umbrella Entity For Retail Payments → NPCi (learned in previous section)
Card Payment Gateway Operator → MasterCard, Visa, Rupay
Crossborder / International Remittance Western Union, MoneyGram
Prepaid Payment Instrument (PPI) AmazonPay, Mobikwik, Phonepe, PayU, PayTM Wallet
etc
Payment Aggregators (PAs) They help the merchant to collect payment from
customer digitally e.g. Paytm, Amazon, GooglePay,
Zomato, CCBill, CCAvenue, Razerpay, Stripe etc.
ATM Operators SBI etc's own ATMs
White label ATMs by Tata, Muthoot, SREI etc
Financial Market Infrastructure Clearing Corporation of India (CCI): provides digital
Provider infrastructure for share/bond/foreign currency deals etc.
(📑📑Ref: HDT-Pillar#1C)
10.23.1 �New Umbrella Entity (NUE) for Retail Payments System (2019)
⇒ Paytm has rival companies like Mobikwick, Phonepe; Mastercard vs Visa; SBI vs Axis Bank;
⇒ But there is no rival company against NPCi. वतर्मान समय म� NPCi का प्र�त�ध� कोई नहीं है
⇒ NPCi is an umbrella entity for retail payments system - it operates in card payment (RuPay),
Money transfer (IMPS), Mobile Apps (UPI, BHIM), ATM Network (NFS) etc.
⇒ 2020: RBI issued a proposal, “if any Indian company interested to compete in this (NPCi-like)
retail payment segment, we’ll license them as new umbrella entity (NUE: खुदरा भुगतान के �लए नई छतरी
इकाई). Subject to these technical “XYZ” technical eligibility requirements”
�Benefits? More companies like NPCi → more competition → more innovation and cheaper
services for users. (�धार् बढ़ेगी तो नए आ�व�ार होंग,े िड�जटल भुगतान सेवाएं पहले से भी �ादा स�ी / िकफायती/बहेतर हो)

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⇒ Facebook, Google, Amazon, Flipkart and others had applied for NUE licences. But none of them
met RBI’s expectations. So, 2023-Jan: RBI has put this license process on halt/suspension. (�जन
कं प�नयों ने इसके वा�े अज� डाली थी उनके अनुभव और का�ब�लयत से �रजवर् ब�क सं तु� नहीं था. इस�लए अभी �रजवर् ब�क ने इस पूरे
मामले को ठं डे ब�े म� डाल िदया है)

🔠🔠❓ MCQ. Find Correct Statement(s) [asked in UPSC- Prelims-2017]

1. NPCI helps in promoting the financial inclusion in the country.
2. NPCI has launched RuPay, a card payment scheme.
Answer codes: (a) 1 only (b) 2 only (c) Both 1 and 2 (d) Neither 1 nor 2
🔠🔠❓ MCQ. Find Correct Statement(s) [asked in UPSC- Prelims-2018]
1. BHIM app allows the user to transfer money to anyone with a UPI-enabled bank account.
2. While a chip-pin debit card has four factors of authentication, BHIM app has only two factors of
authentication.
Answer codes: (a) 1 only (b) 2 only (c) Both 1 and 2 (d) Neither 1 nor 2

10.23.2 � Third Party Application Providers (TPAPs): Google Pay, Whatsapp Pay
Delhi HC court case going on about their registration. But NOTIMP/outdated. #RAFTAAR �
�जसको IAS/IPS बनना है वह आगे का Next topic पढ़े….

10.24� 💳💳 DIGITAL PAYMENT REGULATORY BODIES (�नयं त्रण सं �ाएँ )

10.24.1 � 💳💳 Digital Transactions Ombudsman (DTO-2019)
⇒ RBI designates senior RBI officials at 21 places across India as DTO. They hear customer complaints upto
₹ 20 lakh against prepaid payment instruments, Mobile wallets, Apps, NEFT/RTGS and other digital
transactions. ((िड�जटल लेनदेन �शकायत �नवारण अ�धकारी/लोकप्रहरी).
⇒ They can order the company / bank to fix problem and pay upto additional ₹ 1 lakh for mental agony of
customer → Higher Appeal to Dy.Gov of RBI. (मान�सक उ�ीड़न के �लए जुमार्ना/मुआवजा).
⇒ If matter > ₹ 20 lakh, then matter outside his jurisdiction. Victim has to approach courts. (20 लाख से अ�धक
रकम का मामला होगा, तो पीिड़त ने �ाय/इं साफ के �लए अदालत/कोटर् म� जाना होगा)

10.24.2 � RBI: BPSS (Statutory body)

⇒ 1998: Narsimham-II Committee on Banking Reforms suggested regulatory framework for e-
banking, card payment etc. Then,
⇒ 2007: Payment & Settlement Systems Act (भुगतान और �नपटान प्रणाली अ�ध�नयम) → RBI → (Statutory)
Board for Regulation and Supervision of Payment and Settlement Systems (BPSS: भुगतान और
�नपटान प्रणाली के �व�नयमन और पयर्वे�ण के �लए बोडर्).
⇒ All types of payment system providers have to register with RBI’s BPSS- whether bank, non-
bank, wallet/Prepaid Payment Instrument (PPI) etc. (सभी भुगतान सं �ाओं ने पं जीकरण करवाना अ�नवायर्)

10.24.3 �Payment Regulatory Board (PRB)

Government wanted to setup this body few years back. But, this is not YET setup and no new
developments. So, Outdated for 2024. Deleted for #Prelims-RAFTAAR🏎🏎

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10.25🐯🐯📊📊 DIGITAL PAYMENT RELATED INDEX / COMPETITIONS/REPORTS BY RBI
Below table given if preparing for RBI grade-B officer exam etc. I am not spending time in writing
the ranks because poor cost benefit for #IAS-Prelims-RAFTAAR.

��REPORT RBI's Payment and Settlement Systems in India Vision 2019 – 2021
��INDEX/Ranking RBI Digital Payments Index– to check level of digital payment in various areas
of India. (DPI िड�जटल भुगतान सूचकांक)
��INDEX/Ranking RBI’s Financial Inclusion Index– to check whether every poor person is having
access to banking, loan, insurance pension, etc. (�व�ीय समावेशन सूचकांक)
��Competition RBI’s Harbinger Hackathon 2021 competition for innovation in digital
payment.
10.26🔗🔗💮💮 CRYPTO-CURRENCY & BLOCKCHAIN TECHNOLOGY
Note: For easier visualisation, I have wrote “bitcoin” instead of “crypto-currency” at most places.

⇒ [Definition] Cryptocurrency: is a digital / virtual currency created & stored using blockchain
technology.िक्र�ोमुद्रा एक िड�जटल मुद्रा है �जसे �ॉकचेन तकनीक का उपयोग करके बनाया और सं ग्रहीत िकया जाता है।

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⇒ [Definition] Blockchain: A secured decentralized database/ distributed ledger technology (DLT)
that maintains a continuously growing list of records / transactions. Old entries can’t be deleted,
new entries will be visible to all. Mainly used for running cryptocurrency network. But it can also
store any type of data. (�ॉकचेन एक डेटाबेस है जो �रकॉडर् क� �नरंतर बढ़ती सूची को �वके �ीकृ त �प से बनाए रखता है।)
⇒ [Origin] Anarchist groups lost faith in FIAT MONEY because USA’s Subprime Crisis (2007)
eroded the purchasing power of US Dollar. They also dislike Banks & Card Companies because
of transaction charges on e-banking, card payments, MDR, interoperability issues. (अशासनवादी
समूहों को सरकार द्वारा जारी क� मुद्रा नापसं द। इन अशासनवादी समूहों को ब�क और काडर् कं प�नयों से भी नफरत है)
⇒ 2009: An anonymous user (अनाम/अ�ात) Satoshi Nakomoto launched a cryptocurrency ‘Bitcoin’.
⇒ total 21 million Bitcoins, wherein 1 Bitcoin (BTC) = 108 Satoshi (the smallest unit).
⇒ Other examples: Ethereum, Litecoin, Digicoin, Laxmicoin, Ripple, Dogecoin etc.

10.26.1 👝👝Hot Wallet vs Cold Wallet

Just like you store money in Paytm DIGITAL Wallet. You can store Bitcoin and other
cryptocurrency in Crypto Digital Wallets. Such wallet could be hot wallet or cold wallet.

⇒ 🔥🔥 Hot wallets are connected to the internet, (e.g. an online app)

⇒ ❄ Cold wallets are not connected to internet (e.g. a USB pendrive).

10.26.2 🔗🔗🔗🔗📉📉:🥶🥶☃Crypto-Winter in Bitcoin Prices (भाव �गरा अब उठ निह रहा है)

⇒ Between 2021-Nov to 2022-Jun: Bitcoin fell from ~$70,000 to $20,000 → almost 70% loss! &
similar situation in many other cryptocurrencies.
⇒ Some experts fear the prices will remain frozen in this range for upcoming months, hence using
the term "Crypto-Winter" to denote it. (िक्र�ो-मुद्राओं के दाम �गर गए ह� और वापस ऊपर निह चढ़ रहे, लगता है
िक्र�ो-बाज़ार सद�/ठं डी म� जम गया है)

10.26.3 🔗🔗🔗🔗📉📉:🥶🥶☃ Crypto-scams - Recent Global Scams

Binance It is name of an online exchange/portal to buy/sell cryptocurrency. Remains in
negative news because of frauds/scams.
FTX ⇒ It is name of an online exchange/portal/exchange to buy/sell cryptocurrency. It
went bankrupt. Resulting into losses for the investors. . Its founder/CEO arrested
for scam → 10 lakh+ investors’ money got stuck.
��FAQ: FAQ: How were these scams conducted? Ans. Its forensic analysis not important for
our exam. Ans. Sufficient to know these are the dangers associated with crypto currency. ऑनलाइन
�ेटफॉमर् जहां िक्र�ो मुद्रा क� खरीद �बक्र� क� जाती थी. 10 लाख से अ�धक �नवेशकों को चूना लगाया गया/ गबन �आ है

��FAQ: FAQ: How is Bitcoin not traceable, we can trace it using XYZ technology?

�Ans. Using HTML, we can create Wikipedia website and using HTML we can also create gmail
website. While everyone can read Wikipedia, I can’t read your gmail page, unless I know your
username password. Blockchain is similar. It depends on designer to make database “open” or

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“private/encrypted”. Beyond that, we are not here for B.Tech (Computer Science) Semester
exam/James Bond recruitment. We just have to memorize 3-4 negative points for exam.

10.26.4 🔗🔗🔗🔗:Crypto currency observations by 📙📙EcoSurvey’23

⇒ Cryptocurrencies are primarily held by a few big players/“whales”. So they can manipulate the
prices by manipulating the supply.
⇒ Problems related to electricity-consumption, tax-evasion, abnormal fluctuation in prices,
investors-fraud, no-intrinsic value et cetera.
⇒ then economic survey, 2023 give various examples of different-different legal provisions in EU,
Japan, Switzerland, Nigeria etc. But from exam point of view not much benefit chasing it.
⇒ sufficient to know that coordinated international effort required to regulate the sector. OECD
and G20 group are working in this direction. More about these intl.orgs in Pillar3B.
⇒ And ideally, we need strict rules over crypto-market, just like we’ve strict rules over sharemarket
चं द बडे �खला�ड़यों ने �ादातर िक्र�ोमुद्रा अपने क�े म� क� है. और वही �खलाडी इसक� स�ाई/आपू�त को �नयं �त्रत करके , उसके दामों
म� छे ड़छाड़ करते रहते ह�. िक्र�ो मुद्रा म� �बजली क� खपत, कर-चोरी, आम-�नवेशक से धांधली होती है. �व�भ� देशों म� इसपर अलग-
अलग के �नयम/कानून बनाए गए ह�, लेिकन वै��क �प से �नयमों म� एक�पता और सहकार क� ज�रत है- आ�थक सव��ण ने पाया.

10.26.5 🔗🔗🔗🔗:🍋🍋 Cryptocurrency Profit pe 30% Tax and 1% TDS in 👜👜👜👜Budget-2022

Refer to Pillar2A: Budget Direct Taxes to learn this matter.

10.27⚖🔗🔗🔗🔗✋ CRYPTOCURRENCY BANNED IN OTHER NATIONS?

⇒ Nepal, Algeria, Egypt, Morocco, Turkey , Iran etc: Bitcoin is illegal. (कु छ देशों म� िक्र�ो मुद्रा रखना
गैरकानूनी है)
⇒ Chinese prohibited the banks from providing buying/selling/investment services for bitcoin etc
cryptocurrencies. After this crackdown, Bitcoin prices fallen ⏬⏬ by 30%

10.27.1 Crypto currencies as legal tender is in some countries

Two legal tenders: 1) Bolivar Paper currency issued by Govt 2) Petro
Venezuela
Cryptocurrency issued by Govt.
Capital: Majuro, Sovereign state having free association with USA (for defense,
Marshall social security, budget). Legal Tender was U$D. But,
Islands ⇒ 2018-Feb: became first country to launch sovereign cryptocurrency named
“Sovereign” [SOV]. So, now two legal tenders: US Dollars and SOV.
⇒ El-Salvador: Two Legal tenders [1) US Dollars (from 2001). [2) Bitcoin
(from 2021).
El-Salvador
⇒ Thus, El-Salvador became 1st nation in the world to allow Bitcoin as legal
tender
😤😤FAQ: Why El-Salvador allowed Bitcoin? Ans.✋ not important after looking at previous
prelims and mains papers. We’re not preparing for El-Salvadori-ElAS exam

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10.28🔗🔗🔗🔗:🤩🤩 CRYPTOCURRENCY PERMITTED IN OTHER NATIONS/GROUPS
⇒ United Nations International Children's Emergency Fund (UNICEF, HQ-
🌐🌐 UNICEF
New York,USA; 1946, later renamed to UN Children's Fund)
⇒ 2019: UNICEF setup a Cryptocurrency Fund to accept donations in
cryptocurrencies. It has become the first UN organization to accept
cryptocurrency. (यू�नसेफ सं �ा दान म� िक्र�ो मुद्रा का भी �ीकार करती है)
⇒ 2018: World Bank launched World’s first blockchain bond called “Bond-i”
🌐🌐 World
in Australia, denomination: Australian Dollars → public invests, gets ~2%
Bank
interest after 2 years.
(More about
⇒ Blockchain bond requires less cost in server / database /paperwork
this org in
maintenance unlike traditional bonds. 📑📑More in Pillar#1C:
📑📑Pillar#3B)
SEBI/Sharemarket
⇒ World Economic Forum (WEF) is a non-government organization in
Bill of Rights Cologny-Geneva, Switzerland. (�व� आ�थक मं च. गैर सरकारी सं गठन)
⇒ 2020: Published a document, ‘Blockchain Bill of Rights’ . Document talks
(अ�धकारो का about rights to accountability, transparency, data privacy, data protection
�वधेयक) etc. (�ॉकचेन अ�धकार पत्र/�वधेयक: जवाबदेही, पारद�शता, डेटा गोपनीयता, डेटा सुर�ा आिद के
अ�धकार)

10.29🔗🔗🔗🔗🔗🔗 CRYPTOCURRENCY → GLOBAL REGULATIONS

10.29.1 Global Regulations → MICA regulation by EU (2023)

⇒ European union (EU)’s rules called the Markets in Crypto Assets (MiCA)
⇒ To protect people from scams /frauds in crypto currency investment.
⇒ To combat tax-evasion, money laundering (i.e. converting black money into white) AND terror-
finance.
⇒ Doesn’t regulate central bank digital currencies (CBDC). Doesn’t regulate nonfungible tokens
(NFTs).

10.29.2 Global Regulations → CARF Framework by OECD (2022)

⇒ Crypto-Asset Reporting Framework By OECD (Organisation for Economic Co-operation and
Development)O
⇒ Objective? Similar to EU’s MICA Rules.

10.30🔗🔗🔗🔗🔗🔗 CRYPTOCURRENCY → STABLE-COINS

⇒ Stablecoin is a type of cryptocurrency whose price is backed by a reserve asset like gold / dollar /
fiat currency e.g. Facebook’s proposed ‘Libra’, Tether, Basecoin, and TrueUSD.
⇒ 😰😰But, stablecoins challenges: 1) money laundering (धनशोधन / काले धन को वैध बनाना) 2) terror
financing (आतं क� �व�पोषण) 3) lack of consumer protection (उपभो�ा सं र�ण क� कमी) 4) financial
frauds (�व�ीय धोखाधड़ी). 2019: France, EU, G20 group opposed. (बड़े देश/सं गठन इसके �वरोध म� है)

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🔠🔠❓MCQ. Find correct statement(s) about Bitcoin? [UPSC-CDS-2017-I]
1. It is a decentralized virtual currency.
2. It is generated through complex computer software systems.
3. The Reserve Bank of India recognized it as a legal tender in January 2016.
Answer Codes: (a) 1 only (b) 1 and 2 only (c) 2 and 3 only (d) 1, 2 and 3
🔠🔠❓ MCQ. Find correct statement(s) about “Blockchain Technology” [UPSC-Prelims-2020]
1. It is a public ledger that everyone can inspect, but which no single user controls.
2. Structure and design of blockchain is such that all the data in it are about cryptocurrency only.
3. Applications that depend on basic features of blockchain can be developed without anybody’s
permission.
Answer Codes: [a) 1 only [b) 1 and 2 only [c) 2 only [d) 1 and 3 only

10.31WORLD COIN PROJECT (2021–22)

Pros and Cons? Similar to the Aadhaar card:

- Pros: IF governments across the world ACCEPT this as “identification proof”= easier to avail
various government schemes benefits /college admission / passport application etc. Time-trouble
saved. (यिद देश �वदेश क� सरकार� इसे एक आ�धका�रक पहचान पत्र के �प म� मान ल� तो गरीबों को �व�वध योजना �ू ल कॉलेज
दा�खले आिद म� काफ� सु�वधा हो सकती है)
- Cons: concerns over privacy / misuse. (�नजता का हनन. द�ु पयोग का भय)

10.32🐯🐯🐯🐯🐯🐯 CENTRAL BANK DIGITAL CURRENCY (CBDC)

क� द्रीय ब�क िड�जटल मुद्रा / सं प्रभु िड�जटल मुद्रा

Year Nation Paper Currency CBDC
2020 Bahamas (Capital Nassau) – Bahamaian Dollar “digital B$”, also called ‘sand
1st nation in the world to BSD dollar’. issued Non-Interest
issue CBDC## Bearing CBDC

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 Year Nation Paper Currency CBDC
2021 Nigeria (Capital Abuja) Naira the “eNaira”-Non-Interest
Bearing CBDC.
���Marshal island launched SOV currency in 2018 then shouldn’t we call it the first
##�
country to launch CBDC? why above table says Bahamas is 1st country to launch CBDC?

⇒ Ans. Big Newspapers using such headlines. I didn’t bother to write/ask to their chief-editors. If
asked in Exam, then tick MCQ depending on options.

⇒ China, Britain, Japan, Singapore, Sweden have also started such experiments.
⇒ 👜👜👜👜Budget-2022 announced issuance of Digital Rupee using blockchain technology).

10.32.1 🐯🐯🐯🐯🐯🐯=👌👌👌👌Benefits of CBDC (क� द्रीय ब�क �ड�जटल मुद्रा के फायदे)

CBDC/ Sovereign Digital Fiat Money / Digital Base Money will provide following benefit
1. ⏬ Cost printing and transporting physical currency. (नोट छापने क� लागत और प�रवहन खचर् म� कमी)
2. ⏬ Scope for counterfeiting. (जाली नोट बनाना मु��ल)
3. ⏫Traceability, ⏬Anonymity: (ढूँ ढना आसान, गुमनाम/अ�ात रहेना मु��ल)
a. Whether money is reaching the intended beneficiary or not? (लाभाथ� को योजना का पैसा �मला
िक नहीं)

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 b. From where did the businessman accumulate this money, did he pay an appropriate
amount of tax or not? Else auto-alert to the Income tax department for tax evasion.
(करचोरी पर �नगरानी आसान)
4. Possible to develop programmable currency. E.g. govt transferring ₹6000 in poor farmer’s
account with condition ke it must be spent WITHIN next 15 days for buying seeds/farming tools
ONLY.
5. Global money transfer more easier. E.g. in future China may give DIGITAL YUAN currency
LOANS directly to Ghana Without converting into US Dollars and without using SWIFT
messaging system.
+ many other things but they are more relevant for Mains rather than Prelims.

�MCQ.Pre-2023: Find correct about Central Bank digital currencies,:

1) It is possible to make payments in a digital currency without using US dollar or SWIFT system.
2) A digital currency can be distributed with a condition programmed into it such as time-frame for
spending it.
Codes: (a) 1 only (b) 2 only (c) Both 1 and 2 (d) Neither 1 nor 2
10.32.2 🐯🐯🐯🐯🐯🐯= ✋🥵🥵Challenges of CBDC (चुनौ�तयां)
1. 😰😰Digital Divide, Financial Literacy, Access Points: (िड�जटल उपकरणों क� उपल�ता क� खाई, �व�ीय
सा�रता का भाव, िड�जटल भुगतान इ�ेमाल करने के प�ंच �बदं ओ
ु ं क� कमी)
a. Not everyone has electronic gadgets or internet connectivity, (सबके पास इं टरनेट निह)
b. Not everyone knows how to operate bank account digitally, (सबको इ�ेमाल करना निह आता)
c. Not every village shopkeeper accepts payments in the digital form. (दकु ानदार नक़दी माँगते है)
2. 😰😰Cyber Terrorism/Nuclear Attack/Natural Disaster. If electricity stops → economy will stop
functioning. (साइबर आतं कवाद / परमाणु हमला / प्राकृ �तक आपदा: �वद्युत उपकरण बं द तो अथर्�व�ा बं द)
3. 😰😰Maintaining the blockchain → 24/7 use of server/electricity → e-waste, pollution. (प्रदू षण)

10.32.3 E-Rupee vs E-Rupi

Term E-Rupee E-Rupi
Founder RBI NPCi
Digital GIFT CARD / SMS Code to
Feature Central Bank Digital Currency.
help beneficiary do shopping.
Yes (when it becomes fully
Fiat money and No. Because, this is not money. This
operational. Presently, it is in TRIAL
legal tender? is a tool to use money.
STAGE.)

10.33💠💠≠ ❇ NON-FUNGIBLE TOKEN (NFT: ग़ैर-फ़ं जीबल टोकन)

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10.33.1 (⬜=◻+◻+◻+◻) Fungibility: Meaning?
Item Can it be Is mutual substitution possible in terms of value? Is it
subdivided in fungible?
smaller units?
₹2,000 Yes ₹500x 4 Yes ₹500 x 4 Notes can buy same quantity of ✅Yes
Note Notes=2000 goods as a single ₹2000 Note
1kg gold Yes 100gm x 10 Yes 100gm x 10 biscuits can buy same quantity of ✅Yes
bar biscuits=1kg gold goods as a single 1kg gold bar
bar
1Bitcoin 1BTC=10^8 Satoshi Yes 1BTC’s value = 10^8 Satoshi coins. So, ✅Yes
coins theoretically, they buy same quantity of goods
100 gm Bigger single piece diamond considered to be more precious/valuable ✋No
single than small-small pieces diamond. So, 100gm Single_Big_Diamond
Diamond =NOT equal 1gm x 100 small_Diamonds, in terms of value
Shares, NOT possible (How Ref: 📑📑Pillar#1C: SEBI sharemarket) ✋No
Bonds
NFT NOT possible. Explained below. ✋No

10.33.2 💠💠 Non-fungible token (NFT: ग़ैर-फ़ं जीबल टोकन)

⇒ (Definition) NFT is a Digital file photo file (JPEG), Animated image (GIF), music file (MP3) etc
Stored using blockchain Technology. �ॉकचेन प्रौद्यो�गक� द्वारा सं ग्रिहत फ़ोटो, सं गीत इ�ािद िक़� क� िड�जटल फाइल
है।
⇒ NFT may also be used in storing physical assets. E.g. Ownership document of house, boat,
physical-painting etc. (इस भौ�तक स���यों क� मा�लक� के द�ावेजों का भी िड�जटल करण कर एनएफ़टी म� सं ग्रिहत कर
सकते है)
⇒ NFT cannot be subdivided. Their individual sub-units cannot be exchanged with one another.
Because their values are different based on buyer’s preference. So NFTs are non-fungible. (अलग
अलग �चत्र/सं गीत कृ �तऑ का मू�, ग्राहक क� पसं द से िहसाब से अलग अलग हो सकता है इस�लए उ�े छोटे टुकड़ों म� �वभा�जत करना /
आपस म� उनक� अदला-बदली नहीं हो सकती.)
⇒ Mass Hysteria going on to purchase such digital assets from new-age artists using (mostly)
Ethereum cryptocurrency. (नए ज़माने के िड�जटल �चत्र/धुन के एनएफटी ख़रीदने का सामूिहक पागलपन चल रहा है.)
⇒ e.g. American digital artist Beeple’s Painting JPEG auctioned for $70 million
⇒ E.g. Robot Sophia created a digital painting/art "Sophia Instantiation" (NFT)→ Auctioned for
more than 6 lakh dollar$.
⇒ Many sportsmen, filmstars also creating NFT out of their posters/autographs but we’ll not waste
preparing all that General Knowledge (GK). (मश�र �खलाड़ी और िफ़� अ�भनेता भी इसे जारी कर रहे ह�)

10.33.3 💠💠🤩🤩NFT-Charms? (आकषर्ण)

⇒ 1) Multimedia Creators: Easier to trade digital assets (िड�जटल �चत्रकार/धुनकार के �लए कृ �तयों क� �बक्र�
आसान.)

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⇒ 2) Easier to verify ownership records. Prevent plagiarism. (सं पती क� मा�लक�/�ा�म� क� जाँच करना आसान.
नकल�चयों के �लए जालसाजी करना / बनावटी द�ावेज बनाना मु��ल.)
⇒ 3) Cinema / Sports tournament / Travel tickets etc can be stored with ownership records. Helps
in Paperless administration. (�सनेमा / खेल /प�रवहन क� िटकट क� �बक्र� िड�जटल ��प से करना आसान, काग़ज़ मु�
प्रशासन.)

10.33.4 💠💠😰😰NFT-Challenges: (चुनौ�तयां)

⇒ 1) Started in 2017→ steep price rise in 2021. Single GIF /meme file selling for millions
dollar$ worth of cryptocurrencies. This mass-hysteria / investment-bubble will collapse.
Investors will lose money. (ये सामूिहक पागलपन /�नवेश का गु�ारा फट जाएगा तब �नवेशकों का पैसा डू ब जाएगा.)
⇒ 2) Money laundering & terror Finance. How: Ref Pillar#2. (धनशोधन और आतं क� �व�पोषण म� द�ु पयोग
स�व)
⇒ 4) Maintaining such computer blockchain record → Electricity consumption⏫→ CO2
Emission. (इस डेटाबेस का सं चालन/वहन करने म� ब�त �ादा �बजली खपत होती है, �जससे काबर्न डाइऑ�ाइड उ�जर्न म�
बढ़ोतरी.)

🔠🔠❓MCQ. Find correct statements abt Non-Fungible Tokens (NFTs) (Prelims-2022)

1. They enable the digital representation of physical assets.
2. They are unique cryptographic tokens that exist on a blockchain.
3. They can be traded or exchanged at equivalency and therefore can be used as a medium of
commercial transactions.
Codes: (a) 1 and 2 only (b) 2 and 3 only (c) 1 and 3 only (d) 1, 2 and 3

10.33.5 ✍ Mains Answer Writing

From this particular topic, the Mains angles are centred around - why we should promote digital
economy ? what are the challenges? why crypto currencies are bad? how is Blockchain technology
useful? what is CBDC? et cetera
⇒ This Raftaar-courses deals purely with Prelims and NOT with Mains. So, You’ve two options:
⇒ A) Watch previous recorded course QEP2 Course finished in 2023-June-to-August: OR
⇒ B) Wait for next LIVE course for Mains-QEP3 from 2023-Nov onwards.

📑📑Next Handout: Pillar1A2: Monetary Policy: CRR, SLR, Repo etc.

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 Pillar1A2: 🤑🤑 Money Supply (M0-M4) & Monetary Policy- CRR, SLR, Repo
Previous Years' official UPSC MCQs also given in this handout. You can see that UPSC is not going
into microscopic details of RBI's Operational/technical guidelines. Very simple-broad-overview type
MCQs asked. So, ✋ Donot live in 😰😰imaginary fear that.... का��नक डर मे मत �जयो के …
- Inexperienced Pvt Mock Test-walla asking random/technical Qs so I must do PHD 🎓🎓✋
- EconomicTimes / Financial Express/ Hindu-BusinessLine columnist are writing long winded
columns on RBI's Operation Twist or TLTRO so I must do PHD 🎓🎓✋
Table of Contents

11 �Money’s Demand, Supply & Creation ................................................................................... 48

11.11 � Demand of Money: Liquidity Preference Theory (तरलता अ�धमान) ........................................... 48
11.11.1 TOTAL demand of money: factors affecting .............................................................................................. 48

11.12 ��Supply of Money (मुद्रा क� पू�त) ............................................................................................... 49

11.12.1 �� Liquidity of assets ............................................................................................................................. 49
11.12.2 �� Liquidity Trap ( तरलता जाल) – refer to end section ............................................................................ 50
11.12.3 ���Measures of Money Supply (मुद्रा आपू�त के प�रमाण) ............................................................................ 50

11.13 ��� Money Supply [M3] .................................................................................................. 51

11.13.1 �Call Money | Notice Money | Term Money .......................................................................................... 52
11.13.2 Full Reserve Banking vs. Fractional Reserve Banking................................................................................ 52

11.14 ��Money Multiplier (मुद्रा गुणक) ............................................................................................... 52

11.14.1 Money Multiplier From 2019 to 2021: why fallen? .................................................................................... 54
11.14.2 ��Money Multiplier From 1981 to 2020 ............................................................................................. 55

11.15 �� M0: Creation of Money (मुद्रा का �नमार्ण) ................................................................................ 55

11.16 �Money Supply & FRBM Act .................................................................................................. 56

11.16.1 Monetisation of deficit (घाटे का मुद्रीकरण) ............................................................................................................. 57
11.16.2 ��Money Supply: observation by EcoSurvey23 ................................................................................. 58
11.16.3 ��: Currency in Circulation (CIC) ....................................................................................................... 59
11.16.4 � Misc. topic: Velocity of Money Circulation (मुद्रा सं चालन का वेग) ................................................................. 59

12 �� Monetary Policy (मौ�द्रक नी�त) .............................................................................................. 60

12.11 ��� MonPolicy: Quantitative Tools (प�रमाणा�क साधन) ........................................................ 60
12.11.1 ��Statutory Reserve Requirements: CRR, SLR (Fight inflation: ↑, deflation: ↓) ............................ 61
12.11.2 : ��CRR SLR on Foreigners/NRI’s deposits in Indian Banks? ........................................................ 62

12.12 ���� CRR, SLR: Development in Recent Years .......................................................... 62

12.12.1 ���� (2020-Feb) CRR Exemption for 5 yrs, depending on loans (सीआरआर म� छू ट) ...................... 62
12.12.2 ���� (2020-Mar) CRR during and after Corona ....................................................................... 63

12.13 Net Interest Margin, Liquidity overhang & ₹2000 Withdrawal ................................................ 63

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12.14 Incremental CRR after ₹2000 withdrawal .................................................................................. 64
12.14.1 ��: ���� CRR Technical things NOTIMP ......................................................................... 65

12.15 ��� MonPolicy → Quant Tools → Rates → LAF Repo................................................ 66

12.16 �Current repo vs [neutral or terminal] repo rate ............................................................................ 67

12.17 �� REPO → Special Windows under Atma Nirbhar ........................................................ 67

12.17.1 �� REPO → TLTRO, SLTRO, On-Tap Windows ............................................................................ 67
12.17.2 ��RBI’s Special Windows: Useless Doubts by flag-carrying Babushonas....................................... 68
12.17.3 (2020) ��Reverse Repo Rate cut........................................................................................................... 69
12.17.4 ��� MonPolicy → Quant Tools → Variable Rate Reverse Repo (VRRR) ................................. 69
12.17.5 �� � Enhanced Reverse Repo Rate for Hardworking Bankers ..................................................... 69
12.17.6 ��� MonPolicy → Quant Tools → Rates → MSF (2011) ........................................................... 69
12.17.7 ��� MonPolicy → Quant Tools → Rates → Bank rate (ब�क दर): ................................................... 70
12.17.8 ��� Quanti. Tools → SDF (=Reverse Repo walla game Without Collaterals) ........................... 70
12.17.9 MSF Repo vs Reverse Repo vs SDF ............................................................................................................. 71
12.17.10 Policy Corridor / LAF Corridor................................................................................................................... 72
12.17.11 ��� Tri-Party Repo (�त्र-प�ीय पुन: क्रय-अनुबंध): ........................................................................................... 72
12.17.12 �� BPLR, MCLR, External Benchmarks, etc: ...................................................................................... 73

12.18 open market operations- two types............................................................................................. 73

12.18.1 ��� Market Operations (OMO): (Inflation → Sell G-Sec, Deflation → Buy) ........................... 73

12.19 ����MonPolicy: Quanti Tools: OMO → Operation Twist ....................................... 73

12.19.1 ��: Security → Debt → G-Sec & Bonds (ऋण के �लए जारी क� गई प्र�तभू�तयां).................................................... 73
12.19.2 � (�
��: ��) Deepening of G-Sec market- Retail investors’ RDAG @RBI ............................. 74
12.19.3 ��:�
�Corporate Bonds: factors that determine its interest rate ...................................................... 74
12.19.4 ��: � Bond Yield (बांड म� �नवेश करने पर होने वाली आय या मुनाफा) ........................................................................... 75
12.19.5 ��: � Bond Yield ∝ 1/Price (स�े म� खरीदा= तो मुनाफा �ादा) ......................................................................... 75
12.19.6 ��: � Bond yield: other factors affecting it (अ� कारक) ....................................................................... 75
12.19.7 ����Operation Twist: why? ......................................................................................................... 76
12.19.8 ����RBI’s Operation Twist: methodology (2019-Dec) ............................................................ 76
12.19.9 �� ��: � Bond Yield & Inverted Yield Curve: poor benefit for exam .................................. 77

12.20 ���: � MonPolicy: Quanti Tools: OMO → G-SAP.................................................... 78

12.20.1 ���:�
� OMO → G-SAP : Benefit?................................................................................................. 78

12.21 ��� Monetary Policy: Qualitative Tools (गुणा�क साधन) ...................................................... 79

12.21.1 � Moral Suasion (नै�तक दबाव / सलाह) & Publicity (प्रचार) ................................................................................... 80
12.21.2 �� Direct Action (सीधी कायर्वाही: �ोिक लातो के भुत बातो से नहीं मानते)......................................................................... 80
12.21.3 � Margin Requirements / Loan to Value (LTV) (सीमा अ�नवायर्ता) ................................................................ 80
12.21.4 Selective Credit Control (चयना�क ऋण �नयं त्रण) ..................................................................................................... 81

12.22 ��� Priority Sector Lending (PSL: प्राथ�मकता �ेत्र के �लए ऋण मानक) ............................................. 81
12.22.1 ��� PSL Reforms-2020: on RRB/SFB/UCB? .................................................................................. 83

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 12.22.2 ��� PSL Reforms-2020: Startups, Renewable Energy and Healthcare .......................................... 83
12.22.3 ��� PSL Reforms-2020: Weightage to poor districts (गरीब/�पछड़े �जलों को भारांक) ................................... 83
12.22.4 �PSL Shortfalls: RIDF and UIDF ............................................................................................................... 84
12.22.5 ���:�
� Priority Sector Lending Certificates (PSLC) from 2016 onwards ................................. 84

12.23 � � Monetary Policy Tools: A Ready Reckoner Table ........................................................ 86

12.24 � Monetary Policy in Present-Day India ................................................................................ 87

12.24.1 � Monetary Policy Making under RBI Act since 2016 ........................................................................... 87

12.25 � Review of Bi-Monthly Monetary Policies ............................................................................ 90

12.25.1 �� Stance: Calibrated Tightening / Neutral / Accommodative ........................................................ 90

12.26 ���RBI’s Monetary Policies: Before 2020-Corona ......................................................... 91

12.27 ���RBI’s Monetary Policies: Corona 2020 ..................................................................... 91

12.28 ���RBI Monetary Policies: April-2022 Onwards ........................................................... 92

12.28.1 ���Monetary Policy: April-2022 (SDF) .......................................................................................... 92
12.28.2 ���Monetary Policy: May-2022 Repo�
� ...................................................................................... 92
12.28.3 ���Monetary Policy: 2022 so far upto 2023-Sept .......................................................................... 93

12.29 ���Monetary Policy: Governors other regulatory announcements .............................. 93

12.30 ���� Banks’ Lending Rates % (ब�क ऋण क� �ाज दर�) ............................................................ 94

12.31 ���� Bank’s loan interest rate: External Benchmark (बाहरी ब�चमाकर् ) .............................. 95
12.31.1 ���� External Benchmark: Formula Components: ................................................................... 95
12.31.2 ���External Benchmark system: Which borrowers eligible? ....................................................... 95
12.31.3 ���:� ��External Benchmark system: FAQ .............................................................................. 95
12.31.4 Interest Rate Reset of EMI based Floating Interest Loans ......................................................................... 96
12.31.5 Banks’ Lending Rates % → Fixed vs Floating interest loans, teaser loans, NPA etc. ............................ 96

12.32 �� Limitations of Monetary Policy in India (मौ�द्रक नीती क� मयार्दाए) ........................................... 97

12.32.1 �� Monitory policy: liquidity deficit in banking system................................................................... 98
12.32.2 �� Monetary policy limitations: Cheap loans causing inflation? ..................................................... 98
12.32.3 ��USA Quantitative Easing (QE) & Fed Tapering : Impact on India.............................................. 99
12.32.4 �� Monetary policy limitations: Black Swan Events .......................................................................... 99

12.33 Monetary policy observations by �ES23 ............................................................................... 100

12.33.1 Rate hikes: RBI vs Other Central banks ..................................................................................................... 100
12.33.2 Monetary Policy: Soft landing vs Hard Landing....................................................................................... 101
12.33.3 �� Monetary policy limitations: Cantillon Effect ............................................................................. 101
12.33.4 �Liquidity Trap (तरलता जाल) ............................................................................................................................ 101
12.33.5 �Mains Related Content .............................................................................................................................. 102

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11 🤑🤑MONEY’S DEMAND, SUPPLY & CREATION
11.11🤲🤲 DEMAND OF MONEY: LIQUIDITY PREFERENCE THEORY (तरलता अ�धमान)
British Economist John Maynard Keynes (Book: The General Theory of Employment, Interest and
Money, 1936) noted - people prefer to keep a part of assets in liquid form (cash money) with 3
motives: (लोग अपना कु छ पैसा नकदी म� हाथ म� रख�गे. सारे का सारा पैसा ब�को म� जमा नहीं कर द�गे. �ोंिक तीन कारण होते ह�)

1. 🌽🌽 Transaction motive (सं �वहार उद्दे�): For using money as a medium of exchange e.g. for
buying daily milk, vegetables and fruits. (रोजाना क� खरीद के �लए कु छ पैसा हाथ म� रखा जाता है सारा पैसा ब�क म�
नहीं जमा करते)
2. 💊💊 Precautionary motive (एह�तयाती): To protect against sudden / unforeseen expenditure e.g.
medical emergency or impulsive purchase during a holiday trip. (घर म� कोई बीमार हो गया, प्रवास म� जाना
है)
3. 📉📉 Speculative motive (सट्टा-उद्दे�): Investors hold cash to make the best use of any investment
opportunity that arises later e.g. waiting for gold / land prices to fall, then “I will use my cash to
buy it”. Also known as "Asset Demand of Money". (जो सं प�� मुझे खरीदनी है उसका दाम थोड़ा �गर जाए उसक�
राह देख रहा �ँ )
The amount of money held in cash form vary inversely with (deposit) interest rates. If higher
interest available in Bank Deposits etc. → people would invest money in banks, instead of keeping
money in liquid form (cash). (ब�क वाला अगर बचत खाते पर अ�ा �ाज देगा तो लोग हाथ म� नकदी पैसा कम रख�गे ब�क म�
�नवेश �ादा कर�ग)े

11.11.1 💰💰TOTAL demand of money: factors affecting

(Batch: PCB10-RATFAAR) Mrunal’s Economy Pillar#1A-2: Money Supply & RBI’s Monetary Policy → Page 48
�FAQ: What does above chart mean? Ans. Explained in video.
- Total demand for money in an economy = transaction demand + speculative demand.
- �FAQ: why have you not mentioned speculative demand in above formula? Ans. Because
NCERT has not mentioned it.
11.12 💸💸📥📥SUPPLY OF MONEY (मुद्रा क� पू�त)

🗓🗓 Time Liabilities of a Bank (FDRD) 💪💪 Demand Liabilities of a Bank (CASA)

समय / मीयादी देयताएँ मांग देयताएं
- Fixed deposits, Cumulative/ recurring - Current Account
deposits, Staff security deposit etc. - Savings Account
- Bank legally not required to pay customer - Demand Draft
before maturity. But bank may pay after - Overdue balance in Fixed Deposits
deducting penalty/ interest. (व� से पहले पैसा - Unclaimed deposits. (What does it mean?
�नकाला तो दंड लगेगा) Ans. Explained in Video Lecture.)
- What is Nostro/Vostro account? Ans.
Refer Pillar3A. ELSE This Youtube Video:
https://youtu.be/UwYqP84l1AQ?t=49
Public parks more money here, because better LESS (ऐसे बचत खातों पर �ाज कम �मलता है इस�लए जनता
returns / higher interest rates. कम मात्रा म� पैसा रखती है यहाँ पर)
LESS liquid. More liquid because easily convertible into
cash on demand.
🔠🔠❓ ____ is not included in the assets of a commercial bank in India? (Prelims-2019)
(a) Advances (b) Deposits (c) Investments (d) Money at call and short notice

11.12.1 ☔💸💸 Liquidity of assets

- Liquidity= ease of converting an asset into cash. Cash is the most liquid asset.
- ☔☔Highly liquid assets = Gold, Demand deposits, G-Sec/T-Bill, shares/bonds of reputed
companies. (अ��धक तरल सं प��: तुरंत खरीदार �मल जाते ह�. आप सं प�� को नगदी धन म� आसानी से प�रव�तत कर सकते ह�)

(Batch: PCB10-RATFAAR) Mrunal’s Economy Pillar#1A-2: Money Supply & RBI’s Monetary Policy → Page 49
- ☂Relatively illiquid assets= Home/Real estate, Paintings/Sculptures etc. Because difficult to
find buyers at right price instantly. खरीदार आसानी से नहीं �मलता इस�लए इन सं प��यों क� तरलता थोड़ी कम है
- 💸💸 💉💉Liquidity injection / infusion refers to phenomenon when RBI buys Bank/NBFCs’ G-
Sec/T-bill/financial assets to give them cash. (HOW? Ans. Watch Video) (तरलता अ�ः�ेपण)

11.12.2 ☔💸💸 Liquidity Trap ( तरलता जाल) – refer to end section

- Refer to the end section of this handout.
11.12.3 💸💸💸💸💸💸Measures of Money Supply (मुद्रा आपू�त के प�रमाण)
- (Objective) To make a good nutrition scheme for India, the government will have to first find the
weight of the citizens. Similarly, to make a good monetary policy, RBI will have to find the
quantity of money in the system. (कु पोषण के �ख़लाफ़ अ�� योजना बनाने से पहले सरकार ने लोगों का वज़न नापना
होगा. उसी तरह देश के �लए अ�� मौिद्रक नी�त बनाने के �लए �रज़वर् ब�क ने सबसे पहले तो देश म� पैसों का ज�ा नापना होगा)
- (Definition) Money supply means the total amount of money in an economy at any given time.
(िदए गए समय पर अथर्तंत्र म� कु ल �मलाकर िकतना पैसा है उसक� मात्रा या ज�े को कहते ह� “मुद्रा आपू�त”)
- (Significance) Money supply plays a crucial role in 1) price level (=inflation) and 2) interest rates
on deposits & loans. (मुद्रा क� आपू�त → महंगाई दर और �ाज दरों पर असर करती है)
- (Types) RBI measures the money supply through indicators: M0, M1, M2, M3, M4
Table 1: *CU: Coins & Currency with Public
Commercial Banks Post Office Savings Bank
Measure Demand Time Demand Liquidity Qty
*CU Time
सं कु �चत, �ापक Deposits Deposits Deposits तरलता मात्रा
Deposits
(CASA) (FDRD) (SA)
Narrow M1 ✓ ✓ ✗ ✗ ✗ ☆☆☆☆ ☆
Money M2 ✓ ✓ ✗ ✓ ✗ ☆☆☆ ☆☆
Broad M3 ✓ ✓ ✓ ✗ ✗ ☆☆ ☆☆☆
Money M4 ✓ ✓ ✓ ✓ ✓ ☆ ☆☆☆☆
Apply logic to derive formula e.g. M3 = M1 + Time deposits with banks. (�यं से फामूर्ला बनाइए)

- M3 is the most commonly used measure of money supply, also known as Aggregate Monetary
Resources / Aggregate Money Supply” (सम� मौिद्रक सं साधन) because out of all the money supply
indicators (M0-M4) this is the indicator RBI will focus the most for its analysis while designing
of monetary policy. (अपनी मौिद्रक नीती बनाते व�, �व�ेषण के �लए �रज़वर् ब�क इस आंकड़े पर खास �ान रखती है)
- In above formulas for money supply, we are only counting the “NET Demand / NET Time
deposits” i.e. only public’s deposits in bank. We are not counting inter-bank deposits i.e. one
commercial bank’s deposit in other commercial banks. एक ब�क से दू सरे ब�क म� पैसा िडपॉ�जट िकया हो तो उसे
इधर नहीं �गनते.
- Corona-2020: Initial months of lockdown (May2May-2020) → deposit⏬⏬ because people
withdrew money in panic / precautionary motive. Although in the later months → Unlockdown
and normalcy → ⏫⏫ bank deposit by Dec-2020. तालाबं दी के शु�आती महीनों म� लोगों ने एह�तयाती कारणों से
ब�कों से अपनी िडपॉ�जट �नकाली हालांिक प�र���त सामा� होने पर, बाद के महीनों म� वापस बचत क� मात्रा म� बढ़ोतरी होने लगी है

(Batch: PCB10-RATFAAR) Mrunal’s Economy Pillar#1A-2: Money Supply & RBI’s Monetary Policy → Page 50
🚩🚩🚩🚩 FAQ1: Why M3 is Aggregate Money Supply? ✅Ans. Watch video.
🚩🚩🚩🚩 FAQ2: Why is the liquidity of M4 less than M3? ✅Ans. Watch video.
🚩🚩🚩FAQ3: What is Narrow Money and Broad Money?
M1 and M2 are called Narrow money. Because of their smaller size (since they only cover demand
deposits) M3 and M4 are called broad money, because of their relatively larger size than M1 and M2.
since these terms are given in the NCERT so we have to prepare & accept. It is not some great thing
worthy of mains exam that we have to spend more time than that 1 word association.
🚩🚩🚩FAQ: What is Hard Money vs Soft Money? Definition differs from website to website besides
All such random terms mentioned on Investopedia.com are not automatically important for exam.
My boundary for this money-supply/indicator topic is “NCERT textbook, not the entire internet.”
🚩🚩🚩🚩FAQ4: As per NCERT class12: “M4 = M3 + Total deposits with Post Office savings
organisations (excluding National Savings Certificates)”. So why you revision table doesn’t talk about
National Savings Certificates. ✅Ans. This much pedantry I find it less imp for exam so don’t want
to overcomplicate my revision friendly table.

🔠🔠❓ MCQ. If you withdraw Rs. 1 lakh in cash from your Demand Deposit Account at your bank,
the immediate effect on aggregate money supply in the economy will be _ _ . (Prelims-2020)
[a) to reduce it by ₹ 1,00,000 [b) to increase it by ₹ 1,00,000
[c) to increase it by more than ₹ 1,00,000 [d) to leave it unchanged
🚩🚩🚩🚩 FAQ: I’ve 500 jaat-ke doubts in above MCQ ✅Ans. Watch entire pillar’s 5 videos.

11.13💸💸💸💸💸💸 MONEY SUPPLY [M3]

💸💸💸💸💸💸Indicator Situation in 2021
M0 = also known as reserve money /high Quantity ⏫increased but % growth lower
powered money than 2020. वृ�द्ध दर �पछले साल क� अपे�ा कम रहा
<formula in separate section>
M3 = “Aggregate Monetary Resources / Quantity ⏫increased but % growth lower
Aggregate Money Supply” (सम� मौिद्रक सं साधन). than 2020
Money multiplier 5.6 in 2020 and 5.2 in 2021. So, Money
= M3 divided by M0 Multiplier decreased than 2020 . (Reason:
(मुद्रा गुणक) Bankers couldn’t find enough loan taker, so,
<more explanation in separate section> parked large quantity of deposits with RBI
under Reverse Repo Window.)

(Batch: PCB10-RATFAAR) Mrunal’s Economy Pillar#1A-2: Money Supply & RBI’s Monetary Policy → Page 51
11.13.1 ⏰Call Money | Notice Money | Term Money
These terms are used when bank/Non-Banking Financial Companies (NBFC) lend/borrow money
among themselves for short term (i.e. less than 1 year)

word Duration of LOAN

Call Money borrowed for one day (=This duration also called “overnight”.)
Notice Money 2 days to 14 days
Term Money Exceeding 14 days but less than 1 year
�DONOT mix above words with broad money / narrow money / M1/M2/M3/M4 etc.

11.13.2 Full Reserve Banking vs. Fractional Reserve Banking

> इन श�ों का िहदं ी अनुवाद नहीं कर�गे �ोंिक इस प्रकार क� �थयरी पूछने का मु� परी�ा म� कोई �रवाज नहीं है.

Full Reserve Banking Fractional Reserve Banking

can banker give money from NO. And consequently, YES, can give.
DEMAND Deposits as Banker may not pay
LOANS? (e.g. current account, interest to demand
saving account) depositors.
can banker give money from YES, can give YES, can give
TIME Deposits as LOANS?
(e.g. Fixed Deposits)
Bankers’ vulnerability to LESS. Because demand MORE. Because both time and
sudden/panic withdrawals by deposits not given as demand deposits are given as loans.
clients (known as ‘Bank Run’) loans. So if Vijay Mallya fled the country
→ it will create more problems!
Banker’s ability to help in Less. Because it can give More
Economic growth? less qty of loans.
- India uses Fractional Reserve Banking.

11.14💸💸⚡MONEY MULTIPLIER (मुद्रा गुणक)

RBI’s Cash Reserve Ratio (CRR) controls the Fractional Reserve Banking & Credit Creation by the
commercial banks, in the following manner:

(Batch: PCB10-RATFAAR) Mrunal’s Economy Pillar#1A-2: Money Supply & RBI’s Monetary Policy → Page 52
 Table 2: this process is called 'Fractional Reserve Banking & Credit Creation'
High Powered money (M0) = 100 Deposits Loaning 10% Reserve (‘R’)
Bank#1 100 90 10
Bank#2 90 81 9
Bank#3 81 72.9 8.1
Bank#.. .. .. ..
Total Money (here M3) Total sum = ₹1000**
𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆 𝑜𝑜𝑜𝑜 𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀 (𝑀𝑀3) 1000
𝑴𝑴𝑴𝑴𝑴𝑴𝑴𝑴𝑴𝑴 𝑴𝑴𝑴𝑴𝑴𝑴𝑴𝑴𝑴𝑴𝑴𝑴𝑴𝑴𝑴𝑴𝑴𝑴𝑴𝑴 = = =10
𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆 𝑜𝑜𝑜𝑜 𝐻𝐻𝐻𝐻𝐻𝐻ℎ 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚(𝑀𝑀0) 100

🚩🚩🚩🚩 FAQ: How is this possible/ I didn’t understand? ✅Ans. Watch the video.

- In above example, 10% CRR (CRR) generated 10x times of M0 money. [ब�क कजर् देने से पहले यिद 10%
रकम आर��त रखती है तो 10 गुना �ादा पैसों का �नमार्ण]
- 4% reserve ratio will generate [1/(1/25)]= 25x times (in theory). See formula below:
𝟒𝟒 𝟏𝟏
𝑪𝑪𝑪𝑪𝑪𝑪 𝟒𝟒% = =
𝟏𝟏𝟏𝟏𝟏𝟏 𝟐𝟐𝟐𝟐
𝟏𝟏 𝟏𝟏 𝟏𝟏
𝒎𝒎𝒎𝒎𝒎𝒎𝒎𝒎𝒎𝒎 𝒎𝒎𝒎𝒎𝒎𝒎𝒎𝒎𝒎𝒎𝒎𝒎𝒎𝒎𝒎𝒎𝒎𝒎 𝒆𝒆𝒆𝒆𝒆𝒆𝒆𝒆𝒆𝒆𝒆𝒆 = = = = 𝟐𝟐𝟐𝟐 𝒕𝒕𝒕𝒕𝒕𝒕𝒕𝒕𝒕𝒕
(𝑪𝑪𝑪𝑪𝑪𝑪) (𝟒𝟒%) ( 𝟏𝟏 )
𝟐𝟐𝟐𝟐

- ✋however in reality the multiplier may be lower than 25x, due to poor banking penetration.
(गांव गांव तक ब�क क� सु�वधा नहीं है इस�लए वा��वक जीवन म� इतना मुद्रा गुणक नहीं होगा)
- In a functional economy, money multiplier (MM) is always greater than 1 & CRR will always be
less than 100%. WHY? Ans. Watch video.
- MM directly improves with ⏬reduction in CRR. (सीआरआर घटेगा तो मुद्रा गुणक बढ़ेगा)
- MM indirectly improves as economy develops, consumption / loan demand increases, banking
penetration, digital economy, less-cash economy etc.

(Batch: PCB10-RATFAAR) Mrunal’s Economy Pillar#1A-2: Money Supply & RBI’s Monetary Policy → Page 53
- MM improves with the ⏫in banking penetration, financial inclusion (�व�ीय समावेशन)
- Boom period, Whenever loan demand ⏫ (तेजी का माहौल → लोन �ादा �लए जा रहे हो)
- When RBI adopts Cheap / Easy / Dovish / Expansionary monetary policy to combat deflation.
(जब स�ापे/ अप���त से लड़ने के �लए �रज़वर् ब�क लोन के �ाज दर स�े कर दे)
- In 1960s = less than 2x, 90s = more than 3x, At present = more than 5x.

🚩🚩🚩FAQ: What will be the impact of SLR changes on Money Multiplier? Ans. Can’t be written
mathematically. Reason given in Video.

11.14.1 Money Multiplier From 2019 to 2021: why fallen?

Money multiplier (MM) fallen from 5.6 on 31/3/20 to 5.2 on 31/3/21 because

⇒ if banks kept loaning to households & business firms then (M3/M0)=Money Multiplier would
grow thru lending-deposit activity from One bank account to another bank account.
⇒ But this deposit-to-lending activity seems to have slowed down in Corona & afterwards so MM
did not improve.
⇒ Then between 2021-22, the money multiplier remained stable in the range of 5.2 (2021) → 5.1
(2022). (मुद्रा गुणक म� कु छ खास बदलाव नहीं आया)
✋Note: There may be 500 other factors as well affecting these indicators but gives poor:cost benefit
learning all those things from MCQ point of view. वा��वक �जदं गी म� और भी 500 कारकों के चलते इन आंकड़ों पर
असर होता है लेिकन उन सब क� पं चात करने बैठे तो परी�ा के �लए उपयोगी नहीं #⏳📚📚थोड़ा-पढ़ो-आगे-बढ़ो

(Batch: PCB10-RATFAAR) Mrunal’s Economy Pillar#1A-2: Money Supply & RBI’s Monetary Policy → Page 54
11.14.2 💸💸⚡Money Multiplier From 1981 to 2020

Figure 1: source- Economic Survey 2020, zigzag pattern means 'not increasing steadily'.
- between mid-1990’s to 2016-17: Money multiplier (measured as a ratio of M3/M0) was mostly
⏫. Reasons are explained in the video.
- But 2017-18 onwards: Money Multiplier is ⏬. Could be attributed to the lack of growth in
loaning activities & slowdown in economy.
🔠🔠❓ MCQ. Money Multiplier in an economy increases with _ _ _? (UPSC-Prelims-2019)
A) Increase in the cash reserve ratio B) Increase in the banking habit of the population
C) Increase in the statutory liquidity ratio D) Increase in the population of the country

👆👆Same above MCQ also repeated in Prelims 2021

11.15💸💸💸💸 M0: CREATION OF MONEY (मुद्रा का �नमार्ण)

M0 / Reserve Money / Government Money / High Powered Money (उ� श�� मुद्रा) is issued under
RBI Act, by RBI’s ISSUE DEPARTMENT, with condition that ISSUE DEPARTMENT’s assets must
match its liabilities. (आरबीआई के वल उतना ही पैसा छाप सकता है �जतनी प�रसं प��यां उसके इ�ू-�वभाग के पास हो)
Assets of Issue Department (प�रसं प��याँ) Liabilities of Issue Department [M0]
1. Rupee coins [RBI ‘buys’ coins & ₹1 notes from Total Bank notes in circulation, which
Govt and circulates it as the ‘Agent of govt’] consists of:
2. Gold coins [Min. ₹ 200 crores] सोने के �स�े 1. Held by Public
3. Gold bullion [Min. ₹ 115 crores] सोने क� �टे 2. Held by other Banks in “Vault cash”
4. Foreign Securities, incl. IMF [Earlier Min. ₹ 400 (i.e. amount kept by banks for day to
crores but Post-1995 no such requirement.] day Operations.)
5. (Indian) Govt. Securities [through which Govt 3. Other Deposits in RBI (of Public*,
borrows money from RBI & returns Principal + Banks & Governments)
Interest at later date] सरकारी प्र�तभू�तयां
Total = suppose 100 Cr @”X”date Total = 100 Cr @”X” date.
- * such as PM Garib Kalyan Yojana (2016) under which Blackmoney holder was required to
deposit 25% of his blackmoney in RBI for a lock-in period of 4 years. More in Pillar#2B

(Batch: PCB10-RATFAAR) Mrunal’s Economy Pillar#1A-2: Money Supply & RBI’s Monetary Policy → Page 55
- M0 ⏫increases when RBI’s asset side increases ⏫ e.g. Govt borrowing more from RBI using
G-sec. जब सरकार �रज़वर् ब�क से �ादा पैसा कज� मे ले तब �रज़वर् ब�क क� प�रसं प��यों म� बढ़ोतरी होती है

11.16🖨🖨MONEY SUPPLY & FRBM ACT

FISCAL RESPONSIBILITY AND BUDGET MANAGEMENT ACT 2003 (राजकोषीय उ�रदा�य� और बजट
प्रबं धन कानून ) Notable provisions:
- Government has to control its fiscal deficit within X% of GDP. (Ref: Pillar#2D) (सरकार ने अपने घाटे
को GDP के कु छ प्र�तशत से �ादा नहीं बढ़ने देना होगा.)
- Government CANNOT borrow from RBI. (In other words, RBI cannot buy government’s loan
instruments for itself from primary market) **Except in TWO situations:**
o i) Short term Ways and Means Advances (WMA) (Ref: Pillar#1C)
o ii) During war, disaster, agri-crisis, big fall in GDP. (Ref: Pillar#2D)
- RBI can buy/sell government’s loan instruments from secondary market (i.e. from other
investors in OMO/ Open market operations.) (�रज़वर् ब�क आमतौर पे प्राथ�मक बाज़ार से सरकार के लोन कज़र्
उपकरण नहीं ख़रीद सकती है, िकंतु िद्वतीयक बाज़ार ले �रज़वर् ब�क उसक� ख़रीद �बक्र� कर सकती है. )

(Batch: PCB10-RATFAAR) Mrunal’s Economy Pillar#1A-2: Money Supply & RBI’s Monetary Policy → Page 56
�FAQ: didn't understand this. Ans. Complete this whole 1A2 pillar ke 5 lectures, Pillar1C AND
pillar2D lectures.

11.16.1 Monetisation of deficit (घाटे का मुद्रीकरण)

- It means RBI printing more currency notes to give as loans to Government. (जब सरकार को उधार देने
के �लए �रजवर् ब�क नया पैसा छापती है)
- However, this process is difficult/ not easy due to FRBM Act conditions learned above. (हालाँिक
FRBM क़ानून के चलते ये इतना आसान नहीं है अब.)

🚩🚩🚩FAQ: Whose responsibility is it to exchange the public’s torn / soiled ₹ 1 note ?

Ans. RBI will do it as the agent of the Govt.

🚩🚩🚩FAQ: Whose responsibility is it to exchange broken coins?

Ans. First of all it is difficult to break a coin unless with a metal cutter. And secondly I’d not loose
sleep over such JAMES-Bond-Babu-Shona Qs. for UPSC exam point of view. Common-sense
suggests that if RBI is exchanging torn ₹1 Note, then RBI would be exchanges coins as well.

🚩🚩🚩FAQ: All coins and ₹1 paper-note is whose liability ? RBI or Govt

⇒ All coins and ₹1 paper-note are issued by Government. (Ref: Pillar1A1 Handout)
⇒ RBI circulate them as “agent of the government”.
⇒ However these items are liability of government. As per RBI Website.
⇒ So, All coins & ₹1 paper-note are liability of Govt.
⇒ However, some books interpret that since 1) RBI is circulating them 2) RBI is responsible for
getting torn ₹1 rupee notes exchanged, so it is RBI's liability.
⇒ If in Doubt for MCQ → then tick “Govt.” as Answer.

🚩🚩🚩FAQ: Can Govt borrow as much ₹₹ as they want via G-Sec? ✅Ans. No! There are legal
limits on govt borrowing under the Fiscal Responsibility And Budget Management act (FRBM).
(More in 📑📑Pillar#2D) (सरकार अंधाधुंध तरीक़े से उधारी नहीं कर सकती FRBM क़ानून के अंतगर्त उस पर कु छ सीमाएं ह�.)

(Batch: PCB10-RATFAAR) Mrunal’s Economy Pillar#1A-2: Money Supply & RBI’s Monetary Policy → Page 57
🚩🚩🚩FAQ: RBI’s money supply is limited by above Asset-liability balance method. But what if govt
issues large number of coins and one rupee notes before election to keep voters happy? Will it not
create problems in the M0 & economy? ✅Ans. Too much money supply without enough goods-
supply → inflation. So, a sensible govt will not do such drama. Beyond that I’ve no interest in
engaging in further PHD-intellectual debates. Not important for exam. Move to next topic. (झं डे वाले
बाबूशोनो को ये ख़ास प्र� होता है यिद सरकार अपनी तरफ़ से अंधाधुंध तरीक़े से �स�े छाप देगी तो �ा M0 पे ख़राब असर निह होगा?
जवाब: अगर ब�त �स�े छापे लेिकन बाज़ार म� माल सामान क� िक़�त होगी तो महँ गाई बढ़ी जाएगी इस�लए एक �ज़�ेदार सरकार ऐसी
नौटंक� नहीं करेगी. इससे �ादा मेरे को इसक� चचार् नहीं करनी है �ोंिक वो परी�ा के �लए काम क� निह है।)

🚩🚩🚩FAQ: How did RBI print money in British times? Ans.✅ Watch the lecture videos
🚩🚩🚩FAQ: Where is the repo, where is the RBI’s profit in above table? Ans.✅ Watch the videos
🚩🚩🚩FAQ: If RBI’s gold/G-sec gets stolen/burned/lost then will M0 decrease? ✅ Watch the videos
🚩🚩🚩FAQ: I’ve 500 jaat-ke other doubts. Ans.✅ then u keep looking for answers on Google until Saif’s son
Taimur grows up & gets married. I am done with this topic from Exam point of view.#🕰🕰थोड़ा-पढ़ो-आगे-बढ़ो

11.16.2 💸💸💸💸Money Supply: observation by EcoSurvey23

Indicator Year 2022’s observations by �ES23 (published on 31/Jan/23)

M0 Since RBI � CRR → Bankers deposit in RBI � → M0��.
What / how? Ref: Wait till CRR section is over.
Money 5.2 (2021) → 5.1 (2022). So broadly remained stable / not much changed. (मुद्रा
Multiplier गुणक म� कु छ खास बदलाव नहीं आया)

(Batch: PCB10-RATFAAR) Mrunal’s Economy Pillar#1A-2: Money Supply & RBI’s Monetary Policy → Page 58
11.16.3 💸💸⚡: Currency in Circulation (CIC)

- What is CIC’s exact formula? Ans. Economic Survey didn’t give, Google giving vague ans.
- CIC is an indicator to measure cash as a payment instrument i.e. instead of other payment
instruments such as Cheque, NEFT/RTGS, Card etc. (भुगतान के �लए नक़दी का िकतना प्रयोग हो रहा है)
- 2021: Currency in Circulation (CIC) growth (%) declined from Reason: Corona-led
precautionary demand for cash has reduced/subsided → People are keeping less qty of cash in
hand, and depositing more qty in Banks. (लोगों म� कोरोना का ख़ौफ़ कम �आ है इस�लए जनता अब एह�तयादी �प म�
हाथ म� नक़दी कम मात्रा म� रखती है।)
- 2022: Russia-Ukraine war → temporary increase in ⬆ precautionary cash holdings →
Currency in Circulation (CIC) increased. (�स यूक्रेन के युद्ध के चलते एह�तयाद/सावधानी के �लए लोगों ने हाथ म�
नगदी /रोकड़ा रखना �ादा मुना�सब/उ�चत समझा।)

11.16.4 💸💸 Misc. topic: Velocity of Money Circulation (मुद्रा सं चालन का वेग)

It is the average number of times money passes from one hand to another, during given time period.
e.g. you bought pen worth Rs.10 from shopkeeper, he uses same ₹10 note to buy tea from another
shop → same currency note performed function of Rs.20. िकतनी बार एक नोट एक हाथ से दू सरे हाथ म� जाता है?
This “Velocity of money circulation” is affected by following factors:
- Income distribution: Money in the hands of poor people has higher velocity than the rich
people. Why/HOW? Ans. Watch Video.
- If more people borrow money → higher velocity. Hence developed countries => higher velocity,
because people save less and spend more because of consumerist lifestyle and confidence in
Government’s social-security/pension system e.g. USA. (जब लोगों म� बचत क� भावना कम हो)
- Boom period in economy = more raw material purchase & hiring = higher velocity. (तेजी का माहौल)
- Other 500-jaat-ke-combination-PHD = poor cost:benefit for exam
- What is its scene in Corona? Answer not given in 📔📔📔📔ES so no point in SELFPHD.

(Batch: PCB10-RATFAAR) Mrunal’s Economy Pillar#1A-2: Money Supply & RBI’s Monetary Policy → Page 59
12 🐯🐯📢📢 MONETARY POLICY (मौिद्रक नी�त)

- [Definition] Monetary Policy is a macroeconomic policy (सम�� आ�थक नी�त), designed by Central
bank of a country, to manage money supply & interest rates. It helps shaping variables such as
inflation, consumption, savings, investment, & capital formation (मुद्राआपू�त व �ाजदरो को �नयं �त्रत कर
मुद्रा���त/महंगाई, मांग/खपत, बचत, �नवेश, पूंजी �नमार्ण को आकार देना- क� द्रीय ब�क द्वारा बनाई गई इस प्रकार क� नीती को
मौिद्रक नीती कहते ह�).
- [Significance] Monetary policy plays an important role in price stability [inflation control],
economic growth, job creation and social justice in any economy. (महंगाई-�नयं त्रण, आ�थक वृ�द्ध, रोजगार
सृजन, सामा�जक �ाय के �लए मह�पूणर् साधन है ये मौिद्रक नीती)
- Milton Friedman: This American economist’s research on monetary policy made this subject
more popular, he also won a Nobel in Economics in this regard (1976).
- Philip Curve: Inflation ↑ = unemployment ↓ (and vice versa). मं हगाई बढ़ेगी तो बेरोजगारी घटेगी. मं हगाई कम
होगी तो बेरोजगारी बढ़ेगी. (More in Pillar#4C)
- So, stable & moderate inflation is good for the economy. (��र व म�म�र महंगाई अथर्तंत्र के �लए अ��)
So, RBI tries to keep inflation with 2-6% Consumer Price Index (CPI: All India) using its bi-monthly
monetary policy made by its 6- member statutory Monetary Policy Committee. (छ:-सद�वाली वैधा�नक
स�म�त द्वारा िद्व-मा�सक मौिद्रक नी�त �नमार्ण करके �रजवर् ब�क महंगाई दर को उपभो�ा मू� सूचकांक के िहसाब से २-६% म� �नयं �त्रत
करने क� को�शश करता है)

12.11🐯🐯📢📢📐📐 MONPOLICY: QUANTITATIVE TOOLS (प�रमाणा�क साधन)

Also known as (aka) General or Indirect Tools as they affect the entire economy, and not just a
particular sector. (ये साधन / ह�थयार / उपकरण सामा� या अप्र�� ह� �ोंिक यह िकसी एक �ेत्र-�वशेष को नहीं, िकंतु पूरी
अथर्�व�ा को असर करते ह�)

(Batch: PCB10-RATFAAR) Mrunal’s Economy Pillar#1A-2: Money Supply & RBI’s Monetary Policy → Page 60
12.11.1 🗄🗄✂Statutory Reserve Requirements: CRR, SLR (Fight inflation: ↑, deflation: ↓)

- CRR and SLR are collectively known as “Variable Reserve Ratios” or “Statutory Reserve Ratios”
(इन दोनों को प�रवतर्नीय आर��त अनुपात / वैधा�नक आर��त अनुपात भी कहा जाता है)
CRR SLR
Full form: Cash Reserve Ratio Full form: Statutory Liquidity Ratio
(नकद कोष अनुपात) (वैधा�नक तरलता अनुपात)
Banks must keep this much deposits (or Banks must keep this much deposits in liquid
balance) with RBI. RBI doesn’t pay interest on assets such as cash, gold, G-Sec, T-Bills, State
this deposit, except in extraordinary Development Loan Bonds and other securities
circumstances like 1999’s Banking slowdown. notified by RBI. (ब�क ने जमाकतार्ओ ं से हांसील क� �ई रकम
(ब�क ने जमाकतार्ओ ं से हांसील क� �ई रकम का कु छ िह�ा �रजवर् का कु छ िह�ा, �रजवर् ब�क द्वारा मा� तरल प�रसं प�तमे �नवेश
ब�क मे जमा करना पड़ेगा।) करना होगा)
Bank earns no profit / interest, as such. Some profit may be involved. (मुनाफा हो सकता है)
- CRR: first suggested by British economist Mandated under Banking Regulation Act, 1949
J.M. Keynes & first introduced in US (ब�िकंग �व�नयमन अ�ध�नयम के अनुसार इसे लागू िकया जाता है)
Federal Reserves (=Central Bank of USA).
- Mandated under RBI Act, 1934
⇒ RBI can fix any amount of CRR. Legally ⇒ Presently it is 18.00% of NDTL.
there is no minimum or maximum limit.
Although in real life, RBI will not keep

(Batch: PCB10-RATFAAR) Mrunal’s Economy Pillar#1A-2: Money Supply & RBI’s Monetary Policy → Page 61
 CRR SLR
CRR@100% otherwise, no bank can give ⇒ Legally, SLR can’t be made more than 40%.
loans then economy will stop functioning. (कानूनन �प से �रज़वर् ब�क इसे 40% से �ादा नहीं रख
⇒ Presently it is 4.50% of Net Demand & सकतीं.)
Time Liabilities of a bank (NDTL: �नवल मांग
और समय देयताएँ )
- All Banks must keep CRR. Similar to left cell of this table.
- However, RBI may prescribe separate % (सभी प्रकार के ब�क के �लए अ�नवायर्. हालांिक �ेत्रीय ग्रामीण ब�क
norms/slabs for Regional Rural Banks तथा सहकारी ब�को के �लए इसक� प्र�तशत मात्रा �रज़वर् ब�क, अ�
(RRBs) and Cooperative Banks. ब�को क� तुलना म� थोड़ी �भ� रख सकती है)
- More in 📑📑Pillar1B1: classification
🚩🚩🚩🚩 ✋Difference between NDTL, ODTL, Total DTL?= NOT IMP4IAS. If you want to satisfy
your curiosity, do google search yourself but I don’t t think it as best use of time.

- CRR-SLR are counted on fortnightly basis. If not maintained, bank will have to pay penalty
interest rate to RBI. This Penalty rate is linked with Bank Rate%. (हर 15 िदनों के �लए �गना जाता है. यिद
ब�कर ने निह नहीं माना तो जुमार्ना लगेगा.)
- CRR-SLR ensure monetary stability of India through two primary functions:
1) CRR assists in money multiplier effect. (HOW? Watch lecture video.)
2) CRR-SLR provide buffer/protection during a Bank Run (ब�कों म� से जमारा�श वापस लेने क� दौड़)
i.e. an emergency when every depositor wants to pull out money from his bank account
at once, mainly due to fake news / rumours sometimes due to war e.g. in Russia-Ukraine
- Theoretically, CRR/SLR can be used for inflation control. But RBI primarily relies on REPO Rate
(=its Policy Rate) to combat inflation, and not CRR/SLR. (हालांिक, सीआरआर और एसएलआर महंगाई
�नयं त्रण के मु� साधन नहीं है. �रज़वर् ब�क महंगाई से लड़ने के �लए मु�ता रेपो रेट का इ�ेमाल करती है)

🚩🚩🚩FAQ: What will be the impact of SLR changes on Money Multiplier? Ans. Can’t be written
mathematically. Reason given in Video.

12.11.2 🌐🌐� : 🗄🗄✂CRR SLR on Foreigners/NRI’s deposits in Indian Banks?

🚩🚩🚩FAQ: does CRR and SLR also apply to the deposits made by foreigners / NRIs / FCNR
Accounts? Has RBI changed any rules regarding this?

Ans. Wait till we reach Pillar3A: Currency Exchange Rate. Presently we are in Pillar1A2.

12.12🐯🐯🐯🐯✂🗓🗓 CRR, SLR: DEVELOPMENT IN RECENT YEARS

12.12.1 🐯🐯🐯🐯✂🗓🗓 (2020-Feb) CRR Exemption for 5 yrs, depending on loans (सीआरआर म� छू ट)
- Outdated / technical stuff for 2023-24 exam so removed from handout

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12.12.2 🐯🐯🐯🐯✂🗓🗓 (2020-Mar) CRR during and after Corona

Graph is self-explanatory. Not adding any text-explanation. IF not understood then watch video.

12.13😥😥NET INTEREST MARGIN, LIQUIDITY OVERHANG & ₹2000 WITHDRAWAL

(Batch: PCB10-RATFAAR) Mrunal’s Economy Pillar#1A-2: Money Supply & RBI’s Monetary Policy → Page 63
- Net interest margin (NIM) is difference between Loan interest MINUS Deposit Interest Rate. An NIM of 3–4%
is considered healthy/good for bank’s profitability and growth.
- Liquidity overhang refers to a situation in monetary policy where money supply is >> (higher)
than demand for money (loans). [जब मुद्रा आपू�त �ादा और मुद्रा/लोन क� माँग कम हो]
- Result? Loan interest rates become cheaper. This could have negative consequences if there is a
problem of high inflation. (Because cheap loans → more shopping → more demand → inflation
problem worsens) (लोन स�े हो जाएँ गे, और वे महंगाई क� सम�ा को जिटल बनाय�ग।े )

Liquidity overhang may occur in following scenarios

- During Very Dovish (Easy) monetary policy e.g USA’s Quantitative Easing (QE) - Refer to the
last section of this handout.
- During Noteban (Demonetisation) or withdrawal of currency. e.g. ₹2000 in 2023. [Solution: i-
CRR. Refer to Next Section]

12.14🔐🔐INCREMENTAL CRR AFTER ₹2000 WITHDRAWAL

- After withdrawal of ₹2000 notes → 87% of such notes coming as bank deposits. (Meaning public
didn’t exchange 87% 2000 notes with other notes like ₹2000 ₹500x4 notes. Public simply
deposited in to their bank accounts.)
- But as we learned in previous section, this can cause problem of ‘Liquidity overhang’
- So, RBI came up with Incremental Cash Reserve Ratio (I-CRR: वृ�द्धशील नकद आर��त अनुपात)
Normal CRR i-CRR (10%)
Rate 4.5% of NDTL Whatever extra/ additional deposits came during []May
19, 2023 and July 28, 2023]…keep… 10% extra CRR
from it, During 12th-Aug to 7th-Oct on those deposits.
(Exact dates / Exact formula not imp.)

2000 के नोट चलन हटाने के बाद ब�को म� जो अ�त�र� रा�श जमा �ई उसम�
कु छ अ�त�र� CRR एक अ�ायी समय तक रखना होगा ऐसा �नयम.
Objective? - Protection - To suck / absorb excess liquidity after withdrawal of
against bank ₹2000 .
run. - To avoid LIQUIDITY overhang problem.
- Controlling
money supply
Will RBI pay No. No. �रज़वर् ब�क ब�करों को कोई �ाज नहीं देगा इस पर.
interest to
bankers on this?
- i-CRR locked ₹1 trillion worth money.

(Batch: PCB10-RATFAAR) Mrunal’s Economy Pillar#1A-2: Money Supply & RBI’s Monetary Policy → Page 64
- i-CRR was a temporary measure from 12th-Aug to 7th-Oct 2023. Then i-CRR will be
withdrawn/removed.
Earlier, RBI had issued a temporary i-CRR in 2016–17 after demonetisation of ₹500 & ₹1000

�FAQ: does i-CRR only count ₹2000 note deposit or does it also count ₹100-500 type deposits?
Ans. RBI press release didn't clarify. And I didn’t waste time doing self-PHD.

12.14.1 🚩🚩🚩🚩✋: 🐯🐯🐯🐯✂🗓🗓 CRR Technical things NOTIMP

Following technical operational aspects of CRR not imp / poor cost benefit in studying for exam
- What is Automated sweep-in and sweep-out (ASISO) facility? = NOT-IMPORTANT.
https://www.youtube.com/watch?v=q-GNbExdTlA&t=2094s (Although explained here)
- What is Flexible Automated Option for Managing CRR? = NOT-IMP
- Banks are required to calculate CRR on a fortnightly (15 days) basis. They have to maintain at
least 90% of that amount in CRR on daily basis. RBI also ⏬ minimum daily CRR balance
maintenance from 90% to 80% upto 2020-June. = NOTIMP. परी�ा के �लए काम क� नहीं
🚩🚩🚩🚩✋Above type of information is not really important for the scope of civil service exam. So,
don’t lose sleep if some inexperienced private Mocktest quiz master framing MCQs like this.

🔠🔠❓Cash Reserve Ratio refers to _ _ _ . (UPSC-CDS-i-2020)

(a) the share of Net Demand and time liabilities (NDTL) that banks have to hold as liquid assets
(b) the share of NDTL that banks have to hold as balances with the RBI
(c) the share of Net demand and time liabilities that banks have to hold as part of their cash reserves
(d) the ratio of cash holding to reserves of banks
🔠🔠❓Find correct statements about SLR: (UPSC-CDS-2011-II)
1. To meet SLR, Commercial banks must keep cash only.
2. SLR is maintained by the banks with themselves.
3. SLR restricts the banks leverage in pumping more money into the economy.
Answer codes:(a) 1, 2 and 3 (b) 1 and 3 (c) 2 and 3 (d) only 2
🔠🔠❓When RBI reduces SLR by 50 basis points which is likely to happen? (UPSC-Pre-2015)
(a) India's GDP growth rate increases drastically.
(b) Foreign Institutional Investors may bring more capital into our country.
(c) Scheduled Commercial Banks may cut their lending rates.
(d) It may drastically reduce the liquidity to the banking system.
🔠🔠❓ If the CRR is lowered by the RBI, supply of money in the economy will:_ _ _ (CAPF-2023)
(a) remain unchanged. (b) decrease. (c) increase. (d) have ambiguous impact.
🔠🔠❓ The banks are required to maintain a certain ratio between their “cash in hand” and total
assets. This ratio is known as :_ _ _ (CAPF-2023)
(a) Cash Reserve Ratio (CRR) (b) Statutory Liquidity Ratio (SLR)
(c) Central Bank Reserve (CBR) (d) Statutory Bank Ratio (SBR)

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12.15🐯🐯🐯🐯🐯🐯 MONPOLICY → QUANT TOOLS → RATES → LAF REPO

RBI’s Liquidity Adjustment Facility (LAF, तरलता समायोजन सु�वधा): has two windows:
® LAF-Repo Rate ® ® LAF-Reverse Repo Rate
(�रपो दर/पुन: क्रय-अनुबंध) (उलट �रपो/ पुन: क्रय-अनुबंध)
The Interest rate at which RBI lends short-term It’s the interest rate that clients earn when
loans to its clients, keeping their G-Sec as parking their surplus funds with the RBI for
collaterals. (�रजवर् ब�क अपने ग्राहको को लघु अव�ध के ऋण short periods, to earn interest. (ग्राहक अपना
देता है। उसपर लागू �ाज दर को �रपो दर कहेते है। ग्राहक ने अ�त�र� धन, �रजवर् ब�क मे लघु अव�ध के �लए जमा कर जो
अपनी सरकारी प्र�तभू�तयों को �रजवर् ब�क मे �गरवी रखना पड़ता �ाजदर कमाते है, उसे उलट-�रपो-दर कहेते है)
है)
⇒ Clients enter into an agreement with RBI to Mechanism similar to Repo, RBI gives its G-Sec
repurchase their G-sec at a future date at a as a collateral to client.
(higher) pre-determined price.
⇒ Banks can’t pledge their SLR-quota-G-Secs
for this borrowing.✋
⇒ Repo also called ‘Ready Forward Reverse Repo Rate = Repo% MINUS x%
Transaction’.
⇒ Repo Rate is our Policy Rate to control
inflation. (मौिद्रक नी�त दर)
⇒ Repo = RBI lends short term loans its clients, & demands G-Sec/T-bill as collateral. ✋ At every
place, I’ve not mentioned T-bill, as it just reduces the speed of revision.

(Batch: PCB10-RATFAAR) Mrunal’s Economy Pillar#1A-2: Money Supply & RBI’s Monetary Policy → Page 66
⇒ Market Repo = Players other than RBI (such as bank, NBFCs) loaning short money to other
Banks/NBFCs/Corporate Companies, and demanding financial securities (G-Sec/T-
Bill/shares/bonds/commercial paper etc.) as collateral. What do those terms mean? Ans. Ref the
table given in topic Operation Twist.

12.16⚡CURRENT REPO VS [NEUTRAL OR TERMINAL] REPO RATE

Term Meaning
�Current repo whatever is the present Repo rate e.g. 6.50% on 5/Sept/2023
rate वतर्मान रेपो दर
Neutral or - % repo rate at which inflation is under control, and full employment
Terminal repo achieved. RBI Will not increase the repo rate beyond this point ELSE it’ll
rate damage consumer demand & GDP growth.

तट� रेपो दर - This is a theoretical concepts, RBI has not officially declared any number
/ target for it. (यिद इस नं बर से �ादा रेपो दर को बढ़ाया तो िफर प��क लोन कम लेगी और
अथर्तंत्र को किठनाई होगी बेरोजगारी बढ़ जाएगी.)
NAIRU Non-Accelerating Inflation Rate of Unemployment. This term is related with
Unemployment. It is not loan interest rate. (We’ll study it in: Pillar#4C:
Unemployment) (यह बेरोजगारी दर है. �ाज दर नहीं. �खचड़ी मत करो)
12.17👻👻🐯🐯🐯🐯📈📈 REPO → SPECIAL WINDOWS UNDER ATMA NIRBHAR
‘Atma-Nirbhar’ is a set of reforms by RBI and govt to revive Indian economy after Corono-2020

12.17.1 👻👻🐯🐯🐯🐯📈📈 REPO → TLTRO, SLTRO, On-Tap Windows

Figure 2: कोरोना प�ात लोन म� �ादा पैसा घुमाके अथर्तंत्र को वापस खड़ा करने के �लए �रज़वर् ब�क ने ये नई �खड़िकयाँ खोली है

#In above chart, All Banks doesn’t include Payment Banks. PB can’t give loans (Ref:📑📑Pillar#1B1)

(Batch: PCB10-RATFAAR) Mrunal’s Economy Pillar#1A-2: Money Supply & RBI’s Monetary Policy → Page 67
 Tools Changes in Corona-2020 upto 2022-Feb
Repo RBI's short term loan interest rate to clients while using non-SLR-quota G-
Sec as collateral. Repo Interest ⏬from 5.15 to 4.00% = 1.15% = 115 basis
points cut= Cheaper loans to revive economy
LTRO Long Term Repo Operations (LTROs: दीधर् अव�ध के रेपो ऋण) for 1 year to 3
years. MORE PHD NOT REQ For 2023.
TLTRO Targeted Long Term Repo Operations (TLTRO): Up to 3 years
loans@Repo% to Banks with condition that they must invest x% of it in
NBFC companies’ Bonds etc.
Special LTRO RBI loan for 3 years @Repo% to ONLY Small Finance Banks (SFB) →
Window (SLTRO) Loans to A) Micro and small industries (सू� और लघु उद्योग) B) Unorganized
sector entities (असं गिठत �ेत्र)
💊💊💊💊 On-Tap RBI loan for 3 years @Repo% to Banker → loans to Hospitals, vaccine
Liquidity Windows manufacturer, vaccine importers, medical device makers, oxygen suppliers
for Healthcare etc (अ�ताल, टीका उ�ादक, आयात करने वाले �चिक�ा साधन बनाने वाले इ�ािद)
🍸🍸⛱ On-Tap RBI loan for 3 years @Repo% to Banker → Hotels, Restaurants, Tour
Liquidity Windows Operators, Bus Operator, Car Repair Service, Beauty Parlours/Spa/Saloons,
for Contact- Event/Conference Organisers ब�कर ने ये पैसा �शर्-सं वेदनशील उद्योग �ेत्र जैसे प्रवासन
Intensive Sectors उड्डयन इ�ािद को कज़र् म� देना होगा
AIFI RBI loaned large amount of money to All India Financial Institutions
(AIFI) i.e., NABARD, NHB, SIDBI, EXIM, NaBFID (Ref: 📑📑Pillar#1B1)
12.17.2 🚩🚩🚩RBI’s Special Windows: Useless Doubts by flag-carrying Babushonas
1. 🚩🚩🚩FAQ: Why would bank borrow ₹₹ in TLTRO / On-Tap windows, when many conditions
are imposed on it? Ans. maybe the bank feels it will earn profit from such loan/investment. (ब�कर
को ज�रत होगी तो ल�ग,े वरना नहीं ल�गे. �रज़वर् ब�क के गवनर्र उसको बं दू क िदखाकर ज़बरद�ी नहीं दे रहे)
2. 🚩🚩🚩FAQ: Why would bank borrow ₹₹ in REPO rate (Short term) when LTRO offering long
term loans? Ans. depends on the requirement of the bank. RBI not point gun on them. And
further more, longer term loan means you have to pay interest rate for more number of times.
3. 🚩🚩🚩FAQ: How does LTRO/TLTRO involve “flight of foreign investors & its impact on
exchange rate & bond yield” etc.? Ans. Such long-winded-financial-cause-effect = no
importance in UPSC, even though private mock-test-walla design useless MCQs from it. इतनी दू र
क� बीरबल क� �खचड़ी अपने को पकाने क� ज�रत नहीं है!
4. 🚩🚩🚩FAQ: I want to do PHD on this until Saif son Taimur grows up & gets married. Ans.
Good luck to you! But, I’m finished teaching this topic here. शुभकामनाएँ , आप लेके बैठे रहो.

(Batch: PCB10-RATFAAR) Mrunal’s Economy Pillar#1A-2: Money Supply & RBI’s Monetary Policy → Page 68
12.17.3 (2020) 🐯🐯🐯🐯Reverse Repo Rate cut

Figure 3: sir, जब तक आप loan के �लए हाँ नही कं ह�गे, हम आपको telemarketing spam-calls करते रह�गे!
Corona led Economic Slowdown → Loan demand ⏬ → banks parking their excess funds in RBI to
earn interest in the form of reverse repo rate. (कोरोना महामारी के दौरान ब�क वाले अपना अ�त�र� धन �रज़वर् ब�क म�
डाल के बैठे �बठाये �ाज कमा रहे थे. ग्राहकों म� लोन का पैसा घुमाने क� मेहनत नहीं कर रहे थे.)

⇒ By 2020-March: banks parked ₹~3 lakh crores in RBI in Reverse Repo.

⇒ So, RBI has drastically reduced ⏬the reverse repo rate to 3.35% to discourage such laziness of
banks. (ब�को के इस आलसीपन को दू र करने के �लए �रज़वर् ब�क ने �रवसर् रेपो रेट म� कटौती क�)
⇒ Benefit of reverse repo reduction?
 IF SBI offers 5.9% Fixed deposit interest rate to depositors, and parks it in the RBI
reverse repo rate (3.35%) then SBI will actually make losses.
 So, RBI hopes SBI will now be ‘forced’ to give loans in a proactive manner (through
SMS-spam, email-spam and unwanted telemarketing calls etc)
Although as per 📔📔📔📔ES21, Banks still continued to park their surplus funds in Reverse repo
because there were not enough loan takers due to Corona slowdown. (हालांिक कु छ खास फायदा नहीं �आ ऐसा
आ�थक सव��ण का कहना है)

12.17.4 🐯🐯🐯🐯🐯🐯 MonPolicy → Quant Tools → Variable Rate Reverse Repo (VRRR)
Outdated/technical for 2024-exam cycle, so removing from latest handout.

12.17.5 🐯🐯🐯🐯 🎛🎛 Enhanced Reverse Repo Rate for Hardworking Bankers

Outdated/technical for 2024-exam cycle, so removing from latest handout.

12.17.6 🐯🐯🐯🐯🐯🐯 MonPolicy → Quant Tools → Rates → MSF (2011)

- Marginal Standing Facility (MSF: सीमांत �ायी सु�वधा) is the Interest rate at which RBI lends short-
term loans to Scheduled Commercial Banks (SCB) & Regional Rural Banks (RRB) with their
SLR-quota G-Sec as collaterals. (ऐसी खास �खड़क� है जहाँ से �रज़वर् ब�क द्वारा अनुसू�चत वा�ण��क ब�को तथा �ेत्रीय
ग्रामीण ब�कों को, उन ब�को के एसएलआर कोटा क� प्र�तभू�तयों को �गरवी लेकर �रजवर् ब�क उ�� लघु अव�ध के कजर् देता है)
- MSF higher than Repo Rate. MSF = Repo% + 0.25%
- What is the difference/meaning of SCB/RRB/SFB/UCB etc? Ans: (📑📑Ref: HDT-Pillar#1B1:)

🚩🚩🚩FAQ:Which types of banks can access MSF facility? ✅Ans. It is given in above note itself.

(Batch: PCB10-RATFAAR) Mrunal’s Economy Pillar#1A-2: Money Supply & RBI’s Monetary Policy → Page 69
12.17.7 🐯🐯🐯🐯🐯🐯 MonPolicy → Quant Tools → Rates → Bank rate (ब�क दर):
Bank Rate MSF Repo Rate
Introduced in RBI Act, 1934** 2011 2000
What is the % Since 2012: Monetary Policy
MSF = Repo% + “x”%
rate? Bank Rate% = MSF% Committee decides
Who can All clients of RBI:
borrow from Only banks bank, non-bank,
the RBI? Union & State Govt
Collateral Bank can pledge securities Yes, G-Sec/T-bill. But
**Yes and No
required? from its SLR quota not from SLR
Loan duration Longer than repo Short term usually overnight to 14 days
Emergency borrowing by
Nowadays mainly
Primary bank, using their securities Short term borrowing
for deciding penalty
Utility? from SLR quota subject to by all clients of RBI.
on errant banks
certain limits.
- **RBI Act, 1934: “Bank rate is the standard rate at which RBI buys or rediscounts first class
securities, bills of exchange or other commercial papers.(-NCERT)” rediscounting basically
means the “repo-walla game= RBI buys @x price, re-sells@y price where y>x”
- But, since the introduction of the Repo rate in the 2000s, the Bank rate has become a dormant
tool (�न��य उपकरण) =not frequently used by RBI for lending or by banks for borrowing).
- So, reference books/websites differ in its present operational status e.g. some of them would say:
- Bank rate requires no collateral and is meant for long term loans.
- Bank rate accepts collateral which can be both GSec/T-bill as well as private companies’
securities.
🚩🚩🚩🚩✋So, in the real exam, it depends on which book/web source the examiner has copied the
statement(s) and accordingly you’ve to take a judgement call in ticking the answer. (�व�भ� और िकताबों
और वेब साइटों पर ब�क दर क� �ा�ा/अथर् गठन अलग अलग है इस�लए असल परी�ा म� जो पूछा जाए तो ��ती/�ववेक के िहसाब से
आपने जवाब tick करना है.)

12.17.8 🐯🐯🐯🐯🐯🐯 Quanti. Tools → SDF (=Reverse Repo walla game Without Collaterals)
⇒ 2013: Urjit Patel Committee on Monetary policy proposed standing deposit facility (SDF)
⇒ SDF = Clients park/deposit their extra money in RBI. RBI pays them interest. RBI doesn’t give
any collateral (unlike in REVERSE REPO). (�ायी जमा/िडपॉ�ज़ट सु�वधा = �रज़वर् ब�क के ग्राहक अपना अ�त�र�
पैसा �रज़वर् ब�क म� जमा करेगा. �रज़वर् ब�क ग्राहकों को िडपॉ�ज़ट के �लए �ाज देगा. �रज़वर् ब�क ग्राहक के पास �गरवी कु छ नहीं रखेगा.)
⇒ 🤩🤩Benefit of SDF: To combat inflation → RBI can suck extra money supply via SDF window.
RBI will not have to pledge G-Sec as collateral to clients. (महँ गाई से लड़ने वा�े बाज़ार म� से पैसों क� अ�त�र�
आपू�त को चूसने/हटाने/कम करने के �लए �रज़वर् ब�क एसडीएफ़ का इ�ेमाल कर सकता है- �बना कु छ �गरवी रखे।)
⇒ 2018: RBI act amended to add SDF facility. (�रज़वर् ब�क क़ानून म� सुधार िकया गया).

(Batch: PCB10-RATFAAR) Mrunal’s Economy Pillar#1A-2: Money Supply & RBI’s Monetary Policy → Page 70
⇒ 2022-April: RBI started/launched SDF. RBI also made changes in Policy corridor. <REF: NEXT
SECTION>

🚩🚩🚩FAQ: SDF is launched so does it mean Reverse Repo discontinued?

> Reverse Repo rate not discontinued. Reverse Repo will remain as part of RBI’s toolkit. RBI will
continue to use it at its discretion from time to time. Presently Reverse Repo is 3.35%

🚩🚩🚩FAQ: what is the deposit time duration of SDF and Reverse Repo?

> Sufficient to know these are for short-term. Now what exactly is short-term? Is it 1 day, 7 day, 14
day? = Not important for exam. Why overburden the memory card of the brain with unnecessary
information?

🚩🚩🚩FAQ: IF SDF and Reverse Repo both present, then why would Bankers go for SDF where no
collateral given?

> The time period and interest rate offered on SDF and Reverse Repo are different. So, it depends on
bankers’ business-requirement, cash-flow management. RBI is not pointing in gun their head to use
it. (ब�कर को ज़�रत होगी तो इ�ेमाल करेगा. �रज़वर् ब�क उसक� कनपटी पर �प�ौल नहीं रखा है.)

12.17.9 ⛓ MSF Repo vs Reverse Repo vs SDF

Tool MSF Repo Reverse Repo SDF
Present rate 6.75% 6.50 3.35% Fixed 6.25
(2023-Feb) Reverse Repo
Rate (FRRR)
Lender RBI RBI Banks+some Banks+some
NBFCs NBFCs
Borrower ONLY Scheduled Banks+some RBI RBI
Commercial Banks NBFCs
(SCB) & RRB
Borrower need to Yes Yes Yes Not required.
give Collateral?
##Facility Client (SCB) RBI RBI Client
available at (Banks+Some
Discretion of NBFC)
⇒ ## Discretion = here means suppose a client (Bank/NBFC) comes for Reverse Repo= It's not
compulsory for RBI to entertain him. (�रज़वर् ब�क क� मज़� क� बात है िक उसको सेवा देगा या नहीं देगा.)
⇒ But, If client (Banker) comes for MSF = RBI will not say "NO" to him. RBI will help him.
⇒ What is SCB? Ans. Refer Pillar1B1: Classification of Banks

(Batch: PCB10-RATFAAR) Mrunal’s Economy Pillar#1A-2: Money Supply & RBI’s Monetary Policy → Page 71
12.17.10 🚧🚧 Policy Corridor / LAF Corridor

⇒ Policy Corridor also known as Liquidity Adjustment Facility (LAF) corridor. (नी�त ग�लयारा / तरलता
सु�वधा ग�लयारा)
⇒ BEFORE 2022-April: Policy Corridor = total width between: MSF <—> REPO <—> Reverse
Repo. (इन तीनों उपकरणों के बीच क� कु ल चौड़ाई)
⇒ After 2022-April: Policy Corridor = MSF (Repo+0.25%) <—> REPO <—> SDF (Repo-0.25%)
⇒ Thus total width is 0.25+0.25= 0.50%
Upper end of Center Lower end of Corridor Total width
Corridor / Floor (फ़शर्)
/ Ceiling (छत/ऊपरी
सीमा)
Tool? MSF REPO Before: Reverse Repo. (RR)
After: SDF
Before MSF= R+25 bps R% RR = Repo-25 bps 25+25=50bps
Corona
In Corona MSF= R+25 bps R% RR = Repo - 65bps 25+65=90bps
2020-21
2022-Apr MSF = Repo + 25bps R% SDF = Repo-25bps 25+25=50bps
Note: 100 base point system (BPS) = 1% So 25 bps = 0.25%. 50 bps = 0.50%

⇒ SDF has replaced the Reverse Repo Rate as the floor of the Policy corridor.
⇒ However, Reverse Repo was not discontinued.
⇒ Reverse Repo will remain as part of RBI’s toolkit
⇒ Reverse Repo will be used as per the mood/discretions of the RBI from time to time

12.17.11 �⚖� Tri-Party Repo (�त्र-प�ीय पुन: क्रय-अनुबंध):

- Outdated topic. I find it not important for exam anymore. So DELETED from handout.

(Batch: PCB10-RATFAAR) Mrunal’s Economy Pillar#1A-2: Money Supply & RBI’s Monetary Policy → Page 72
 - Sufficient to know this is not a tool of Monetary Policy. It is a method to meant to help
companies to borrow money from the market.(ये मौिद्रक नीती का िह�ा नहीं है. )

12.17.12 🔪🔪🐰🐰 BPLR, MCLR, External Benchmarks, etc:

Terms related to how individual banks decide their loan rates. Ref: End section of present handout.

12.18🏪🏪OPEN MARKET OPERATIONS- TWO TYPES

OMO Types Meaning
repo-OMO already learned in previous section. RBI buys/sells G-Sec with promise of
repurchase. (e.g. Repo and Reverse Repo)
outright- RBI buys/sells G-Sec WITHOUT any promise to buy them back.
OMO
�FAQ: does it mean Repo is sub-type of OMO? Ans. Theoretically yes as per NCERT. But as far as
MCQ ticking is concerned it depends on CONTEXT/Tone of the question. So far after observing the
PYQ, UPSC examiner treats them as two separate tools, without MIXING up. For the purpose of my
NOTES- consider OMO= secondary market mein RBI’s buying-selling.

12.18.1 🐯🐯🐯🐯📁📁 Market Operations (OMO): (Inflation → Sell G-Sec, Deflation → Buy)

Figure 4: Aloo Lelo, Pyaaz Lelo, G-Sec Lelo...

I. Open Market Operations (खुले बाजार क� िक्रयाए): RBI buys and sells Union & State Govts’ securities
to control money supply.
o RBI buying= Money supply ⏫increased/liquidity injected in the market.
o RBI selling = Money supply ⏬decreased/liquidity absorbed from the market.
II. Market Stabilization Scheme (बाजार ��रीकरण योजना): RBI sells special type of G-sec, T-Bill & Cash
Management Bills (CMB) to suck excess liquidity. ✋How it works? How is it similar or
different than OMO? Ans. NOTIMP. Very low profile thing for scope of UPSC.
III. Sterilization / Forex Swap: Their primary objective is to control the currency exchange rate
volatility (e.g. $1=₹65,70,80… मुद्रा �व�नमय दर क� ��रता के साथ जुड़ा �आ मामला). <More in 📑📑Pillar#3 >
IV. Operation Twist (2019): a special type of OMO. Explained in next segment.

12.19🐯🐯📢📢🗃🗃🧬🧬MONPOLICY: QUANTI TOOLS: OMO → OPERATION TWIST

Before that, you’ve to be aware of some many basic concepts:

12.19.1 🔪🔪🔪🔪: Security → Debt → G-Sec & Bonds (ऋण के �लए जारी क� गई प्र�तभू�तयां)
A ‘Security’ means a certificate/document indicating that its holder is eligible to receive a certain
amount of money at a particular time. This could be a…

(Batch: PCB10-RATFAAR) Mrunal’s Economy Pillar#1A-2: Money Supply & RBI’s Monetary Policy → Page 73
 Table 3: प्र�तभू�तयों के �व�भ� प्रकार
Borrower 🦁🦁Govt 🤵🤵Corporate (�नगम)
Short term Treasury bills, Cash Bill of Exchange, Commercial Papers,
(less than 1 year) Management bills Promissory Notes.
→
Long term G-Sec, Sovereign Bonds Bonds / Debentures
(1 year/>) →
Usually lower than Corporates’ Depends on following factors →
Interest rate
because risk is low
12.19.2 🛒🛒 (🔪🔪🔪🔪: 🧔🧔🧔) Deepening of G-Sec market- Retail investors’ RDAG @RBI
- RBI launched “Retail Direct Scheme” in 2021.
- Under this scheme, RBI permits “Retail Direct Gilt (RDG) account” for retail investors on its E-
Kuber online platform. (आम �नवेशक �रज़वर् ब�क म� आरडीजी नामक खाता खोल पाएं गे)
- Both Resident Indians & non-resident Indians (NRIs) can open this account. (गैर �नवासी भारतीय भी)
- Then Retail investors can directly buy Treasury Bills (T-Bill), G-Secs (of Union Government),
State Development Loans (SDL are ‘G-secs’ of State Govts) and Sovereign Gold Bonds, from RBI
directly. (आम �नवेशक सीधा �रज़वर् ब�क से इन प्र�तभू�तयों को खरीद सकता है.)
- Application fees to open the account = ₹ ZERO
− 🤩🤩Benefit? 1) Earlier retail investors bought G-sec “indirectly” through mutual funds wherein
mutual fund manager (MF) charged commission/fees. Now retail investor can buy directly so
does not have to pay such commission/fees to MF managers. (�बचौ�लयों को दलाली/कमीशन नहीं देना होगा)
− (More in 📑📑Pillar#1C- SEBI Share market, DEMAT account etc)

12.19.3 🔪🔪🔪🔪:🤵🤵Corporate Bonds: factors that determine its interest rate

If companies want to borrow money, they may issue bonds to investors. e.g. “Whoever buys this
Reliance Bond worth ₹1000, we will pay him 9.40% interest rate per year and return the principal after
15 years.” Usually the interest rate offered on such bonds depends on
Factor (कारक) How it determines corporate bond interest rate?
(Risk) Credit rating Lower credit rating (e.g. CCC or D) → higher interest rate needs to be
of company offered because risk of default is high. जब िदवा�लयेपन का जो�खम �ादा हो
Inflation If Bond is not offering more % than the level of inflation% then investors
may not come. (महंगाई दर से अ�धक �ाज दर नहीं देगा तो लोग नहीं जुड़�गे)
why/how: Ans. Ref: 📑📑Pillar1C → Inflation Indexed Bonds
Bank deposit interest Higher the (Bank) deposit interest rate, higher bond interest rate needs to
rates be offered to attract households to shift money from bank savings/FD to
corporate bonds. (अगर ब�क जमाकतार्ओ ं को अ�ा �ाज दे रहा है तो कं पनी ने �ादा �ाज
ऑफर करना होगा)

(Batch: PCB10-RATFAAR) Mrunal’s Economy Pillar#1A-2: Money Supply & RBI’s Monetary Policy → Page 74
 Factor (कारक) How it determines corporate bond interest rate?
Yield on G-Sec If G-Sec yield ⏫, then corporate will have to offer even higher bond
interest rate to attract the investors from G-Sec investment towards
Corporate/company-Bond investment.
12.19.4 🔪🔪🔪🔪: 🤑🤑 Bond Yield (बांड म� �नवेश करने पर होने वाली आय या मुनाफा)

⇒ Bond yield is the profit an investor earns on a bond investment.

12.19.5 🔪🔪🔪🔪: 🤑🤑 Bond Yield ∝ 1/Price (स�े म� खरीदा= तो मुनाफा �ादा)
⇒ Bhide bought @100, his yield is 8%; Jethalal bought @90, his yield is 20%.
⇒ Thus, Bond yield is inversely related to the current selling price of the bond in the secondary
market.
⇒ If a bond’s demand ⏫ → its selling price will ⏫ → bond yield ⏬ (Because of inverse
relation)
12.19.6 🔪🔪🔪🔪: 🤑🤑 Bond yield: other factors affecting it (अ� कारक)
⇒ If the economy is booming (तेजी), companies are making great profit, investors may sell bonds at
lower prices in a hurry to unlock their money to invest it in shares of companies, because they
think it’ll get them more dividend. Then bond’s current selling price in the secondary market
⏬ → yield ⏫.
⇒ If the economy is facing recession (Continuous decline in growth rate: मं दी) → companies will
NOT make great profit → investors sell shares, and prefer to buy bonds hoping they’ll get
secured fixed interest. Then bond’s demand ⏫ in the secondary market → selling price ⏫ →
yield ⏬.

(Batch: PCB10-RATFAAR) Mrunal’s Economy Pillar#1A-2: Money Supply & RBI’s Monetary Policy → Page 75
⇒ Inflation. (How? Explained in video).
⇒ Political instability. (Self-explanatory from SriLanka example.)
⇒ Actions of the central bank. (Explained below).

12.19.7 🐯🐯🐯🐯🐯🐯🐯🐯Operation Twist: why?

⇒ Commercial banks were reluctant to lend money to private sector companies because of the
problem of Bad Loans /Non-Performing assets (NPA: More in 📑📑Pillar1B2). िदवा�लयेपन क� घटनाओं
के चलते, ब�कवाले �नजी �ेत्र क� कं प�नयों को कजर् देने से डर रहे थे। आ�थक वृ�द्ध और रोजगार सृजन के �लए यह अ�� बात नहीं थी.
⇒ If such companies could borrow money by issuing corporate bonds (at cheaper interest rate) →
more factories, more jobs, more production, more GDP.
⇒ RBI decided to attack the third factor: “If the yield on long term G-Sec decreased, then
automatically Corporate Bond interest rates could also decrease.”

Figure 5: figures are only for illustration. ✋No need to memorize numbers.

12.19.8 🐯🐯🐯🐯🐯🐯🐯🐯RBI’s Operation Twist: methodology (2019-Dec)

Since RBI’s existing monetary policy tools had failed to make loans cheaper for corporates / boost the
economy. So in 2019-Dec, RBI started a “special OMO” wherein:
⇒ Since RBI started buying long-term G-Sec, their demand will ⏫ → price will ⏫ → yield is ⏬.
The 10YearGSec’s yield lowered from 6.75% to 6.60%
⇒ And we’ve already learned, Corporate bonds are priced (benchmarked) keeping G-sec yields in
mind.
So, Op Twist → Lower G-Sec yield means →
 Cheaper borrowing for Private sector Companies. Because
o They can borrow money by issuing their (long term) Corporate-Bonds at much cheaper
interest rate than before. (�नजी �ेत्र क� कं प�नयों के �लए बॉ� जारी कर- ऋण लेना �आ स�ा🤩🤩)
o When a private company meets a bank manager to borrow money, it can negotiate the
loan price, “If your bank does not lend me money at this cheaper interest% then I will

(Batch: PCB10-RATFAAR) Mrunal’s Economy Pillar#1A-2: Money Supply & RBI’s Monetary Policy → Page 76
 issue my own corporate bonds.” → Even the bank lending rates for corporate loans could
be reduced.
 Cheaper borrowing for Government. For reasons similar to above. (How? Explained in Video)
 Investor of long term G-Sec will feel discouraged to hold the G-Sec till maturity (10-14 years),
He will try to sell it to another party/RBI and pull out his money, then he may park ₹₹ it a
Corporate Bond / Bungalow / car / Goa-vacation etc. Thus, it helps boost the consumption →
economy grows.

समज म� आ गया हो तो ब�ढ़या है, नहीं तो रट्टा मारो �जदं ाबाद (if not understood then memorize by Rot-learning)
1. 1961: "Operation Twist" was first used by the US Federal Reserve.
2. 2019: RBI used also done it. Officially called “Special Open Market Operation (OMO) wherein
the Central bank simultaneously buys and sells G-sec of varying maturities to adjust their yields.
Which helps reduce interest rates on corporate bonds/debentures → easier to mobilize
investment → factory expansion → jobs, GDP growth. (यह एक खास िक� क� खुले बाजार क� िक्रया है, जहाँ
अगल अलग �मयादी क� सरकारी प्र�तभू�तयाँ खरीद-व-बेच कर �रजवर् ब�क उनक� उपज को कम करता है, तािक कॉप�रेट कं प�नया
स�े �ाज मे पैसा बाजार से हा�सल कर सके , तािक रोजगार और आ�थक वृ�द्ध मे मदद �मले)
3. Objectives of Op-Twist=
a. To make borrowing cheaper for Companies and Govt. कं पनीओ/�नगमों और सरकार के �लए कजर्
स�ा करवाना (HOW? Ans. Explained in Video).
b. It was NOT MEANT For fighting inflation. महंगाई से लड़ना इसका उद्दे� नहीं है
4. It ensures better Monetary Policy transmission for economic growth. (because, earlier, simply
reducing the repo rate has not helped much in making loans cheaper, for corporates. इससे पहले रेपो
दर कम करने पर भी बाजार म� लोन स�े नहीं हो रहे थे, तो �रज़वर् ब�क ने सोचा ये ऑपरेशन �ट्व� नामक नया साधन आजमाते ह�)
✋🎓🎓 🚫🚫 Beyond this, further PHD on what/why/how = poor cost:benefit for MCQs.

12.19.9 ✋🎓🎓 🔪🔪🔪🔪: 🤑🤑 Bond Yield & Inverted Yield Curve: poor benefit for exam
1. Inverted Yield curve = ✋🎓🎓 इस मुददे को पढने म� हम व� बबार्द नहीं कर�गे
2. Negative Bond Yield = ✋🎓🎓 इस मुददे को पढने म� हम व� बबार्द नहीं कर�गे
3. Chinese Bond Yield ki News, Italian Bond Market crisis = ✋🎓🎓NOT IMP.
🔠🔠❓MCQ. India Government Bond Yields are influenced by which of the following? (Pre-2021)
1. Actions of the United States Federal Reserve [अमे�रक� फे डरल �रजवर् क� िक्रयाओं द्वारा]
2. Actions of the Reserve Bank of India. [�रजवर् ब�क क� िक्रयाओं द्वारा]
3. Inflation and short-term interest rates [महंगाई और लघु अव�ध के �ाज दर]
Answer Code: a) 1 and 2 Only b) 2 Only c) 3 Only d) 1, 2 and 3
🔠🔠❓ MCQ. 'Open Market Operations' refers to: (Prelims-2013)
a) borrowing by banks from the RBI b) lending by commercial banks to industry and trade
c) purchase and sale of government securities by the RBI d) None of the above

(Batch: PCB10-RATFAAR) Mrunal’s Economy Pillar#1A-2: Money Supply & RBI’s Monetary Policy → Page 77
🔠🔠❓ MCQ. Which would result in an increase in money supply in economy? (Prelims-2012)
1. Purchase of G-Sec from the public by the Central Bank.
2. Deposit of currency in commercial banks by the public.
3. Borrowing by the government from the Central Bank.
4. Sale of government securities to the public by the Central Bank.
Answer Codes: (a) 1 only (b) 2 and 4 only (c) 1 and 3 (d) 2, 3 and 4
🔠🔠❓ MCQ. Which of them is/are part of Monetary Policy? (Prelims-2015)
1) Bank rate 2) Open market operations 3) Public debt 4) Public Revenue
Answer Codes: (a) 1 only (b) 2, 3 and 4 (c) 1 and 2 (d) 1, 3 and 4

12.20🐯🐯🐯🐯🐯🐯: 📅📅 MONPOLICY: QUANTI TOOLS: OMO → G-SAP

⇒ Full form: (Secondary Market) G-sec acquisition programme
⇒ Mechanism: RBI to buy G-Sec from Secondary market on specified timetable. एक �न��त समय ता�लका
के िहसाब से �रज़वर् ब�क िद्वतीय बाज़ार से सरकारी प्र�तभू�तयां ख़रीदेगा.
G-SAP During these months Total
G-SAP 1.0 (पहला चरण) → 1st Quarter of 2021-22 =April to Jun 2021 (पहली �तमाही) ₹1.0 Lakh cr
G-SAP 2.0 (िद्वतीय चरण) → 2 Quarter of 2021-22 = July to Sept 2021 (दू सरी �तमाही)
nd
₹1.2 Lakh cr

12.20.1 🐯🐯🐯🐯🐯🐯:📅📅 OMO → G-SAP : 🤩🤩Benefit?

⇒ ⏫ Money supply in the economy. (अथर्तंत्र म� मुद्रा आपू�त बढेगी)
⇒ Investors, who sold G-Sec to RBI= those investors got ₹₹ →They may 1) do shopping and/or 2)
invest in other companies shares/bonds→ 1+2=economic growth. मुद्रा आपू�त म� बढ़ोतरी के चलते �नवेशकों
के हाथ म� पैसा आएगा तो वे बाज़ार से ख़रीदारी कर�ग,े अ� क��नयों म� �नवेश कर�गे→ देश क� आ�थक वृ�द्ध म� मदद �मलेगी
😤😤FAQ/Moral Outrage: Why G-SAP? Why not achieve this via ⏬ reducing REPO ? Ans.

(Batch: PCB10-RATFAAR) Mrunal’s Economy Pillar#1A-2: Money Supply & RBI’s Monetary Policy → Page 78
⇒ Every person may not be interested in taking new bank loans. Some investors may be interested
in selling their previous investments in G-Sec to unlock the money. (हर ��� ब�क से कज़र् लेगा ये ज़�री
नहीं है। कु छ �नवेशक अपना पुराना G-sec �नवेश बेचकर पैसा बटोरना चाहते हो तो जी-सेप म� आ सकते है)
⇒ if RBI ⏬decreases the repo rate too much→ it can result in A) inflation and B) ⏬decrease in
the deposit interest rates offered by the bankers on savings account → middle-class and
pensioners affected negatively. (रेपो दर म� ब�त �ादा कटौती �ई तो नई सम�ाए खड़ी होंगी)
Table 4: To Sum up, OMO, GSAP, OP-TWIST (कु ल �मलाकर बात ये है िक)

G-SAP ⇒ RBI is buying G-Sec to increase money supply → Post-corona revival.

⇒ Money amount, date&time/calendar/timetable is transparently & systematically
announced in advance before starting.
⇒ इसम� पैसों क� मात्रा, समय-ता�लका सब कु छ पारदश� और �व��त �प से, ख़रीदारी शु�आत करने से पहले
�रज़वर् ब�क प्रका�शत कर देता है।
OMO ⇒ RBI is selling G-Sec to control inflation.
⇒ RBI is buying G-Sec to fight deflation. मुद्रा���त(मं हगाई)/अप���त(स�ाई) से लड़ने के �लए
�रज़वर् ब�क सरकारी प्र�तभू�तयों को बेचेगी/खरीदेगी
⇒ Its timetable NOT announced in advance, in detailed manner, unlike G-SAP.
�रज़वर् ब�क के �ववेक/मनमज़� पर अ�नय�मत समय पर ये िक्रया होती थी। समय से पूवर्, �व�ृत �प से इसक�
समय ता�लका प्रका�शत नहीं क� जाती थी।
⇒ OMO window is NOT discontinued. It’ll continue to function as per discretion
of RBI. इस �खड़क� को बं द नहीं िकया गया। �रज़वर् ब�क के �ववेकानुसार भ�व� म� भी जारी रहेगा.
Op.Twist ⇒ RBI is Buying and Selling of G-Sec of varying maturities
⇒ To reduce G-Sec yield → so future borrowing becomes cheaper for Government
and Companies. (�रज़वर् ब�क द्वारा �भ� �भ� अव�ध/�मयादी क� सरकारी प्र�तभू�तयों को खरीदना और
बेचना तािक यी� कम हो सके तािक भ�व� म� सरकार तथा कं प�नयों के �लए कजार् लेना स�ा हो सके । )
12.21🐯🐯🐯🐯🌽🌽 MONETARY POLICY: QUALITATIVE TOOLS (गुणा�क साधन)
Quantitative tools (SLR,CRR,Repo etc.) control ‘volume’ of loans. मात्रा�क साधन कज� क� मात्रा तय करते ह�

⇒ Whereas, qualitative tools (PSL,LTV etc.) control “distribution” of loans to a particular sector of
economy. गुणा�क साधन कज� के �वतरण को तय करते ह�
- e.g. how much loan to a particular sector e.g. agriculture, renewable energy.
- how much loan to a particular segment of society (e.g. farmers, women, SC/ST).
- So, qualitative tools also known as SELECTIVE (चयना�क) or DIRECT (प्र��) Tools.

(Batch: PCB10-RATFAAR) Mrunal’s Economy Pillar#1A-2: Money Supply & RBI’s Monetary Policy → Page 79
12.21.1 � Moral Suasion (नै�तक दबाव / सलाह) & Publicity (प्रचार)

Figure 6: “म�ने तो अपनी repo-दर कम कर दी लेिकन ये लालची ब�क वाले अपने loan-दर कम नही कर रहे , कम से कम मेरा �लहाज/स�ान रखने के �लए भी उ�े थोड़ा तो स�ा
करना चािहए।“ - RBI Governor
- Moral suasion meaning applying “Persuasion” without applying punitive measures. RBI
governor tries this tactic via conferences, informal meetings, letters, seminars etc
- E.g. RBI-Governor asking banks to transmit repo-rate cuts, open new branches in rural areas,
spread financial literacy, give loans to farmers beyond PSL quota etc.
- E.g. RBI Governor requesting CM or Finance Minister to control fiscal deficit & subsidy leakage
to enhance the efficacy (प्रभावका�रता) of RBI’s monetary policy.
- Publicity: RBI governor could give media statement, speech during university convocation (दी�ांत
पदवीदान समारोह), memorial lectures… “Look I reduced repo rate but banks are not passing the
benefit to customers…and xyz”. By doing so, he can create an effective public opinion which also
pressurizes the banks to stop their thuggery.

12.21.2 �🚯🚯 Direct Action (सीधी कायर्वाही: �ोिक लातो के भुत बातो से नहीं मानते)
- RBI can punish banks (and even non-banks) for not complying with its directives under RBI Act,
Banking Regulation Act, Payment and Settlement Systems Act, Prevention of Money Laundering
Act (PMLA), Foreign Exchange Management Act (FEMA). �रजवर् ब�क के िदशा �नद�शों का पालन न करने पर
�व�भ� कानूनों म� सजा/दंड
- 2019: RBI ordered the banks to have a “Clawback” provision in their CEO & Top executives’
salaries. E.g. If the CEO did any scam/fraud, he’ll have to return his previously paid salary /
bonus, even if he had retired/left the job afterwards. (िकसी ब�क का सीईओ कांड म� पकड़ा गया तो उस सीईओने
पुरानी तन�ाह भी लौटानी होगी.)
12.21.3 💍💍 Margin Requirements / Loan to Value (LTV) (सीमा अ�नवायर्ता)

Figure 7: जब घर मे पड़ा है सोना, िफर काहे को रोना?

- RBI can mandate Loan to Value (LTV) for a gold-loan, home loan, auto loan or business loan
etc. so a Bank/NBFC can’t lend more than x% of the value of the collaterals. RBI can change this
x% to boost / curb demand. (�गरवे रखी चीज के मू� के सामने ब�क या गैर-ब�क सं �ान ��� को िकतना कजर् दे सकते
है? �रजवर् ब�क उसके मानदंड म� बदलाव द्वारा, बाजार म� चीज-व�ुओ क� मांग को बढ़ा या कम कर सकता है)
LTV reforms in 2020-Aug Before After
Gold Loan 75% value of gold/gold- 90%
jewellary

(Batch: PCB10-RATFAAR) Mrunal’s Economy Pillar#1A-2: Money Supply & RBI’s Monetary Policy → Page 80
🤩🤩Benefit? More quantity of loan by pledging same qty of gold → 😷😷 post-corona-biz-revival.

12.21.4 Selective Credit Control (चयना�क ऋण �नयं त्रण)

😰😰In a negative / restrictive direction (नकारा�क) 🤩🤩In a positive direction
(सकारा�क �दशा म�)
- Credit Rationing System: English (in 18th century) - 🚗🚗 Consumer credit control e.g.
and USSR (till 1990s)– their central bank will not During deflation / recession, RBI
give more than “X” amount as loan to individual can relax the down payment / EMI
banks. And an individual can’t get more than installment norms for durables
prescribed amount of loans for each category like Vehicles, TV, Fridge etc. to
(housing, education, business). (एक ��� को इससे �ादा boost consumption and demand.
कजार् नहीं �मलेगा) - Priority Sector Lending <see
- 1960s: Credit Authorization Scheme (CAS) in India: below> प्राथ�मक �ेत्र के ऋण मानक
all commercial banks had to obtain prior approval of
the RBI before loaning ₹ 1 crore/> to a single
borrower.
- 1970s: RBI imposed quantitative ceiling on non-food
loans to boost green revolution, food inflation.
😰😰But such measures failed due to lax monitoring and
loopholes. (�श�थल �नगरानी के चलते, बेअसर रहे ये साधन)

12.22 🐯🐯🐯🐯🐯🐯 PRIORITY SECTOR LENDING (PSL: प्राथ�मकता �ेत्र के �लए ऋण मानक)

Figure 8: थोड़ा लोन हमको भी िदलवा दो Governor-sahib, हम बहोत गरीब है!

- 1968: First time RBI used the word “priority sector”: Banks must give 40% of their loans to 3
priority sectors 1) agriculture 2) small industries 3) exporters by 1985. (कृ �ष छोटे उद्योग और �नयार्तक)
- Over the years, more sectors were included in it. (समय के साथ साथ और भी �ेत्रों को इसम� शा�मल िकया गया)
- 2015: some reforms in PSL. → 2019: RBI's UK Sinha Committee on MSME loan reforms
suggested some more reforms in the PSL. →2020-Sept: RBI reformed PSL guidelines as
following: (�न� सुधार िकए गए)
Priority Sector Loans norms → minimum quota after 2020-Sept Reforms BEFORE AFTER
� Weaker Sections (कु ल लोन का कम से कम 12% जाना चािहए कमजोर वगर् को): 10 % ⏫12%*
⇒ SC, ST, Women, PH, Minorities, Manual scavengers, Artisans,
⇒ PM-Jan DhanYojana Overdrafts upto Rs.10,000

(Batch: PCB10-RATFAAR) Mrunal’s Economy Pillar#1A-2: Money Supply & RBI’s Monetary Policy → Page 81
 Priority Sector Loans norms → minimum quota after 2020-Sept Reforms BEFORE AFTER
⇒ Beneficiaries of Govt's National Rural/Urban Livelihood Mission
Schemes (NRLM/NULM: More in 📑📑Pill#6: HRD →Poverty Removal
Schemes)
🌽🌽 Agriculture (कृ �ष) (all farmers: small and big) 10% 8%
🌽🌽 Agriculture: सीमांत िकसान और छोटे िकसान 8% ⏫10%*
⇒ Marginal Farmer (owns upto 1hectre land) सीमांत िकसान
⇒ Small farmer (>1 upto 2ht) छोटे िकसान
🧵🧵 Micro Enterprises (अ�त लघु उद्योग), Khadi-Village industries 7.50% 7.50%
Above categories (Weaker section, agriculture, micro-enterprise ) 4.50% 2.50%
plus, other categories such as
⇒ Small & Medium Enterprises, Affordable housing loans to beneficiaries
under Pradhan Mantri Awas Yojana
⇒ food processing companies, Vermi compost, biofertilizer, seed
production,
⇒ Exporters, Student-Education loans (upto Rs.10lakh),
⇒ Social Infrastructure (schools,drinking water, sanitation facilities,
health care, COVID related hospitals/labs etc);
⇒ Renewable Energy Projects (wind mills, biomass generators, solar
street light, micro-hydel plants etc.) etc. (नवीकरणीय ऊजार् प�रयोजनाएं )
Total PSL for Indian Scheduled Commercial Banks and 40% 40%
(Foreign Banks with 20 or more branches).
* Above quota reforms to be implemented in Phase-Wise by 2023-24. (क्र�मक �प से नए सुधार होंगे)

🤩🤩Benefit? It will ⏫ loan-availability for the weaker section and small farmers thus helping in the
United Nations' Sustainable Development Goals related to poverty removal. (📑📑Ref: HDT-Pillar#6)
कमजोर वगर् और छोटे िकसानों को �ादा मात्रा म� कजार् �मल पाएगा. गरीबी �नवारण, सं यु� रा�� के सतत �वकास ल�ों क� प्रा�� म� मदद.
- PSL quotas are ‘minimum (�ूनतम/कम से कम)’ & not maximum. So, if bank wishes, it can EVEN
give even 60% of its loans to weaker sections, instead of just 12% “minimum quota” meant for
weaker section.
- Bank’s Loans given to Non-Banking Financial Company (NBFC) who are lending to above PSL
categories = such ‘indirect loan’ to PSL sectors will also be counted for bank’s quota. (ब�कर द्वारा
गेरब�क �व�ीय कं पनी को िदया गया कजार् यिद परो� �प से प्राथ�मक �ेत्र को जाता है तो वह रा�श भी कवोटा-सफलता म� �गन ली
जाती है। )
- Bank + NBFC’s joint lending / co-lending/ co-origination loans – what does it mean? #PHD-
NOT-IMP. (ब�क और गेर-ब�क का साथ मे �मलकर पीएसएल �ेत्र को कजर् िदया, तो उसमे ब�क ने िदया कजर् इस �ोटे म� �गन �लया
जाता है, कु छ शत� के आधीन)
- NOTE: PSL Norms donot apply to NBFCs. PSL Norms apply ONLY to Bankers.

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12.22.1 🐯🐯🐯🐯🐯🐯 PSL Reforms-2020: on RRB/SFB/UCB?
What is the difference/meaning of SCB/RRB/SFB/UCB etc? Ans: (📑📑Ref: HDT-Pillar#1B1:
classification)
Table 5: need not memorize for IAS Exam, but Memorize for RBI /Bank Exams

Type of Bank & PSL Reforms-2020: Before After

Indian Scheduled Commercial Banks (SCB: अनुसू�चत वा�ण��क ब�क) and 40% same 40%
Foreign Banks in India with 20 or more branches
Foreign Bank in India with <20 branches (�वदेशी ब�क) 40% same 40%
Regional Rural Banks (RRB: �ेत्रीय ग्रामीण ब�क) 75% same 75%
Small Finance Banks (SFB: लघु �व� ब�क) 75% same 75%
Urban Cooperative Banks (UCB: शहरी सहकारी ब�क)* 40% ⏫75%
Rural Cooperative Banks (ग्रामीण सहकारी ब�क) N/A N/A
⇒ These quotas implemented in a gradual/phase-wise manner by 2025-26.(Separate Deadline for
different-different types of bank. Exact dates NOT.IMP.)
⇒ Internal quotas may be different for these Banks e.g. RRBs: Weaker section =15%. But, poor cost-
benefit in chasing all that information. #⏳📚📚थोड़ा-पढ़ो-आगे-बढ़ो

12.22.2 🐯🐯🐯🐯🐯🐯 PSL Reforms-2020: Startups, Renewable Energy and Healthcare

Outdated/technical for 2024-exam cycle, so removing from latest handout.

12.22.3 🐯🐯🐯🐯🐯🐯 PSL Reforms-2020: Weightage to poor districts (गरीब/�पछड़े �जलों को भारांक)
RBI will classify the districts based on previous PSL loans given by all banks:
Type of district if Axis bank gives ₹100 PSL loan in this district →
RBI will count Axis’s quota-fulfillment as _ _ .
Low Credit penetration e.g. Tawang, ₹125 (आरबीआई ने एक ऐसी भारांक प्रणाली बनाइ है �जसमे ब�क
Dantewada etc. जहां भूतकाल म� ब�क-कजर् क� प�ँ च �पछड़े �जलों म� लोन देकर ब�त आसानी से अपना पीएसएल ल�ं क
कम रही है हा�सल कर सकती है।)
High Credit penetration e.g. Ahmedabad, ₹90 (तािक ब�क जो पहले से स�� �जले है, उसे �ादा स�� बनाने
Pune etc. जहाँ पहले से ही काफ� कजार् िदया जा चूका है क� जगह �पछड़े �जले पर �ान दे)
Thus, RBI’s PSL weightage system will passively discourage banks from giving more PSL-loans to the
developed districts and it will encourage banks to give PSL-loans to backward districts. This will help
in more balanced regional development. (�ेत्रीय �प से सं तु�लत �वकास म� यह कदम फायदेमंद होगा.)

🔠🔠❓ MCQ. Priority Sector Lending by banks in India constitutes loans to _ _ _ _ . (Pre-2013)
a) Agriculture b) Micro and Small Enterprises c) Weaker Sections d) All of the above

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12.22.4 🐯🐯�🏗🏗PSL Shortfalls: RIDF and UIDF

⇒ If a bank can’t fullfill its PSL-quotas then such Underachiever bank will have to deposit PSL-
shortfall money to NABARD’s Rural Infrastructure Development Fund (RIDF), or other funds
under SIDBI, National Housing Bank (NHB), MUDRA Ltd. etc as per the norms decided by RBI
from time to time. (ल�ं कों को हा�सल नहीं कर पाने वाली ब�क ने आरबीआई द्वारा �च��त अलग-अलग सं �ाओं म� पैसा
�नवेश करना पड़ेगा)
⇒ Underachiever bank will earn interest from such deposited money, but it’ll be (usually) linked
with Bank-Rate & their money will be locked-in a long-term project. ( पैसा लं बे समय तक अटक जाएगा)
⇒ �Budget-2023: announced setting up one more such fund called UIDF, to receive money from
PSL-shortfalls.
Rural Infrastructure Development Urban Infrastructure Development Fund
Fund (RIDF) (UIDF: शहरी बु�नयादी अवसं रचना �वकास �न�ध)
When? 1995–96 2023-Budget
Where? under NABARD- National Bank for under National Housing Bank (NHB)
Agriculture and Rural Development.
for for Agriculture, Social sector and Rural for urban infra projects especially in
What? connectivity projects.  Tier-2 cities (population from 50,000 to
99,999) and
 Tier-3 cities (population from 20,000 to
49,999).

12.22.5 🐯🐯🐯🐯🐯🐯:📜📜 Priority Sector Lending Certificates (PSLC) from 2016 onwards

Figure 9: भाई आ�मर/Rancho हमने अपना assignment नही िकया, तू अपना "EXTRA-walla" हमे बेच दे! (img source-3 idiots movie)
- In this arrangement, the overachieving Banks can sell their excess PSL in form of ‘certificates’ to
underachieving banks. (ल�ं कों से �ादा उपल�� हांसील करने वाली ब�क, अ� ज�रतमं द ब�क को स�टिफके ट बेचती)

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- If an underachiever bank can’t fulfil its PSL-quota through PSL-certificates purchase then
ultimately, it’ll have to deposit PSL-shortfall money to RIDF, UIDF etc funds, as explained in the
previous section.

🔠🔠❓ Which of the following is not an instrument of Selective Credit Control? (Pre-1995)
a) Regulation of consumer credit b) Rationing of credit
c) Margin requirements d) Cash reserve ratio
🔠🔠❓ An increase in the Bank Rate generally indicates that _ _ _ (Pre-2013)
a) Market rate of interest is likely to fall.
b) Central Bank is no longer making loans to commercial banks.
c) Central Bank is following an easy money policy.
d) Central Bank is following a tight money policy.
🔠🔠❓ If RBI adopts an expansionist monetary policy, which would it not do ? (Pre-2020)
1. Cut and optimize the Statutory Liquidity Ratio
2. Increase the Marginal Standing Facility Rate
3. Cut the Bank Rate and Repo Rate
Answer Codes: [a) 1 and 2 only [b) 2 only [c) 1 and 3 only [d) 1, 2 and 3
🔠🔠❓MCQ. Find Correct Statements: (Prelims-2022)
1. If the inflation is too high, Reserve Bank of India (RBI) is likely to buy government securities.
2. If the rupee is rapidly depreciating, RBI is likely to sell dollars in the market.
3. If interest rates in the USA or European Union were to fall, that is likely to induce RBI to buy
dollars.
Codes: (a) 1 and 2 only (b) 2 and 3 only (c) 1 and 3 only (d) 1, 2 and 3

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12.23📢📢 � MONETARY POLICY TOOLS: A READY RECKONER TABLE
Table 6: समज म� आ गया हो तो बिढ़या है, नहीं तो रट्टा मारो �जदं ाबाद (If understood then well & good, else memorize by Rot-Learning)

Tools & Strategy? <2%CPI= Fight deflation (अप���त) >6%CPI= Fight Inflation (मुद्रा���त)
- Deflation: ↑ money Easy, Cheap, Dovish, Expansionary Tight, Dear, Hawkish,

supply, inject liquidity=> policy. Contractionary

आसान-स�ा �ाजदरे, �व�ारवादी तं ग- मँ हगी �ाजदरे, सं कु चनवादी
make loans cheaper, ↑
consumption
- Inflation: Do reverse
Reserves: CRR, SLR ↓ (Decrease) ↑ (increase)
Key Rates ↓ (Decrease) ↑ (increase) महंगाई से लड़ना है तो
(Repo, MSF, Bank रेपो दर बढ़ा दो
Rate)
↓ (Decrease) – so banks feel less ↑ (increase) : so banks feel
Quantitative

motivation to park ₹ in RBI & more motivation to park ₹ in

Reverse Repo, they become more proactive to RBI → ⏬loanable funds to
SDF give loans to people → people → ⏫loan interest rate
⏫demand → deflation fought → ⏬demand → inflation
fought
Market Ops OMO: RBI Buys G-Sec from OMO: RBI Sells G-Sec
(OMO) market.

Moral Suasion / Nudge / Force the banks to Enforce the Hawkish policy
Direct Action enforce Dovish Policy
Margin Requirement Increase e.g. Do reverse of left cell.
/ Loan to Value (LTV) Gold-LTV: 60% → 90%
Qualitative Tools

↑ loan-flow to sectors that can - ↓the loan-flow to sectors

generate employment e.g. textile where speculative
→workers buying more investment is leading to
Selective Credit
→demand /consumption demand-side inflation e.g.
Control / Priority
increased →deflation fought. लोन real estate & housing.
Sector Lending (PSL)
का बहाव कु छ ऐसे �ेत्रो म� करो िक रोजगार - ↑loan-flow to sectors
�नमार्ण हो और वह सब मजदू र खरीदारी कर� where loans can ↑supply
तािक अथर्तंत्र म� मांग बढे e.g. onion farmers.
** MCQs usually confined to how can CRR,SLR,Repo & OMO be used for inflation /
deflation control. For rest of the tools you need not waste time thinking 500-jaat-ke-
combinations and Birbal-Khichdi.✋

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12.24📢📢 MONETARY POLICY IN PRESENT-DAY INDIA
There are 3 strategies / ways of making a monetary policy: (तीन तरीके से मौिद्रक नीती बनाई जा सकती है)
1. 💸💸 Exchange rate stability (�व�नमय दर ��रता): Singapore & other export-oriented economies use
this. They try to keep their local currency at certain rate against US-dollar to boost exports.
(How?Ans📑📑Pillar#3)
2. 🎳🎳 Multiple Indicators (एका�धक सं के तक): Central Bank tries to focus on Economic Growth,
Employment, Inflation Control and Exchange rate stabilization. India's RBI followed this
strategy upto 2016.
3. 🧄🧄 Flexible Inflation Targeting (FIT) / Price Stability (मुद्रा���त ल�ीकरण): Central Bank only
aims to keep inflation controlled, THEN other indicators (growth, employment, exchange rate)
will automatically fall in line. Model successful in Western nations → RBI’s Urjit Patel
Committee Report (2013-14) recommended it for India → adopted from 2016-October, by
amending RBI Act Section 45. (2016 म� �रज़वर् ब�क के कानून म� सं शोधन कर भारत ने यह रणनी�त/तरीका अपनाया है)

12.24.1 📢📢 Monetary Policy Making under RBI Act since 2016

Figure 10: जाने �ा होगा रामा रे..... सोचना है �ा? जो होना है होगा, चल पड़े है िफ़क्र यारो….

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 Table 7: composition of the ⚖� statutory Monetary Policy Committee (MPC: वैधा�नक मौिद्रक नी�त स�म�त):
🐯🐯 RBI side (3 members) 🦁🦁 Govt. Side (3 members)
1. RBI Governor, as the Ex-officio Chairman. 1. Dr. Shashanka Bhide from National
2. Dy.Governor responsible for Monetary Council for Applied Economic Research
Policy. Michael Patra (from 2020-Jan). (NCAER, Delhi)
Earlier Viral Acharya. 2. Dr. Ashima Goyal from Indira Gandhi
3. One person nominated by RBI Central Board: Institute of Development Research
Mridul Saggar (Executive Director, RBI). (Mumbai)
3. Dr. Jayanth R Varma from IIM-A
Their tenure tied with their ex-officio job tenure Tenure: 4 years, no re-appointment. (4 साल का
(पदेन कायर्काल) E.g. Shaktikanta’s shakti (powers) कायर्काल और उसके बाद पुन:�नयु�� असं भव)
will be gone after his 3-years tenure as RBI-
Governor expires, unless he is reappointed.
(Note: Shaktikanta is reappointed till Dec-2024.)
RBI Governor & Dy.Gov are selected by Financial They’re selected by Search-cum-Selection
Sector Regulatory Appointment Search Committee headed by Cabinet Secretary
Committee (FSRASC) is headed by Cabinet (IAS)
Secretary (IAS)
- Meeting quorum 4 persons, incl. Governor. (कायर्साधक सं �ा: कम से कम चार लोगों क� हाजरी ज�री)
- Legally required to hold minimum four meetings in a year. (सालाना कम से कम 4 बार �मलना ज�री)
- In practice, they meet every two months to decide bi-monthly monetary policy updates.
(Although during 😷😷Corona-lockdown met more frequently).
- Repo rate=Policy rate= benchmark interest rate: decided by Majority vote. (मौिद्रक नी�त दर ब�मत से
तय)
- When they vote for the first time, all members, including the Governor, will vote. If tie →
Governor can vote again for second time as casting vote (यिद मतों म� बराबरी �ई, तो गु�ी सुलझाने के �लए
�नणार्यक मत गवनर्र द�गे).
- To ensure transparency / accountability (पारद�शता / जवाबदेही):
- Govt can send message only in writing. (सरकार के वल �ल�खत म� सं देश भेज सकती है)
- Committee must publish its minutes of the meeting on the 14th day, and “Monetary Policy
report” at every 6 months.(�नयत समय पर कु छ द�ावेज प्रका�शत करने होंग)े

- 🎯🎯 Inflation target decided by Union Government, after consulting with RBI Governor. (गवनर्र से
�वमशर् करने के बाद महंगाई �नयं त्रण का ल� सरकार तय करेगी)
- 🎯🎯 Present target: Keep Consumer Price Index (CPI:All India) within 2-6%.[alternate way of
saying= 4% +/- spread of 2%] (More about CPI/Inflation in 📑📑Pillar#4C)

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- 📅📅 Target was Valid for: Originally from 2016-2020 (ending at 31/03/2021). Now same target
extended till 31/3/2026.
- 😰😰Target fail: if inflation not kept in this 2-6% zone for 3 consecutive quarters (=9 months)
then Committee must send report to Govt with reasons and remedies (यिद सतत नौ महीनों तक महंगाई
इन सीमाओं के बाहर रही तो स�म�त क� असफलता मानी जाएगी → असफलता के कारण-उपचार क� �रपोटर् �रज़वर् ब�क ने सरकार को
भेजनी होगी).
- 2022-Nov: the inflation has remained more than 6% for more than 9 months continuously so
now the MPC committee drafting a report to Govt. But it is not released public domain yet. We
will learn about it in Win23 FREE Series in 2023-Feb, depending on observations of Eco Survey.

🔠🔠❓ MCQ. With reference to inflation in India, find correct statement: (Prelims-2015)
a) Controlling the inflation in India is the responsibility of the Government of India only
b) The Reserve Bank of India has no role in controlling the inflation
c) Decreased money circulation helps in controlling the inflation
d) Increased money circulation helps in controlling the inflation
🔠🔠❓ MCQ. Find correct statements about Monetary Policy Committee: (Prelims-2017)
1) It decides RBI’s benchmark interest rates.
2) It is a 12-member body including the Governor of RBI and is reconstituted every year.
3) It functions under the chairmanship of the Union Finance Minister.
Codes: (a) 1 only (b) 1 and 2 only (c) 3 only (d) 2 and 3 only
🔠🔠❓MCQ. Who is responsible for maintaining price stability by controlling inflation ? (Pre-
2022)
(a) Department of Consumer Affairs (b) Expenditure Management Commission
(c) Financial Stability and Development Council (d) Reserve Bank of India
🔠🔠❓MCQ. Statement I: In India, Central Government determines the inflation target, in
consultation with RBI, in terms of Consumer Price Index once in five years. (EPFO-2023)
Statement II: At present, the Monetary Policy framework in India is operated by Central
Government.
- Both I and II are correct and statement II in the correct explanation for statement I
- Both I and II are correct and statement II is not the correct explanation for statement I
- Statement I is correct but statement II is incorrect
- Statement I is incorrect but statement II is correct

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12.25📢📢 REVIEW OF BI-MONTHLY MONETARY POLICIES

As of 11th Sep 2023, Repo is still unchanged @6.50%. So I’ve not updated above graph.

12.25.1 🚕🚕🚕🚕 Stance: Calibrated Tightening / Neutral / Accommodative

After every meeting, RBI MPC will announce its stance i.e. What they’ll do with Repo Rate in the
next Meeting. (भ�व� क� मीिटगं म� रेपो दर के साथ �ा िकया जाएगा, इसका इशारा/ सं के त िदया जाता है)

Stance= what RBI will do Will they Will they Will they hold/keep
in next meeting hike/increase cut/decrease repo unchanged?
⏫repo? ⏬Repo?
Calibrated Tightening ✅ Possible ✋No they’ll not cut ✅ Possible
Neutral ✅ Possible ✅ Possible ✅ Possible
Accommodative ✋No they’ll not ✅ Possible ✅ Possible
hike
⇒ This provides guidance to the investors/borrowers/bankers about future action of RBI.
⇒ However, RBI MPC is not legally bound to follow the stance. E.g. Dec-2018 Governor Urjit-Patel
led MPC announced Calibrated Tightening, yet in next meeting Feb-2019 Governor Shaktikanta
led MPC decreased⏬ repo rate, because they felt it was necessary to combat deflation. (कानून �प
से बा� नहीं. कभी कभी स�म�त इसका उ�ं घन भी कर देती है)
⇒ 2022-May-June: Even though MPC said Accommodative Stance, still they kept increasing the
Repo Rate to fight inflation.

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12.26🐯🐯🐯🐯🐯🐯RBI’S MONETARY POLICIES: BEFORE 2020-CORONA
📢📢 Policy Decisions & Regulatory Announcements
[We will study in appropriate pillars/sections, so DONOT LOSE SLEEP YET]
2018 -era ⇒ Inflation was high/rising ⏫ so, Governor Urjit Patel led MPC kept ⏫Repo in
pattern the range of 6-6.50% (मुद्रा���त/महंगाई बढ़ रही थी इस�लए रेपो दरों को ऊंचा रखा गया था)
- Stance: Calibrated Tightening.
2019-era ⇒ Inflation was falling below 2%⏬ so, Governor Shaktikanta Das led MPC kept
pattern decreasing Repo from 6.##% to 5.##% to boost economy (अप���त/स�ाई बढ़ रही थी
इस�लए �रपो दरों म� कटौती)
- Stance: Accommodative.
2020-2021 ⇒ Corona lockdown = supply chain disruption = inflation was rising. in such
Corona Era situation, making a loan is expensive, will not fix the problem. (आपू�त श्रृंखला प्रबं धन
म� सम�ा के चलते खाद्य महंगाई बढ़ी थी- तो �रपो दरों म� बदलाव द्वारा उस महंगाई का समाधान असं भव)
⇒ So, instead, RBI decreased Repo to 4% and CRR to 3% boost demand/shopping
in the corona slowdown. (कोरोना के बाद अथर्त� को वापस खड़ा करने के �लए स�े लोन अ�नवायर्)
⇒ Stance: Accommodative.

12.27🐯🐯🐯🐯🐯🐯RBI’S MONETARY POLICIES: CORONA 2020

⇒ By default, RBI’s MPC Committee supposed to meet every 2-2 months. So, After February’s
meeting, they should hold next meetings in April.
⇒ But in Corona crisis economic slowdown they met more frequently in March to May. (कोरोना
महामारी के चलते आए आ�थक सं कट से �नपटने के �लए स�म�त ने तय समय से पहेले एका�धक मीिटगं का आयोजन िकया)
⇒ The gist of above March-April-May announcements are as following (and they’re considered to
be part of 👻👻ATMANIRBHAR BHARAT initiative to revive Indian Economy after Corona.
We’ll learn more about it in Pillar#2D and #4C):
👻👻ATMANIRBHAR → Reforms by RBI 2020-2021 We’ll learn in 📑📑Pillar#
Reduced CRR to 3% and Repo to 4% Present handout
Opened new loan windows such as TLTRO, On-Tap Present handout
Window etc.
Gold Loan LTV: Before 75% → AFTER 90%. �benefit? Present handout
More quantity of loan can be taken by pledging same
quantity of gold → post-corona economic-revival.

🐯🐯🐯🐯🐯🐯✋ Loan/EMI/NPA relief / Moratorium (ऋण 📑📑1B2: NPA

अदायगी पर अ�ाई �प से रोक)

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 🐯🐯🐯🐯🐯🐯🐯🐯 Special Refinance Facility for AIFI (All India 📑📑1B1: classification of Banks →
Financial Institutions). खास िक� क� पुन�वत योजना, अ�खल भारतीय AIFI (NABARD, SIDBI, EXIM,
�व�ीय सं �ानो के �लए NHB)
RBI Committee under KV Kamath submitted report on how 📑📑1B2: BASEL norms
to restructure loans impacted by the Covid 19 pandemic.
RBI assured we’ll implement that report.
RBI defers BASEL Norms, IndAS accounting Norms, orders 📑📑1B2: BASEL norms
bank to pause/halt the Dividend Distribution (�नयमों को ��गत
िकया गया)
🐯🐯🐯🐯🐯👨👨: RBI reforms Ways and Means advances 📑📑1C: SEBI/Sharemarket: Short
(WMA) and Consolidated Sinking Fund (CSF) term Debt instruments
RBI reforms attracting foreign investment: 📑📑3A: Balance of Payment (BoP):
⇒ Voluntary Retention Route (VRR: �ै��क अवधारण मागर्) FDI, FPI
⇒ Fully Accessible Route (FAR: स�ूणर्त: सुग� मागर्)

12.28🐯🐯🐯🐯🐯🐯RBI MONETARY POLICIES: APRIL-2022 ONWARDS

12.28.1 🐯🐯🐯🐯🐯🐯Monetary Policy: April-2022 (SDF)

⇒ No changes in key rates or Stance. Repo unchanged @4% so Automatically [email protected] and
[email protected]%. Stance: Accommodative
⇒ Introduced Standing Deposit Facility (SDF: �ायी िडपॉ�ज़ट सु�वधा).
⇒ BEFORE 2022-April: Policy Corridor = MSF <—> REPO <—> Reverse Repo
⇒ After 2022-April: Policy Corridor = MSF (Repo+0.25%) <—> REPO <—> SDF (Repo-0.25%)

12.28.2 🐯🐯🤧🤧🤧🤧Monetary Policy: May-2022 Repo⏫

⇒ RBI required to control inflation in 2-6% CPI and RBI MPC usually meets every 2-2- months.
⇒ but inflation crossed 7% (Because Russia Ukraine crisis → imported fertiliser & crude oil prices
increased etc.)
⇒ so emergency MPC meeting held → outcome → (वैसे तो हर दो महीने �मलना था लेिकन महँ गाई हद से �ादा बढ़
गयी तो आपातकालीन मीिटंग बुलायी)
⇒ Repo increased from 4% to 4.40% to combat inflation.
⇒ Automatically, as per the formula: MSF = 4.40% + 0.25% = 4.65%
⇒ Automatically, as per the formula: SDF = 4.40% - 0.25% = 4.15%
⇒ Reverse Repo Unchanged at 3.35%
⇒ Separately, RBI Governor announced to increase CRR from 4% to 4.50%. This will reduce the
loanable funds to by more than ₹85,000 crore. ⏬loanable funds→ ⏫ loan interest rate →
⏬demand/shopping → ⏬inflation. (NOTE: MPC can’t decide CRR. Only RBI Governor
alone can decide CRR.)

(Batch: PCB10-RATFAAR) Mrunal’s Economy Pillar#1A-2: Money Supply & RBI’s Monetary Policy → Page 92
⇒ Stance: Accommodative but in future we will ‘withdraw’ this stance.

🚩🚩�FAQ: Isn't this repo-increase a violation of the Accommodative stance announced earlier?
Ans. MPC has no legal obligation for accommodative stance. MPC has only 1 legal obligation-
control inflation in 2-6% range. (अकोमोडेिटव-रवैये के िहसाब से ही काम करना होगा ऐसा क़ानूनन �प से अ�नवायर् नहीं है।)

12.28.3 🐯🐯🐯🐯🐯🐯Monetary Policy: 2022 so far upto 2023-Sept

Month Repo Addl. Comments if any
2022-April 4% Learned in previous section
2022-May 4.40%
2022-June 4.90% Repo increased to fight inflation
2022-Aug 5.40%
2022-Sept 5.90% Traditionally, committee meets every 2-2 months, but this Emergency
meeting because inflation not under control.
2022-Dec 6.25% Repo increased to combat inflation.
2023-Feb 6.50% Repo increased to combat inflation. Consequently,
- SDF = Repo minus 0.25% = 6.25%
- MSF = Repo PLUS 0.25% = 6.75%
- Reverse Repo Unchanged at 3.35%
2023-Apr 6.50% No change
2023-June 6.50% No change
2023-Oct Presently CELL is empty because today is 11_Sep_23. This Oct policy,
and more updates to be covered in Free Win24 series in Feb’24.

12.29🐯🐯🐯🐯🐯🐯MONETARY POLICY: GOVERNORS OTHER REGULATORY ANNOUNCEMENTS

- Monetary Policy Committee decides only Repo rate. Other decisions, such as CRR-SLR cut, PSL
norms, banning magnetic-chip cards etc are decided separately alone by RBI Governor.
However, after the meeting, he’ll make above type of announcements, in the Press conference.

🔠🔠❓ MCQ. RBI recent directives relating to ‘Storage of Payment System Data’, popularly known
as data diktat command the payment system providers that : (Prelims-2019)
1) They shall ensure entire data relating to their payment systems are stored in a system only in
India.
2) They shall ensure that the systems are owned and operated by public sector enterprises.
3) They shall submit the consolidated system audit report to the comptroller and Auditor General
of India by the end of the calendar year.
Find Correct Statement(s): codes: (a) 1 only (b)1 and 2 only (c) 3 only (d) 1,2 and 3 only

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Ans. After April-2018’s monetary policy RBI governor announced certain regulatory reforms. One of
them was :- Payment System data must be stored in India within next 6 months, to ensure its safety
against misuse / Russian-Chinese-hackers. So, for Prelims-2019, this was D-1 year current affairs. Now
we are targeting 2024, so need not put so much efforts behind 2018’s current affairs.
12.30🔪🔪🔪🏠🏠🏠🏠 BANKS’ LENDING RATES % (ब�क ऋण क� �ाज दर�)

RBI’s 6-member statutory MPC decides policy rate (=repo rate) to keep inflation within 2-6%CPI
(All India) but who decides lending rates of individual banks, & how? Ans:
Govt began nationalization of private banks, and ‘administered interest rates’ (प्रशा�सत �ाज
1969 दर�) on them i.e. Govt would decide how much loan interest rate the banks should charge on
borrowers?
M.Narsimham suggested deregulation: Govt should not dictate / administer individual
1991 banks’ interest rates. RBI should only give methodology to banks. (सरकार ने अपने मनमाने �ाज
दर थोपने नहीं चािहए)
2003 RBI introduced Benchmark Prime Lending Rate (BPLR) system
- RBI introduced formula “BASE Rate + formula = bank’s loan interest rate”;
- update frequency on individual banks’ discretion (अपनी मज�/ �ववेकाधीन). So, it did not
2010 help transmission of monetary policy much.
- So, Even If RBI reduced repo rate, the banks would not update their formula figures
regularly. �रजवर् ब�क ने अपनी �रपो दर कम करी िकंतु ब�कोने लोन स�े नहीं िकए😰😰
⇒ RBI introduced formula “Marginal Cost of Funds based Lending Rate (MCLR) +
2016
Spread” system. (how exactly it worked? Outdated info. NOT IMP)

(Batch: PCB10-RATFAAR) Mrunal’s Economy Pillar#1A-2: Money Supply & RBI’s Monetary Policy → Page 94
 ⇒ 😰😰Limitation? From January to Oct 2019, RBI ⏬ repo rate by 1.35% but banks
reduced their loan interest rates by merely 0.40%.
⇒ Thus, even though RBI reduced its repo rate, banks are not quickly reducing their loan
interest rates. So MCLR system was ineffective. (�रजवर् ब�क ने अपनी �रपो दर कम करी िकंतु ब�कोने
लोन स�े नहीं िकए, इस�लए ये प्रणाली प्रभावी नहीं)

12.31🔪🔪🔪🏠🏠🏠🏠 BANK’S LOAN INTEREST RATE: EXTERNAL BENCHMARK (बाहरी ब�चमाकर् )

MCLR’s #EPIC-FAIL ultimately forced RBI to order external benchmark formula from 1st Oct 2019.

External Benchmark + Spread(Profit) + Risk premium = Bank’s Loan interest rate.

12.31.1 🔪🔪🔪🏠🏠🏠🏠 External Benchmark: Formula Components:

Individual bank free to pick any one External Benchmark such as

1) RBI repo rate or

2) 91-day T-bill yield or
3) 182-day T-bill yield or
4) any other benchmarks by an organization named Financial Benchmarks India Ltd.
⇒ Banks must feed the latest data of external benchmark in above formula, atleast once every three
months. (हर 3 महीनों पर फामूर्ला म� नए आंकड़े डालने होंगे)
⇒ So both fresh and old/existing borrowers will benefit (e.g.if repo rate decreased).. तो मान ली�जए रेपो
दर स�ी �ई होगी → नए और पुराने लोन ग्राहकों को उस स�े �ाजदर का फायदा �मल जाएगा)

12.31.2 �🏠🏠🏠🏠External Benchmark system: Which borrowers eligible?

1. Personal loans (taken for any sudden emergency expenditure)
2. Retails loans (home, vehicle, electronics etc)
3. Loans to micro & small enterprises
4. Loans medium enterprises (this 4th category is to be added from 1/April/2020).
5. It is applicable to old/previous loans in above categories, if borrower fills the application form.
🤩🤩🤩🤩External Benchmark Benefits? = Better/faster transmission of Monetary Policy; transparency
& accountability to borrowers. (मौिद्रक नी�त का प्रभावी प्रसार म�, लोन ग्राहकों के प्र�त पारद�शता और जवाब देही)

12.31.3 �🏠🏠🏠🏠:🚩🚩🚩External Benchmark system: FAQ

⇒ 🚩🚩🚩FAQ: Can existing existing/old borrowers benefit? Answer is within the handout if you
read it carefully.
⇒ 🚩🚩🚩FAQ: Can bank change external benchmark indicator after giving loan? Ans. Watch
Video
⇒ 🚩🚩🚩FAQ: Can bank change the spread(Profit) in the formula after giving loan to a client?Ans.
Not allowed to change. (and this is not imp for exam)

(Batch: PCB10-RATFAAR) Mrunal’s Economy Pillar#1A-2: Money Supply & RBI’s Monetary Policy → Page 95
⇒ 🚩🚩🚩FAQ: Can bank change the “Risk Premium” in the formula after giving loan to a client?
Ans. Yes e.g. Govt employee thrown out of job after getting loan, then banker may ⏫ the risk
premium on him because now he’s jobless so the risk probability of his loan default ⏫. (and
this is not imp for exam)

12.31.4 🚗🚗📈📈Interest Rate Reset of EMI based Floating Interest Loans

- Between 2020 to 2023, the repo rate increased from 4% to 6.50% - consequently the EMI burden
increased for the external benchmark rate based loans.

So, RBI wants bankers to give option to borrower after every change in such floating interest loans:

- A) Ability to RESET i.e. switch from floating (external) rate to fixed rate loans.
- B) Foreclosure of loan. Meaning, full repayment of your remaining loan amount in one single
payment instead of paying multiple EMIs. Benefit? LESS burden of compound interest (byaaj-
pe-byaaj) in monthly instalments.
�FAQ: Will this not be misused by the borrower IF he RESETS his fixed/floating loan every
time it becomes unfavourable to him after change in REPO?

Ans. There will be ceiling/limits on how many times ‘reset’ can be done throughout the loan period.
RBI yet to issue guidelines. Further, real-life Phd not important.

12.31.5 Banks’ Lending Rates % → Fixed vs Floating interest loans, teaser loans, NPA etc.
Refer to 📑📑Pillar1B-2: burning issues → NPA

(Batch: PCB10-RATFAAR) Mrunal’s Economy Pillar#1A-2: Money Supply & RBI’s Monetary Policy → Page 96
12.32🐯🐯🔇🔇 LIMITATIONS OF MONETARY POLICY IN INDIA (मौिद्रक नीती क� मयार्दाए)

Figure 11: मै काम तो कर रहा �ँ , लेिकन उसक� सकारा�क असर, अथर्�व�ा पर िदख नही रही। 😢😢
Even though monetary policy updated is every 2 months, its efficacy in controlling inflation &
boosting growth is restricted by following factors: (मौिद्रक-नी�त मं हगाई-�नयं त्रण और आ�थक वृध्धीमे असरकारकता
नही िदखा पायी �ोंिक:)
1) 😰😰Western countries’ households → consumerist lifestyle → don’t save large amount of
money in Banks. So their banks borrow more quantum of money from US Federal reserve and
European Central Bank respectively. Whereas in India, Repo is not major source of funds for
Indian banks, due to higher level of savings & deposits. (पा�ा� देशो मे उपभो�ावादी जीवनशैली. जबिक
भारतीयो मे ब�क-बचत क� भावना के चलते हमारे ब�कों के �लए आरबीआई के रेपों लोन, पैसो का मु�य �ोत नहीं है। अंत: �रपो दर
स�े होने पर भारतीय ब�को को खास फकर् नहीं पड़ता। )
2) 😰😰Before the External Benchmark System: Indian Banks did not immediately pass on the RBI
rate cuts to customers, citing NPA/Bad loans / profitability problem. According to RBI’s own
research, it took minimum 6-12 months for repo rate cut to benefit end-customers and it took
about 24 months for repo rate changes to impact inflation. (बाहरी-ब�चमाकर् से पहेले के समय मे,भारतीय ब�क
तुरंत अपने �ाजदर कम नही करते थे।)
3) 😰😰Poor management in Public Sector Banks (PSB), scams in the private sector banks, large level
of Non-Performing Assets (NPA) also stymie the impact of monetary policy. (सावर्ज�नक �ेत्र के ब�कों म�
बेअसर प्रबं धन, �नजी �ेत्र के ब�कों म� घोटाले, अनजर्क प�रसं प��या) 📑📑 More in Pill1B2
4) 😰😰Supply Side Issues: El-Nino/Poor monsoon hurting crop production → food inflation; Wars
& Geopolitical issues ⏫ global crude oil & raw material prices, protectionism by China-US
denting our exports. RBI can’t control them. (कम बा�रश + म�पूवर् क� भूराजनी�तक तनाव= भारत मे क�े माल
क� आपू�त को असर करते है, चीन-अमरीका का सं र�णवाद भारतीय �नयार्तमे बाधा डालता है। इ�े �नयं त्रण मे रखना आरबीआई के
�लए मु��ल।) 📑📑Refer Pill3&4A
5) 😰😰While cheap loans can boost consumption, investment and growth but because of poor-
monsoon-fear and oil-price fear, RBI (during Raghuram Rajan and Urjit Patel’s governorships)
was usually apprehensive of inflation and more inclined to keep repo rate high. Then RBI was get
criticized for not facilitating cheap loans & economic growth because of its ‘Hawkish policy’.
(महंगाई-�नयं त्रण के च�र मे कभी कभी खुद �रजवर् के मं हगे �रपो-�ाजदारों ने अथर्त� को आगे बढ्ने से रोका है।)

(Batch: PCB10-RATFAAR) Mrunal’s Economy Pillar#1A-2: Money Supply & RBI’s Monetary Policy → Page 97
6) 😰😰Government Side Issues: Fiscal deficit, Subsidy leakage, Populist Loan-waivers etc. (राजकोषीय
खाध, सब�सडी का �रसाव, लोकलुभावन के �लए िकसानो क� ऋण-माफ�) 📑📑 Pill#2D → FRBM Act
7) 😰😰Structural Issues in Economy: lack of Ease of Doing Biz, electricity-road infrastructure =
production /supply affecting inflation trends. (�ापारमे सुगमता क� कमी, �बजली-सड़क क� अवसं रचना आिद
बु�नयादी मसलो के चलते उ�ादन/आपू�त क� कमी। �रजवर् ब�क जादू क� छड़ी चलाकर इसे द�ु � नहीं कर सकता) 📑📑More in
Pill4B&5
8) 😰😰Presence of Informal moneylenders in rural areas who circulate black money at exorbitant
interest rates. Poor penetration of banking sector, lack of financial inclusion, cash-intensive rural
economy etc. (�ाजखोर/सा�कार जो कालाधन ऊंचे �ाज पर घुमाते है, सभी गरीबो के �व�ीय समोवेशन क� कमी, नगदी मुद्रा
पर �ादा आधीन है हमारी ग्रामीण अथर्�व�ा। �रजवर् ब�क अपनी रेपो दर कम भी कर�, इधर कु छ फकर् नहीं पड़ता) 📑📑More in
Pill1D

12.32.1 🐯🐯🐯🐯 Monitory policy: liquidity deficit in banking system

As of now, I don’t find it imp for exam. Because, textbook, budget, economic survey, RBI etc not
loudly talk about it. ONLY Indianexpress wrote about it to fill pages. But u can satisfy your
intellectual curiosity from this video: https://youtu.be/4q8Xk1cJUCg?t=1099 Timestamp: 18:19

12.32.2 🐯🐯🐯🐯 Monetary policy limitations: Cheap loans causing inflation?

⇒ MPC member Prof. Jayanth Varma believes that Covid-19 is becoming like tuberculosis which
kills a very large number of people every year without inflicting major damage to the economy.
And there is a possibility that Covid-19 will haunt us for the next 3-5 years. (�य रोग /टीबी म� भी
सालाना कई लोग मरते ह� लेिकन उससे अथर्तंत्र को कोई नुकसान नहीं होता। भ�व� म� कोरोना भी एसा हो जाएगा। इस�लए कोरोना के
डर से पूरी �जदं गी हम लोन स�े नहीं रख सकते.)
⇒ But we can't continue to keep cheap loans (4% repo) for so long, else it'll cause asset price
inflation. (e.g. suppose rich men buying 3-3 bungalows using cheap loans for 'investment'
→ demand for bungalows increased → home prices increased = inflation in asset prices.
Similar problem in Sharemarket Ref#1C). (वरना यही स�े लोन भ�व� म� मकान, शेयर इ�ािद सं प��यों म� महंगाई
का कारण बन सकते ह�)
⇒ This could also result in Stagflation= Persistent high inflation, high unemployment and low
growth. (अंततः उ� महंगाई दर, उ� बेरोजगारी दर हो सकती है और आ�थक वृ�द्ध दर म� �गरावट हो सकती है)

(Batch: PCB10-RATFAAR) Mrunal’s Economy Pillar#1A-2: Money Supply & RBI’s Monetary Policy → Page 98
12.32.3 🐯🐯🐯🐯📈📈USA Quantitative Easing (QE) & Fed Tapering : Impact on India

FAQ: What does above chart mean? Ans. Explained in the Video lecture.

12.32.4 🐯🐯🐯🐯 Monetary policy limitations: Black Swan Events

⇒ A Black Swan Event means an unprecedented unexpected extreme risk event e.g. 2007’s USA
sub-prime crisis, 2020’s Corona. (ऐसी अप्र�ा�शत घटना �जससे अथर्तंत्र को ब�त नुक़सान हो जाता है)
⇒ RBI report says next black swan event → FPI may pullout $100 billion from Indian market →
it’ll create problems similar to previous section.
⇒ Black Swan Theory given by author Nassim Nicholas Taleb in book– The Black Swan.

(Batch: PCB10-RATFAAR) Mrunal’s Economy Pillar#1A-2: Money Supply & RBI’s Monetary Policy → Page 99
🚩🚩🚩FAQ: Can we say “Fed Tapering” is a black swan event? Ans. No. Because it was not
‘unexpected’ event. It was expected by economists. (वो अप्र�ा�शत निह था, पहेले से सब �वशेष�ों को अनुमान था।)

12.33🐯🐯📈📈MONETARY POLICY OBSERVATIONS BY 📙📙ES23

More about inflation in Pillar4E: macroeconomic indicators - inflation.

12.33.1 🐯🐯📈📈🦅🦅Rate hikes: RBI vs Other Central banks

Nation / Central Bank Repo Hike since 2022-April to Dec
�US Federal Reserve 4.25%
European Central Bank (ECB) 3%
Bank of England 2.50%
�India’s RBI 2.25%
 Tight monetary policy is being pursued in all major countries, and not just in India.
 RBI has not increased the loan rates as much as some other big countries e.g. USA, because RBI
wants to do ‘soft landing’ and not ‘hard landing’.
�सफर् भारत म� नहीं सभी बड़े देशों म�, क� द्रीय ब�क महंगाई से लड़ने वा�े, सं कुचन वादी मौिद्रक नी�त अपना रहे ह�। हालांिक अ� देशों के
मुकाबले भारतीय �रजवर् ब�क ने दे दनादन लोन को ब�त महंगा नहीं, तािक भारत क� आ�थक वृ�द्ध म� हाडर् ल�िडंग/भारी �गरावट न आ जाए.

(Batch: PCB10-RATFAAR) Mrunal’s Economy Pillar#1A-2: Money Supply & RBI’s Monetary Policy → Page 100
12.33.2 🐯🐯🛬🛬Monetary Policy: Soft landing vs Hard Landing

�What does above chart mean? Ans. Explained in the video lecture�.
12.33.3 🐯🐯🐯🐯 Monetary policy limitations: Cantillon Effect
⇒ Concept given by the 18th century
French economist Richard
Cantillon.
⇒ When the money supply is
increased, the purchasing power of
people who first receive the freshly-
created money is increased at the
cost of the rest of people. (लोन जब
स�ा होता है तो अमीर लोग ही �ादा लोन अपने
क�े म� लेके कोठी बं गलो के दाम बढ़ा देते ह�)
⇒ What does it mean? Ans. Watch
video lecture.

12.33.4 💦💦🕸🕸Liquidity Trap (तरलता जाल)

- Term was first used by economist John Maynard Keynes.
Concept explained through the comix given below. For more details, watch lecture.

(Batch: PCB10-RATFAAR) Mrunal’s Economy Pillar#1A-2: Money Supply & RBI’s Monetary Policy → Page 101
This results into

Finally

12.33.5 ✍Mains Related Content

I’ve made separate course for it. �NEXT HDT: Pillar1B1- Classification of Banks and NBFCs

(Batch: PCB10-RATFAAR) Mrunal’s Economy Pillar#1A-2: Money Supply & RBI’s Monetary Policy → Page 102
 Pillar#1B-1: Classification of Financial Intermediaries: Bank & NBFC
🚩🚩🚩FAQ: This handout is very lengthy, contains lot of Banking GK😰😰!!.
✅Ans. I’ve such Banking-GK for helping UPSC aspirants trying for Bank-exam as backup/Plan-B.
Which GK is imp/notimp for UPSC = Watch lecture, you’ll get idea.
Table of Contents

13 � Financial Intermediaries → Banks .................................................................................... 104

13.11 �� ₹ � Banks → Reserve Bank of India (RBI): भारतीय �रजवर् ब�क .............................................. 105
13.11.1 � ₹ � RBI Governor & Dy Governor .................................................................................................. 106
13.11.2 � ₹ � RBI Offices & Departments ....................................................................................................... 107
13.11.3 � ₹ � RBI: Functions of ........................................................................................................................ 107

13.12 �Agency Banks of RBI ........................................................................................................... 108

13.13 �: �RBI’s notable portals ................................................................................................. 108

R�
13.13.1 �: � UDGAM Portal: Unclaimed Bank Deposits (2023) ................................................................. 108
13.13.2 �: � PRAVAAH Portal for license from RBI (2023)......................................................................... 108
13.13.3 �: � Daksh Web Portal for supervision (2022) ................................................................................. 109
13.13.4 �: � E-Kuber Portal .............................................................................................................................. 109

13.14 � � Scheduled Banks (अनुसू�चत ब�क) ............................................................................................. 109

13.15 � �FI⇒ Commercial Banks⇒ Pre-Independence ................................................................ 111

13.15.1 � → � Nationalization of Banks After Independence (आजादी के बाद �नजी ब�कों का रा��ीयकरण) ...................... 112

13.16 � � �Consolidation of PSBs [एकत्रीकरण] ................................................................................. 113

13.16.1 �Consolidation of PSBs → A) Merger (�वलीनीकरण).................................................................................. 113
13.16.2 �Consolidation of PSBs → B) Privatization (�नजीकरण) ........................................................................... 115
13.16.3 PSB Privatization: Banking Investment Company (BIC-ब�िकंग �नवेश कं पनी) ................................................... 115

13.17 � �Commercial Banks ⇒ Pvt. Sector Banks (PvB) �नजी-�ेत्र के ब�क ............................................. 115
13.17.1 � � �� ‘On-Tap’ License to open Private Sector Banks (जब मन चाहे तब अज� डाल दो) ......................... 116

13.18 �� � �� Allowing NBFC/Large Corporate to setup Banks .................................... 117

13.19 � � � Commercial Banks ⇒ Foreign Banks (�वदेशी ब�क) ........................................................ 117

13.20 � � ��Commercial Banks ⇒ Differential Banks ........................................................... 118

13.20.1 � � �� Commercial Banks ⇒ Differential Banks⇒ RRB and LAB ....................................... 118
13.20.2 � � �� RRB’s Shareholding pattern / IPO ................................................................................. 119
13.20.3 � � ��Commercial Banks ⇒ Differential Banks ⇒ SFB & PB ............................................... 119
13.20.4 � � ���� On-Tap Licenses for starting SFB (मन चाहे तब अज� डालो) .......................................... 121
13.20.5 Commercial Banks → �India Post Payment Bank (IPPB).................................................................. 121
13.20.6 � (Yearbook) Dept of Post: POSB vs IPPB ............................................................................................ 122
13.20.7 � � (Proposed) Wholesale & Long Term Finance Banks (WLTF) ................................................. 123
13.20.8 ��: Digital Payments- (Proposed) Digital Banks by NITI Aayog (2021) ..................................... 123

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 13.20.9 ��: Digital Banking Units in Budget 2022 ....................................................................................... 124
13.20.10 ��: Digital Payments- NeoBanks / full-stack digital banks ............................................................ 124
13.20.11 ��FAQ : DIFFERENCE between digital banking unit vs Neobank ............................................... 124

13.21 � �FI ⇒ Banks ⇒ Cooperative Banks (सहकारी ब�क) .............................................................. 124

13.21.1 � �� Cooperative Banks: Negative News (2019): PMC Bank (कांड हो गया) ...................................... 126
13.21.2 ��������Banking Regulation (Amendment) Ordinance/Act, 2020.................... 127

13.22 ��� Formal FI ⇒ Non-Banking Financial Institutions ................................................... 128

13.22.1 Development Finance Institutions (DFI: �वकास �व� सं �ान) ............................................................................ 128
13.22.2 ���What is Bad Bank- NARCL-IDRCL? ..................................................................................... 128
13.22.3 ���Non Bank ⇒ All India Financial Institutions (AIFI): .......................................................... 129
13.22.4 NABFID, the 5th AIFI (2022-Mar) ............................................................................................................ 130
13.22.5 ���FI ⇒ Non-Bank ⇒ Primary Dealers (PD)- (प्राथ�मक �वक्रेता) ...................................................... 131
13.22.6 ���FI ⇒ NBFCs (गेर-ब�िकंग �व�ीय कं प�नया) ............................................................................................... 131

13.23 ��� NBFCs Regulated by RBI � (�नयं त्रण/देखरेख) ............................................................. 133

13.24 FinTech Companies ................................................................................................................. 135

13.24.1 Fintech regulated by RBI ............................................................................................................................. 135
13.24.2 Fintech regulated by NON-RBI org (e.g SEBI, IRDAI) ........................................................................... 136
13.24.3 ���Digital Lenders .......................................................................................................................... 136
13.24.4 ���Credit Information Companies (CIC) versus Credit Rating Agencies (CRA) .................. 136

13.25 ��� NBFCs Regulated by SEBI � (�

�More in Pillar#1C) ........................................ 137

13.26 ��� NBFCs Regulated by Others � ............................................................................ 138

13.27 �(�
��): NBFC: Shadow Banking (आभासी / प्र�तछाया ब�िकंग प्रणाली) ............................................... 139

13.28 �NBFC-not allowed in India: Islamic Banking .................................................................... 139

13.29 ����� Informal Financial Intermediaries (अनौपचा�रक �व�ीय म��/�ाजख़ोर) .................. 140
13.29.1 � Mains Answer Writing ......................................................................................................................... 140

13 🏛🏛 FINANCIAL INTERMEDIARIES → BANKS

- A Financial Intermediary (FI: �व�ीय म��) is an entity that acts as the middleman between two
parties in a financial transaction- between lenders vs. borrowers, investors vs. entrepreneurs,
households vs business firms.
- Such FI can be subdivided into (1) Formal (औपचा�रक) (2) Informal (अनौपचा�रक). But presently
we’ll focus on Formal Financial intermediaries, given in following chart:

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13.11🐯🐯🏦🏦 ₹ 🖨🖨 BANKS → RESERVE BANK OF INDIA (RBI): भारतीय �रजवर् ब�क

1913 Commercial banks were required to register under the Companies Act, but monitoring
was lax. No CRR, SLR, BASEL Norms. (उन पर पहले �नयम स� नहीं थे)
1926 Royal Commission on Indian Currency Hilton Young Commission) recommends setting
up a central bank named 'Reserve Bank of India'. (एक �ब्रिटश आयोग ने �सफा�रश क� �नगरानी के �लए �रज़वर्
ब�क बने)
1929 Great Depression in USA leads to collapse of 450+ banks in India. So British Indian Govt
becomes serious about setting up RBI. अमे�रक� महामं दी के बाद क� द्रीय ब�क क� �ापना क� आव�कता महसूस �ई
1934 Reserve Bank of India Act was enacted. (इसक� �ापना के �लए कानून बनाया गया)
1935, RBI becomes operational from 1st April, with 1st Governor Sir RBI Gov: Osborne Smith.
April India’s Viceroy: Willingdon. Government ownership was ~4.4% only.
1935, Commercial Banks fulfilling certain conditions were listed in the 2nd Schedule of RBI Act,
July & such “Scheduled Banks” were required to keep CRR with RBI.
1943- C.D. Deshmukh 2nd FM of India becomes the first INDIAN Governor of RBI. He had also
49 participated in the Bretton Woods Conference, USA (1944).

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 1948- All private investors’ shares transferred to Govt of India under the RBI transfer of
49 ownership act 1948. Therefore, RBI governor answerable to Parliament, has to pay
dividend to Govt from its profits. (�रज़वर् ब�क अपने मुनाफे मे से सरकार को लाभांश �वतरण करता है)
1949

Banking Regulation Act (ब�िकंग �व�नयमन अ�ध�नयम) empowered the RBI to

⇒ Give license to companies to open banks,
⇒ Give permission banks to open new branches.
⇒ Prescribe auditing norms, liquidity norms for Banks such as SLR.
⇒ Protect interest of depositors. Force elimination / merger of weak banks.
⇒ Related Topic: banking regulation ordinance 2020 → Pillar#1B2: Bad loans & other
burning issues in the banking sector.
🔠🔠❓Which was the earliest event to take place? (UPSC Prelims-2009)
A) Nationalization of insurance companies B) Nationalization of State Bank of India
C) Enactment of Banking Regulation Act D) Introduction of first Five year plan
Table 1: RBI Central Board Composition
(Non-Official Directors) (Official Directors)
- 2 Government officials - RBI Governor
- 10 directors nominated by Government. - 4 Dy. Governors
- 4 directors from RBI’s local boards @West, East, North, South
13.11.1 🏦🏦 ₹ 🖨🖨 RBI Governor & Dy Governor
- RBI Act (Section 8) provides for “NOT MORE than 4” Dy. Governors.
- They’re selected by Financial sector regulatory appointment search committee (FSRASC)
headed by the Cabinet Secretary (IAS) → successful candidates’ names sent to
Appointments Committee of the Cabinet headed by the Prime Minister for final approval.
- Governor and Dy.Govs’ tenure usually (not always) 3 years. Re-appointment is possible.
कायर्काल
- 2018-Dec: Shaktikanta Das appointed as Governor for 3 years, he replaced Urjit Patel. 2021:
Modi Govt renewed his tenure for three years till Dec- 2024, thus giving him a total tenure of
six years (�रज़वर् ब�क के गवनर्र के �प म� पुनः �नयु��)
- Shaktikanta Das is Retd. IAS, Former finance secretary, Member of 15th Finance
Commission.

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 📑📑 Related Topics: RBI Autonomy, Dividend Controversy, Section 7, PCA/BASEL:
[Handout 1B2 → Burning Issues in Banking Sector]

13.11.2 🏦🏦 ₹ 🖨🖨 RBI Offices & Departments

- RBI 4 regions: Northern: Delhi, Eastern: Kolkata, Southern: Chennai, Western: Mumbai
- RBI has various dept after Banks, NBFCs, Payment Systems, Foreign Exchange Management etc.
13.11.3 🏦🏦 ₹ 🖨🖨 RBI: Functions of

�more in
1) Controller of Money Supply: Issues M0 under RBI Act, Makes Monetary Policy. (�
Pillar#1A2) (मुद्रा आपू�त �नयं त्रक)
2) Controller of Foreign Exchange: through FEMA Act. (�वदेशी मुद्रा का �नयं त्रक, �more in Pillar#3)
3) Banker to Union & State Governments & Public Debt Manager (सावर्ज�नक ऋण प्रबं धक).
4) Banker’s Bank: Lender of Last resort, Advises in monetary matters.
5) Regulator of all “BANKS”: through BR Act’49, Payment Systems’07 (�नयामक)
6) Regulator of AIFI, NBFC-D (Deposit Taking NBFC) & others.
7) Promotional Roles (सं वधर्क भू�मका):
a. Customer protection through Ombudsman (�शकायत �नवारण अ�धकारी),
b. Financial Inclusion through PSL norms. Requires bank to open 25% of branches in rural
areas
8) Data Publication & awareness e.g. Annual Financial Stability Report (वा�षक �व�ीय ��रता �रपोटर्)
9) International Cooperation e.g. BASEL, IMF, G20’s Financial Stability Board etc.
a. E.g. 2021: RBI became member of “Network For Greening The Financial System
(NGFS)”. NGFS is a group of central banks to contribute to the development of
environment. HQ: Paris, Foundation Year: 2017 (�व�ीय प्रणाली क� ह�रयाली के �लए नेटवकर् - तािक
अ�य ऊजार्, पयार्वरण आिद को मदद �मले)

🚩🚩🚩FAQ: Article 371-F of Constitution gives special status to Sikkim, as a result their State
Bank of Sikkim is outside RBI’s regulation!! Ans. Such JamesBond/obscure GK = poor cost benefit.

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13.12🪜🪜AGENCY BANKS OF RBI

- �FAQ1: What does this chart mean? Ans. Explained in the video lecture.
- �FAQ2: How can a bank collect the tax? isn’t it the work of the income tax officers? Ans. Yes,
it is the function of income tax Officer. But, Tax money is to be transferred from tax payers’ bank
account to government’s account. Agency banks deal with that aspect of money
collection/storage/transfer work.

13.13R🐯🐯: 🦋🦋RBI’S NOTABLE PORTALS

13.13.1 🐯🐯: 🦋🦋 UDGAM Portal: Unclaimed Bank Deposits (2023)

- If deposits remain unclaimed for 10 years in a bank → banker need to transfer it to “Depositor
Education and Awareness FUND” (DEA) OF RBI.
- 2023: RBI setup UDGAM portal for it. (Unclaimed Deposits Gateway To Access inforMation)
- Beneficiary can easily search unclaimed deposits across multiple banks at one place. (e.g. by
searching the Aadhaar card / PAN Card number of the dead parent etc.)
- How it works in real life? NOTIMP4EXAM. You can satisfy your curiosity by
visiting https://udgam.rbi.org.in/unclaimed-deposits/#/login

13.13.2 🐯🐯: 🦋🦋 PRAVAAH Portal for license from RBI (2023)

- Banks/NBFC/ Digital payment related companies need to obtain license from RBI.
- They can apply for such licenses using PRAVAAH Portal (Platform for Regulatory Application,
Validation And AutHorisation)

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- � Benefit? Ease of doing business. The entrepreneur does not have to visit RBI office offline
multiple times.

13.13.3 🐯🐯: 🦋🦋 Daksh Web Portal for supervision (2022)

- Web system wherein Banks, NBFC send their reports to RBI
- Then RBI can monitor them more effectively. E.g. how many credit card frauds this month, new
guidelines to prevent it etc.

13.13.4 🐯🐯: 🦋🦋 E-Kuber Portal

- Core banking solution (CBS) portal of RBI.
- All bankers have current accounts here.
- RBI handles NEFT/RTGS, Repo, OMO & other instruments from here.
- Retail Investors can buy G-Secs from here.

🔠🔠❓ RBI acts as a bankers’ bank. What does it mean? (UPSC-Pre-2012)

1) Other banks retain their deposits with the RBI.
2) The RBI lends funds to the commercial banks in times of need.
3) The RBI advises the commercial banks on monetary matters.
Answer codes: (a) 2 & 3 only (b) 1 and 2 only (c) 1 and 3 only (d) 1, 2 and 3
🔠🔠❓ RBI regulates the commercial banks in matters of (Asked in UPSC-Pre-2013)
1) Liquidity of assets 2) Branch expansion 3) Merger of banks 4) Winding-up of banks
Answer Codes: (a) 1 & 4 only (b) 2, 3 & 4 only (c) 1, 2 & 3 only (d) 1, 2, 3 & 4
🔠🔠❓ In India, the central bank’s function as the ‘lender of last resort’ means what? (क� द्रीय ब�क को
अं�तम उपाय का ऋणदाता कहा जाता है इस श� का मतलब �ा है) (Prelims-2021)
1. Lending to trade and industry bodies when they fail to borrow from other sources. [�ापार औद्यो�गक
सं �ाओं को जब कहीं और से कजर् नहीं �मले तो क� द्रीय ब�क कजर् देता है]
2. Providing liquidity to the banks having a temporary crisis.[अ�ाई सं कट के दौरान ब�कों को तरलता देता है]
3. Lending to governments to finance budgetary deficits [बजट घाटा पूरा करने के �लए सरकार को कजार् देता है]
Codes: a) 1 and 2 b) 2 Only c) 2 and 3 d) 3 Only

13.14🏦🏦 � SCHEDULED BANKS (अनुसू�चत ब�क)

When RBI is satisfied with TWO conditions simultaneously (दो शत� का एक साथ पालन होना चािहए)
- #1: That a public sector or pvt sector bank has (Paid Up Capital + Reserves#1) = Min ₹5
Lakhs
- #2: Bank is not conducting business in a manner harmful to its depositors. (जमाकतार्ओ ं के िहतों का
नुक़सान न हो इस िहसाब से ब�क अपना कायर् कर रहा है)
then such bank is listed in the 2nd Schedule of RBI Act → then it is known as a Scheduled Bank.

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⇒ ��FAQ: What is paid up capital? Ans. Explained in the video.
⇒ ��FAQ#1: Which reserves are included in this ₹5 lakh formula? Ans. Routine books did not
bother to elaborate so I did not bother to do Google search. Such technical things not imp4exam.
⇒ ��FAQ: “₹5 lakh is very small!!! It should be ⏫ to ensure safety in bank”. Ans 1) neither
economic survey, NITI Aayog, Court-PIL, nor any big columnists have demanded reform here.
So we need not apply our brain here. 2) Send your suggestion to PM to amend the British Era
provisions of ₹5 lakh from RBI Act. Until that happens, prepare the present facts.
⇒ 🚩🚩🚩FAQ: “nowadays every bank will easily have five lakh rupees of deposits so
automatically all bank will become schedule bank from DAY1!” Ans. No. Because, RBI will also
check condition#2. Usually RBI ticks condition#2 after observing bank for one year from its
birth. So the Scheduled status will not be given on DAY1. (धं धा चालू करने क� एक साल तक तो �रज़वर् ब�क
उसका मुआयना करेगी क� दू सरी शतर् का अनुपालन हो रहा है िक नहीं. पहले ही िदन से �रज़वर् ब�क उसको अनुसू�चत नहीं बना देगी।)

🐴🐴 Scheduled Bank (अनुसू�चत ब�क) 🐭🐭 Non-Scheduled Bank (गैर- अनुसू�चत)

Can be subdivided into two parts Many cooperative banks are non-Schedule. But
1) Scheduled Commercial Banks (SCB) e.g. we need not see their list at
SBI, Axis, ICICI Rbi.org.in/CommonPerson/English
2) Schedule Cooperative Banks like Haryana /scripts/banksinindia.aspx
Rajya Sahakari Bank, Tamil Nadu State
Apex Cooperative Bank

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 🐴🐴 Scheduled Bank (अनुसू�चत ब�क) 🐭🐭 Non-Scheduled Bank (गैर- अनुसू�चत)
Need to deposit CRR money to RBI’s office Can maintain the CRR money with themselves
(CRR का पैसा ट�क म� भरके �रज़वर् ब�क म� प�ँ चाना होगा) in their own office/vault. (खुद क� �तजोरी म� रख सकते ह�)
Eligible to borrow / deposit funds in RBI’s Depends on RBI’s discretion. (�ववेकाधीन/�रज़वर् ब�क
window operations. E.g. LAF-Repo, MSF, etc. क� मज़� – आने भी दे सकता है, लात मार के भगा भी सकता है)
are required to protect the interests of Ofcourse, they also have to do it, else RBI can
depositors and abide to RBI norms. (जमाकतार्ओ के shut them down under Banking Regulation Act.
िहतो क� र�ा करनी होगी, और �रजवर् ब�क के �नयमो का पालन करना
होगा)
Govt depts and big private sector companies are Less likely to happen. (ग़ैर अनुसू�चत ब�कों म� सरकारी �वभाग
more likely to open their bank accounts/ या बड़ी कं प�नयों वाले अपने ब�क-खाते खोले इसक� सं भावना कम होती
employees’ salary deposit accounts in it. है)
Bank becomes eligible to partner in the govt’s Usually not eligible. (�व�ीय समावेशन क� सरकारी
financial inclusion scheme e.g. PM Jan Dhan योजनाओं म� ग़ैर अनुसू�चत ब�कों को सामा�त: शा�मल नहीं िकया जाता
Scheme for opening bank accounts of poor है. जैसे िक प्रधानमं त्री जनधन योजना म� गरीबों का ब�क खाता इन ब�को
people. (Ref Pillar1D3: financial inclusion) म� नहीं खोला जा सकता.)
- Airtel Payments Bank and Paytm Payment Bank categorised as a scheduled bank in 2021-22.
🚩🚩🚩FAQ: “After getting scheduled status, Can Payment Banks give loans/credit cards or accept
Fixed Deposits?” Ans. No, they’re prohibited from such activities. Paytm doing such activities as
“an Agent” of a federal bank, IndusIndia bank etc but Paytm cannot do it as ‘its own Banking
business’.

13.15🏦🏦 �FI⇒ COMMERCIAL BANKS⇒ PRE-INDEPENDENCE

Table 2: Before Independence (Exact Years Not-IMP.)

1770 Bank of Hindustan, Calcutta (Europeans owned it. So it was not truly ‘Swadeshi’)
1806-42 - Three Presidency Banks at Bengal then Bombay then Madras.
- 1861: all three were given the right to issue currency.
- 1921: They were combined into Imperial Bank of India⇒ SBI (1955)
1865 Allahabad Bank (Europeans owned)
1894 PNB: Indian owned, Lala Lajpat Rai helped in foundation.
1908 Bank of Baroda by Maharaja Sayajirao Gaekwad III
1913-30s State Bank of Mysore, State Bank of Patiala, the rise and collapse of Banking
industry, then Birth of RBI (1935)

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 1940s State bank of Bikaner, Jaipur, Hyderabad, Travancore by the respective princely
states / Nawabs. Post-Independence, these banks became ‘Associated Banks of SBI’,
and ultimately, merged in SBI (2017).
13.15.1 🦄🦄 → 🦁🦁 Nationalization of Banks After Independence (आजादी के बाद �नजी ब�कों का रा��ीयकरण)

⇒ NEXUS between Banks and Industrialists: From 1950s to 60- only 188 elite people controlled
the economy by being in board of top 20 banks, 1452 companies.
⇒ This led to reckless lending to directors and their firms. So, Banks failed frequently, RBI had to
close them. (रसूखदार लोग के क�े म� थी ब�िकंग �व�ा. भाई भतीजावाद म� अंधाधुन कजर् देते थे)
⇒ Private Banks unwilling to open in rural areas- this did not help in financial inclusion of poor,
farmers, MSME or achievement of Five Year Plan (FYP) targets or reducing regional imbalance.
(�व�ीय समोवेशन, पं चवष�य योजनाओ के ल�ाक हा�सल करने म� �नजी �ेत्र के ब�क मदद नहीं करते थे. �ेत्रीय असमनाताए बढ़ी)
Table 3: Nationalization & Merger of Banks after Independence
1948 RBI Transfer of Ownership Act.
1948 1948: Op. Polo, Hyd. → 1951:1st FYP, → 1953: Air India nationalized from Tata
1955 Imperial Bank nationalized and became SBI.
1955-56 LIC Act took over private life insurance cos.
57: 1st Communist Govt in Kerala
61: Operation Vijay for liberation of Goa, Daman and Diu.
1963 State Bank of Jaipur and Bikaner merged together.
1969 ⇒ 'Banking Companies (Acquisition and Transfer of Undertakings) Ordinance,
1969: 14 Private banks with ₹ 50 cr/> deposits were nationalized e.g. Bank of
Baroda, PNB, Dena, Canara etc. (बड़ी जमा-रा�श वाले �नजी ब�को का रा��ीयकरण)
⇒ Catholic Syrian Bank (1920, Kerala), Ratnakar Bank, Dhanlaxmi Bank, etc., did
not have such large deposits, so they were not nationalized. So, they are called
“Old Private Banks”.
1972-73 GIC Act- took over private Non-Life (=General) insurance cos. Later GIC was re-
organized with 4 subsidiaries: National Insurance, New India Assurance, Oriental
Insurance and United India Insurance. More in 📑📑Pillar#1D

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 1980 6 banks with ₹ 200 cr/> deposits were nationalized e.g. Corporation Bank, Vijaya
Bank, Oriental bank of Commerce etc.
2019 Previously, State Government of J&K owned 60% shares in J&K bank → Article
370 removal → Union Government took-over this shareholding. 🎓🎓✋Further
500 type historical-GK things NOTIMP.
Reform following Committees were made for reforms in banking sector
Committee M Narasimham-I (1991), M Narasimham-I (1997), Dr. Raghuram Rajan
s Committee (2007) and P J Nayak Committee (2014)
Death 2021: Death of M Narasimham. He was ex-Governor of RBI and chairman various
देहांत Committees on Banking Sector Reforms, therefore known as “father of Indian
banking system reforms” (एम नर�सहं म भारतीय ब�िकंग प्रणाली सुधार के �पतामह माने जाते है। )
🔠🔠❓(Prelims 2009) Q. In independent India's economy, which was earlier event to take place?
A) Nationalization of insurance companies B) Nationalization of State Bank Of India
C) Enactment Of Banking Regulation Act D) Introduction of first Five year plan
🔠🔠❓(Prelim-2018) Q. Consider the following events:
1. The first democratically elected communist party government formed in a State in India.
2. India’s then largest bank, ‘Imperial Bank of India’, was renamed ‘State Bank of India’.
3. Air India was nationalised and became the national carrier.
4. Goa became a part of independent India.
Which of the following is the correct chronological sequence of the above events?
A) 4 – 1 – 2 – 3 B) 3 – 2 – 1 – 4 C) 4 – 2 – 1 – 3 D) 3 -1-2 -4
13.16🏦🏦 � 🔂🔂CONSOLIDATION OF PSBS [एकत्रीकरण]
PSB consolidation = made up of two types of reforms: A) Merger B) Privatization

13.16.1 🔂🔂Consolidation of PSBs → A) Merger (�वलीनीकरण)

Table 4: Notable PSB Mergers before 2019, April. ✋You need not memorize exact years/ HQ for IAS Exam
2008-10 State Bank of Saurashtra and State Bank of Indore merged into SBI.

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 2013 - Bharatiya Mahila Bank setup as PSB, HQ Delhi, 100% ownership by Union
Government. (भारत सरकार ने �यं बनाया था)
- BMB’s Board of Directors: All women. Staff & Deposit Holders: both men and
women, Loans given predominantly to women- and that too without collaterals
2017 BMB & 5 Associated Banks of SBI viz. State Bank of Bikaner and Jaipur (SBBJ), State
Bank of Hyderabad (SBH), State Bank of Mysore (SBM), State Bank of Patiala (SBP)
and State Bank of Travancore (SBT), merged with SBI.
2017 - Alternative Mechanism Panel setup under the Finance Minister’s chairmanship.
- This panel examine the proposals for merger/consolidation of the Public Sector
Banks (PSBs) and forward to Cabinet for approval.
- Department of Financial Services coordinates the filework.
2019, 1st Vijaya & Dena to be merged into Bank of Baroda.
April - Among these three oldest: BoB (1908) > Vijaya (1931)> Dena (1938)
Table 5: 2019, merger of 10 banks into 4 anchor banks (NOTIMP UNLESS preparing for IBPS)
Amalgamating Banks → → → Anchor Bank
(एक�कृ त / �वलीन होनेवाली) (सहारा देनेवाली)
− Oriental Bank of Commerce (1943, 1) PNB. (1984, HQ: Delhi, It’ll become the 2nd
HQ: Gurugram, Haryana), largest bank after SBI, in terms of business size
− United Bank of India (1950, Kolkata) and branch network)
Syndicate Bank (1925, HQ: Manipal, 2) Canara Bank (1906, HQ: Bengaluru,
Karnataka) → Karnataka)
− Andhra Bank (1923, Hyderabad) 3) Union Bank of India (1919, Mumbai)
− Corporation Bank (1906, Mangaluru)
− Allahabad Bank (1865, Kolkata) → 4) Indian Bank (1907, Chennai)
After this process is over, we’ll be left with only 12 PSBs (+1 India Post Payment Bank).
- Benefit? Geographical & technological synergies in ATM, Branches, Security Staff, Servers cost
etc. (भौगो�लक और तकनीक� तालमेल)
- More Argument in favour / against = Mains QEP handout. This is Prelims #RAFTAAR.

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13.16.2 🔂🔂Consolidation of PSBs → B) Privatization (�नजीकरण)
It involves Government selling 51% or larger shareholding to private parties. Then such Public
Sector Bank will convert into a private sector bank. For example, (i) Axis Bank (Earlier called UTI
Bank) and (ii) IDBI Bank.

13.16.3 PSB Privatization: Banking Investment Company (BIC-ब�िकंग �नवेश कं पनी)

Removed from handout because outdate/faded topic until Finance Ministry implements it.

13.17 🏦🏦 �COMMERCIAL BANKS ⇒ PVT. SECTOR BANKS (PVB) �नजी-�ेत्र के ब�क

While the nationalization of banks was done with the lofty objectives, but politicization in Public
Sector Banks (PSBs) created new set of problems:
- Govt administered loan interest rates for populism= Low profitability for PSBs. (मुनाफा कम)
- Political Interference= Low recovery difficult (राजनी�तक ह��ेप के चलते दबं ग त�ो से ऋण वसूली मु��ल)
- Employees Unions hampering innovation or customer delight. (नवाचार, ग्राहक सु�वधा कम)
- 1991: Balance of Payment crisis (BoP: भुगतान सं तुलन,More in Pill#3) finally forced Govt. to set up a
committee for Banking Sector Reforms under The former RBI Governor M.Narasimham. He
suggested:
o Govt should ↓ its shareholding in Public Sector Banks. (सरकार अपनी शेयर िह�ेदारी कम करे)
o RBI should ↓ CRR and SLR (सीआरआर, एसएलआर मे कटोती करे)
o Govt should not dictate interest rates to Banks. Liberalize the branch expansion policy
(ब�कों को लोनदर, शाखा �व�ार नी�त तय करने मे सरकार दखल न करे।)
o Allow entry of New Private Banks and New Foreign Banks. (�वदेशी ब�क और �नजी �ेत्र के ब�कों को
अनुम�त)
Table 6: Three rounds of bank licensing in India. Names not that IMP unless giving Banking-exams
Round-1 (1993-95) Round-2 (2001-04) Round 3 (2013-16)
1) ICICI 1) Kotak Mahindra Rajan invited applications,
2) HDFC Bimal Jalan Committee made

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 Round-1 (1993-95) Round-2 (2001-04) Round 3 (2013-16)
3) IndusInd 2) Yes Bank (Founder Rana selections:
4) DCB Kapoor). Related Topic: 1. Bandhan (A Microfinance
5) #UTI → later Axis bank Yes bank scam/Crisis company based in
6) #IDBI → now owned by �Pillar#1B2: Bad loans W.Bengal)
LIC & other Burning issues in 2. IDFC (An infra finance
7) Global Trust Bank → Bank/NBFC sector NBFC based in
Merged with Oriental Bank Maharashtra). Later on,
No. 8-9-10: Bank of Punjab, another NBFC “Capital
Centurian Bank, Times Bank First” merged so renamed
were merged into HDFC into IDFC-First
Above banks are also known as new-generation private banks in India. (नयी पीढ़ी के �नजी �ेत्र के ब�क)

🚩🚩🚩FAQ: In early 90s- UTI Bank & IDBI Bank were not private sector banks, then why have you
kept them here in table? Ans. Because presently, they’re private sector banks. I don’t have to submit
this handout as evidence in the Supreme Court so I don’t care being so pedantic about everything.
You need to change your approach towards studies, to finish syllabus faster. #RAFTAAR

13.17.1 🏦🏦 � 🚗🚗🚗🚗 ‘On-Tap’ License to open Private Sector Banks (जब मन चाहे तब अज� डाल दो)
A private entity can open Bank only after getting license from RBI under Banking Regulation Act,
1949. Previously, one had to wait till RBI invited applications. But in the On-Tap system (from
2016), one can apply to RBI whenever he wishes (like a driving license), provided that he meets the
eligibility requirements e.g. min. 10 years’ XP in banking finance, minimum 500 crore capital etc.

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🚩🚩🚩FAQ: isn’t above Rs.500 cr capital conflicting with Scheduled Commercial Bank Definition?
Ans. It works in step by step fashion. Observe above chart peacefully and watch video lecture.

13.18🚫🚫🏦🏦 � 🚗🚗🚗🚗 ALLOWING NBFC/LARGE CORPORATE TO SETUP BANKS

This controversy shifted to Mains-QEP Handout. Because this Handout deals ONLY with
PRELIMS. #RAFTAAR

13.19🏦🏦 � 🈶🈶 COMMERCIAL BANKS ⇒ FOREIGN BANKS (�वदेशी ब�क)

In Nehruvian Socialist Economy there was disdain & apprehensions about Foreign Banks. So, only a
handful of them were allowed to open branches. But, Post-1991-Reforms: system liberalized. (नेह�-
समाजवादी �वचारधारा के नी�त �नमार्ताओं म� �वदेशी ताकतों के प्र�त घृणा और डर → ब�त कम �वदेशी ब�कों को अनुम�त दी थी)

- They’re Incorporated abroad (i.e. registered under the Companies Act of a

foreign nation) & opening branch / subsidiary in India e.g. Citibank, Bank of
America, HSBC. (उ�ोंने िकसी अ� देश के कं पनी कानून म� पं जीकरण करवाया है और िफर भारत
आकर शाखाएं खुली है)
🤠🤠 Foreign - While CRR, SLR & other norms applicable, but PSL norms vary depending on
Bank in India �Ref: Prev. Handout: PSL]
number of branches. [�
- RBI gives them ‘on-tap’ license on reciprocal basis. i.e. if foreign nation
allows Indian banks to operate in their country, THEN RBI allows that
nationa’s banks to operate in India.
- 2023: Axis bought/tookover Citibank’s Indian branches.
🧔🧔 Indian - Foreigners can invest max. 20% in its shareholding. E.g. BoB (15%), SBI
Public Sector (14%), PNB (13%) भारत क� सावर्ज�नक �ेत्रों म� �वदेशी �नवेश क� सीमा
Bank

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 - Foreigners can invest upto 49% (automatic-�चा�लत तरीके ) and upto 74% by
🤵🤵 India approval of Government (सरकार क� अनुम�त लेकर). (More in �Pillar#3A: FDI)
Private - e.g. HDFC (73%), ICICI (59%) Axis Bank (52%) is owned by Foreigners.
Sector Bank - Although Govt thinking of � to 100% to help capital mobilization for
�More in Next Pillar#1B2: NPA handout]
BASEL-III norms . [�

13.20🏦🏦 � 🌎🌎🚫🚫COMMERCIAL BANKS ⇒ DIFFERENTIAL BANKS

Difference 🌎🌎Universal Bank (सावर्�त्रक ब�क) 🌎🌎🌎🌎Differential Bank (भेदकर ब�क)

Open Anywhere: example SBI, ICICI Geographical Restrictions on branch opening
Branches [*After opening 25% of branches in for Local Area Bank (LAB), Regional Rural
शाखाएं unbanked rural areas] Banks (RRB)
Both Time & Demand Deposits of Payment Bank – Accept Max. 1 lakh deposit
Accept
any amount. only. In 2021- This limit increased to ₹2 lakh.
Give Loans Anyone [After 40% PSL] - SFB, RRB: 75% to PSL
to - �Payment Bank can’t give loans;
Chronology of differential banks: RRB(1976) → Local Area Bank (1996) → Small Finance Bank &
Payments bank(2015) → Wholesale banks (proposed)

13.20.1 🏦🏦 � 🌎🌎🌎🌎 Commercial Banks ⇒ Differential Banks⇒ RRB and LAB

Regional Rural Banks (�ेत्रीय ग्रामीण ब�क) Local Area Bank (�ानीय �ेत्र ब�क)
- Based on M.Narasimham’s Committee on - Based on Budget-1996 by Finance Minister
Financial Inclusion in 1970s# Manmohan Singh
- Setup under the provisions of RRB act - Unlike RRBs, they're not setup by Union or
- e.g. Uttar Bihar Gramin Bank (Sponsor State govts or by any special act or
bank- Central Bank of India) parliament. But by pvt entities simply
- Subjected to CRR, SLR norms but RBI applying to RBI under Banking Regulation
could prescribe separate norms. Act.
- PSL: 75%.(More in �Pillar#1A1) - Can open branches in Max. 3 districts
- Their loan interest rates can’t be more than sharing borders with each other. only 1
prevailing lending rates of Cooperative urban centre per district allowed.
Banks in the area. Remaining branches need to be opened in
rural areas of that district.
- Restricted to few districts. E.g. Baroda
Gramin Bank branches confined to
Gujarat’s southern districts.

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 Regional Rural Banks (�ेत्रीय ग्रामीण ब�क) Local Area Bank (�ानीय �ेत्र ब�क)
- Ultimate regulator: RBI but immediate - They’re Non-Sch. Banks so while CRR,
regulator NABARD. SLR, PSL etc very apply but every norm
may be different, decided by RBI.
- E.g. Subhadhra Local Area Bank, Kolhapur

13.20.2 🏦🏦 � 🌎🌎🌎🌎 RRB’s Shareholding pattern / IPO

RRB Act 1976 Amendment in 2015
Shareholding: Union 50% + State 15% + ⇒ Shareholding: (Union+State+Sponser
Sponsor Bank 35% = 100% bank) 51% + others (pvt investors) 49%.
⇒ Benefit? RRB can issues new / fresh shares
in market to acquire more capital from
private investors. #
# Govt has Issued guidelines related to RRB’s IPO (Initial public offer) in sharemarket. But technical-
stuff notIMP for IAS Exam. More about IPOs in Pillar#1C.

🚩🚩🚩FAQ#: M.Narasimham committee was made in 1990s so how can he be in 1970s? Ans. Same
gentleman was chairman of many committees ✅(1) Financial inclusion (1970s) ✅(2) banking
reforms-I (1990s) ✅(3) banking reforms-II (1990s).
🚩🚩🚩FAQ: I’ve 500 jaat-ke Doubts about Local Area Banks. Ans. Not Important for UPSC. I’ve
only given short-note of LAB for helping UPSC aspirants trying for Bank-exam as backup/Plan-B.

13.20.3 🏦🏦 � 🌎🌎🌎🌎Commercial Banks ⇒ Differential Banks ⇒ SFB & PB

On Nachiket Mor Committee’s recommendations (2013-14), Governor Raghuram Rajan approved
these new types of banks for (1) financial inclusion (2) competition & innovation among players.
Table 7: Need not memorize all the FACTs, UNLESS Preparing for Banking Exams as PLAN-B

Parameters Small Finance Banks लघु �व� ब�क Payment banks भुगतान ब�क
Examples Capital Small Finance Bank (Punjab), 6 at present: Airtel, India Post, FINO,
Ujjivan (Karnataka), Utkarsh (UP): Paytm, Jio, NSDL. (Total 11 were
Total 10 list at selected; but AdityaBirla-Idea & other
rbi.org.in/scripts/banklinks.aspx withdrew later)
Eligibility Min.100cr. capital-walla Resident Min.100cr. capital-walla resident
during 1st Indian, Local Area Bank, NBFC, Indians, NBFCs, PPI-wallets (pre-paid
payment instrument), mobile telephone

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 Parameters Small Finance Banks लघु �व� ब�क Payment banks भुगतान ब�क
round of Micro-finance, with 10 years exp. in companies, super-market chains,
licensing banking / finance cooperatives & companies controlled by
resident Indians
📌📌Area RBI Committee gave selection Anywhere
preference North East & Central
India clusters where Universal Banks’
penetration is poor
CRR, SLR, Same as Indian private banks Same as Indian Private Banks, but
Repo, FDI? special terms & condition in SLR.
Rural Must have 25% branches in unbanked No need but 25% access points must be
Penetration rural areas in rural areas like Kiraana Stores
🛒🛒Target Unserved Underserved Farmers, Promoting Small savings
Consumers Micro, Small industries: िकसान, सू�, लघु Remittance of migrant labors, low
उद्योग income households, unorganized sector,
small business.
💰💰Accept Yes, without any restrictions ✋No NRI deposits, ✋No Fixed
Deposits िडपॉ�जट �ीकार करने म� कोई पाबं दी नहीं है deposit**
- Can accept only Demand Deposits
and Max. balance Rs.1 lakh per
customer. (In 2021- limit increased
to ₹2 lakhs)
Debit cards 💳💳 YES can give. 💳💳 YES can give.
Credit cards 💳💳 YES can give. ✋No (because can’t give “loan”)
Loans - Yes, but 75% in PSL, - Can’t loan, So no PSL.
- 50% of loan portfolio of Rs. 25 - They’re required to invest all
lakhs/< loans. deposits in G-sec, T-Bill and in other
SCBs. �How much% notimp.
Evolve/ After 5 years can become Universal After 5 years can become Small Finance
future Commercial Bank, If RBI is satisfied. Bank, If RBI is satisfied with their record.
growth?
- BASEL-III norms applicable on both of SFB & PB. (More in �Pillar#1B2:BASEL Norms)
- Both SFB & PB can sell Mutual Fund (MF), Pension, Insurance policies with approvals of
respective regulators i.e. SEBI, IRDAI, PFRDA.

🚩🚩�FAQ: You wrote that Payment Banks can't accept FD or give loans or credit card but Paytm
is doing that!!?? Ans: Paytm doing FD/Credit Card/Loan activities as “an Agent” of a federal bank,

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IndusIndia bank etc. Similarly, Although India Post Payments Bank (IPPB) cannot give loans
because it is a payment bank but signed a deal with HDFC Bank to give home loans as an ‘Agent’.

🚩🚩🚩FAQ: if payment banks cannot give loans, then what do they do with deposit money? Ans. It
is answered within the above table itself. Read properly. If you’re going to glance over this handout
casually & carelessly like a WhatsApp message then handout cannot help you in the UPSC exam.

13.20.4 🏦🏦 � 🌎🌎🌎🌎🚗🚗🚗🚗 On-Tap Licenses for starting SFB (मन चाहे तब अज� डालो)
- RBI reviewed & found SFBs have achieved their priority sector targets and helped in financial
inclusion. More competition and new players will help. (अ�धक ब�कों को अनुम�त देने से �धार् म� बढ़ोतरी
�व�ीय समावेशन म� मदद)
- so 2019-June, RBI announced it’ll allow ‘On-Tap’ license for SFB soon. (i.e. no need to wait for
notification unlike IAS exam, apply whenever you wish like a driving license)
- �Exact norms NOT IMP for IAS Exam)
Eligibility conditions to start SFB license ‘On Tap’: (�

🔠🔠❓ Find correct Statement(s) about Payment Banks? (Prelims-2016)

1) Mobile telephone companies and supermarket chains that are owned and controlled by residents
are eligible to be promoters of Payment Banks.
2) Payment Banks can issue both credit cards and debit cards.
3) Payment Banks cannot undertake lending activities.
Codes: (a) 1 and 2 only (b) 1 and 3 only (c) 2 only (d) 1, 2 and 3
🔠🔠❓ What is the purpose of setting up of Small Finance Banks (SFBs) in India? (Prelims-2017)
1. To supply credit to small business units
2. To supply credit to small and marginal farmers
3. To encourage young entrepreneurs to set up business particularly in rural areas.
Codes: (a) 1 and 2 only (b) 2 and 3 only (c) 1 and 3 only (d) 1, 2 and 3

13.20.5 Commercial Banks → 📬📬India Post Payment Bank (IPPB)

- Registered as a Public Limited Company under Companies Act, 100% owned by Department of
Posts (Ministry of Communication and Information Technology.) → Obtained RBI’s License
under Banking Regulation Act to start working as a Payment Bank.
- Airtel Payments Bank was first to launch operations in 2017. Later, IPPB launched in 2018.
- Largest customer reach with 1.55 lakh Post offices across India.
- Doorstep banking through Postmen.
- Bank Account Types: Safal, Sugam, Saral (internal differences not imp4UPSC).
- Account can be opened with zero balance, no minimum balance requirement.
- Minor Customer Aged 10 years or more can also open account. (नाबा�लग का भी खाता खुलवा सकते ह�)

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- 2019: IPPB announced it desires to convert itself from Payment Bank into a Small Finance Bank
(SFB), so it can offer loans to customers. (But as per RBI guidelines, Payment bank need 5 years’
experience before upgrading their license to SFB. या�न क� अभी मं �जल दू र है। )

13.20.6 📮📮 (Yearbook) Dept of Post: POSB vs IPPB

Don’t loose sleep unless preparing for Postal- Assistant etc. exams

Ministry of Communications two dept: 1) Depart of Telecommunications 2) Department of Posts →

 Setup by Clive (1766), expanded by Warren Hastings (1774)
 1854: Dalhousie- Post Office Act; 1st postal stamp, rates by weight & not by distance.
 2008: Project Arrow for modernization.
 2013: Telegram stopped by India Post, due to onset of SMS & email.
 Dept of Post sells
o Gangajal sourced from Rishikesh and Gangotri.
o UTI-Mutual funds and Sovereign Gold bonds.
 Post Shoppe = special outlet in big post offices for philately (stamp collection hobby)
 RTI fees can be submitted by buying Indian Postal Orders (IPO). E-IPO = overseas Indians can
pay RTI fees online using this mechanism.
 Deen Dayal SPARSH Yojana: Students in class 6-9 given scholarship for philately.
 Dhai Akhar Letter Writing Competition-students asked to write letters to Mother Teresa,
Tagore etc.
 Officers’ training conducted at Rafi Ahmed Kidwai National Postal Academy at Ghaziabad, UP.
Kidwai was India's first Minister for Communications.
Table 8: ✋No need to loose sleep, UNLESS preparing for Post-Office staff exams.

Dept of Post → Post Office Savings India Post Payments Bank (IPPB)
Bank (PoSB)
foundation Govt Savings Bank Act Companies act 2013 → Public ltd
1873 company registered in 2016
Accept demand Savings account only 1. Current account
deposits? 2. Savings account
Accept time YES No, bcoz it is a payment bank
deposits?
Can keep more than YES No, bcoz it is a payment bank. But u can link
₹2 lakh balance? IPPB account with PoSB account to auto-
transfer (=SWEEP) excess balance to PoSB.
E-Banking and Not directly but you can yes , UPI, BHIM, NEFT, IMPS and BBPS
online bill payment do it by linking PoSB (Bharat Bill pay) available.
account with IPPB
account

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 Dept of Post → Post Office Savings India Post Payments Bank (IPPB)
Bank (PoSB)
Sukanya Smriddhi Can be opened Not possible. Because time deposits are not
(daughter’s fixed allowed in Payment Banks.
deposit account)
loans to individual? No. ₹₹ goes to NSSF. Not until it becomes Small Finance Bank
More in Pillar2A.
Objective? Promote savings habits Remittance & digital payments
among poor
- �Budget-2022: Post Office Savings Bank (POSB) will be connected with Core Banking System
(CBS). So, their depositors too can use E-banking/net-banking, mobile banking, ATMs etc.
- Benefits? �1) Convenience for POSB depositors esp. villagers, farmers and senior citizens.
�2) interoperability= (ability to use POSB deposit money in above NEFT/ATM etc facilities)
- Interoperability is the ability of customers to transact across commercially and technically
independent payment platforms. �ावसा�यक और तकनीक� �प से �तं त्र �ेटफाम� के बीच लेन-देन करने क� सु�वधा

🔠🔠❓ MCQ. Find correct about India Post Payments Bank (IPPB)? [Asked in UPSC-CDS-2018-1]
1) It has been incorporated as a Public Limited Company.
2) It started its operation by establishing two pilot branches at Hyderabad and Varanasi.
Answer codes: (a) 1 only (b) 2 only (c) Both 1 and 2 (d) Neither 1 nor 2

13.20.7 🚐🚐 ⏳ (Proposed) Wholesale & Long Term Finance Banks (WLTF)

- 2017: RBI proposed WLTF Bank. दीघर्का�लक थोक �व� ब�क.
- NOT Yet made. Topic Outdated, not much in news, so removed from handout.

13.20.8 💸💸💸💸: 🏦🏦 Digital Payments- (Proposed) Digital Banks by NITI Aayog (2021)
⇒ 2021: NITI Aayog proposed setting up 'full-stack digital banks’.
⇒ This will be new type of banks under the Banking Regulation Act, 1949 (BR Act).
⇒ Digital Banks will not have physical branches. They will rely on internet for delivering banking
services. �Benefit? financial inclusion of rural area. (नी�त आयोग ने ऐसा प्र�ा�वत िकया है िक नए िक़� के
िड�जटल ब�क बनाए जाएं जो क� भौ�तक भौगो�लक �प से ब्रांच न हो िक�ु इं टरनेट के ज़�रए ब�िकंग सु�वधा दे इसे गाँव गाँव तक
�व�ीय समावेशन म� मदद �मलेगी)
⇒ ��But since it’s not yet formed, so we need not loose sleep about how exactly it’ll work.

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13.20.9 💸💸💸💸: 🏦🏦 Digital Banking Units in Budget 2022

⇒ Budget-2022 announced to setup 75 DBUs. Then RBI announced rules.

⇒ Basically commercial banks open fancy type of offices wherein every service provided digitally /
paper-less application forms with help of digital kiosks e.g. opening bank account, getting credit
cards etc.
⇒ How is this similar or different than NITI Aayog's Digital Banks? NOT IMP.

13.20.10 💸💸📡📡: 🏦🏦 Digital Payments- NeoBanks / full-stack digital banks

- Neo-banks/full-stack digital banks= are completely online-based digital banking platforms. They
don’t have physical branches.
- NITI Aayog proposed this to increase banking penetration in India. But RBI not keen to allow.
- RBI believes our existing banks are capable to deliver the banking services both online and thru
physical branches.
But this is “fancy term” (Neobank) comes in news every once in a while due to Startup-company ke
PR (public relations)/paid promo-articles in newspapers. . (�नवेशकों को आक�षत करने के �लए �ाटर्अप क�नीओ
द्वारा �चकने चुपड़े श�ों वाले समाचार �ांट िकए जाते ह�. अपने को अभी से ब�त नींद खोने क� ज़�रत नहीं, �ोिक आरबीआई इसको
अनुम�त देने क� ज�ी म� नहीं है।)

13.20.11 🚩🚩🚩FAQ : DIFFERENCE between digital banking unit vs Neobank

Digital banking unit (DBU) Neobank
Do they’ve physical Yes. But Everything done via No physical branch.
branch automatic machines. Scroll up and Everything done online.
see photograph.
Do they exist in reality? Yes. E.g. Axis bank DBU No. RBI yet to permit them.

13.21🏦🏦 �FI ⇒ BANKS ⇒ COOPERATIVE BANKS (सहकारी ब�क)

Type 🏦🏦 �Commercial 🏦🏦 �Cooperative Banks
Banks
Banking Reg. Applicable since 1949 Applicable since 1966.
Act
Regulator RBI Under RBI’s supervision:

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 Type 🏦🏦 �Commercial 🏦🏦 �Cooperative Banks
Banks
- Multistate Cooperative Banks
- Urban Cooperative Banks
Under Dual supervision
- Other types of cooperative banks are under
dual supervision of RBI + respective State
govt’s registrar for cooperative society.
CRR, SLR, Yes Yes, but, RBI could keep different slabs/ norms.
BASEL-III
Repo, MSF Eligible to borrow Yes, but only selected category of Cooperative
Banks
PSL Lending Yes 40-75% Only urban cooperative banks
Who can Anyone First preference to members
borrow
Vote power Based on Shareholding, According to Cooperative Society norms,
like a Commercial members have vote power. So, 1 member = 1 vote
Company irrespective of how much capital contributed.
Profit Motive Yes, purely profit motive, Desire to help community. So, lending rates little
(मुनाफा करने क� so lending rates may be lower than commercial bank
चाह?) higher than Coop.
Presence (कहा पाई All India & overseas Mainly in Gujarat, Maharashtra, Andhra,
जाती है?) branches. Tamilnadu.
😰😰Challenges: Politicization, casteism, poor recovery of loans, scams, money laundering.
(राजनी�तकरण , जा�तवाद, कजार् वसूली म� अ�नय�मतता, घोटाले, धन-शोधन/ काले धन को वैध बनाना)

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 Table 9: Classification of Cooperative Banks
Urban Cooperative Banks (UCB: शहरी) Rural Cooperative Banks (ग्रामीण)
Further subcategories depending on 1) Notable State Cooperative Bank → District
- Scheduled / Non-Scheduled; OR Central Cooperative Bank (DCCB) →
- Single State / Multi State. Primary Agricultural Credit Societies
From 2018, RBI allowed them to voluntarily (PACS: प्राथ�मक कृ �ष ऋण स�म�तयां)**
upgrade to Small Finance Banks, with certain 2) Misc Types: Land Banks, Cooperative
conditions. Agriculture & Rural Development Banks.
(they give longer duration loans compared
to above banks. How long-duration?
NOTIMP)
**PACS are not ‘banks’. They can’t issue
chequebooks. RBI doesn’t regulate them. Only
State registrar regulates them.

🔠🔠❓ Find correct statement(s) (asked in UPSC-Prelims-2020)

1. In terms of short-term credit delivery to the agriculture sector, District Central Cooperative Banks
(DCCBs) deliver more credit in comparison to Scheduled Commercial Banks and Regional Rural Banks
2. One of the most important functions of DCCBs is to provide funds to the PACS.
Answer Codes: [a) 1 only [b) 2 only [c) Both 1 and 2 [d) Neither It nor 2

13.21.1 🏦🏦 �😥😥 Cooperative Banks: Negative News (2019): PMC Bank (कांड हो गया)
Outdated for 2023. So removed. Brief idea given in the video lecture.

🔠🔠❓ MCQ. Recently the RBI has imposed limitations, initially for a period of six months, on the
withdrawal of amount by account holders of this banks: (UPSC-CDS-i-2020) (a) IndusInd Bank

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(b) Dhanlaxmi Bank (c) Punjab and Maharashtra Cooperative Bank (d) South Indian Bank

13.21.2 ⚖🐯🐯🐯🐯🐯🐯🐯🐯🐯🐯🐯🐯🐯🐯Banking Regulation (Amendment) Ordinance/Act, 2020

- 2020-June: Ordinance issued to amend the Banking Regulation Act, 1949. 2020-Sept: Act passed
- Objective? protect depositors, prevent cooperative banks from falling into fraudulent activities.
Table 10:भूतकाल म� दोहरे �नयं त्रण के चलते घोटाले/कांड के बाद कायर्वाही धीमी होती थी, इस�लए अब �ादातर सहकारी ब�को को �सफर् �रजवर् ब�क के दायरे मे लाया गया
Type of Bank 😰😰BEFORE: Regulator(s) 🤩🤩After:
Regulator(s)
Commercial (SBI Axis) 🐯🐯RBI 🐯🐯RBI
Coop (Single State: rural) 🐯🐯RBI + �State Govt (=dual 🐯🐯RBI + �State
regulation) Govt
Coop (Single State: urban) 🐯🐯RBI + �State Govt(=dual 🐯🐯RBI ONLY
regulation)
Coop (Multi State 🐯🐯RBI + 🧔🧔Union Govt(=dual 🐯🐯RBI ONLY
Cooperative) regulation)
Coop: Primary Agricultural �State Govt �State Govt
Credit Societies ("PACS")
⇒ �State Government = State Govt’s Registrar for Coop Societies
⇒ �Union= Agro Ministry’s Registrar Multi-State Coop Societies

🔠🔠❓MCQ. Find correct Statements about ‘Urban Cooperative Banks’ in India (Pre-21)
1. They are supervised and regulated by local boards set up by the State Governments. [रा� सरकार
उनक� �नगरानी और �नयं त्रण करता है]
2. They can issue equity shares and preference shares. [वे इ��टी शेयर और वरीयता शेयर जारी कर सकते ह�।]
3. They were brought under the purview of Banking Regulation Act, 1949 through an Amendment
in 1966. [उ�� 1966 म� एक सं शोधन के मा�म से ब�िकंग �व�नयमन अ�ध�नयम, 1949 के दायरे म� लाया गया था।]
Codes: a) 1 only b) 2 and 3 only c) 1 and 3 only d) 1, 2 and 3’

Related topics: Refer to

DICGC, UCB’s Supervisory Action Framework Pillar##1B2: Bad loans & other burning issues
(SAF), UCB 4 tier regulation→ refer to in Banking Sector
Jan Dhan Yojana, Lead Bank Scheme etc → Pillar##1D: Financial Inclusion

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13.22🚫🚫🚫🚫🚫 FORMAL FI ⇒ NON-BANKING FINANCIAL INSTITUTIONS
13.22.1 Development Finance Institutions (DFI: �वकास �व� सं �ान)

⇒ are meant for Medium to long term loans to industries, including support services like arranging
foreign currency, underwriting, technical / management consultancy, Bank guarantee etc.
⇒ They don't accept DEPOSITs from ordinary people.
⇒ Previously the financial intermediaries (�व�ीय म��) were classified into three categories 1) Bank,
2) Non-Bank 3) DFI
⇒ But M.Narasimham-II Committee on Banking sector reforms (1998): recommended only two
categories: Bank or non-bank. DFI were required to join either one category.
Table 11: Exact Years, Full Forms not very important but Chronology is important.

Industrial Finance Corporation of India (IFCI) owned by the Finance Ministry's

1948
Department of Financial Services.
National Small Industries Corporation (NSIC) under the Ministry of Micro, Small and
1955
Medium Enterprises (MSME).
ICICI: Industrial credit and Investment Corporation of India Ltd was setup by GoI, World
1955
Bank etc. Later became a Private Sector Bank.
Industrial Development Bank Of India (IDBI) Act. 2004: Transformed into a Public Sector
1964
Bank. 2018: Government sold its majority shareholding to LIC.
India Infrastructure Finance Company Ltd (IIFCL) owned by the Finance Ministry's
2006
Department of Financial Services.
National Bank for Financing Infrastructure and Development (NaBFID) Bill, 2021 (बु�नयादी
2021
अवसं रचना और �वकास के �व� पोषण के �लए रा��ीय ब�क)

13.22.2 🚫🚫🚫🚫🚫What is Bad Bank- NARCL-IDRCL?

📑📑Ref: HDT-Pillar#1B2: Bad Loans

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13.22.3 🚫🚫🚫🚫🚫Non Bank ⇒ All India Financial Institutions (AIFI):

अ�खल भारतीय �व�ीय सं �ान were setup by respective acts of Parliament

EXIM (Jan 1982) NABARD (Jul 1982) NHB (1988) SIDBI (1990)
आयात �नयार्त के �लए कृ �ष और गाँव �वकास के �लए गृह/आवास �नमार्ण छोटे उद्योगों के �वकास के �लए
Export-Import National Bank for National Housing Small Industries
Bank of India Agriculture and Bank Development
Rural Development Bank of India
Boss: Government Previously RBI had Original boss: Originally 100% owned by
of India (100%) minority-stakes in RBI (100%). But, IDBI. Later on shareholding
NABARD but 2018: 2019: RBI sold transferred → SBI, LIC etc
100% Govt owned. 100% to Govt.
Promotes cross - Regulatory - Finance to - Operates Credit
border trade and supervision: Coop banks and Guarantee fund, Small
investment, helps + RRB NBFCs for Enterprises Development
importers-exports - + Indirect housing Fund (SEDF).
with loans and refinance to projects. - Operates udyamimitra.in
foreign currency. farmers, artisans - RESIDEX for loans to small
- Operates Rural index to entrepreneurs via schemes
Infra. monitor like Mudra, Stand-up-
Development residential �Ref: HDT-
India. (�
fund (RIDF) real estate Pillar#1D: to know more
prices. abt these schemes)
⇒ AIFIs are not ‘banks’ because can’t accept direct deposits from the public.
⇒ RBI is the regulator over AIFI.

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⇒ BASEL norms applicable but RBI can prescribe different / slabs norms / deadlines.
What/why/how?NotIMP.

🚩🚩🚩FAQ: Whether NABARD is 100% owned by govt or 100% owned by RBI- what difference
does it make? Ans. Shareholders select board of directors via Voting. Shareholders receive dividend
from the profit of the organization. So Govt or RBI gets benefits depending on who owns majority
shareholding.

🚩🚩🚩FAQ: What is the difference between Owner and Regulator? Ans. Ans. Government owns
SBI. But Government doesn’t regulate SBI’s banking business. RBI regulates it using powers of
Banking regulation Act.

🔠🔠❓ MCQ. Who grants direct credit assistance to rural households? (UPSC-Pre-2013)
1) RRB 2) NABARD 3) Land Development Banks
Answer Codes:(a) 1 and 2 only (b) 2 only (b) 1 and 3 only (d) 1, 2 and 3
🔠🔠❓Find Correct Statement(s) (Asked in UPSC-Prelims-2004)
A) NHB, apex institution of housing finance in India, was setup as a wholly owned subsidiary of RBI
B) SIDBI was established as a wholly owned subsidiary of the Industrial development bank of India
C) Both A and B D) Neither A nor B

13.22.4 NABFID, the 5th AIFI (2022-Mar)

2021: NaBFID: National Bank for Financing Infrastructure and Development was setup by an
law/act of Parliament, with an initial capital of ₹20,000cr capital.
⇒ NaBFID will get funding from RBI, Govt, Financial institutions, World Bank etc. It’ll also issuing
bonds in market etc
⇒ NaBFID will give loans worth ₹5 lakh crore in 3 years. It’ll help in National Infrastructure
�Ref: HDT-Pillar#5:Infrastructure)
Pipeline (NIP) project.(�
⇒ Chairman: K.V. Kamath.

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⇒ HQ: Mumbai (Presently it is working from the office of SIDBI in Mumbai)
⇒ Regulator? RBI.
⇒ 2022: RBI ordered that NaBFID will be treated as All India Financial Institution (AIFI).
⇒ Thus, NABFID is the fifth AIFI after EXIM Bank, NABARD, NHB and SIDBI.
सरकार ने क़ानून द्वारा बु�नयादी ढांचे और �वकास के �व�पोषण के �लए रा��ीय ब�क बनाया था. और उसे �रज़वर् ब�क द्वारा अ�खल भारतीय
�व�ीय सं �ान (एआईएफआई) का दजार् िदया गया है।

13.22.5 🚫🚫🚫🚫🚫FI ⇒ Non-Bank ⇒ Primary Dealers (PD)- (प्राथ�मक �वक्रेता)

- They deal in "primary" market i.e. directly buy fresh G-sec from RBI’s E-Kuber platform and
sell it in the secondary market. Total 20+ PD licensed by RBI: 14 of them are Banks. E.g.
Standard Chartered Bank, HSBC (HongKong), SBI, Kotak etc. (Numbers not important)

Related Topic: Retail/Ordinary Investors also buy G-Sec directly from RBI by opening a ‘Retail
Direct Gilt Account’ (RDG Account). (More in 📑📑Pillar#1C: Deepening of Capital Market)

13.22.6 🚫🚫🚫🚫🚫FI ⇒ NBFCs (गेर-ब�िकंग �व�ीय कं प�नया)

Parameter Commercial Banks Non-Banking Financial Companies (NBFCs)

Registration Banking Regulation Act Companies Act
Supervision RBI Depends.Mutual funds-SEBI, Insurance Co:
IRDAI etc.
Entry Capital 500 Cr. Different-different norm depends on organization

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 Parameter Commercial Banks Non-Banking Financial Companies (NBFCs)
Numbers 13 Public Sector (incl. Post Total 10,190. Out of them 108 deposit Taking,
Payment Bank), 56 RRBs, 39 remaining are non-deposit-taking (ND).
private sectors (including SFB, [figures not imp]
PB), 44 Foreign Banks.
[figures not imp]
Can accept - Can accept Time & Demand - Only NBFC-Deposit-Taking (NBFC-D) &
Deposits? deposits [also known as even they can accept only Time Deposits. E.g.
chequable deposit]. Bajaj Finance.
- Payment banks- can’t accept - Deposits are not insured under DICGC Act.
time deposits e.g. Fixed � More in Pillar#1B1
Deposits.
- Their deposits are insured
under DICGC Act.
Can issue - Yes, Banker can issue these - Can’t issue their chequebook, debit/credit
Chequebook, instruments. card.
Credit Card, - ��FAQ: Bajaj Finserv is issuing Credit
Debit Card? Cards!!?? Ans. Bajaj Finserv is giving you the
credit card of RBL-Bank. So Bajaj Finserv is
acting as an 'Agent' of the RBL Bank.
Prudential CRR, SLR, applicable - SLR applicable ONLY on NBFC-D. but RBI
Norms सावधानी can prescribe different slabs / formulas than
के मानदंड banks.
- CRR not applicable on any type of NBFC.
BASEL Yes, Applicable. - Applicable on 108 NBFC-D and
norms 📑📑 More in Pillar#1B2 - Applicable on 276 NBFCs – ND – SI (non-
deposit taking Systematically Important with
assets over ₹ 500 crores)
- e.g. L&T Finance, Cholamandalam etc.
But RBI can prescribe different slabs / norms
/deadlines.
Investment They can keep depositor’s money Can invest clients’ money in share market. E.g.
ग्राहक का पैसा in RBI approved securities. But Mutual Funds, Insurance Companies.
िकधर �नवेश करते can’t invest in share market,
directly.

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 Parameter Commercial Banks Non-Banking Financial Companies (NBFCs)
Loan Interest Decided as per RBI’s methodology Varies & depends on nature of biz.
Rate �ाज दर from time to time (BPLR, MCLR,
External Benchmark etc.) Ref:
Pillar#1A1
Recovery Loan recovery powers under - Housing Finance Companies have SARFAESI
बकाया रा�श क� SARFAESI Act. powers. But, all types of NBFCs don’t have it.
वसूली 📑📑 More in Pillar#1B2 (More in �Pillar#1B2)
Consumer RBI’s Ombudsman, Bank’s RBI’s separate Ombudsman for NBFCs starting
Complaints Internal Ombudsman ** �शकायत the NBFC-D since 2018**.
�नवारण
**More about these Ombudsman in 📑📑Pillar#1D: Insurance handout
🔠🔠❓ Find correct Statement(s) about NBFCs in India [Asked in UPSC-Prelims-2010]
A) They cannot engage in the acquisition of securities issued by government.
B) They cannot accept demand deposits like savings account.
C) Both A and B D) Neither A nor B
🔠🔠❓ The main functioning of the banking system is to [Asked in UPSC-CDS-2013-II]
(a) accept deposits and provide credit (b) accept deposits and subsidies
(c) provide credit and subsidies (d) accept deposits, give credit and subsidies

13.23🚫🚫🚫🚫🚫 NBFCS REGULATED BY RBI 🐯🐯 (�नयं त्रण/देखरेख)

Table 12: 🎓🎓✋no need to remember examples, just observe pattern
Investment and They mainly help buying ‘assets/machinery’ like tractor, bulldozer, etc
Credit Company E.g. SREI Equipment Finance, Limited
Consumer Durable - Help buying TV, Fridge, Mobile, AC etc. with Buy now Pay later
Loan Finance /BNPL (BNPL) / Equated Monthly Instalment (EMI) model. (How they’re
similar or different = PHD not required. हर चीज़ का �विकपीिडया बनना ज�री
नहीं है. पुराने पेपर देख लो)
- Eg. Bajaj Finserv, Flexpay, Zestpay etc.

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Core Investment - They do long term investment in Companies. E.g. Tata Capital,
Company (CIC) Reliance Capital, Infrastructure Leasing & Financial Services Limited
(IL&FS)
- IL&FS in controversy because couldn’t repay interest to lenders. �
More in next NPA handout.
Infrastructure Internal difference notimp for UPSC. Basically, they give loan for infra.
Finance Company Projects like highway, airport, powerplants. ( बु�नयादी अवसं रचना के �लए दीघर् अव�ध के
(IFC) लोन)
Infrastructure Debt - E.g. Rural Electrification Company ltd. (REC)
Fund (IDF) - L&T IDF, Kotak IDF, IDFC IDF (“IDFC First” has separate license
for Private Sector Bank).
Asset Reconstruction They buy bad loans / NPA from Banks & other NBFCs, and try to salvage
Companies (ARC) value from the underlying assets. E.g Anil Ambani’s Reliance ARC.
Factoring They lend short term money to client against his invoices / accounts
Companies receivable. E.g. IFCI Factors, Siemens Factoring. (What is Factoring?
Ans. 📑📑Pillar#1C)
Gold Loan e.g. Muthoot gold loan, Mannapuram Gold.
Companies RBI decides their Loan to Value ratio (LTV) (More in 📑📑Pillar#1A2).
� Home Loan - such as DHFL, Muthoot Housing finance etc. Housing Finance
Companies Companies.
- RBI regulates them since 2019. [Before 2019, National Housing Bank /
NHB regulated them. Some very old PYQ asked about it. so I gave this
historical info, Otherwise donot loose Blood Pressure over this.]
Micro Finance - 2010: RBI’s Y. H. Malegam Committee → RBI created a new NBFC
Institutions category called Micro Finance Institution (MFI)
(MFI: सू� �व� सं �ान) - They give small loans to poor without collateral, flexible EMI.
- eg:Bandhan (W.Bengal, separately got PvB license), Disha (A'Bad:
separately got SFB license), SKS (Andhra), Cashpor (UP), Ujjivan
(Karnataka).
- Who regulates them? RBI. Plus some regulation also done by
Ministry of Corporate Affairs. (What/HOW? NOTIMP)
- Who can borrow from MFI? Ans. Household whose annual income is
not more than ₹ 1.25 lakh (rural) or ₹ 2 lakhs (urban).
- How much can one person borrow from an MFI? Ans. Not More than
₹ 1.25 lakh.
MUDRA (2015) - A non-deposit taking NBFC owned by SIDBI. It gives indirect loans to
Micro enterprises through PM Mudra Yojana.
- � More in Pillar1D- Financial Inclusion.

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 Money Changers/ - They help the clients buy/sell foreign currencies e.g. Rupee to Dollars
Authorised dealers - They have to obtain license from RBI under FEMA (Foreign
(AD) for foreign Exchange Management Act, 1999)
currency - Both banks & NBFC can get this license from RBI.
Residuary (अव�श�) - Any NBFC not regulated by any other regulator (e.g. SEBI, IRDAI,
PFRDA)- falls under RBI’s purview.

13.24🤖🤖💳💳 FINTECH COMPANIES

FinTech Companies provide innovative solutions for money/financial transaction/loan/sharemarket
etc using digital technology.

13.24.1 🐯🐯Fintech regulated by RBI

P2P Lenders - It is like Olx-Quickr connecting sellers of second hand goods with buyers.
the P2P lending websites connect borrowers and lenders. E.g.
Faircent.com, Cashkumar.com, CRED Mint etc.
- 2021- CRED Mint launched. Newspapers gone crazy so Babushonas are
demanding that I should teach them PHD thesis on its business model.
�Bhai, I’ll not teach it. Look @PYQ in this Handout
Account - They manage information of a customer’s financial assets & display it to
Aggregators him or to third party (like loan giver, credit rating company & Apps). 2018:
(AA) RBI gave license to 5 cos- NeSL,Cookiejar etc.
Loan E.g. Loanadda.com, Moneytap.com, Loanbazaar, Paisabazaar etc. portals
Aggregators - �Challenges? Often these digital platforms that act as outsourced agents
(ऋण समूहन) of banks/NBFCs to sell loans.
- But, customers face difficulty in complaint/grievance redressal.
- Now even Google Pay app developing features for loans. So RBI has
expressed its displeasure and is presently working on rules to fix this.
Payment - They help sellers to accept payment from buyer by providing technological
Aggregators solutions
- E.g. Razerpay. Seller opens account on Razerpay website-> embeds the
code/link in his own website-> can accept payment through credit card,
debit card, netbanking, UPI JioMoney, Mobikwik, Airtel Money
- Further subtypes: Online Payment Aggregators Vs Offline Payment
Aggregators but internal difference not imp. for IAS exam.
Mobile Wallet - PhonePe, MobiKwik, Paytm etc many apps/services.
App - Learned enough about them in Pillar1A1 subtopic digital payments.

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13.24.2 🐯🐯Fintech regulated by NON-RBI org (e.g SEBI, IRDAI)
Type Examples Regulator
Discount brokers e.g.Zerodha, Upstox, 5paisa, Groww. They help the clients SEBI
buy/sell shares/bonds etc online via mobile apps / webportals.
Insurance Web e.g Policybazaar.com. Help client find & compare the insurance IRDAI
Aggregator policies of various companies.
�FAQ: Tell me about Fintech pension companies regulated PFRDA? Ans. Nothing
newsworthy/important in that category YET- to deserve our time / energy.

13.24.3 🔪🔪🔪🔪🔪🔪Digital Lenders

RBI classified them into 3 groups

Sr Organization Examples �Regulator

1 giving loans online and regulated by Banks, P2P lenders RBI itself
RBI
2 Giving loans online but NOT regulated Venture Capital Funds (VCF) SEBI
RBI but some other regulator e.g. SEBI
3 Giving loans online but not regulated unauthorized digital lenders : Nobody /
by anyone = their App will be shut goonda/mafia ke online mobile illegal.
down. Legal action will be taken. app for giving online loans.
Note: RBI keeps releasing guidelines for digital lending. But daily-commentary not important.
Sufficient to know that such guidelines mostly deal with customer protection.

13.24.4 🚫🚫🚫🚫🚫Credit Information Companies (CIC) versus Credit Rating Agencies (CRA)

Credit Information Credit Rating Agencies (CRA)

Companies (CIC)
�Regulator RBI regulates them SEBI regulates them

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 Credit Information Credit Rating Agencies (CRA)
Companies (CIC)
EXAMPLES CIBIL TransUnion, CRIF ⇒ Standards and Poor's, Moody’s,
High Mark, Equifax and CRISIL, CARE, ICRA, FITCH
Experian. Ratings India Pvt. Ltd, SMERA.
⇒ Brickwork Ratings India = SEBI
ordered it to shut office due to
malpractices.
They check the credit “Individual Persons” (एकल companies, NBFCs, governments, local
worthiness/ loan ��� के कजर् वापस चुकाने क� औकात है bodies, non-profit organizations.
repayment capacity of िक नहीं उसका मू�ांकन करते ह�) They do not check it for individual
persons. ( सं �ानों क� कजार् वापस चुकाने क� औकात
का मू�ांकन करते ह�. एक एक इं सान के �लए नहीं करते)
Rating numerical scores. e.g. alphabetical symbols e.g. AAA, AA-, D-
CIBIL Score between 300- etc.
900.
Utility? Better the score → similar to the left cell.
🤩🤩1) loan application will
be passed more easily
🤩🤩2) You'll have to pay
lower interest rate.
🔠🔠❓MCQ. Find Correct about credit rating agencies (CRA) in India? (Prelims-2022)
1. They are regulated by the Reserve Bank of India.
2. The rating agency popularly known as ICRA is a public limited company.
3. Brickwork Ratings is an Indian credit rating agency.
Which of the statements given above are correct ?
(a) 1 and 2 only (b) 2 and 3 only (c) 1 and 3 only (d) 1, 2 and 3

13.25🚫🚫🚫🚫🚫 NBFCS REGULATED BY SEBI 🐱🐱 (📑📑MORE IN PILLAR#1C)

- They help clients buy-sell Shares/Bonds depending on his instructions

Stock Broker E.g. Motilal Oswal, Sherkhan, Indiabulls, , Karvy etc.
- Karvy did a fraud/scam → SEBI banned Karvy for 7 years from 2023.
- e.g.Zerodha, Upstox, 5paisa, Groww. They help the clients buy/sell
Discount Broker
shares/bonds etc online through mobile apps. Discount-brokers’

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 operational costs are lowers, as they do not keep large number of sales-
agents or physical offices.
- Therefore, discount-brokers charge less commission than traditional
Stock brokers such as Motilal Oswal or Sherkhan.
- They pool clients’ money and MF-manager invests it in shares/bonds
using his own discretion & expertise.
Mutual Funds (MF) - E.g. SBI's Shariah Equity Mutual Fund: clients' money invested in
Sharia compliant Cos. That don’t deal with alcohol, pork, debt, tobacco
or weapons.
- �More
Pool & invest money in real estate / infra projects e.g. IRB. <�
REITs / InvITs
in Pillar#1C: SEBI Handout>
⇒ Underwriting, Merger & Acquisition, Wealth Management of rich
Investment Banks: people:
(USA term) & ⇒ E.g. Kotak Mahindra, Citigroup, Bank of America, DSP Merrill Lynch,
Merchant Banking Morgan Stanley, SBI capital
Companies: ⇒ 2021: SEBI allowed payments banks to act as investment bankers (after
(UK term) fulfilling the rules/regulations of SEBI). सेबी से अनुम�त लेकर भुगतान ब�क ये कर
सकते ह�
Venture Capital VCF Help startup companies to arrange capital e.g. IFCI-VCF, IDG-VCF
Fund (VCF)
3 sub-types (Ref: Pillar#1C for more)
- 1) Stock exchanges (BSE/NSE etc) - help buyer/seller connect in
secondary market
Market
- 2) Depositories (NSDL/CDSL etc): help clients store shares, bonds etc
Infrastructure
DIGITALLY in the demat account.
Institutions (MII)
- 3) Clearing houses/Central Counter-Parties (e.g. CCIL): help settling
the trade by transferring money to seller and transferring shares to
buyer.

13.26🚫🚫🚫🚫🚫 NBFCS REGULATED BY OTHERS 🦊🦊

Regulator Example NBFC Companies

IRDAI Insurance Regulatory and Development Authority (IRDAI) regulates:
(📑📑More in - 1) Life Insurance companies e.g. LIC, HDFC Standard Life Insurance
Pill1D) - 2) Non-Life (=General) insurance e.g. IFFCO-Tokyo General Insurance.

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 - 3) Policy aggregator web-platforms such Policybazaar.com
PFRDA Pension Fund Regulatory and Development Authority (PFRDA) regulates all
(📑📑More in Pill1D) Pension Funds, except EPFO & other statutory funds.
1. NIDHI Companies: Mutual benefit club, only members can borrow. e.g.
Ministry of South Madras Benefit Fund ltd, Maben Nidhi Ltd (of Mannapuram group)
Corporate 2. Microfinance Companies: learned in previous section. Microfinance
Affairs Companies’ some regulation by RBI. and some of the regulation done by
Corporate Affairs Ministry. (Why/How=NOTIMP. थोड़ा-पढ़ो-आगे-बढ़ो.)
It regulates ‘Chit funds’. e.g. Shriram Chit fund. It is a type of collective
State Registrar
investment scheme with monthly contributions & borrowing by contributing
of Chit Funds
members Chits. (Ref 📑📑Pillar#1D)

13.27👻👻(🚫🚫🚫🚫): NBFC: SHADOW BANKING (आभासी / प्र�तछाया ब�िकंग प्रणाली)

⇒ ��ES20 observed: Shadow banking is a set of activities and institutions. They operate
partially (or fully) outside the traditional commercial banking sector. They are not fully regulated
by the RBI. ये सं �ाए पारंप�रक ब�िकंग �नयमो के दायरे से बाहर काम करती है.
⇒ They mobilize funds by borrowing from banks, issuing Commercial Papers (CP) and Bonds
(=Non-convertible debentures)
Table 13: Three important segments of the shadow banking system in India
HFCs Housing Finance Companies. E.g. Dewan Housing Finance Limited (DHFL)
LDMFs - Liquid Debt Mutual Funds invest clients money into short term debt instruments
such as T-bill (of Govt) and Commercial Papers (of companies).
- e.g. certain schemes by UTI, Kotak, L&T, Tata mutual funds
Retail- Retail Non-Banking Financial Companies such As Gold Loan Companies, Asset
NBFCs Finance Companies etc.
Shadow banking system’s assets are risky. Sometimes they can’t honour their obligations/bond
repayments. It results into severe crisis, as seen in the ILFS crisis (2019). (उनक� सं प�तया जो�खमपूणर् होती है)
(More in 📑📑Pillar#1B2: Burning issues in Banking Sector)

13.28🧕🧕NBFC-NOT ALLOWED IN INDIA: ISLAMIC BANKING

- Interest (Riba) is prohibited (Haram) in Islam. So, Islamic Banking operates through Ijara,
Murbaha, Musharaka mechanisms- in which depositors’ money is invested in borrower’s
property / business and returns are shared in form of rent / profit but not in the form of Interest.
- Some committees said give permission to Islamic Banks in India, but RBI is opposed (2017).
- 2017: Kerala Govt allowed opening of a Islamic Bank by registering it as “co-operative society”,
so as to avoid the RBI’s ban. But further, legal controversy notimp. ��
- �Pro-Arguments? Financial inclusion of Minorities/Muslims. अ�सं �कों का �व�ीय समावेशन

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 👎👎Anti-Arguments against allowing Islamic Banking in India?
- Specialized Manpower required. Secular India’s PM-Jan-Dhan Yojana & Post Office Payment
bank efforts are sufficient. (भारत म� ब�क-बचत क� से�ूलर/धमर्�नरपे� सेवाएं उपल�. अलग से एक धमर् �वशेष के �लए
�व�ीय सेवा देने क� कोई ज़�रत नहीं)
- USA Govt alleges their involvement in terror finance & money laundering. (अमरीक� सरकार का आरोप
है िक ये सं �ाएँ आतं क�ओ को पैसा प�ँ चाना, और काले धन को वैध/सफ़े द बनाने जैसे ग़ैर-क़ानूनी काम करती है।)
13.29🧔🧔🧔🔪🔪💵💵😱😱 INFORMAL FINANCIAL INTERMEDIARIES (अनौपचा�रक �व�ीय
म��/�ाजख़ोर)
- Unlike banks/NBFCs, they provide loans without formal application procedure, etc but require
Property/Vehicle/Home/Goods/Crop/Gold etc. as collaterals/pawn. (सं प�� �गरवी रखवा के कजर्)
- They charge very high compound interest rates & use muscle power for recovery (ऊंचे �ाजदर,
वसूली के �लए धमकाना-बलप्रयोग करना.)
- For every Rs.100 borrowed by a rural household, 33% from informal money lenders, remining
from banks, friends-family etc. (2012 data)
- They don’t fall under RBI purview, but State Govts have individual laws to regulate them e.g.
Bombay Moneylenders Act 1947, Kerala (1958), Gujarat (2011). These laws require such
informal lenders to register, impose ceiling on the interest rate & prohibit strong-arm tactics.
(�रजवर् ब�क क� �नगरानी म� नहीं िकंतु रा� सरकारों ने �नयं त्रण के �लए कानून बनाएं - पं जीकरण, �ाज क� मह�म सीमा �नधार्�रत
करना, बलप्रयोग/जबरन वसूली पर रोक)
Table 14: Following Examples/Differentiation not imp for IAS Exam but Banking Exams

Types → Indigenous Banker (देशी ब�कर) Moneylender / Brokers

Shroff, Shikarpuri, Chettiar, Kabuli Pathan, Quistwala, Arhatia,
Medieval time
Marwari, Aiyar, Rastogi Village Bania, Soni, Mahajan & Seth,
known as →
Pawnbrokers, Financial Brokers
They used to mobilize money They use their own savings-money
Money
from Public via: 1) Hundi: bill of (or sometimes some villain’s black
mobilization →
exchange; money- �यं का पैसा कज� पर देते या िकसी भ्र� नेता
पैसा कहां से लाते ह�
2) Commercial bills अफसर का काला धन कज� पर घुमाते)

13.29.1 ✍ Mains Answer Writing

- From this particular topic, the Mains angles are centred around – problems of
PSBs/nationalization, is privatization of banks a panacea? importance of bank-NBFC in
economic growth and human development ? etc.
- This Raftaar-courses deals purely with Prelims and NOT with Mains. There is separate course
for Mains. Go to my profile page.

�Next HDT: 🔥🔥 1B2: Burning Issues in Banking: Bad Loans, NPA, IBC, SARFAESI, BASEL etc.

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 Pillar#1B-2: Bad loans & other Burning issues in Banking sector
Table of Contents

14 �� Bad Loans & Other Burning Issues in Banking ............................................................ 143

14.11 �Loan types depending on guarantee / Collateral ................................................................ 143

14.12 �Types of loans: Based on Interest Rate ............................................................................... 144

14.13 �Types of loans: Based on Borrowers ................................................................................... 144

14.13.1 ��-�
�-�
�-�
�NPA / TBS Problem: Three Stages of .................................................................... 144

14.14 ��Non-Performing Assets (अनजर्क प�रसं प��यां) ........................................................................ 145

14.14.1 ��NPA related definitions in Banking Sector................................................................................... 145

14.15 ���� ATMANIRABHAR → Loan/EMI/NPA relief / Moratorium ......................... 147

14.16 ��� RBI “3R” Framework for Revitalizing Stressed Assets (2015-19) ........................ 147
14.16.1 � �RBI’s Prudential Framework for stressed assets (2019) ............................................................. 147
14.16.2 � �Resolution Framework 1.0 and 2.0 (2020-21) ............................................................................. 147

14.17 �� SARFAESI Act 2002: Origin, Objective & Limitations ............................................... 148
14.17.1 ���� Which lenders have SARFAESI powers? ........................................................................ 148
14.17.2 ��Legal Rights of Loan Defaulter in SARFAESI Act ....................................................................... 148
14.17.3 ��: �Limitations of SARFAESI Act (मयार्दाए).................................................................................... 149

14.18 ��� Insolvency and Bankruptcy (I&B) Code 2016 ....................................................... 149
14.18.1 ��� IBC Code: Appeal Structure .................................................................................................... 149
14.18.2 ��� IBC: Process for resolution...................................................................................................... 150
14.18.3 ��� Statutory bodies related to IBC ............................................................................................... 150

14.19 ��|Insolvent vs Wilful Defaulter ....................................................................................... 151

14.19.1 � Wilful Defaulter Data ........................................................................................................................... 151
14.19.2 � Declare wilful defaulters within 6 months of NPA- says RBI Proposal .......................................... 151
14.19.3 �Wilful Defaulters can do compromise settlement – RBI (2023) ...................................................... 151
14.19.4 � Guarantor (ज़मानतदार) ............................................................................................................................... 152
14.19.5 ��� Insolvency and Bankruptcy Code Amendments in 2018-2019 .......................................... 152
14.19.6 ���:�
� IBC Pre-Packs (पद� के पीछे ज�ी से के स सुलटा लेते है!) ....................................................................... 152
14.19.7 ���: � IBBI directive on Avoidance Transaction and 500 other technical things ................ 153
14.19.8 �� (�
���) ATMANIRBHAR → IBC Ordinance/Act 2020 to suspend new cases .............. 153
14.19.9 �(�
���) Insolvency and Bankruptcy Board of India (IBBI) ..................................................... 154
14.19.10 � �IBBI → Information Utility ......................................................................................................... 154
14.19.11 �(�
���)Insolvency → Misc. Org: Indian Institute of Corporate Affairs ................................ 154
14.19.12 � Project Sashakt by Finance Ministry (2018) ...................................................................................... 155
14.19.13 ��� ATMA-NIRBHAR → Insolvency → Micro,Small,Medium Enterprises ........................ 155
14.19.14 ���)�
(� �� Cross-border Insolvency (सीमा-पार का िदवा�लयापन) .......................................................... 155

14.20 ���) Voluntary Liquidation of Companies ................................................................. 156

(�

14.21 ���)�
(� � � Economic survey on IBC/NPA: reforms (आ�थक सव��ण)............................. 157

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14.22 👁👁👁🗨🗨🗨🗨🗨🗨- � Credit Rating / Monitoring- various org/initiatives ...................................... 157
14.22.1 👁👁👁🗨🗨🗨🗨🗨🗨- � National Financial Information Registry (NFIR) in �Budget-2023 ....................... 157
14.22.2 �RBI’s Public-Tech Platform for Frictionless Credit (2023)............................................................... 157
14.22.3 👁👁👁🗨🗨🗨🗨🗨🗨- � Legal Entity Identifier (LEI) Number: (कानूनी इकाई पहचान सं �ांक) ........................................ 158

14.23 ����- � Fugitive Economic Offenders Act, 2018 .................................................. 158

14.24 � � �� DICGC Act: Objective & Limitations ............................................................. 159

14.24.1 �� �� : Proposal: DICGC should cover PPIs/Mobile Wallets?............................................... 160
14.24.2 � � ��- � Limitation of DICGC (मयार्दाएँ ) .................................................................................. 160

14.25 �(�
� ��) Bad Bank (NARCL, IDRCL-2021): Intro ..................................................... 160
14.25.1 �(�
� ��): � Bad Bank Structure ................................................................................................ 161
14.25.2 � ��) Bad Bank: 🗃🗃 functioning ............................................................................................. 162
�(�
14.25.3 �(�
� ��) Bad Bank: Benefits & Challenges? .............................................................................. 162
14.25.4 �(�
� ��) Bad Bank: �Conclusion (�न�षर्) .................................................................................. 163

14.26 ������ Prompt Corrective Action (PCA) Framework .................................... 163

14.26.1 ������ RBI’s Prompt Corrective Action (PCA) for NBFCs.......................................... 163
14.26.2 ������ RBI ‘s Supervisory Action Framework for Urban Co-operative Banks .......... 164
14.26.3 RBI’4-tiered regulatory framework for urban cooperative banks (2022-Dec)...................................... 164
14.26.4 �: �Regulations Review Authority (RRA 2.0)- for Ease of implementing RBI rules .................... 164
14.26.5 �: �RBI supervision: Utkarsh-2022” roadmap ................................................................................. 164
14.26.6 Digital lending norms by RBI (2022-Nov) ................................................................................................ 165
14.26.7 Digital lending → FIRST LOSS DEFAULT GUARANTEE (FLDG) norm by RBI............................. 166

14.27 �� FinTech- Self-regulatory organisation (SRO) ............................................................. 166

14.27.1 � FinTech SRO-Benefits? ........................................................................................................................ 166

14.28 ��
� BASEL-III Norms (बेसेल-3 मानदंड) ..................................................................................... 167
14.28.1 ��
� � BASEL-III norms: Capital Tiers ............................................................................................ 168
14.28.2 ���Additional Tier 1 (AT1) Bonds ............................................................................................... 168
14.28.3 ���Zero Coupon Bonds.................................................................................................................. 169
14.28.4 ��
� D-SIB: Domestic Systematic Important Banks ........................................................................... 169

14.29 ��: BASEL Norms deferred / Suspended in Corona......................................................... 169

14.30 ��� Banks’ Balance sheet / Audit Norms (तुलन पत्र लेखा परी�ण) ........................................... 170
14.30.1 ��� IndAS Accounting Norms deferred (लेखा मानदंड ��गत/टाल िदये) .................................................... 170

14.31 ��
�� Recapitalization of PSBs: [सावर्ज�नक �ेत्र के ब�को का पुन:पूंजीकरण] ........................................... 170

14.32 �Banking Sector: Governance / Administrative Reforms .................................................... 171

14.32.1 �Gyan-Sangam-I, 2015, Pune ................................................................................................................. 171
14.32.2 � Personnel Selection → Bank Board Bureau (BBB), 2016 ................................................................. 171
14.32.3 � Personnel Selection → FSIB replaces BBB (2022) ............................................................................ 171
14.32.4 �PSB Banking Personnel Reforms→ ES20 suggestions ...................................................................... 172
14.32.5 �Customer Service: Enhanced Access and Service Excellence (EASE) Agenda 2018 ...................... 172
14.32.6 ��:🛡🛡Staff Accountability Framework for PSB-NPA ...................................................................... 172
14.32.7 �Customer Service: RBI’s B.P.Kanungo committee (2022) ................................................................ 173

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 14.33 ��: �(�
��) NEGATIVE News: ILFS & Shadow Banking......................................... 173
14.33.1 �(�
��) NBFC: Shadow Banking (आभासी / प्र�तछाया ब�िकंग प्रणाली) ................................................................ 173
14.33.2 �(�
��) Shadow Banks → IL&FS & NBFC Liquidity Crisis........................................................... 174
14.33.3 � ATMANIRBHAR → �: �(�
��) RBI Helping NBFCs/ Shadow Banks ............................ 174
14.33.4 �(�
��) �� Shadow Banking → Remedies by RBI .................................................................. 174
14.33.5 � ATMANIRBHAR → ���� Partial Credit Guarantee Scheme (PCGS) 2.0.................... 175
14.33.6 � ATMANIRBHAR → ���� Special Liquidity Scheme for NBFC/HFC .......................... 175
14.33.7 Shadow Banking: More reform points by Government and SEBI .......................................................... 175

14.34 ��� Negative News: PNB, LoU, SWIFT, & Nirav Modi ............................................... 175

14.35 ��
� Negative News: International Level Banking Sector ................................................... 175
14.35.1 ��
� Intl. Banking Crisis: Silicon Valley bank crisis (SVB), USA 2023 ............................................. 175
14.35.2 ��
� Credit Suisse Bank, Switzerland (2023) ....................................................................................... 176

14.36 �� RBI Dividend, Reserves, Economic Capital Framework ............................................. 176

14.36.1 �� RBI’s Bimal Jalan panel (2018) ..................................................................................................... 177
14.36.2 � RBI’s Financial / Accounting Year (�व�ीय वषर् म� बदलाव) ............................................................................ 177
14.36.3 ��Section-7 Directive & Urjit Patel’s Resignation (इ�ीफा) ............................................................... 177
14.36.4 � Mains Answer Writing ......................................................................................................................... 178

14 🔥🔥🔥🔥 BAD LOANS & OTHER BURNING ISSUES IN BANKING

14.11🔪🔪LOAN TYPES DEPENDING ON GUARANTEE / COLLATERAL

Secured Loans Unsecured Loans (collateral free loans)
where borrower has to pledge an asset as boravar does not pledge asset as collateral. e.g.
security while borrowing from the lender. Overdraft, Credit Card, Personal loans for
e.g. home loans, gold loans, automobile wedding/travel, student loans, farmer loans etc.
loans. Biz Loans by pledging fix deposit
certificates, shares, bonds, factory etc.
Banker’s risk is lower. So loan interest rates Higher risk. Higher interest rate.
may be lower. Exception: in education loans, Micro enterprise
loans, farmer loans etc. Union government provides
credit guarantee against the losses of the bank. So
such loans may be ‘unsecured’, YET cheap interest
rate. (Ref: Pillar#1D for more.)
Amount of loan given is usually higher lower. �ोिक आप कु छ �गरवी नहीं रख रहे तो ब�क कोई आपको
than unsecured loan. (मोटी मात्रा का लोन �मलता अरबों �पये तो देगा नहीं।
है)
Longer tenure of repayment e.g. 15–20 Shorter. (because the banker would want to recover
years (लं बी अव�ध का लोन �मलता है) the money as fast as he can)

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14.12🔪🔪TYPES OF LOANS: BASED ON INTEREST RATE
Table 1: Type of Loans based on Lending Rates
Fixed Interest Loan (�न��त �ाजदर का ऋण) 🎈🎈 Floating Interest Loan (चलायमान)
e.g. Short-term crop loans upto ₹3 lakh for e.g. (External Benchmark) + spread + risk
farmers at fixed Interest 7%. premium. (Ref#1A2-MonPolicy).
This interest rate will not be changed But benchmark is regularly updated. So
throughout the loan tenure. resultant interest rate may increase or decrease
throughout the tenure of loan.
टीजर लोन यानी िक ऐसे लुभावने लोन जहाँ शु�आती वष� म� �ाज Teaser Loan: A sub-type of Floating interest
दर ब�त कम रहे लेिकन बाद के वष� म� ग्राहक पर बड़ा �ाज दर rate loan, wherein initial years have low
थोप िदया जाए. अमे�रका म� सबप्राइम सं कट के पीछे इसे कारण interest, but afterwards- higher interest rate.
माना जाता था While RBI has not banned Teaser loans but has
put stricter regulations on them from 2011.
14.13🔪🔪TYPES OF LOANS: BASED ON BORROWERS
Table 2: Type of Borrowers
🤵🤵 Prime Borrower He has the capacity to repay loans. (वो कजार् वापस चुकाने क� �मता रखता है)
� Subprime Such person doesn’t have the capacity to repay loan. Giving teaser rate
Borrower home loans to them caused Sub-prime Crisis in USA (2007-08),
(Individual) ultimately led to Global Financial Crisis (GFC). (More in 📑📑Pillar#3).
🧔🧔 Overleveraged Such company has borrowed too much money than its ability to pay it
Borrower back. An Overleveraged company has high ratio of Debt (Bonds/loans)
(Company) to Equity (Shares). वापस करने क� �मता से भी अ�धक कजर् ले �लया है
When a weak bank keeps giving new loans to a subprime / overleveraged
� Zombie Lending
borrower. कमजोर ब�क, कमजोर कजर्दार को लोन देता रहे है
🔠🔠❓Why is the offering of "teaser loans" by commercial banks a cause of economic concern? (Pre-2011)
1. The teaser loans are considered to be an aspect of sub-prime lending and banks may be exposed
to the risk of defaulters in future.
2. In India, the teaser loans are mostly given to inexperienced entrepreneurs to set up
manufacturing or export units. (�बनअनुभवी नौसी�खए उद्य�मयों को �व�नमार्ण और �नयार्त इकाइयों बनाने के �लए टीजर
लोन िदए जाते ह�)
Answer Codes: (a) 1 only (b) 2 only (c) Both 1 and 2 (d) Neither 1 or 2
14.13.1 🔪🔪🔪🔪-🤑🤑-😕😕-😭😭NPA / TBS Problem: Three Stages of
1. 🤑🤑Till mid-2000s: Boom period in global economy. Indian Corporates were taking large
amount of loans & became overleveraged. (भुगतान क� �मता से बड़ा लोन लेना)
2. 😟😟From 2007-08: Subprime & Global Financial Crisis (GFC: वै��क आ�थक सं कट): Indian exports
⏬. UPA govt’s policy paralysis & judicial activism, environment activism (नी�तगत प�ाघात और
�ा�यक सिक्रयता, पयार्वरण सिक्रयता) ⇒ projects delayed. Companies began facing difficulties finishing
projects & repaying loans.

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3. 😰😰By 2013: ~1/3rd of the bank loans were owned by “IC1 companies” i.e. companies with
interest coverage ratio less than 1, meaning they were not generating enough revenue even to
repay the loan interest. (IC>1 is good and IC <1 is bad.)
Thus, balance-sheets of (1) some Large Corporates Companies & (2) Public Sector Banks (PSB)
became weak. It is called “Twin balance sheet syndrome (TBS)” [दोहरे तुलनपत्र क� सम�ा] by Economic
Survey 2015-16.

🔠🔠❓What is the importance of “Interest Coverage Ratio” of a firm in India? (Prelims-2020)

1. It helps in understanding the present risk of a firm that a bank is going to give a loan to.
2. It helps in evaluating the emerging risk of a firm that a bank is going to give a loan to.
3. The higher a borrowing firm’s level of ICR, the worse is its ability to service its debt.
Answer Code: (a) 1 and 2 only (b) 2 only (c) 1 and 3 only (d) 1, 2 and 3

14.14🔪🔪🔪🔪NON-PERFORMING ASSETS (अनजर्क प�रसं प��यां)

- If loan principal or interest is not paid for more than 90 days from its due date, then such loan
account is classified as Non-Performing Asset (NPA). िक� जमा करने क� �नयत �त�थ/तारीख के ऊपर भी 90
िदनों से अ�धक हो चुके हो िक�ु िक� जमा नहीं क� गयी तो….
- For farm loans, NPA is not counted on number of days but on number of cropping seasons. कृ �ष
ऋण म� महीनों के िहसाब से नहीं फसल क� मौसम/ऋतु के िहसाब से होता है
- NPA as a % of total loans given by SCB = 11% (2017), 7% (2021), 5% (2022)
Year 2020-Mar 2021-Mar 2022-Mar
Total NPA in SCBs** Rs. 8.8 lakh cr Rs. 8.3 lakh cr Rs. 7.4 lakh cr
**SCBs = scheduled commercial banks. (अनुसू�चत वा�ण��क ब�क)

14.14.1 🔪🔪🔪🔪NPA related definitions in Banking Sector

Loan account where borrower is repaying the principal and interest in timely
Std. Assets
fashion. (आदशर् परीसं प�तया= �नय�मत �ाज मुद्दल/ मूलधन �मला)
If loan principal or interest unpaid for 1-30 days from its due date, then such
SMA-0
loan account is classified as Special Mention Account-0.
SMA-1 31-60 days
SMA-2 61-90 days

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Provisioning As per RBI norms, banks must set aside funds to cover losses against their NPA.
प्रावधानीकरण Such ‘provisioning of funds’ ⏬decrease profitability of the Bank.
Gross NPA - Gross non-performing assets = grand total of all NPA loans(कु ल योग)
(GNPA: सकल
एनपीए)
NET NPA (शुद्ध एनपीए) = GNPA Minus Provisioning
NET NPA
🎓🎓✋WHATITMEANSNOTIMP
Substandard When loan account remains in the NPA classification for 12 months or more/>
asset (रद्दी/घिटया परीसं प�तया- जब कोई लोन खाता 12 महीना या उससे �ादा एनपीए श्रेणी म� रहे)
Doubtful Asset When loan account in substandard classification for 12 months or more />
When a bank, its auditor or RBI declares that given doubtful asset has little / no
Loss Asset
salvageable value. (नीलामी करके भी नुकसान भरपाई असं भव)

- Loan write off= banker removes a loan amount from the ‘asset-side’ of the
bank balance sheet, to save corporation tax (How? = we-are-not-here-for-
CA-exam).
- Loan write-off doesn’t waive bank’s right to recover that bad loan, it’s
merely an accounting exercise for tax-benefits. (कराधान म� कु छ �रयायतों के �लए
Loan write-off िहसाबी प्रिक्रया क� जाती है। हालांिक ऐसा करने के बावजूद भी ब�कर कजर्दार से पैसा वापस तो मांग ही
सकता है)
- Loan write-off⏬ reduces the NPA% of the Bank (Because amount is
written-off/cancelled from balance sheet)
- 2022-Dec: Government replied in Parliament that Banks write off loans
worth Rs 11.17 lakh crore in last six years
Restructured When principal / interest rate / tenure of the loan is modified. Banks may do it
loan when borrower facing difficulty in repaying loans. (पुनगर्िठत कजर् / ऋण)
Stressed Asset NPA + Loans Written-Off + Restructured Loans = Stressed Assets (तनावपूणर् सं प��)
For example, If bank allows the borrower to pay 60% of dues & forgoes 40% as
OTS with
loss, then bank has offered “One time Settlement (OTS) with 40% haircut”
Haircut
कजर् का कु छ िह�ा ब�क खुद ही नुकसानी समझकर माफ कर दे।
Evergreening When a borrower taking a new loan to pay off his old loan.
of loans पुराना कजर् चुकाने के �लए नया कजर् िदया जाए।

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14.15👻👻🤧🤧🤧🤧✋ ATMANIRABHAR → LOAN/EMI/NPA RELIEF / MORATORIUM
⇒ IF a loan is outstanding as of THEN 2020-March: RBI allowed (optional)
moratorium/suspension of loan repayment for 6 months for March, April, May, June, July, Aug.
⇒ So, If a borrower’s income ⏬ due to Corona, he gets relief from Equated Monthly Instalments
(EMIs) for “X” months. (ऋण अदायगी पर 6 महीने के �लए अ�ायी �प से मु��/रोक)
⇒ It WAS NOT compulsory to skip EMI. Borrower MAY repay loan regularly, if his financial
situation was strong. (इन महीनों म� िक�े भरना वैक��क होगा. वो आ�थक �प से सश� हो तो भर सकता है)
⇒ Loan was not ‘removed/waived’. It was only temporarily suspended. (ये कज़ार् माफ़� नहीं था. के वल कु छ
महीने के �लए िक�� भरने म� छु ट्टी दी गई थी- िक बाद म� धीरे धीरे पूरा भर देना। उसने �जतना उधार �लए, वो सारा अंत म� तो पूरा
चुकाना ही होगा।)

💡💡Note: In last handout, I had kept a very big short note here discussing how some banks
demanded compound interest rate for 6 months / matter went to SC / Govt gave subsidy to those
banks. But for 2023-24 exam-cycle all that microscopic details are outdated / faded/not grabbing
headlines anymore. so I am deleting.

14.16🐯🐯🐯🐯🐯🐯 RBI “3R” FRAMEWORK FOR REVITALIZING STRESSED ASSETS (2015-19)

Shifted to Mains-QEP handout.

🔠🔠❓ ‘Scheme for Sustainable Structuring of Stressed Assets (S4A)’ is related to: (Prelim-2017)
a) procedure for ecological costs of developmental schemes.
b) ✅scheme of RBI for reworking the financial structure of big corporates with genuine
difficulties.
c) disinvestment plan for Central Public Sector Undertakings.
d) Provision in ‘The Insolvency and Bankruptcy Code’.
Answer is B. But we’ll not study topic, scheme is discontinued, and topic outdated for 2023.

14.16.1 🦁🦁 🔪🔪RBI’s Prudential Framework for stressed assets (2019)

This is outdated topic so removed from Handout.

14.16.2 🦁🦁 🔪🔪Resolution Framework 1.0 and 2.0 (2020-21)

Based on the recommendations of the KV Kamath committee, RBI issued a set of guidelines for
Bank/NBFCs for dealing with the bad loans after Corona.
Resolution Framework Applicable to borrowers who are
1.0 Large companies
2.0 Individual persons and small companies
What exactly is written in above frameworks? Ans. 1) Giving extra loans to genuine cases 2)
Extending the loan tenure 3) reducing loan interest rate etc.. We’ll NOT PHD. #🕰🕰थोड़ा-पढ़ो-आगे-बढ़ो

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14.17⚖🔪🔪 SARFAESI ACT 2002: ORIGIN, OBJECTIVE & LIMITATIONS
कजर् नहीं चुकाया तो सं प�� क� ज�ी और नीलामी करने के �लए कानून
⇒ 1991: Narsimham-I Committee on banking sector reforms observed that borrowers obtain stay
orders from ordinary courts = banks have difficulty recovering NPA. So, Debt Recovery
Tribunals (DRT: ऋण वसूली �ाया�धकरण) were set up (1993)= ordinary courts can’t interfere in the
loan recovery process.
⇒ 1998: Narsimhan-II Committee observed that DRTs need to be strengthened with a law, so,
Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest
(SARFAESI) Act enacted in 2002. [प्र�तभूतीकरण और �व�ीय आ��यों का पुनगर्ठन और प्र�तभू�त िहत को प्रभावी करने
का अ�ध�नयम 2002]
⇒ Under SARFAESI act, lenders can attach the mortgaged assets when loan is not repaid. They can
change board of directors in such companies, can auction such assets, can also sell such assets to
Asset Reconstruction Companies (ARC, NBFC: प�रसं प�� पुन�नमार्ण कं पनी). [2021: RBI setup
Sudarshan Sen Committee to suggest reforms for ARCs]
⇒ SARFAESI not applicable on farm loans. (कृ �ष ऋण पर ये कानून लागू नहीं होता)
⇒ If loan-defaulter wants to obtain a stay order, he cannot go to ordinary courts. He will have to
approach for DRT. If DRT doesn’t help then ⇒ higher appeal to Debt Recovery Appellate
Tribunal (DRAT: ऋण वसूली अपीलीय �ाया�धकरण), but DRAT will require him to deposit minimum
50% of the loan dues (to discourage frivolous appeals). ⇒ higher appeal to high court.

14.17.1 ⚖🔪🔪�💪💪 Which lenders have SARFAESI powers?

 All types of Banks- commercial and cooperative (सभी प्रकार के ब�को को इस कानून के अंतगर्त �मलकत ज�ी करने
क� स�ाएँ है)
 Housing Finance Companies (HFCs) e.g. DHFL.
 if an NBFC fulfills two conditions SIMULTANEOUSLY: (गैर ब�क �व�ीय कं प�नयों को भी यह स�ा है यिद)
o 1) The NBFC having asset size of ₹100 cr or more, AND
o 2) loan given is at least ₹20 lakhs.
 For example Bajaj Finserv, Reliance Capital, Muthoot Finance, IL&FS.

14.17.2 ⚖💪💪Legal Rights of Loan Defaulter in SARFAESI Act

We’ll not prepare Hindi term bcoz not imp for Mains.
Right Description (You = owner/defaulter)
Right to ample After account becomes NPA → Lenders must give you 60 days notice
notice before starting auction.
Right to be heard You can make a representation/appeal to the lender/bank manager during
the notice period.
Right to ensure fair e.g. if bungalow’s fair market value is ₹5cr, then lender can’t start auction
value at ₹2cr.
Right to balance e.g. if bungalow auction fetched ₹6cr and loan due was 5 cr only. THEN
proceeds lender must return ₹1cr to you.

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 Right Description (You = owner/defaulter)
Right to humane Recovery Agents cannot harass you or your family members. They can
treatment only contact you between 7am and 7pm.

14.17.3 ⚖🔪🔪: �Limitations of SARFAESI Act (मयार्दाए)

⇒ 😰😰The DRTs & DRATs are understaffed. 1 lakh+ cases pending (2016), so, case will go on for
years, borrower remained in possession of asset. (जजों क� कमी के चलते के स �नपटान क� प्रिक्रया ब�त धीमी है)
⇒ 😰😰This leads to erosion of asset-value (machinery, vehicles) even when DRT allows auction at a
later time. (गाडी/ मशीन क� ज�ी नीलामी नहीं होगी तो उसके मू� म� �गरावट आती है- �जतनी पुरानी गाड़ी, उतना कम दाम।)
⇒ In some businesses, auction or liquidation may not yield the best returns for the banks e.g. hotel
resort in remote area, where no other hoteliers are keen to invest. (हर प्रकार क� सं प�� क� नीलामी म� अ��
बोली लगाने वाली �मल जाए यह ज�री नहीं। कु छ बार म�म माग� समाधान बेहतर होता है)
⇒ In such cases, if the loans were restructured (i.e. reducing % interest rate, extending tenure,
finding new partners), then banks could salvage more value. (इस�लए नीलामी क� जगह अगर कु छ आपसी
समझौता / बीच का रा�ा/ मांडवाली िकया जाए तो बेहतर)
⇒ But, SARFAESI act doesn’t facilitate such arbitration So, Govt. came up with a new law: IBC.

14.18 ⚖🔪🔪🤝🤝 INSOLVENCY AND BANKRUPTCY (I&B) CODE 2016

शोधन-अ�मता एवं िदवा�लयापन सं िहता 2016: कजर्दार का लेनदार के साथ समझौता/मांडवली करवाने के �लए
IBC code classifies creditors into two categories
A) Financial Creditors (FC) = B) Operational Creditors (OC) =
banks, NBFC, bond & other debt security Suppliers, contractors, salaried employees etc.
holders, + Home buyers. (�व�ीय लेनदार). (कायर्संबं धी लेनदार : �ज�ोंने कं पनी को कु छ व�ु/सेवा मुहैया
कराई थी लेिकन उस पर पैसा बकाया है)
They can complaint under IBC code for They can complaint under IBC code for
recovery of due amount. recovery of due amount.
They can sit in the committee of creditors They can’t sit.
(CoC) for IBC proceedings.

14.18.1 ⚖🔪🔪🤝🤝 IBC Code: Appeal Structure

Borrower individual person or partnership firm Company
Their Biz is various laws like Shops and Companies Act, 2013
registered under Establishments Act, Indian Partnership
Act, 1932 etc.
Adjudicating Debt Recovery Tribunal (DRT) dealing National Company Law
Authority (AA) / with SARFAESI Act Tribunal (NCLT) from
first level ki courts Companies Act
Appellate National Company Law Appellate National Company Law
Authority Tribunal (NCLAT) from Companies Act Appellate Tribunal (NCLAT)
from Companies Act

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 Borrower individual person or partnership firm Company
NEXT Appeal Supreme Court (SC) SC
Note: different websites give different interpretation. I have made the table from IBBI Manual

14.18.2 ⚖🔪🔪🤝🤝 IBC: Process for resolution

⇒ An Insolvency Professional (IP: शोधन-अ�मता सं बंधी पेशवे र) will make a resolution plan e.g. ⏬ loan
interest, extend loan tenure, or IP could even find another investor to finance the pending
project etc. (पेशेवर लोन-पुनगर्ठन क� कोशीश करेगा िक जैसे �ाज दर कमी, समयाव�ध म� बढ़ोतरी, नया भागीदार ढूँ ढना)
⇒ IP will present the plan to Committee of Creditors (CoC: लेनदारों क� स�म�त) madeup of the Financial
Creditors (FC). In this Committee. FCs’ voting power is based on amt of loans given by lender.
⇒ If x% of the FCs agree with such resolution plan, then it will be set in motion, otherwise, IP will
liquidate the assets to recover the loan. (यिद �व�ीय कजर्दाताओं क� स�म�त ब�म�त से पुनगर्ठन प्र�ाव पा�रत न करे तो
नीलामी/ प�रसमापन)

14.18.3 ⚖🔪🔪🤝🤝 Statutory bodies related to IBC

Org Founded under Law HQ
National Company Law Tribunal (NCLT) Companies Act, 2013 Delhi. With benches in
many cities.
National Company Law Appellate Companies Act, 2013 Delhi
Tribunal (NCLAT)
Insolvency and Bankruptcy Board of India Insolvency and Delhi
(IBBI) Bankruptcy Code, 2016

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14.19🔪🔪🔪🔪|😤😤INSOLVENT VS WILFUL DEFAULTER
Criteria Insolvent /incapable defaulter (�दवा�लया/ �Wilful Defaulter (इरादतन कजर् न
असमथर् बकाएदार) चुकानेवाला)
Definition A person /company incapable to pay off A person/company has capacity to
loans due to shortage of money. repay the loans BUT not repaying
the loans
Eligible for Loan Yes. But, IF his loan account is in NPA NOT eligible. His assets will be
Restructuring? for more than a year, and he has no auctioned under SARFAESI Act.
IBC कानून म� लोन capacity to repay even partial loan
पुनगर्ठन का लाभ amount, then no resolution will be
�मलेगा? done. His assets will be auctioned under
SARFAESI Act.
Can contest Not allowed. Constitution silent about this^^.
election / get
Govt job/
become a judge?
^^Bankers’ Association has requested the Election Commission that wilful defaulters should not be
allowed to contest election. (However, EC yet to take decision.)

14.19.1 🔪🔪😤😤 Wilful Defaulter Data

Time Period December 2020 December 2022
Number of Wilful Defaulters 12,911 15,778
Total Sum (in ₹ crore) ₹2,45,888 crore ₹3,40,570 crore

14.19.2 🔪🔪😤😤 Declare wilful defaulters within 6 months of NPA- says RBI Proposal
- 2012: Vijay Mallya stopped paying loans to banks. YET SBI didn't declare him wilful defaulter
until 2017. (Meaning five years gone in paperwork / bureaucratic-laziness.).
- 2023: RBI proposal says banks shouldnot take so long time. Do this exercise within 6 months
AFTER accounts become NPA. (लोन खाता एनपीए क� श्रेणी के अंदर आने के बाद भी यिद 6 महीने तक ��� के पास
पैसा है िकंतु वह कजार् नहीं चुका रहा है. तो ब�कर ने उसे “इरादतन िदवा�लया” घो�षत करना होगा)

14.19.3 🔪🔪😤😤Wilful Defaulters can do compromise settlement – RBI (2023)

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14.19.4 🔪🔪 Guarantor (ज़मानतदार)
- friend, relative, business associate etc who takes legal responsibility for a borrower’s debt ke ‘I
will repay the loan, If this loan-applicant does not repay the loan.”
- Every Bank loan doesn’t require Guarantor. They're usually required in big size loan and/or
borrower’s credit score is not good enough

� Legal consequences for Guarantor, IF borrower fails to repay

- Guarantor as liable as loan defaulter.
- Bank can take action against Guarantor for loan-recovery of principal + interest
- Bank may confiscate/attach the bank accounts of Guarantor, his property etc. depending on case.
- if Guarantor fails to repay the loan, then it will downgrade his credit score/credit-rating also.
- **Note:** there is internal legal difference between the two words Guarantor vs Co-Signer, but
we will not do PHD for MCQ

14.19.5 ⚖🔪🔪🤝🤝 Insolvency and Bankruptcy Code Amendments in 2018-2019

Outdated for exam. so removed.

14.19.6 ⚖🔪🔪🔪🔪:🤫🤫 IBC Pre-Packs (पद� के पीछे ज�ी से के स सुलटा लेते है!)

Figure 1: इज्ज़त क� इतनी परवाह थी, तो आप टाइम पे ही लोन चुका देते, भाई!

⇒ Pre-Pack System is found in United Kingdom and the United States

⇒ IBC 2021 Ordinance (and later Amendment Bill) aim to enable this in India for MSMEs.

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 Corporate Insolvency Pre-packaged Insolvency Resolution Process (PIRP)
Resolution Process (CIRP)
IBC's Formal process: lenders - Pre-packaging = Borrower company informally
file complaint to NCLT → (discreetly) negotiates a resolution plan with its lenders /
Insolvency professional buyer-parties who may be interested in its action, before
appointed → Loan approaching IBC/NCLT process. (प्री पैिकंग = �व�धवत �प से
restructuring proposal → If कोटर्/कानूनी प्रिक्रया शु� होने से पहले ही अनौपचा�रक �प से कजर्दार कं पनी
NOT approved by lenders → अपने कजर्दाता तथा भ�व� क� नीलामी म� ��च रखने वाले खरीदारों से पद� के
Auctioning. (औपचा�रक प्रिक्रया कु छ पीछे /बं द दरवाजे म� चुपचाप समझौता कर कर ले.)
इस तरह से होती है) - e.g. Anil proposes, “I’m unable to repay loan but I’m
getting new partner/investor Mahindra. Together we’ll
revive the biz & repay 80% loan.”
- If this is agreeable to lenders, they’ll send letter to NCLT,
“We’ve internally agreed for this plan. Plz give judicial
approval to it.”
Time limit: upto 330 days Time limit = 120 days = faster than CIRP (ज� �नपटान)
More number of days = more - 🤩🤩Benefit? a quick (speedy) and discreet (confidential)
negative headlines in newspaper way of completing the insolvency resolution process. ��रत
= ⏬confidence of customers & और गु� �प से मसले को समेट �लया जाए
investors (e.g. Customer may - 🤩🤩Prevents the stigma/bad publicity/damage to brand
not buy Videocon refrigerator, if image associated with formal IBC proceedings. else in
he continuously sees negative future difficult to get investors/customers/clients. मामला
news & starts to fear that औपचा�रक �प से कोटर् तक नहीं प�ंचेगा= अखबारों म�/जनमानस म� कं पनी
company will shut down, he’ll बदनाम/कलं िकत ना हो वरना भ�व� म� �नवेशकों/ग्राहकों को आक�षत करना
not get warranty/repair service मु��ल हो जाता है.
after 3-5 years) - least disruptive to the businesses. Cost-effective. Helps in
workers’ job preservation (compared to a scenario where
company is shut down)
CIRP applicable to all small and Only available to micro, small and medium enterprises
big enterprises. (MSMEs) as per 2021’s IBC Ordinance / Amendment Bill.
(के वल चु�नदं ा श्रेणी के �लए है)
14.19.7 ⚖🔪🔪🔪🔪: 🥱🥱 IBBI directive on Avoidance Transaction and 500 other technical things
✋Such technical topics not important for the scope of the exam. If any teacher teaching it / private
quizmaster is asking MCQ on it then please ask them to first go through previous years official
papers and ask him to prove where's the pattern of such questions being asked in real
exam?#🕰🕰थोड़ा-पढ़ो-आगे-बढ़ो

14.19.8 👻👻� (⚖🔪🔪🔪🔪) ATMANIRBHAR → IBC Ordinance/Act 2020 to suspend new cases
⇒ 2020: Govt issues ordinance to amend IBC Code. (अ�ादेश)
⇒ Corona = business is down, difficult to work out any resolution plan. So, No fresh case will be
registered in IBC code for next “X” months Because Corona (नए के सों के दा�खले को ��गत िकया गया.)

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⇒ “X” = 24 March 2021 ✋Exact dates notIMP
IBC Ordinance / Act 2020 Case can start if loan default of minimum _ _ amount
BEFORE Minimum ₹1 lakh/>.
AFTER Minimum ₹1 crore/>**
**So even after suspension is lifted, most of the small businessmen will be spared from IBC
proceedings. (रोक हटाने के बाद भी नए के स दजर् िकए जाएं गे, तो �सफर् बड़े लोन के �लए के स दजर् िकए जाएं गे)

14.19.9 �(⚖🔪🔪🔪🔪) Insolvency and Bankruptcy Board of India (IBBI)

⇒ भारतीय शोधन-अ�मता एवं िदवा�लयापन बोडर् - वैधा�नक सं �ा

⇒ IBBI is the statutory body that monitors and implements I&B Code 2016.
⇒ IBBI’s administrative control rests with Ministry of Corporate Affairs (कॉप�रेट मामलों का मं त्रालय).
⇒ It has 1 Chairman, 1 nominated member from RBI, 8 from Govt’s side = total 10 people.
⇒ 1st chairman of IBBI: M.S.Sahoo. Present Chairman: Ravi Mittal (2022). (अ��)
⇒ Chairman has 5 years / 65 age tenure. Also eligible for reappointment (पुन:�नयु�� सं भव).
⇒ IBBI selects Insolvency Professionals Agencies (IPAs). These IPAs enroll and supervise the
members practicing as Insolvency Professionals (IPs). Presently, 3 organizations given “IPA”
status viz. 1) ICAI (Chartered Accounts) 2) ICSI (Company Secretaries) and 3) Institute of Cost
Accountants.

14.19.10 � 📡📡IBBI → Information Utility

IBBI also selects Information Utility (IU: सूचना उपयो�गता सं �ा) organization to maintain database of
borrowers. In 2017, NeSL: National E-Governance Services Ltd (owned by consortium of SBI, LIC
etc.) was the first to get the IU status from IBBI. It is compulsory for lenders to share data with IU.
😍😍IU helps lenders in two ways:
1. 😍😍by looking @borrowers’ credit history, lenders can make informed decisions about whether
to give loan or not, and how much interest to charge? कजर्दाता को जानकारी उपल� कराता है िक लोन-
अज़�कतार् �वजय मा�ा का इ�तहास/�व�ीय च�रत्र के सा है, �ा वो लोन देने लायक़ भरोसेमंद ��� है क� निह?
2. 😍😍 This database helps establishing documentary proofs during NCLT / DRT / judicial /
liquidation proceedings. कानूनी प्रिक्रया म� द�ावेजी सबूत मुहयै ा/उपल� कराता है

14.19.11 �(⚖🔪🔪🔪🔪)Insolvency → Misc. Org: Indian Institute of Corporate Affairs

- IICA an autonomous body under Ministry of Corporate Affairs. (�ाय� सं �ा)
- It has launched a two-year Graduate Insolvency Programme (GIP). �ातक कायर्क्रम शु� िकया

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- The student passing this program can register as IP, without the mandatory 10 years' experience.

14.19.12 💪💪 Project Sashakt by Finance Ministry (2018)

2018-Jul: Finmin’s Project Sashakt for PSB-NPA on report by Sunil Mehta (PNB CEO).
Gave guidelines to resolve the NPA problem in a timebound manner in Public Sector Banks.
What were those guidelines? Too outdated. So, I’m removing it from latest handout.

🔠🔠❓What was the purpose of the Inter-Creditor Agreement signed by Indian banks and
financial institutions under Project Shashakt? (UPSC-Prelims-2019)
a) To lessen the Government of India’s perennial burden of fiscal deficit and current account deficit
b) To support the infrastructure projects of Central and State Governments
c) To act as independent regulator in case of applications for loans of ₹ 50 crore or more
d) ✅To aim at faster resolution of stressed assets of ₹ 50 cr or more which are under consortium
lending.
Answer to Above MCQ is Option D. but now it is outdated current affairs. so we will not study the
exact matter.

14.19.13 👻👻👻👻👻 ATMA-NIRBHAR → Insolvency → Micro,Small,Medium Enterprises

- 📑📑Ref Pillar#1D: Financial Inclusion → Mudra and other loans schemes

14.19.14 (⚖🔪🔪🔪🔪)🈶🈶🈶🈶 Cross-border Insolvency (सीमा-पार का �दवा�लयापन)

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- Cross-border insolvency has two facets: [1) foreign creditors should be able to recover money
lent to Indian corporates & VICE VERSA. [2) During Indian company's insolvency in India, the
Indian lenders should be able to recover money from Indian company's foreign assets easily,
AND VICE VERSA.
- IBC sections 234 & 235 have provisions for it, BUT they are not notified yet, so they are not
enforced.
- This leads to uncertainty of outcomes for creditors and debtors.
2018: Corporate Affairs Ministry's Insolvency Law (reforms) Committee under Injeti Srinivas
recommended
- We should create a separate law for Cross-border Insolvency. अलग से कानून बने
- More than 40 nations use United Nations Commission on International Trade Law
(UNCITRAL)'s Model Law of Cross Border Insolvency (1997) So, we can use it as a template
while making our own law → 📙📙📙📙ES22 also recommended the same.
- 👜👜👜👜Budget-2022: - We will amend IBC Code to facilitate cross border insolvency resolution.

14.20(⚖🔪🔪🔪🔪)👋👋👋👋 VOLUNTARY LIQUIDATION OF COMPANIES

Image source: Movie Gangajal

Liquidation is the process of shutting down a company. Two type of liquidations (प�रसमापन दो िक़�) →
 1) �Involuntary Liquidation: Due to loan default → it can be conducted either through I) IBC
code or II) SARFAESI Act depending on the case. (अनै��क प�रसमापन- जब कं पनी कज़र् म� िदवा�लयापन िदखा
दे)
 2) �Voluntary Liquidation: when the owner has not committed any loan default but wants to
shut down the business. Voluntary liquidation can be done through
 A) sending application to the registrar of companies under Companies Act, 2013
 B) sending application under the insolvency bankruptcy code.
 However Method-A is more popular than B at present. (�ै��क प�रसमापन. कं पनी ने अभी तक कज़र् म�
िदवा�लयापन नहीं िदखाया लेिकन उसके धं धे/�ापार म� अ�ा भ�व� निह िदख रहा इस�लए क�नी का मा�लक ख़ुद क� कं पनी �यं
बं द करना चाहता है.)
 👜👜👜👜Budget-2022: we’ll setup a Centre for Processing Accelerated Corporate Exit (C-PACE)-
to faster voluntary liquidation / winding-up of the companies.

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14.21(⚖🔪🔪🔪🔪)📘📘 📘📘 ECONOMIC SURVEY ON IBC/NPA: REFORMS (आ�थक सव��ण)
Shifted to Mains Handout.

14.22👁👁👁🗨🗨🗨🗨🗨🗨- 🐯🐯 CREDIT RATING / MONITORING- VARIOUS ORG/INITIATIVES

Following portals are meant to collect the information related to borrowers
Portal Description
CIC and CRA Learned in the previous section the previous session.
Information Utility (IU). Created by Insolvency and bankruptcy board of India (IBBI) with
help of National e-governance services Ltd (NeSL)
CRILC RBI has setup “Central Repository of Information on Large Credits
(CRILC)” for Loans above Rs 5 cr.
Banks & NBFCs have to submit weekly updates in this portal.
Public Credit Registry Proposed by RBI’s Yeshwant M. Deosthalee Committee. RBI yet to
(PCR) set it up. (ऋण क� सावर्ज�नक र�ज��ी)
NFIR Proposed in the Budget 2023. <Next section>

14.22.1 👁👁👁🗨🗨🗨🗨🗨🗨- 🐯🐯 National Financial Information Registry (NFIR) in 👛👛Budget-2023

⇒ NFIR will be designed with help of RBI.
⇒ NFIR will contain info on both individual borrower and company borrowers.
⇒ NFIR will contain info on all the loans taken by them through banks,NBFCs,bonds, etc.
⇒ Thus, NFIR Will provide 360 degree information about a loan applicant’s creditworthiness.
⇒ will help the lenders process the loan application in a more faster and accurate manner

रा�ी� य �व�ीय सूचना र�ज��ी बनाएं गे �जसम� ���यों और कं प�नयों द्वारा �व�भ� सं �ानों से �लए गए कज� क� सं पूणर् जानकारी होगी। तािक
भ�व� म� जब वह वापस लोन के �लए अज� डाले, तो �व�ीय सं �ान आसानी से और �ादा सटीकता से उनक� अ�जयों का �नपटान कर सक�
- ऐसा बजट 2023 ने कहा

14.22.2 🐅🐅RBI’s Public-Tech Platform for Frictionless Credit (2023)

- This portal will collect data from Central and State governments, account aggregators (Ref1B1),
CRA-CICs (Ref1B1) and other organisations.

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- This will make loan application approval/rejection faster for the lender.[घषर्ण रिहत ऋण के �लए सावर्ज�नक-
तकनीक� मं च]

�FAQ: how is it similar or different than the past projects such as public credit registry or
government’s NFIR? Ans. NOTIMP. Because this is not fully launched yet this is in the pilot study
stage.

14.22.3 👁👁👁🗨🗨🗨🗨🗨🗨- 🌐🌐 Legal Entity Identifier (LEI) Number: (कानूनी इकाई पहचान सं �ांक)

Figure 2: �वदेश मे नयी कं पनी बनाकर �वदेशो क� ब�कों को चुना लगाएं गे तो �ा उखाड़ लोगे?
- Objective? Even if a company is blacklisted by Indian banks, it could apply for loans overseas,
and those overseas bankers may not be aware of company’s history.
- So, there should be a global “Aadhar card” number for companies, and they must be forced to
quote that number during every financial transaction.
- After USA’s Sub-Prime Crisis and Global Financial Crisis (GFC), the G20 and its Financial
Stability Board (FSB: �व�ीय ��रता बोडर्) came up this LEI concept- a 20-digit alphanumeric code.
- LEI’s Global Boss: Global Legal Entity Identifier Foundation (GLEIF), Frankfurt, Germany. LEI’s
Indian agent: Clearing Corporation of India.
- From 1/10/2022 RBI has ordered all companies undertaking crossborder transactions of Rs 50
crore or more to quote this number in financial transaction.
- RBI has power to issue such directives under: Payment and Settlement Systems Act, 2007 &
Banking Regulation Act 1949. (�व�ीय लेन देन के दौरान कं पनी ने अ�नवायर् �प से ये नं बर �लखना होगा)

14.23🔪🔪🈶🈶🈶🈶🈶🈶- ⚖ FUGITIVE ECONOMIC OFFENDERS ACT, 2018

Figure 3: देश छोड़ के भाग जाऊं गा, 9 लाख का लेधर जेकेट पहेनके लं डन क� ग�लयो मे घूमँ गू ा, तो �ा उखाड़ लोगे मेरा?
भगोड़ा आ�थर्क अपराधी अ�ध�नयम: This act targets economic offenders accused of cheque dishonor, loan /
investment / chit-fund scam, money laundering etc. worth ₹ 100 crores /> & left India to avoid
facing prosecution / arrest.
- Special courts under the PMLA (Prevention of Money-laundering Act, 2002) will order the
villain to appear within 6 weeks, if not then he is declared “Fugitive Economic Offender”⇒ His
Indian & Overseas & Benami properties will be attached (भगोडे आ�थक अपराधी क� भारतीय तथा �वदेशी
सं प��यों को ज� िकया जाएगा).
- Once property attached- the Union Govt will oversee its administration / liquidation
(नीलामी/प�रसमापन).

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- No ordinary civil court / tribunal can give stay order. Villain can make appeal only in High Court
and Supreme Court. (भगोड़ा आ�थक अपराधी के वल उ� �ायालय और सव�� �ायालय म� जाकर मदद मांग सकता है).
If Borrowers don’t repay, SARFAESI auctions give little recovery, CRR-SLR insufficient
to repay deposits then bank collapse imminent. Then, how to protect the depositors? →

14.24� 🏦🏦 💸💸💸💸 DICGC ACT: OBJECTIVE & LIMITATIONS

Figure 4: ब�क तो घोटाले मे बं ध हो गया। कोन करेगा हमारा पैसा वापस?

- 1961: Deposit Insurance and Credit Guarantee Corporation Act - mandates that all types of
banks must buy insurance on their deposit accounts from DICGC. Banks have to pay premium
for this insurance. (�न�ेप बीमा और प्र�य गारंटी �नगम: प्र�ेक ब�क ने अ�नवायर् �प से अपनी जमाकतार्ओ क� िडपो�जत को
बीम� द्वारा सुर��त करना होगा)
- DICGC is 100% owned by RBI. RBI Dy. Governor acts as chairman of DICGC. HQ: Mumbai.
- When a bank shuts down, DICGC will pay upto ₹ 1 lakh insurance to every deposit holder for
his principal and interest. (यिद ब�क बं द हो गया तो जमाकतार् के नुकसान क� भरपाई यहां से होगी)
- 💼💼Budget-2020: announced ⏫the insurance coverage to ₹ 5 lakhs (नुकसान भरपाई क� रा�श म� बढ़ोतरी)
- 2021: Government introduces Deposit Insurance & Credit Guarantee Corporation
(Amendment) Bill →
BEFORE (सुधार/सं शोधन �वधेयक से पहले) AFTER REFORM (सुधार प�ात)
Upto ₹1 lakh deposit insured Protection increased upto Rs 5 lakh
When will depositors get back above amount? When RBI imposes (withdrawal) moratorium
No clear timelines. Often they had to wait for on a weak bank → within 90 days of that event,
many years (पैसा/मुआवजा कब आएगा उसक� समय सीमा DICGC will pay depositors. (�रज़वर् ब�क जब कमजोर
तय नहीं थी) ब�क म� से ग्राहकों के पैसे उठाने पर रोक लगाए उसके 90 िदनों के
भीतर ही मुआवजा �मल जाएगा)
Banks had to pay premium/fees to DICGC at DICGC can ⏫increase the premium fees to
the rate of ₹10 paise to insure every ₹100 worth ₹12-₹15 paise (i.e. 20%-50% more than the
of deposits. (ब�को ने हर ₹100 के िडपॉ�जट का बीमे के �लए original fees) ✋Exact figures NOTIMP. (बीमा
10 पैसे क� बीमा िक�/फ�स देनी होती थी) िक� म� बढ़ोतरी क� गई)
All types of Banks covered Same as left cell. (सभी प्रकार के ब�क के ग्राहकों को सुर��त
But NBFCs not covered. करता है, िकंतु ग़ैर ब�क �व�ीय सं �ान के ग्राहकों को सुर��त नहीं
करता.)

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- Previously, DICGC provided guarantee cover to bank on the loans granted to Priority Sector
Borrowers.
- E.g. if Micro enterprise owner did not repay PSL-loans → DICGC would cover losses of the
banks, hence its name contains the word ‘Credit Guarantee Corporation’.
- But, with formation of SIDBI (1990), National Credit Guarantee Trustee Company Ltd.
[NCGTC, 2016] etc, this credit guarantee work divided among many organizations
(REF:📑📑Pillar#1D), but we need not PHD over it.#🕰🕰थोड़ा-पढ़ो-आगे-बढ़ो

14.24.1 �🏦🏦 💸💸💸💸 : 📲📲Proposal: DICGC should cover PPIs/Mobile Wallets?

RBI’s B.P.Kanungo committee on customer services (2022) suggested this. RBI NOT YET taken
final decision. So we will not waste time with further PHD on what/why/how.

14.24.2 � 🏦🏦 💸💸💸💸- 👎👎 Limitation of DICGC (मयार्दाएँ )

- 😰😰If a customer deposited more than ₹5 lakh in a single commercial / cooperative bank, then he
gets only ₹5 lakh from DICGC. And for the remaining amount he must wait till RBI /
Cooperative Registrar liquidates the bank. (📑📑Ref 1B1: Banking Regulation Ordinance 2020)
- 😰😰DICGC doesn’t cover PACS and NBFCs. Those victims may have to approach courts.
- 2002: UTI (a Govt owned mutual fund company) made big losses. DICGC not liable to protect
UTI-clients because it is NOT A BANK. So, Govt had to pay ₹14,500 crores (of tax payer’s
money) to customers of UTI-Mutual Fund.
- So, Financial Sector Legislative Reform Commission (FSLRC: �व�ीय �ेत्र �वधायी सुधार आयोग) under
Justice B.N. Srikrishna (2011-13) recommended a new org called Resolution Corporation (RC)
via -Financial Resolution and Deposit Insurance (FRDI) Bill/law. (DIGCG को बं ध कर एक नयी सं �ा
बनाने का सूजाव)
- Govt had proposed the FRDI bill in 2017, but too much opposition in media & public, so
withdrew it in 2018. It’s a defunct topic. We’ll not WASTE TIME learning its salient features.
#🕰🕰थोड़ा-पढ़ो-आगे-बढ़ो

14.25�(🏦🏦 🔪🔪🔪🔪) BAD BANK (NARCL, IDRCL-2021): INTRO

⇒ (DATA) 📙📙📙📙ES2016-17 had found that total ₹ 2 lakh crore of bank money is stuck in large
sized NPA-accounts. Each of this loan account having ₹500cr or more. (ब�कों का क़रीब 2,00,000 करोड़
�पया ऐसे लोन खातों म� अटका है �जनमे एक-एक क� मात्रा 500 करोड़ या उससे अ�धक है)
⇒ (Origin) Sometimes, the resolution of large sized NPA accounts is difficult under IBC Code (e.g.
Vijay Mallya being a wilful defaulter so he is not eligible for IBC).

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⇒ Under SARFAESI act such assets could be auctioned off but sometimes bidders and ARCs (e.g
Anil Ambani’s ARC) do not have enough financial capacity to purchase such big assets (worth
₹500-500 crores!). (इस प्रकार के बड़े लोन खातों का समाधान आईबीसी/सरफ़ाएसी क़ानून म� करते व� सम�ाएं आ रही है)
⇒ Therefore, Economic Survey 2016-17 had suggested to setup a BAD BANK named “Public
Sector Asset Rehabilitation Agency” (PARA). To buy bad loans from, try to get the maximum
value from loan-restructuring / liquidation-auction and absorb the losses. (इस�लए आ�थक सव��ण ने
सुझाव िदया एक बेड-ब�क बनाया जाए जो िक ब�कों के खराब लोन पेपर/ अनअजर्क प�रसं प��यों को खरीदेगा.)
⇒ Then, 💼💼Budget-2021 announced set up an Asset Reconstruction Company (ARC) and Asset
Management Company (AMC) to take over the bad loans from banks. (बजट 2021 ने अमल िकया).
⇒ Govt will not have any shareholding in ARC/AMC. Banks will set these organization(s) up with
their own funds. (सरकार इसम� शेयर धारक नहीं बन�गी. ब�कवाले खुद से शेयर पूंजी देकर इसको बनाएं ग)े
⇒ Examples of such bad banks in other countries- Danaharta in Malaysia, UKAR in UK.

14.25.1 �(🏦🏦 🔪🔪🔪🔪): 🧬🧬 Bad Bank Structure

NARCL-ARC (founded in 2021) IDRCL-AMC (founded in 2021)

Type Asset Reconstruction Company (ARC) Asset Management Company
प�रसं प�� पुनगर्ठन कं पनी (AMC)
प�रसं प�� प्रबं धन कं पनी
Full Form National Asset Reconstruction Company India Debt Resolution Company Ltd.
Limited (NARCL) (IDRCL) =
Type Registered company under companies Registered company under
act. (So not a statutory/constitutional companies Act. (कं पनी क़ानून म� पं जीकृ त
body) कं प�नयां है. ये कोई वैधा�नक या सं वधै ा�नक सं �ाएं
Given license by RBI for ARC. नहीं है)^^
Function To purchase bad loan assets from banks. To manage/value addition/ auction
(यह ब�कों से अनजर्क प�रस���यां ख़रीदेगा) those bad loan assets which were
purchased by NARCL. (e.g. factory,
airplanes, bulldozer). (ख़रीदी �ई सं प��यों
का प्रबं धन, मू� वधर्न, नीलामी करेगा)

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 NARCL-ARC (founded in 2021) IDRCL-AMC (founded in 2021)
Ownership/ ⇒ 51% PSBs like SBI, BoB, PNB** ⇒ 49% (Public Sector Banks,
Shareholding ⇒ 49% by Pvt banks and NBFCs# NBFCs)
⇒ 51% (private sector bank,
NBFCs).#
Tenure This organization will exist for five years. Same as left cell
** NARCL Ownership 51% shareholding/ownership among 8 public sector banks (PSB) viz. SBI
(13.17%), Punjab National Bank (12%), Bank of Baroda, Canara Bank, Bank of Maharashtra, Union
Bank of India, Indian Bank, Bank of India. (Note: Future Some of these PSBs may get merged so the
% may change.)
🚩🚩🚩FAQs:
⇒ what are their names? Ans. Not explicitly mentioned in Pressnote. #🕰🕰थोड़ा-पढ़ो-आगे-बढ़ो
#

⇒ ^^AMC got license from RBI or SEBI? Ans. Same as above

⇒ Bad Bank means “ONLY NARCL” or (NARCL+IDRCL) Ans. Same as above. But from how
📙📙📙📙ES17 had given the vision of Bad bank, it should be the combined work of
(NARCL+IDRCL)= Bad Bank.

14.25.2 �(🏦🏦 🔪🔪🔪🔪) Bad Bank: 🗃🗃 functioning

बैड ब�क नीलामी म� ब�कों क� अनजर्क प�रसं प��यां ख़रीदेगा, और वह भुगतान क� रक़म: 15%मुद्रा और 85% सुर�ा रसीदों के �प म� ब�कर
को चुकाएगा। ऐसी Rs.30,600 cr करोड़ क� सुर�ा रसीदों के पीछे भारत सरकार ने अपनी सं प्रभु गारंटी अगले पाँच वष� के �लए दी है।
⇒ Suppose Axis Bank has a bad loan account worth ₹200. Axis may conduct an (Swiss Challenge)
Auction. Bad Bank offers ₹100, Anil Ambani’s ARC offers ₹95, Mahindra offers ₹92.
⇒ Then Axis will sell to Bad Bank for ₹100 (because its the highest bidder)
⇒ BadBank will pay Axis ₹100= Partially in currency (₹15) + partially in Security receipts (SR
worth ₹85).
⇒ Security receipts (SR) is a piece of paper issued by BadBank promising to pay the remaining
dues/amount (₹85) to banker in 5 years.
⇒ Security receipts (SR) is a legally valid instrument under the Sarfaesi Act.
⇒ If the Axis banker very urgently requiring money then he may resell the SR at discount (e.g. at
₹80) to another Bank, Insurance/Pension Company, AIFI (e.g. SIDBI, NABARD) etc.
⇒ Then those new SR-holders will receive the money (₹85) from Bad Bank in future.
⇒ IF Bad Bank faces problems in honoring the SR payment deadlines→ then, Union Govt has
given sovereign guarantee of Rs.30,600 cr to Security Receipts (SR). This sovereign guarantee
valid for 5 years.

14.25.3 �(🏦🏦 🔪🔪🔪🔪) Bad Bank: 🤩🤩😰😰 Benefits & Challenges?

⇒ 😍😍 Faster resolution of large sized NPA. (तेज �नपटान)
⇒ 😍😍 Individual Bank’s Bad loan size⬇ = BASEL-III Capital requirement ⬇ (ब�को क� अनजर्क
प�रसं प��यां कम होगी तो उ�ोंने बासेल मानदंड के �लए कम पूंजी प्रावधान करना होगा)
⇒ Further benefits = RE-Paste the points given in Intro & Conclusion. (प�रचय और �न�षर् म� जो मुददे �लखे
ह� उसक� वापस पीपूड़ी बजाओ)

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⇒ 😥😥Ultimately the losses caused by Vijay Mallyas are paid by depositors/investors (of the
Banks/NBFCs who own NARCL & IDRCL) and Taxpayers (using whose money Govt’s is giving
sovereign guarantee to Security receipts). (अंत म� तो परो� �प से इस नुकसान क� भरपाई जमाकतार् �नवेशक और
करदाताओं द्वारा ही हो रही है)

14.25.4 �(🏦🏦 🔪🔪🔪🔪) Bad Bank: ✍Conclusion (�न�षर्)

NARCL aims to resolve stressed loan accounts above ₹500 crore each. Total about ₹ 2 lakh crore
stuck in such loan accounts. Thus, individual banks will be relieved from not having to waste time
haggling with NPA-borrower. Bankers will be able to focus energy on business expansion, financial
inclusion. Thus, Govt taken an appreciable step, it will help in a long way in re-invigorating Indian
banking sector. (दो लाख करोड़ क� अनजर्क-प�रसं प��यों का �नपटान होगा। ब�कर अपनी समय और ऊजार् पुराने बकायदारों से लोन
पुनगर्ठन क� माथाप�ी करने क� जगह, अपने ब�क के �ापार �व�ारण तथा �व�ीय समावेशन म� लगा पाएगा। सरकार ने प्रशं सनीय क़दम
उठाया है, �जससे भारतीय ब�िकंग �ेत्र म� नवऊजार् का सं चार होगा.)
14.26🐯🐯💉💉👹👹👹👹👹👹� PROMPT CORRECTIVE ACTION (PCA) FRAMEWORK
Under PCA framework, RBI classifies the scheduled commercial banks (SCB) into Risk threshold #1,
#2, #3 based on its capital, loan-asset quality etc. Higher the number, higher the risk. Then,
accordingly, RBI will take corrective actions such as: (जो�खम के िहसाब से ब�कों को वग�कृ त करता है)
⇒ RBI giving strict warning, conducting deeper audit & supervision. (�ादा कड़ी �नगरानी)
⇒ Restricting bank’s directors’ salaries and dividend distribution to its investors. (वेतन, लाभांश �वतरण
पर रोक)
⇒ Restricting bank’s branch expansion & lending operations. (शाखा �व�ार और ऋण देने पर रोक लगाना)
⇒ Forcing merger / shutdown (under Banking regulation Act 1949). (कमजोर ब�क को बं ध करना)

If a PCA-listed bank wants to get ‘whitelisted’, it’ll have to ⏬its NPA, obtain additional capital,
⏫its profitability. (इस सूची से बाहर �नकलना है तो अनजर्क सं प��यों को कम करना होगा, �ादा पूंजी बटोरनी होगी, �ादा
मुनाफा लाना होगा)
⇒ PCA is “Monetary Policy → Qualitative / Selective Tool → Direct Action”. (मौिद्रक नी�त →
गुणा�क → सीधी कायर्वाही का यह एक साधन है)
⇒ As of 2020-Feb: 4 PSBs in this list viz. Indian Overseas Bank (IOB), Central Bank of India, UCO
Bank and United Bank of India. ✋Dynamically changing info so we need not remember / loose
sleep for MCQs.

14.26.1 🐯🐯🐯🐯🐯🐯🐯🐯🐯🐯� RBI’s Prompt Corrective Action (PCA) for NBFCs

(ग़ैर ब�क �व�ीय कं पनीयो के लीए ��रत सुधारा�क कारर्वाई)
⇒ From 1/10/2022- RBI to monitor NBFCs using 3 indicators/parameters: - 1) Non-Performing
Assets, - 2) BASEL-capital adequacy ratio - 3) BASEL- Tier 1 capital. (What do they mean?
NOTIMP। इन पैमानो पर �नगरानी)
⇒ Accordingly, RBI to classify the NBFCs in risk category#1-2-3. (जो�खम के िहसाब से वग�करण)
⇒ Higher risk → higher restrictions e.g. ✋1) restriction on branch expansion ✋2) halt on
dividend distribution, ✋3) NBFC owners will be asked to infuse capital in NBFC etc. etc (ग़ैर ब�क
�व�ीय कं पनी म� �जतना �ादा जो�खम → तो उतनी �ादा पाबं िदया �रज़वर् ब�क उसपे डालेगी)

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⇒ This NBFC-PCA-norms applicable on ✅ deposit-taking-NBFCs (e.g BajajFinServ).
⇒ But ✋Not Applicable on govt owned NBFCs (e.g UTI Mutual Fund), primary dealers, housing
finance companies (HFC), non-deposit taking NBFCs (e.g. ILFS). However, in future, RBI may
add more categories of NBFC in this list.

14.26.2 😼😼😼😼😼😼😼😼😼😼� RBI ‘s Supervisory Action Framework for Urban Co-operative Banks
Outdated topic. Deleted from handout.

14.26.3 RBI’4-tiered regulatory framework for urban cooperative banks (2022-Dec)

Tier Deposit Range

1 Up to ₹100 crore
2 ₹100 crore - ₹1000 crore
3 ₹1000 crore - ₹10,000 crore
4 Above ₹10,000 crore
Higher the tier e.g. 3-> 4 = stricter RBI norms under BASEL-III. What/HOW exactly? NOT IMP.
(शहरी सहकारी ब�कों के �लए 4-�रीय �नयामक ढांचा)

14.26.4 🐯🐯: 🦋🦋Regulations Review Authority (RRA 2.0)- for Ease of implementing RBI rules
- RBI has setup RRA 1.0 (in 1999, for one year) and RRA 2.0 (in 2021, for one year)
- Chairman: RBI’s Dy. Governor M Rajeshwar Rao. Who are other members? NOTIMP.
- Objective: To give suggestions to RBI to simplify its rules/regulations so Bank/NBFCs have ease
of doing business. (�नयं त्रण समी�ा प्रा�धकरण जो िक �रज़वर् ब�क को सुझाव देगा िक कै से �रज़वर् ब�क के �नयमों म� सरलीकरण
िकया जाए तािक उनके अनुपालन मे ब�क और एनबीफ़सी को आसानी रहे।)

14.26.5 🐯🐯: 🦋🦋RBI supervision: Utkarsh-2022” roadmap

⇒ 2019 July: Dy. Gov Viral Acharya Committee → RBI board approved 3 year medium term
framework to improve RBI regulation & supervision, based on global best practices = “Utkarsh-
2022” roadmap. (वै��क मानदंडों का अनुसरण करते �ए �रजवर् ब�क क� �नयं त्रण और �नगरानी करने क� प्रणा�लयों म� अगले 3
सालों म� सुधार करने के �लए उ�षर् कायर्क्रम )

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14.26.6 Digital lending norms by RBI (2022-Nov)

⇒ A lending/Loan Service Provider (LSP) is financial technology (Fintech) company that connects
borrowers with lender (Banks & NBFCs). e.g. Lazypay, Bank Bazaar, Paisa Bazaar
⇒ LSP helps the customer get the loan digitally.
⇒ RBI has issued guidelines to regulate this ‘digital lending’ market.
Exact guidelines are not important. Sufficient to know that RBI requires
⇒ 1) exorbitant interest cannot be charged.
⇒ 2) Such organisations have to appoint grievance redressal officers & clear the complaint within
stipulated time limit.

कु छ �व�ीय प्रौद्यो�गक� (�फन-टेक) कं प�नयां एक तरफ़ कज़र् लेने वालों को, और दू सरी तरफ़ ब�क- एनबीएफसी के साथ �ड�जटल मा�म
से जोड़ती है। इस �ड�जटल कज़र् प्रणाली पर �रज़वर् ब�क कु छ स��या कर रही है।

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14.26.7 Digital lending → FIRST LOSS DEFAULT GUARANTEE (FLDG) norm by RBI

Basically requires FinTech companies to cover some of the loss of the banker, IF borrower defaults
on the loan.

14.27�👭👭 FINTECH- SELF-REGULATORY ORGANISATION (SRO)

• An SRO is a non-governmental organisation that regulates a particular industry. (गैर सरकारी सं �ा जो

िकसी औद्यो�गक �ेत्र का �-�नयं त्रण करती है)
• Objective? To enforce transparency, fair competition, ethical practices , protect consumer &
workers, dispute resolution among the companies, training and skill development programs for
workers. (पारद�शता, �ायो�चत �धार्, नै�तक आचरण, ग्राहक सुर�ा, �ववाद �नपटान, तालीम कौशल वधर्न)
Example from News Industry
News Type Printed Newspapers Digital News Channel (e.g Lallantop, Firstpost),
Private TV News Channels (e.g AajTak)
Regulator? Press Council of India News Broadcasters & Digital Association (NBDA)
Type? Statutory body/regulator Self-regulatory organisation (SRO) created by the
setup by Parliament’s law in private sector players. NBDA is not a government
1978 body, statutory body, constitutional body.

2023: RBI governor has suggested the Fintech companies to create a self-regulatory organisation
(SRO) for themselves. What are Fintech companies? (Ref: Pillar#1B1-classification)

14.27.1 😍😍 FinTech SRO-Benefits?

• �1) Reduce RBI’s workload in supervision.
• �2) Establish a proper link between RBI and the fintech companies.
• �3) setup rules/standards for data-privacy, cyber security, mis-selling, ethical conduct,
complaint/grievance redressal for consumers.

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14.28🌐🌐🌐 BASEL-III NORMS (बेसेल-3 मानदंड)
Bank for International Settlements (BIS) is an international institution made up of 60 countries’
Central Banks. HQ @ BASEL, Switzerland. Its committee on banking supervision set norms in 1988
(I), 2004 (II), 2011(III) to ensure global financial stability. (वै��क �व�ीय ��रता के �लए मानदंड बनाए ह� इस
स�म�त ने)

- From 1/4/2013, RBI began phased implementation of BASEL-III norms in India:

- First, a bank needs to calculate its Risk-Weighted Assets (RWA: जो�खमपूणर् सं प��).
- Against these RWA, (Universal) Scheduled Commercial Banks (SCB) must keep:
o “Minimum Capital to Risk Weighted Assets Ratio” (CRAR) at 9% or higher from
31/3/2019.
o “a%” Capital Conversation Buffer (CCB) from XX date..
o “b%” Counter Cyclic Capital Buffer (CCCB): whenever RBI notifies.
- “c%” Leverage ratio (LR)
- “d”% Net Stable Funding Ratio (NSFR)
- “e%” High quality liquid assets (HQLA)
- “f%” Liquidity Coverage Ratio (LCR)
- and so on…many things.

Figure 5: We need not bother with Tier-1 Tier-2 Capital etc, #थोड़ा-पढ़ो-आगे-बढ़ो

✋FAQ. How exactly do CCB, CCCB, LR, NSFR, HQLA, LCR etc work? Ans. Not
important for exam, beyond the basic ‘word-association’ that they’re related to BASEL
Norms. #🕰🕰थोड़ा-पढ़ो-आगे-बढ़ो

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⇒ Each member country’s Central Bank can prescribe different %, ratios depending on their
country’s situation. (हर देश क� क� द्रीय ब�क अलग-अलग िदशा �नद�श जारी कर सकती है)
⇒ As Bad loans (NPA) ⏫ = bank’s asset quality degrades ⏬= its Risk-weighted assets (RWA)
⏫ → bank must arrange more capital to comply with these ratios, norms and buffers.
⇒ If a bank can’t comply with BASEL norms → RBI puts it in PCA list. In worst case, bank will
have to merge/ sell off its business to another bank or shut down. (इन मानदंडों को नहीं माना तो अंत म� ब�क
बं द हो सकता है)
⇒ BASEL Norms also apply on Differential Commercial Banks (LAB, RRB,
SFB, PyB), Cooperative Banks, AIFI (EXIM, NABARD, NHB, SIDBI) and certain category of
NBFCs, but RBI can prescribe separate norms / limits / deadlines for them. (�व�भ� प्रकार क� �व�ीय
म�� ऊपर सं �ाओं पर इन मानदंडों क� सीमा अलग-अलग ह�)

14.28.1 🌐🌐🌐🌐 � BASEL-III norms: Capital Tiers

BASEL-III norms require banks to keep capital against their risk weighted asset ratio. This capital is
subdivided into:

14.28.2 🔪🔪🔪🔪🔪Additional Tier 1 (AT1) Bonds

They have no maturity date (i.e. bank has to pay interest for infinite time / perpetuity and principal
will not be returned). However, bank may ‘buyback’ them after certain years.

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If / when a bank makes huge losses → AT1 Bonds’ liability may be
A. written off (खा�रज कर देना) OR
B. converted into shares (process called ‘Bail-In’).
AT1 Bonds are in news due to loan-scam in Yes-Bank. What exactly is that scam? =NOT-IMP.

14.28.3 🔪🔪🔪🔪🔪Zero Coupon Bonds

⇒ Ref: Pillar1C- Sharemarket.

🔠🔠❓ What is the objective of BASEL-III norms? (UPSC-Prelim-2016)

a) Develop national strategies for biological diversity.
b) reduce the GHG emissions but places a heavier burden on developed countries.
c) transfer technology from developed Countries to poor countries to replace chlorofluorocarbons
in refrigeration.
d) improve banking sector’s ability to deal with financial and economic stress and improve risk
management.
🔠🔠❓ Basel Convention provides: (UPSC-IES-2020)
(a) Indian standards for pollution measurement and prevention
(b) International guidelines to control the transboundary movements of hazardous wastes between
different countries
(c) Indian standards for the disposal of municipal and industrial wastes
(d) International standards to categorize pollution in air and wastewater

14.28.4 🌐🌐🌐 D-SIB: Domestic Systematic Important Banks

⇒ In 2010, G-20’s brainchild Financial Stability board (HQ: BASEL) asked countries to identify
Systematically Important Financial institutions and put framework to reduce risk in them. [Side
note: Same parents responsible for birth of Legal Entity Identifier (LEI)]
⇒ Each year, RBI identifies banks that ‘too big to fail’ (=if they fail, it’ll severely hurt the economy)’
and labels them as Domestic Systematic Important Banks (D-SIB), & orders them keep
additional equity capital against their Risk Weight Assets (RWA) & other technical norms.
⇒ Presently, 3 D-SIBs in India: SBI, ICICI, HDFC (Latest Entry).

14.29🐯🐯🐯🐯: BASEL NORMS DEFERRED / SUSPENDED IN CORONA

self-explanatory from the topic-title itself. (कु छ मानदंडों क� अ�तम �त�थ को टाल िदया गया।)
We need not loose sleep over new deadlines, as they may again get extended. So, dynamic
information = dangers of answerkey becoming invalid, so, smart examiners usually avoid it.#🕰🕰थोड़ा-
पढ़ो-आगे-बढ़ो

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14.30🐯🐯🐯🐯🐯🐯 BANKS’ BALANCE SHEET / AUDIT NORMS (तुलन पत्र लेखा परी�ण)
14.30.1 🐯🐯🐯🐯🐯🐯 IndAS Accounting Norms deferred (लेखा मानदंड ��गत/टाल �दये)
⇒ Ministry of Corporate Affairs (MCA) ordered all the companies to keep their balancesheet as per
the format prescribed in the Indian Accounting Standards (IndAS).
⇒ 🤩🤩Benefit? IndAS accounting format makes it easier for the local and global investors and
regulators to compare, analyze and understand a company’s financial position from its
balancesheet. (इस �रपोटर् को देखकर �नवेशक को आसानी से कं पनी क� �व�ीय �मता का अंदाज़ा लग जाता है.)
⇒ IndAS is not part of BASEL norm. But, since commercial banks are basically ‘companies doing
banking activity’, so they also have to comply to IndAS norms. But, only RBI has the power to
notify its implementation deadline on banks. (ब�कों के ऊपर भी इ�ी �नयमों को लागू करना है.)
⇒ 2020- Critics demanded RBI should implement it. What is the deadline? NOTIMP.

14.31🌐🌐🌐💸💸 RECAPITALIZATION OF PSBS: [सावर्ज�नक �ेत्र के ब�को का पुन:पूंजीकरण]

If a bank doesn’t have enough capital to comply with BASEL-III norms it can issue debt (bonds) and
equities (shares) to gather new capital. (बा�सल मानदंडो का अनुपालन करने के �लए ब�क ने पूंजी जमा करनी होती है)
- 2015: Estimation that Public Sector Banks (PSBs) will require ₹ 1.8 lakh crore additional capital
by 31/3/19 to comply with BASEL-III norms.
- So, Finance Ministry’s Dept. of Financial Services up with Indradhanush PLAN for phased-
recapitalization of PSBs with ₹ 70,000 crores from 2015 to 2018. Individual PSB will get funding
based on outcomes / performance. (इं द्रधनुष �ान के अंतगर्त �व� मं त्रालय सरकारी ब�को म� पूंजी दे रहा था-बा�सल
मानदंड के अनुपालन के �लए)
- 2017: It became clear ₹70,000 crores was insufficient for BASEL-III compliance. So, Modi Govt.
announced more amount. (हालांिक बाद म� पता चला क� वो रकम पयार्� नहीं थी और �ादा रकम चािहए होगा)
- To arrange ₹₹ for this, Govt began to issue Bank Recapitalization Bonds (RcB) in the market with
following features: These bonds will have interest rate of ~7%, mature@ 2028-2033. Non-
transferable to third party, Non-convertible into shares. (तो �ादा रकम बटोरने के �लए सरकार ने बाजार म�
बॉ� जारी िकये)
- Govt instructed PSBs to mobilize equity (share) capital from private investors. However,
investors shy away from smaller banks with weak balancesheets, so BMB & 5 Associated Banks
merged with SBI (2017). Vijaya & Dena to be merged with BoB (2019, 1st April) etc. (More in
📑📑Pillar#1B1)
- 💼💼 Budget-2020: FM said we’ve given ₹3.50 lakh cr in the last years years.
- 💼💼Budget-2021: ₹20,000 crores for PSB recapitalization in Financial Year 2021-22.
- 💼💼Budget-2022: No money given for this. Govt’s rationale is that PSBs profitability improving
so PSBs can take care of their capitalization problems by themselves by issuing shares/bonds in
market. (सरकार ने नए बजट म� पुनः पं जीकरण के �लए कोई पैसा नहीं िदया. सरकारी ब�को अब तुम खुद अपना देख लो!)

🔠🔠❓MCQ. Find Correct Statement(s) abt Governance in PSBs:( UPSC-Pre-2018)

1. Capital infusion into PSBs by the Govt of India has steadily increased in the last decade.

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2. To put the public sector banks in order, the merger of associate banks with the parent State Bank
of India has been affected.
Answer Codes: (a) 1 only (b) 2 only (c) Both 1 and 2(d) Neither 1 nor 2.

14.32�BANKING SECTOR: GOVERNANCE / ADMINISTRATIVE REFORMS

14.32.1 �Gyan-Sangam-I, 2015, Pune
FinMin’s Dept of Financial Services (�व�ीय सेवा �वभाग) organized a workshop of financial regulators,
Public Sector Bank, Insurance Companies etc. It resulted in 3 outcomes:
1) PSBs’ CMD post bifurcated into 1) separate chairman and 2) separate MD&CEO so that banks
can function in more professional and accountable manner.
2) Indradhanush plan for bank recapitalization (₹ 70,000 crores)
3) Finance Ministry setting up an autonomous body- Bank Board Bureau (BBB). →

14.32.2 � Personnel Selection → Bank Board Bureau (BBB), 2016

Figure 6: यूपीएससी क� तरह हम ल�गे नोकरी का इं टर�ू

- It is non-constitutional, non-statutory body (यह सं �ान न तो सं वध
ै ा�नक है न तो वैधा�नक)
- It interviews & selects top officials (MD, CEO, Chairman and full-time Directors) for PSBs,
public sector insurance companies, and other public sector financial institutions (e.g. NABARD,
SIDBI etc.).
- Actual appointment done by FinMin’s Department of Financial Services. (Just like UPSC selects
candidates suitable for IAS but DoPT notifies appointment.)
- BBB also helps the banks in governance reforms, raising capital for BASEL-III etc.
- BBB has 1 Chairman (usually a retired IAS) and some members.

🔠🔠❓MCQ. Chairman of public sector banks are selected by the _ _? (Prelims-2019)

(a) Banks Board Bureau (b) RBI (c) Ministry of Finance (d) Management of concerned bank

🔠🔠❓MCQ. Find Correct about ‘Banks Board Bureau (BBB)’ (Prelims-2022)

1. The Governor of RBI is the Chairman of BBB.
2. BBB recommends for the selection of heads for Public Sector Banks.
3. BBB helps the Public Sector Banks in developing strategies and capital raising plans.
Codes: (a) 1 and 2 only (b) 2 and 3 only (c) 1 and 3 only (d) 1, 2 and 3

14.32.3 � Personnel Selection → FSIB replaces BBB (2022)

⇒ 2022: Delhi High Court ruled, “BBB cannot select public sector (govt owned) insurance
companies because of conflict with the other laws related to public sector insurance companies.
⇒ 2022: Then Govt replaced BBB with new body named “Financial Services Institutions Bureau
(FSIB)” to comply with court order.

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⇒ Every thing else (function, feature etc) about FSIB is same as BBB.

🚩🚩🚩FAQ: is this not unethical / big-joke to subvert court order?

Ans. Court has not banned FSIB yet. Govt did not bother to justify loudly in news headlines.
Columnist did not bother to loudly criticise. So, I did not bother to PHD.#🕰🕰थोड़ा-पढ़ो-आगे-बढ़ो

14.32.4 �PSB Banking Personnel Reforms→ 📔📔📔📔ES20 suggestions

Shifted to Mains.

14.32.5 �Customer Service: Enhanced Access and Service Excellence (EASE) Agenda 2018

2018: FinMin’s Dept of Financial Services released EASE framework (बढ़ी प�ंच और सेवा उ�ृ �ता) with 6
pillars to make PSBs more Responsive and Responsible viz.
1. Customer Responsiveness. (ग्राहको के प्र�त जवाबदेही)
2. Responsible Banking: Reduce NPA, prevent frauds. (धोखाधड़ी पर अंकुश)
3. Credit Off Take: Try to reach out to potential borrowers for home, auto, education, loans. (�यम
ब�क ही उधारकतार्ओ को खोज �नकाले)
4. Help MSME entrepreneurs via SIDBI’s Udyamimitra.com portal. Approve/reject loans in not
more than 15 days. (लघुउधोगों क� मदद)
5. Deepening Financial Inclusion & Digitalization. (�व�ीय समोवेशन)
6. Employees’ Human Resource Management (HRM: मानव सं साधन प्रबं धन): improve with training,
performance linked promotion-salaries-posting-transfers etc.
Implementation? Each whole-time director of a PSB will be entrusted with one pillar of the EASE-
framework. Their performance will be checked by the PSB’s board of directors. An independent
agency will be tasked to check public perception. Finally PSB banks will be ranked: E.g. 2018: PNB#1.
Year Framework Theme/focus area
2020-21 Ease 3.0 Tech-Enabled Banking
2021-22 Ease 4.0 clean and smart banking.
2022-23 Ease 5.0 Common reforms agenda e.g. digital customer experience, supporting
small businesses and agriculture etc.

14.32.6 �👮👮:🛡🛡Staff Accountability Framework for PSB-NPA

⇒ Finance Ministry’s issued this for NPA accounts up to Rs 50 crore in PSBs from 1/4/2022.
⇒ If PSB Banker took bonafide business decisions to approve loan application but it turned NPA
then banker will be protected from undue inquiries/harassment by 3Cs — CBI (Central Bureau

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 of Investigation), CVC (Central Vigilance Commission) and CAG (Comptroller and Auditor
General).
⇒ Previously the fear of 3C was discouraging the public sector bank managers from sanctioning big
loans (in the aftermath of TBS, Mallya, Nirav Modi).

(सरकारी ब�क और लोन पास करने से डरते ह� �ोंिक उ�� तो CBI, CVC, CAG क� कारर्वाई का डर लगता है तो अब �वत् मं त्रालय ने
कु छ नए “सावर्ज�नक ब�क कम� जवाबदेही ढांचा” िदशा�नद�श जारी िकए ह� तािक ईमानदारी से �लए गए फै सलों म� अगर लोन का पैसा
वापस न आए तो सरकारी ब�क के ईमानदार ब�कर पर अनाव�क �प से कोई कारर्वाई न हो)

14.32.7 �Customer Service: RBI’s B.P.Kanungo committee (2022)

He suggested various reforms against bullying/harassment for loan recovery agents, etc.
Term Explain
Bancassurance when banker sells insurance product to a customer to earn commission. e.g.
IDBI managers selling LIC policy. This NOT illegal. This is allowed.
Cross-selling when banker sells additional services to customer e.g. credit card, Insurance
policy, mutual fund investment etc. . This NOT illegal. This is allowed.
Mis-selling when customer is misled about a product. e.g. Bank manager says our Credit
card are given for FREE! (but it is free only for 1st year and then starts charging
annual fees of ₹1999/-) . This NOT illegal/unethical.

14.33🧹🧹🧹🧹: 👹👹(🚫🚫🏦🏦) NEGATIVE NEWS: ILFS & SHADOW BANKING

14.33.1 👹👹(🚫🚫🚫🚫) NBFC: Shadow Banking (आभासी / प्र�तछाया ब�िकंग प्रणाली)

📔📔📔📔ES20 Vo1 Chapter 08 on ‘NBFC’s Financial Fragility’ (�व�ीय भं गुरता) observed
⇒ Shadow banking is a set of activities and institutions. They operate partially (or fully) outside the
traditional commercial banking sector. They are not fully regulated by the RBI. ये सं �ाए पारंप�रक
ब�िकंग �नयमो के दायरे से बाहर काम करती है.
⇒ They mobilize funds by borrowing from banks, issuing Commercial Papers (CP) and Bonds
(Non-convertible debentures)
Table 3: Three important segments of the shadow banking system in India
HFCs Housing Finance Companies. E.g. Dewan Housing Finance Limited (DHFL)
LDMFs - Liquid Debt Mutual Funds invest clients money into short term debt instruments
such as T-bill (of Govt) and Commercial Papers (of companies).
- e.g. certain schemes by UTI, Kotak, L&T, Tata mutual funds
- 2019: Some of these LDMFs had invested clients money in IL&FS and DHFL, but
failed to get the money back. Nearly ₹4000 crore of investors’ money is stuck,
triggering the NBFC crisis in India.

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 Retail- Retail Non-Banking Financial Companies such as Gold loan companies, asset finance
NBFCs companies etc.
Shadow banking system’s assets are risky and illiquid. If there is a ‘bank run’ like situation
(depositors / investors demanding the money bank) these shadow banks can’t honour the
obligations. As seen in the ILFS crisis (2019) →
14.33.2 👹👹(🚫🚫🚫🚫) Shadow Banks → IL&FS & NBFC Liquidity Crisis

- Infrastructure Leasing & Financial Services (IL&FS) is a Systemically Important Non Deposit
Taking Non - Banking Finance Company (NBFC - ND – SI: प्रणालीगत �प से मह�पूणर्- िडपॉ�ज़ट न
लेनेवाली- गैर-ब�िकंग �व� कं पनी) Setup in 1987 HQ@Mumbai.
- Shareholders: LIC > Japan’s Orix group > Abu Dhabi’s group > Central Bank of India > SBI.
- Challenge? 1-2-3 of above diagram. + loans given to unworthy borrowers with forged
documents, bribes were paid to IL&FS board directors & auditors.

14.33.3 👻👻 ATMANIRBHAR → 🐯🐯: 👹👹(🚫🚫🚫🚫) RBI Helping NBFCs/ Shadow Banks

- RBI has launched 1) TLTRO and 2) special liquidity window. (Ref 📑📑1A2 Monetary Policy)
- Govt has announced following 1) Partial credit guarantee 2) Sp. Liquidity scheme 3) Credit
Guarantee Enhancement Corporation (this corporation not yet made, so we’ll not PHD)

14.33.4 👹👹(🚫🚫🚫🚫) 💊💊💊💊 Shadow Banking → Remedies by RBI

⇒ RBI tightened norms of Asset-Liability Management (ALM) norms for NBFCs.
⇒ 2021: RBI proposes 4-tier structure for tighter regulation of NBFCs: NBFCs to be classified into
four categories BASE, MIDDLE, UPPER & TOP LAYER (most risky companies). Accordingly
tighter regulation on them. ✋Exact details notIMP, Until they actually implemented. (चार श्रे�णयों
म� जो�खम के िहसाब से बांटा जाएगा सबसे उ� श्रेणी म� सबसे �ादा जो�खम पूणर् कं प�नयों को रखा जाएगा और उन पर �रजवर् ब�क क�
�नगरानी सबसे �ादा स� होगी.)

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14.33.5 👻👻 ATMANIRBHAR → 🧔🧔🧔🧔🧔🧔🧔🧔 Partial Credit Guarantee Scheme (PCGS) 2.0
- Budget 2019: If NBFCs/ MFCs/Micro Finance Institutions (MFIs) borrowed money by issuing
debt securities (Bonds or Commercial Papers) → Public sector banks (PSB) invested in it → but
borrower default then the government pays 20% of loss to PSB. (सावर्ज�नक ब�कों को आं�शक क्रेिडट गारंटी)

14.33.6 👻👻 ATMANIRBHAR → 🧔🧔🧔🧔🧔🧔🧔🧔 Special Liquidity Scheme for NBFC/HFC

Outdated Current. Deleted from Handout. Sufficient to know it helps NBFCs.

14.33.7 Shadow Banking: More reform points by Government and SEBI

Shifted to Mains Handout.

🔠🔠❓In September 2019, which one of the following travel giants declared itself bankrupt? (CDS-
i-2020) (a) Expedia (b) Cox & Kings (c) SOTC (d) ANS: Thomas Cook

14.34🧹🧹🧹🧹💍💍 NEGATIVE NEWS: PNB, LOU, SWIFT, & NIRAV MODI

PNB (Mumbai Branch): Give foreign currency loan to our client Nirav Modi for purchase of goods (diamonds,
airplanes, whatever), if he doesn’t pay, we’ll pay.
- If such bank guarantee given to another bank in a foreign country, it’s called Letter of
Undertaking/ Letter of Credit/ Letter of Comfort: internal difference not important.
- Bank earns commission / fees from client for issuing such letters / guarantees.
- Thus, Nirav got loans in dollars currency from foreign banks, to buy diamonds in HongKong.
- PNB Scam: PNB-Mumbai’s corrupt manager kept issuing LoUs to diamond merchants Nirav
Modi & Mehul Chowkasi without due-diligence or collaterals for 7 years, worth ~₹12,000 crores.
And 2018-January: Nirav & Mehul left India.
- PNB officials couldn’t detect scam because LoUs were generated through SWIFT platform,
which was not integrated with their Core Banking Solution (CBS) server. (What is SWIFT? Ans.
Ref pillar1A1: digital payment)

Afterwards, ⚾📻📻⚾🎓🎓✋ball by ball commentary on Nirav Modi case =NOTIMP

14.35🌐🌐🌐🌐 NEGATIVE NEWS: INTERNATIONAL LEVEL BANKING SECTOR

Sometimes UPSC asks 1 liner MCQs about global bank/NBFC negative news esp. in NON-IAS
exams like CDS/CAPF/IES. So we will prepare basic idea without forensic analysis.

14.35.1 🌐🌐🌐🌐 Intl. Banking Crisis: Silicon Valley bank crisis (SVB), USA 2023
- USA Fed Tapering → USA Central bank increased loan interest rates to fight inflation → SVB’s
loan customers decreased (due to expensive loans).

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- SVB had invested money in government securities, but made losses due to yield change.
- negative media coverage made the depositors panicked to withdraw their money, including some
Indian start-up founders who had parked their money in the bank.
- �Outcome? Federal Deposit Insurance Corporation (FDIC- America’s DICGC type
organization) has shut down SVB. FDIC will sell SVB’s assets to return money to depositors.

14.35.2 🌐🌐🌐🌐 Credit Suisse Bank, Switzerland (2023)

- This bank suffered losses due to an instrument called ‘Credit Default Swaps (CDS: more in
pillar1C)’.
- More problems due to Post-Corona, Post-Ukraine general slowdown in the banking industry.
- Data leak revealed this bank helps criminals/druglords hide their money → investigations/court-
cases started → share-price fell.
�Outcome?
- 1) Bank had to write-off/delete $17 billion worth of AT-1 Bonds to cover losses. The move has
angered AT1 bondholders as their investments have been reduced to zero.
- 2) Another Swiz Bank UBS has bought Credit Suisse Bank.

14.36��🐯🐯 RBI DIVIDEND, RESERVES, ECONOMIC CAPITAL FRAMEWORK

RBI’s income sources include � From its income, RBI allocates funds to�
1. Interest on G-Sec that are not sold in Open 1. Staff retirement fund, provisions for bad
Market Ops. loans, depreciation in assets…
2. Interest on Foreign G-Sec / Sovereign 2. Reserves for contingency (emergency): ~₹
Bonds. 2.5 Lcr. आपातकाल के �लए आर��त भं डार
3. Interest on Loans given to other Banks / 3. Reserves for Exchange Rate Stability
NBFCs. कजर् पर �मलने वाला �ाज (Technically called “Currency & Gold
4. Revaluation of foreign currency and gold in Revaluation Reserve: ~₹7 lakh cr �व�नमय दर म�
RBI reserves. �वदेशी मुद्रा और �णर् भं डारों के मू� म� ��रता के �लए आर��त भं डार)
बढ़ोतरी After making these allocations, profit is shared
with Union Govt. in form of ‘Dividend’ (RBI

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 RBI’s income sources include � From its income, RBI allocates funds to�
5. Seigniorage: profits from printing money- Act Section 47). �रज़वर् ब�क के मुनाफे म� से ये भं डार/ �न�ध म�
because face value > intrinsic value. पैसा रखने के बाद यिद कोई रा�श बची तो वह सरकार को लाभांश
HOW?NOTIMP के �प म� देनी होगी
6. Penalties imposed on errant banks.
14.36.1 ��🐯🐯 RBI’s Bimal Jalan panel (2018)
- 2017: RBI Governor Urjit Patel gave ₹50,000 crore dividend to Govt but Govt wanted ₹3.6 lakh
crore dividend. Then, (गवनर्र उ�जत पटेल �जतना दे रहा था उससे कई गुना �ादा िड�वड�ड सरकार चाहती थी)
- RBI setup Bimal Jalan panel to decide the principles for dividend transfer to Govt. (आ�थक पूंजी
सं रचना तथा लाभांश �वतरण के �सद्धांत)
- 2019- August: RBI board approved Bimal Jalan report.
- It updated norms in such manner that RBI will be able to transfer more dividend / surplus to the
Government. (तकनीक� मानदंडों म� सुधार तािक �रजवर् ब�क अपने मुनाफे म� से भारत सरकार को अ�धक लाभांश दे सक� . )
14.36.2 🐯🐯📆📆 RBI’s Financial / Accounting Year (�व�ीय वषर् म� बदलाव)

2019: Bimal Jalan panel recommended �reform → RBI’s central board accepted it
� Before � After
RBI’s financial year - From 1 April, 2021, RBI will switch to
st

- 1934 onwards: January to December annual April-March format.

- 1940 onwards: July to June
But Govt’s financial year is April-March so, RBI After this reform, no need for interim dividend
had to give interim dividend to govt until RBI’s (अंत�रम लाभांश �वतरण नही देना होगा।)
final balancesheet was prepared, then another
(full) dividend was given.

14.36.3 🐯🐯�Section-7 Directive & Urjit Patel’s Resignation (इ�ीफा)

⇒ Section 7(1) of the RBI Act empowers the Government to consult with RBI Governor in Public
Interest. (जनिहत के �लए, �रजवर् ब�क कानून क� धारा नं बर 7 के अंतगर्त सरकार गवनर्र के साथ �वमशर् कर सकती है)
⇒ In, 2018-October, for the first time in the history of Independent India, Govt began a Section-
7(1) consultation with RBI Governor Urjit Patel, on the issues of PCA norms, BASEL-III
deadline, higher dividend to Govt., Cheap Monetary Policy etc.

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⇒ If RBI Governor doesn’t positively respond in such Section-7(1) consultation, then Section 7(2):
Government can issue binding direction / orders to RBI Central Board to implement its wishes.
(यिद गवनर्र, एसे �वमशर् मे, सरकार क� बात नही सुनते तो, क� द्रीय बोडर् द्वारा सरकार अपनी बात को लागू करवा सकती है)
⇒ Although, fearing backlash from media & opposition parties, Govt did not issue any specific
directions to the RBI Board. But, 2018-Dec: Urjit Patel resigned before completing 3-year term.

🔠🔠❓MCQ. Find Correct statements about RBI: (UPSC Prelims-2021)

1. The Governor appointed by the Central Govt. (�रजवर् ब�क के गवनर्र क� �नयु�� क� द्र सरकार करती है)
2. Certain provisions in the Constitution of India give the Central Government the right to issue
directions to the RBI in public interest. ( कु छ सं वैधा�नक प्रावधानों के अंतगर्त क� द्र सरकार जनिहत म� �रजवर् ब�क को
िदशा �नद�श दे सकती है)
3. The Governor draws his power from the RBI Act. (गवनर्र को आरबीआई कानून से श��यां �मलती है)
Code: a) 1 and 2 only b) 2 and 3 only c) 1 and 3 only d) 1, 2 and 3

14.36.4 ✍ Mains Answer Writing

problems of bad loan-origin, present reforms, future reforms suggestion, IBC code success and
limitations, how to use technology to prevent / solve NPA, etc. This handout deals only with
PRELIMS#RAFTAAR
Next Handout 📑📑Pillar#1C: SEBI SHAREMARKET

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 Pillar#1C: SEBI-Share Market
Table of Contents

15 ���Pillar#1C: SEBI-Share Market ............................................................................ 183

15.11.1 �� Boycott Notice for PHD in Sharemarket handout ...................................................................... 183

15.12 Capital (पूंजी)- types Fixed vs Working ng ................................................................................. 183

15.12.1 Capital / Funding Arrangement: Types ..................................................................................................... 184
15.12.2 Capital Arrange → Trade Credit (Short Term)........................................................................................ 184
15.12.3 Account Receivable / Payable ..................................................................................................................... 184
15.12.4 Capital Arrange → Lease Financing (Medium Term) ............................................................................ 185

15.1 🗃🗃Securities (प्र�तभू�त) ...................................................................................................................... 185

15.1.1 Capital Arrange → Retained Earnings (Long Term)............................................................................... 185

15.2 🗃🗃 �Financial / Securities market: meaning and types ............................................................. 186

15.3 �� Debt Instruments (ऋण उपकरण) .......................................................................................... 187

15.3.1 ���Short term debt instruments (लघु अव�ध ऋण उपकरण ) .............................................................. 187
15.3.2 �Short term debt instruments → by Government .......................................................... 187
���:�
15.3.3 ���: �� �� Short term debt instruments → by Govt → WMA ............................... 188
15.3.4 ��� Consolidated Sinking Fund (CSF) for State Govts’ repayment .......................................... 188
15.3.5 Short term debt: Certificate of Deposit (CD-instrument by Bankers)......................................................... 188
15.3.6 ���Short term debt instruments → more types ......................................................................... 189

15.4 ���Debt → Short Term → Factoring & TREDS............................................................. 189

15.4.1 ���Factoring Regulation (Amendment) Act, 2021 ..................................................................... 190
15.4.2 ���: � TReDS platform to connect factoring-players. ............................................................. 190

15.5 ���Debt → Interest Rate Benchmarks: LIBOR, MIBOR, ................................................ 190

15.6 ��� Long Term Debt Instruments (दीधर्-अव�ध ऋण- उपकरण) ................................................ 192
15.6.1 🕯🕯🕯🕯🕯🕯�
�Colonial era Govt. to borrow money ....................................................................................... 192
15.6.2 ����Modern day Government to borrow money ................................................................... 192
15.6.3 🗃🗃🗃🗃�
� Emerging Debt Market Bond Index- Indian G-Sec added ..................................................... 192
15.6.4 ���Bonds by Modern day Govt. to curb Gold Consumption .................................................... 193
15.6.5 ���� Long term debt instruments by Companies ................................................................... 194

15.7 � Hybrid financing / Mezzanine Financing ............................................................................... 194

15.7.1 � Hybrid: OFCD: Sahara Refund portal (2023) .................................................................................... 195
15.7.2 � Hybrid: Foreign Currency Convertible Bonds (FCCBs): ................................................................. 195
15.7.3 � Hybrid: Contingent convertible bond (CoCo)/ enhanced capital note (ECN) ............................. 196
15.7.4 ���Long Term Debt Instruments: Other issuers ......................................................................... 196
15.7.5 ���Long Term Debt Instruments: Masala, Maharaja, Panda Bond .......................................... 197
15.7.6 ��� Long Term Debt Instruments: Special purpose: �� Surety Bonds ............................ 197
15.7.7 ��� Long Term Debt Instruments: Special purpose Bonds- Sovereign green bonds .............. 198
15.7.8 ��� Long Term Debt Instruments: Special purpose Bonds- Misc. ............................................ 198
15.7.9 🗳🗳(�
��)�
�Electoral bonds (चुनावी बांड, 2017 ) ..................................................................................... 200
15.7.10 ��: � Bond Yield, Yield Inversion, Negative Yield ....................................................................... 201

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15.8 �🗃🗃 Equity Instruments (इि�टी).................................................................................................. 201
15.8.1 Share vs stock- what is the difference? NOTIMP..................................................................................... 202
15.8.2 � Share Types: Preference Shares vs ordinary shares ........................................................................... 202
15.8.3 � Shares for Employees / VIPs / Special investors : ESOP, Equity Warrents .................................... 203
15.8.4 � Share types depending on risk / quality.............................................................................................. 203
15.8.5 �🗃🗃 Share types: Floating vs Restricted Stocks ..................................................................................... 204

15.9 � Ratios / Numbers to compare the companies......................................................................... 204

15.9.1 Depending on Market Capitalization (Small Cap/Mid Cap/Large Cap) ............................................... 204
15.9.2 � Valuation & Unicorn Startups............................................................................................................. 205
15.9.3 � Goodwill –while buying another company/brand ............................................................................ 205
15.9.4 � Price-to-Earnings (P/E) Ratio and EPS (Earnings per Share) ......................................................... 206
15.9.5 � Leverage Ratio, Debt to Equity Ratio, ROCE, etc .............................................................................. 206
15.9.6 �Net Worth = Total Assets −(minus) Total Liabilities ........................................................................ 206
15.9.7 EBITDA, Depreciation, Amortization ....................................................................................................... 207

15.10 �🗃🗃 Methods of Issuing Shares ............................................................................................. 207

15.10.1 Share-selling: Offer for sale (OFS) and share pledging ............................................................................ 208
15.10.2 Share-selling: Open Offer ............................................................................................................................ 208
15.10.3 �Share Selling: Equity dilution ............................................................................................................... 209
15.10.4 �Share Swaping and De-listing............................................................................................................... 209
15.10.5 �Bonus Shares .......................................................................................................................................... 209
15.10.6 �Share Splitting ........................................................................................................................................ 210
15.10.7 �Share buyback by the Company ........................................................................................................... 210
15.10.8 �🗃🗃 � IPO → Special Purpose Acquisition Company (SPAC)..................................................... 211
15.10.9 �🗃🗃 � ADR/GDR: DESHI Shares in Videshi soil .............................................................................. 211
15.10.10 🗃🗃 � Direct listing of Indian Companies in foreign stock exchanges (2023) .................................... 212
15.10.11 �� Initial Coin Offering (ICO) ........................................................................................................... 212

15.11 � Stock Exchanges / Secondary Market: meaning & examples ............................................ 212
15.11.1 � Social Stock Exchange .......................................................................................................................... 213
15.11.2 � Social Stock Exchange: zero-coupon, zero-principal instrument ................................................... 213
15.11.3 � Secondary Market: Significance? (िद्वतीयक बाजार का मह�) .......................................................................... 213
15.11.4 🗃🗃🗃🗃 DEMAT Account and Depositories................................................................................................. 213
15.11.5 � (��:� �) DEMAT → ASBA Reforms ............................................................................................... 214
15.11.6 Central Counterparties (CCPs), Novation & ESMA controversy .......................................................... 214
15.11.7 CCP Examples in India................................................................................................................................ 215
15.11.8 CCP Regulation in India: Who regulates CCP in India? ......................................................................... 215

15.12 �� Investors ke Types......................................................................................................... 216

15.12.1 Types of Investors: Depending on Buying Capacity ................................................................................ 216
15.12.2 �� Types of Investors: Depending on Buying Behaviour ................................................................ 216
15.12.3 Style of Trading / Investing based on duration and risk .......................................................................... 217

15.13 � SENSEX & other Notable Indices (उ�ेखनीय सं के तक/ सूचकांक) ...................................................... 217
15.13.1 ��MSCI Emerging Market (EM) index............................................................................................. 218
15.13.2 🌬🌬🌬🌬:�
��� Force Majeure (अभेद्य श��) ................................................................................................ 218

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15.14 ��� Sharemarket: 2020- Impact of Corona................................................................... 218
15.14.1 ��Sharemarket- 2022: IPO Bubble Burst: Case of Paytm (फू ट गया ग़ु�ारा) .......................................... 218
15.14.2 Sharemarket: 2021-22 observation by �ES23........................................................................................ 218
15.14.3 Proportion of money invested by retailers is falling- says �ES23 ....................................................... 219
15.14.4 Retail investors have decreased participation in the share market due to ............................................. 219

15.15 Efficient Market Hypothesis /theory (EMH) ............................................................................ 220

15.15.1 Beta Value to monitor price volatility or risk of an asset ......................................................................... 220
15.15.2 Alpha value to compare performance of Mutual Funds .......................................................................... 221
15.15.3 �� FAQ: Alpha vs Beta similarity / correlation / difference ............................................................ 221
15.15.4 �Types of Analysis – fundamental vs Technical .................................................................................. 221
15.15.5 �DEMAT Portfolio: Meaning, Types, Portfolio Diversification......................................................... 221

15.16 🗃🗃🗃🗃Securities and Exchange Board of India (SEBI) .............................................................. 222

15.16.1 🗃🗃�
��Securities Market Code .............................................................................................................. 223

15.17 🗃🗃🗃🗃 SEBI Investor charter (�नवेशक अ�धकार पत्र) ............................................................................. 223
15.17.1 🗃🗃🗃🗃: � SEBI: why protect investors & �investors participation?.................................................. 224
15.17.2 ��: measures to � retail investors participation- 25% public holding in Govt Companies ..... 224
15.17.3 Tulip Mania (िकसी �नवेश के पीछे सामूिहक पागलपन) ....................................................................................................... 224
15.17.4 � �Volatility / ViX (क�मतों म� अ��रता) ....................................................................................................... 224

15.18 🗃🗃🗃🗃: � SEBI Reforms to boost investors’ confidence? ....................................................... 225

15.18.1 �Circuit breaker ....................................................................................................................................... 225
15.18.2 T+1 Settlement instead of T+2 ................................................................................................................... 225
15.18.3 T+1 hour settlement .................................................................................................................................... 225
15.18.4 � (�
�:�
�:) Illegal Trading: Dabba-trading, Insider Trading, Front Running ................................ 226
15.18.5 � (�
��:�
�) Algo Trading & Co-Location ........................................................................................... 226
15.18.6 �Investor Protection Fund (IPF) ............................................................................................................ 226
15.18.7 Adani Hindenburg controversy (2023) & Flash Crash ............................................................................ 227
15.18.8 Short selling (make profit from falling share price) ................................................................................. 227
15.18.9 �Finfluencers: Bollywood star Arshad Warsi banned from Sharemarket ......................................... 228
15.18.10 Sharemarket- company related documents .............................................................................................. 228

15.19 � (�
��) Bond Market Reforms......................................................................................... 228
15.19.1 � (�
��: ��) G-Sec Trading- Retail investors’ RDG @RBI .................................................... 228

15.20 � (�
��: ��) G-Sec Trading: RBI's NDS-OM, OTC ................................................. 228
15.20.1 �Bid-Ask Spread ...................................................................................................................................... 229
15.20.2 �Arbitrage: Making profit due to difference in to markets/location. ................................................. 229

15.21 ���� Commodity Market, FMC, SEBI merger ......................................................... 230

15.21.1 ����Commodity Market: Gold exchanges & �Budget-2021 ............................................. 230
15.21.2 ����Commodity Market: Electronic Gold Receipts (EGRs).................................................. 230
15.21.3 ����Commodity Market: India’s first bullion exchange (2022) ........................................... 230

15.22 � Related Bodies with similar sounding names .................................................................... 231

15.22.1 NISM- capacity building for financial market professionals - �Budget-2023................................... 232

15.23 � � � Investment Funds → Mutual fund (MF) for aam-aadmi .................................. 232

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 15.23.1 � � � Mutual fund → ESG, Shariya Mutual Funds ..................................................................... 232
15.23.2 � � � Mutual fund → SIP, ELSS, ULIP ......................................................................................... 233
15.23.3 � � � Mutual fund → 🎛🎛 Mutual fund risk-o-meter .................................................................... 233
15.23.4 � � � Mutual Fund: Backstop Entity- SEBI proposal for stressed MF ....................................... 233
15.23.5 � (�
��: ��) Bond Buying Institution in �Budget-2021 .................................................... 233

15.24 � � � Investment Funds → Hedge Fund (हेज फ�) for rich-aadmi .............................. 233
15.24.1 � � � Investment Funds: “Accredited Investor” .......................................................................... 233
15.24.2 � � � 🛩🛩 Investment Funds → REITs / InvITs: for rich-aadmi ................................................. 234
15.24.3 � � � Investment Funds → Sovereign Wealth Fund (सं प्रभु धन कोष)................................................ 234

15.25 � 🏛🏛 Investment Funds → CPSE-Exchange Traded Funds (ETF: ईटीएफ) ............................ 234
15.25.1 ��)�
(� �: (🏛🏛🏛🏛🏛🏛) Bharat Bond (Debt) ETF (2019) ....................................................................... 235
15.25.2 ��)�
(� �: (🏛🏛🏛🏛🏛🏛) CPSE-ETF vs Mutual Fund ............................................................................... 236

15.26 � Investment Funds → Alternative Investment Funds (AIF) ............................................ 236

15.26.1 ��):(🏗🏗�
(� �) Govt’s AIF for Real Estate Sector (2019) ................................................................... 236

15.27 🗃🗃 � Forward / Future Contracts & Call / Put Option.............................................................. 237

15.28 🗃🗃 � Derivatives & Swaps (�ु�� प्र�तभू�तयां और अदला-बदली) .............................................................. 237

15.28.1 🗃🗃🗃🗃: ��� Bilateral Netting of Qualified Financial Contracts Act 2020.................................... 237

15.29 ��� Participatory notes (P-Notes: पा�ट�सपेटरी नोट्स) ............................................................ 238

15.29.1 �(�
��) Credit Default Swap (CDS) .................................................................................................. 239

15.30 Tax on Investment / financial assets ........................................................................................ 240

15.30.1 Tax relief given on ....................................................................................................................................... 240
15.30.2 � Tax relief NOT given on ...................................................................................................................... 240

15.31 🏙🏙🏙🏙 Company types ................................................................................................................. 241

15.31.1 �Company types based on incorporation ............................................................................................. 241
15.31.2 🏙🏙🏙🏙 Company types based on number of members .............................................................................. 242
15.31.3 🏙🏙🏙🏙 Company types based on Ownership .............................................................................................. 243
15.31.4 🏙🏙🏙🏙 Company Types: Misc. ...................................................................................................................... 243
15.31.5 🏙🏙🏙🏙 Corporate Governance → Small Companies given compliance relief ........................................ 243
15.31.6 🏙🏙🏙🏙 Commercial Organizations: Other Types ....................................................................................... 244
15.31.7 ��� Corporate Governance → LLP settlement Scheme 2020 .................................................... 244

15.32 � Statutory bodies in Ministry of Corporate Affairs (MCA) ............................................... 244

15.32.1 � � Competition Commission of India (भारतीय प्र�त�धार् आयोग) ......................................................... 244
15.32.2 Google pe Penalty by CCI ........................................................................................................................... 244
15.32.3 � � Insolvency and Bankruptcy Board of India (IBBI) .................................................................... 244
15.32.4 Unclaimed shares and dividends of IEPF & �Budget-2023 ................................................................ 245
15.32.5 �� Ministry of Corporate Affairs also associated with:.................................................................... 245
15.32.6 Companies Act: EoD- Central Data Processing Centre in �Budget-2023 ......................................... 246
15.32.7 �� Corporate Governance (कॉप�रेट शासन) ............................................................................................ 246
15.32.8 Corporate Social Responsibility.................................................................................................................. 247
15.32.9 NSE Prime regulation for corporate governance (2022) ......................................................................... 247

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 15.33 �� Takeover related terms ................................................................................................. 247
15.33.1 �� Leverage Buy-Out (LBO) ............................................................................................................... 247
15.33.2 ��� Poison Pill against Takeover by Twitter ................................................................................ 247
15.33.3 � De-Merger When a company subdivided into multiple companies. .............................................. 248
15.33.4 �� Mock Questions for Mains ............................................................................................................ 248

15 🐮🐮🐮🐮🐮🐮PILLAR#1C: SEBI-SHARE MARKET

MCQs from SEBI/ Share market /Financial Market / Companies Act Topic in UPSC Prelims
Year 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
MCQs 1 MCQ 0 2 0 1 1 3 1 2 3
These Qs mostly tested very basic foundation level understanding of share market. So, we are not here
to become Investment Bankers / Mutual Fund managers 🎓🎓✋#🕰🕰थोड़ा-पढ़ो-आगे-बढ़ो

15.11.1 🚩🚩🚩 Boycott Notice for PHD in Sharemarket handout

Since UPSC has recently started asking special types of MCQs from Sharemarket related so I’ve
increased the topic coverage in this handout = number of pages increased without any SHAME.

- I boycott faaltu-ki-PHD/real-life-gyan. We will only grab low hanging fruits / 1-liner-GK and
move. If something was worth knowing then I would have already covered in the handout. If I
have not covered it= that means I do not find it important for exam.
- I boycott unnecessary translation into Hindi for every term: because sharemarket-topic does not
have much utility in the mains examinations. (मु� परी�ा म� शेयर बाजार के बारे म� ब�त कम ही पूछा जाता है तो
जबरद�ी हर चीज का िहदं ी करने नहीं बैठ�ग.े वैसे भी शेयर बाजार क� �ादातर terms अंग्रेजी म� चलती है. जबरद�ी िहदं ी करने
बैठे तो उसे समझना और याद रखना क�ल� हो जाएगा)

15.12💰💰 CAPITAL (पूंजी)- TYPES FIXED VS WORKING NG

Capital required to meet financial needs of a company.
Fixed Capital (�ायी) Working Capital (कायर्कारी)
Money needed for purchase of land, Money needed for purchase raw materials, salaries to
plant and machinery, furniture, and employees, rent of the office, advertising / marketing,
other fixed assets. other day-to-day operations, etc.

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15.12.1 Capital / Funding Arrangement: Types

Source: NCERT Class12 Business Studies Ch.8

Wait till we finish entire handout, then these terms will make sense to you.

15.12.2 Capital Arrange → Trade Credit (Short Term)

15.12.3 Account Receivable / Payable

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15.12.4 Capital Arrange → Lease Financing (Medium Term)

15.1 🗃🗃SECURITIES (प्र�तभू�त)

A ‘Security’ means a certificate/document indicating that its holder is eligible to receive a certain
amount of money at a particular time. This could be a…
🤝🤝Equity: Share certificate 🔪🔪Debt (ऋण): Bond / Debenture
Holder gets dividend from the profits of the Holder gets interest & principal irrespective of
company. If no profit, then no dividend. whether company makes profit or not.
Company’s owners, proprietors (मा�लक) creditors of the company (लेनदार).
Have last claim during liquidation. So, first claim.
Shareholders are ‘Residual Claimants’. नीलामी से �मलने वाली रकम पर पहला हक इनका
Attractive in boom period, since companies Attractive in slowdown period, since bonds
more likely to make profit so more chances of provides fixed interest to the investor
good dividend. Although during corona, many irrespective of profit of the company. �नवेशकों को
investors tried to buy shares cheap from मं दी के दौरान �ादा अ�े लगते ह�, �ोंिक जो�खम कम
secondary market, with hopes of getting profit
after corona-recovery.
��FAQ: Bond and Debenture are not same. They’re having internal technical differences.
Ans. UPSC not asking b.Com/M.Com pedantry here. Then why burden brain’s memory card?

15.1.1 Capital Arrange → Retained Earnings (Long Term)

Company makes profit → ₹₹ goes into two channels.
1. Some of the money given to shareholders as dividend.
2. Remaining money is re-invested in the business = this is called “Retained Earnings”

�FAQ: who will decide how much money will be given as dividend/retained earning? Ans.
Company’s board of directors.

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15.2 🗃🗃 🛒🛒FINANCIAL / SECURITIES MARKET: MEANING AND TYPES

Financial Market is the place where buying and selling of securities takes place. Market doesn’t
require physical location. Can be done online / telephone as well.
Classifi. Market Subtypes
Tenure: 1. ⏰Money Market (<1 year maturity) मुद्रा बाजार
(अव�ध) 2. 🗓🗓Capital Market (1 year/> maturity) पूंजी बाजार
Freshness 1. Primary Market (where new securities are issued for the first time). Helps a
प्राथ�मक company /govt to connect with the investor. It has no separate physical existence
एवं but classified like this, for economic analysis. (इस बाजार का अलग से भौ�तक �ान नहीं होता
िद्वतीयक
िकंतु आ�थक आकलन के �लए आंकड़ों म� अलग से िदखाया जाता है)
बाजार
2. Secondary Market (where the old securities are resold). It has physical existence
such as Bombay Stock Exchange (BSE) at Dalal Street, Mumbai.
Secondary Market provides liquidity & confidence to investors to buy new securities
in Primary Market. (compared to a scenario if there was no market to resale used cars-
तो कम लोग नई कार खरीदने जाएं गे.)
Settlement 1. Future Market: Where parties write contract today to buy/sell something at
(�नपटान) specific price on a future date. भ�व� क� िकसी तारीख को खरीद/�बक्र� के �लए वतर्मान म�
सौदा/समझौता िकया जाए
2. Spot Market: if bought & sold for immediate delivery.
Asset - Depending on what asset is traded, market can be divided into Bond (Debt)
(प�रसं प��) market, Share (Equity) market, G-Sec Market, Foreign Currency Market,
Commodity Market etc.

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 Classifi. Market Subtypes
- if there was a supermall where all these products were available in one place it
will be called “Universal Exchange”. SEBI permitted BSE & NSE to launch such
thing (2018).

15.3 🔪🔪🗃🗃 DEBT INSTRUMENTS (ऋण उपकरण)

Bond holders are creditors to company. First claim during liquidation. Assured interest irrespective
of profit of company. These debt instruments can be classified into short-term vs long term.
15.3.1 🔪🔪🔪🔪⏰Short term debt instruments (लघु अव�ध ऋण उपकरण )

- Tenure = less than 1 year. Usually ‘unsecured’ because not backed by any asset.
- Usually sold at discount and re-purchased at Face Value or Par Value. The difference between
these two prices is the interest earned by investor. स�े म� बेचकर मूल भाव पर खरीदा जाता है
- Another synonym for this process: “rediscount the bills.”
- They’re traded at Money Market and are (usually) ‘negotiable & transferable’ in nature i.e.
lender can sell to 3rd party → 3rd party can demand money from borrower. (परक्रा� और ह�ांतरणीय)
- They’re also called Near Money = Asset that is highly liquid = can be readily converted into cash.

15.3.2 🔪🔪🔪🔪⏰:🧔🧔Short term debt instruments → by Government

1. State govt’s treasury bills (T-bill). But stopped since 2001.

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2. Union govt’s treasury bills (T-bill: 14, 91, 182 and 364 days) & Cash Management bills (CMB:
upto 90 days, started in 2009).
3. WMA (ways and means advances): given below

15.3.3 🔪🔪🔪🔪⏰: 🐯🐯🐯🐯 🧔🧔� Short term debt instruments → by Govt → WMA
⇒ When Govt faces short term mismatch in receipt (income) and payment (Expenditure)
⇒ RBI Lends money on short term (3 months). Not counted in fiscal deficit figure. (More in
📑📑Pillar2D: FRBM)
⇒ Corona-crisis: ⬆mismatch in cashflow because सरकार क� आमदनी और खचर् म� अंतर बढ़ गया �ोंिक
o ⬇Govt Income: Sales ⬇ GST, Govt gave extension in tax payment deadlines
o ⏫Expenses: free LPG, food, mask etc.
⇒ So, ATMANIRBHAR Bharat → RBI ⏫WMA limits by 60% than before to help the Union
(1.20lcr) and State Governments (₹51,560cr collectively).
⇒ If upto above amount of ₹₹ borrowed = its WMA: loan interest = repo%
⇒ If beyond above amount borrowed then called ‘Overdraft’: loan interest repo+2%
🎓🎓✋^ above % or quantity or figures not imp for scope of exam
15.3.4 🐯🐯🐯🐯🐯 Consolidated Sinking Fund (CSF) for State Govts’ repayment

15.3.5 Short term debt: Certificate of Deposit (CD-instrument by Bankers)

⇒ Certificates of deposit (CDs) are unsecured, short-term, negotiable debt instruments issued by
commercial banks in the money market.
⇒ 2023 sudden jump in the CD issued by bank.
⇒ Reason: Bankers received many loan applications, but don’t have enough money to loan because
o A) enough quantity of deposit is not coming and
o B) repo loans becoming very expensive.
⇒ So bankers borrowing money by issuing CDs in money market.
Word Meaning
NEGOTIABLE a signed document that promises money to a specified person at a
INSTRUMENTS specified time (एक द�खत/ह�ा�र िकया �आ द�ावेज �जसम� िकसी ��� को िकसी िदन
पैसा देने क� कसम/प्र�त�ा क� गई है)
UNSECURED no collaterals/assets are pledged. (कु छ �गरवी नहीं रखा गया)
INSTRUMENTS

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 Word Meaning
SHORT-TERM less than 1 year
INSTRUMENTS

15.3.6 🔪🔪🔪🔪⏰Short term debt instruments → more types

Table 1: how does this work in real life? Ans. not important just remember 1-Word Association
Borrower 🔪🔪🔪🔪⏰ Short term debt instrument (लघु अव�ध के ऋण पत्र)
- Bill of Exchange, Hundi, Commercial Papers, Promissory Notes.
- note: Currency Note is a ‘Promissory Note’ issued by RBI Governor
Company however, he’s not bound to pay any interest. He just promises to
exchange it with other currency notes & coins of equal face value.(More
in 📑📑Pillar#1A1)
Merchant Commercial Bill.
It’s the interest rate when Financial Intermediaries (Banks/NonBanks)
Call Money
borrow for ONE DAY among themselves.
Notice Money Same as above but for 2 to 14 days.
Collateralized Borrowing and Lending Obligation.
CBLO Clearing Corporation of India Ltd (CCIL) helps Financial Intermediaries (FI)
to get short term loans through this instrument.
Inter Corporate Deposits are unsecured short-term loan made by a company
ICD
with another company.
Repo Repo and Reverse Repo= Ref: Pillar#1A2: Monetary Policy handout.
MCQ. [CSP23-SET-A-Q025] Consider the following markets :
1. Government Bond Market 2. Call Money Market 3. Treasury Bill Market 4. Stock Market
How many of the above are included in capital markets?
(a) Only one (b) Only two (c) Only three (d) All four

15.4 🔪🔪🔪🔪⏰DEBT → SHORT TERM → FACTORING & TREDS

⇒ Suppose an MSME seller has sold cardboard boxes for jiophones to Mukesh Ambani but Mukesh
Ambani says he will pay the bill next month. Presently this is an unpaid invoices.
⇒ MSME seller can pledge this invoice to a factor (bank/NBFC) to avail loans. (छोटी कं प�नयां बड़ी

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 कं प�नयों को सामान और सेवा बेचती है उसका जो बकाया पैसा है उसके �बल को �गरवी रख के लघु अव�ध का कजर् ले आये)
Bill Discounting Factoring
MSME seller collects the money from Buyer Factor (lender: bank/NBFC) directly collects
(Ambani) & delivers ₹ ₹ to the Factor the ₹₹ from unpaid invoices from Buyer
(bank/NBFC). (Ambani).

15.4.1 🔪🔪🗃🗃⏰Factoring Regulation (Amendment) Act, 2021

to amend the Factoring Regulation Act, 2011
Before After
Banks and only “Factoring Companies Banks and all types of NBFCs allowed (After
(NBFC)” allowed to give loans under this registering with RBI). → So now more than
system. There were only seven NBFCs 9000 NBFCs in India can give loans → this will
registered as Factoring Companies. increase the availability of loans for the MSME.
-- earlier it was less. RBI given more powers to regulate this
business.
-- earlier it was less. More legal clarity about TReDS system.
Earlier this was not clear and so MSME could Need to register the invoice-pledge-factoring-
commit fraud of “dual financing” i.e. Pledging loan transaction on A central registry set up
the same invoice as collateral in multiple under the SARFAESI Act. This will prevent the
Bank/NBFCs. dual financing frauds.

15.4.2 🔪🔪🔪🔪⏰: 📡📡 TReDS platform to connect factoring-players.

⇒ Just like quickr/olx connect buyers with sellers, the Trade Receivables Electronic Discounting
System (TrEDS) online-platform Connect the factors (bank/NBFC) with the borrowers (MSME).
⇒ Examples of 3 TReDs platforms: M1xchange, RXIL, and A.TReDS. Have to register with RBI.
⇒ Most famous is RXIL - Owned by the Small Industries Development Bank of India (SIDBI) and
the National Stock Exchange of India Limited (NSE), State Bank, ICICI and Yes Bank .

15.5 🔪🔪🔪🔪⏰DEBT → INTEREST RATE BENCHMARKS: LIBOR, MIBOR,

London Inter-bank Offered Rate (LIBOR) is the average interest rate at which banks in London give
short term loans to each other.
In LIBOR definition, replace the word “London” → “Mumbai” and “Global” →
MIBOR
“Indian”, and you’ll know what MIBOR is!
⇒ Mumbai Interbank Forward Outright Rate (MIFOR)
MIFOR
⇒ Faded topic so deleting from handout.

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🔠🔠❓Find Correct statements☹Asked in UPSC-Pre-2018)
1. The RBI manages and services Govt of India Securities, but not any State Govt Securities.
2. Treasury bills are issued by Govt of India and there are no treasury bills issued by State Govts.
3. Treasury bills offer are issued at a discount from the par value.
Ans Codes: (a) 1 and 2 only (b) 3 only (c) 2 and 3 only (d) 1, 2 and 3
🔠🔠❓Which of the following is /are example (s) of ‘Near Money’? [UPSC-CDS-2016-I]
1. Treasury Bill 2. Credit Card 3. Saving accounts 4. Money Market Instruments
Answer codes: (a) 1 only (b) 2 only (c) 1, 2 and 3 (d) 1, 3 and 4
🔠🔠❓ In Indian economy, non-financial debt includes ___ ? (Prelims-2020 SetB- Q84)
1) Housing loans owed by households
2) Amounts outstanding on credit cards
3) Treasury bills
Codes: [a) 1 only [b) 1 and 2 only [c) 3 only [d) 1, 2 and 3
🔠🔠❓ Which of the following phrases defines the nature of the ‘Hundi’ generally referred to in
the sources of the post-Harsha period? (UPSC-Prelims-2020)
[a) An advisory issued by the king to his subordinates
[b) A diary to be maintained for daily accounts
[c) A bill of exchange [d) An order from the feudal lord to his subordinates
🔠🔠❓Find correct statement(s) (UPSC-Prelims-2020)
1) ‘Commercial Paper’ is a short-term unsecured promissory note.
2) ‘Certificate of Deposit’ is a long-term instrument issued by the Reserve Bank of India to a
corporation.
3) ‘Call Money’ is a short-term finance used for interbank transactions.
4) ‘Zero-Coupon Bonds’ are the interest bearing short-term bonds issued by the Scheduled

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 Commercial Banks to corporations.
Codes: [a) 1 and 2 only [b) 4 only [c) 1 and 3 only [d) 2, 3 and 4 only

15.6 🔪🔪🗃🗃🗓🗓 LONG TERM DEBT INSTRUMENTS (दीधर्-अव�ध ऋण- उपकरण)

Tenure = 1 year/>. Further sub-division based on who is the Borrower?
15.6.1 🕯🕯🗃🗃🗃🗃🧔🧔Colonial era Govt. to borrow money
1. Coupon Bonds: Contain detachable coupons. Coupons are presented to the issuer to claim the
interest. Therefore, bond interest rate is also called ‘coupon rate’.
2. Zero Coupon Bonds/ Zero Interest Debentures (ZID): Are sold on discount and repurchased at
face value, do not have any coupons. (separate topic: Zero-Coupon, Zero-Principal Bonds-
check ‘social stock exchange’ in this handout)
3. Bearer Bonds: Not linked to a PAN card, Aadhar card or passport, voter card or social security
number. Anyone who presents it to the issuer, will get interest and principal. Usually issued
during the war time.

15.6.2 💡💡🗃🗃🗃🗃🧔🧔Modern day Government to borrow money

⇒ Government securities, Dated securities, Sovereign bonds (सं प्रभु बांड), Kisan Vikas Patra etc.
(more in 📑📑Pillar 1D: Financial inclusion lecture)
⇒ Also called Gilt Edged securities (उ� / अ�ग्रम दज� क� प्र�तभू�तया) because repayment is assured by
Government. (But then, they give lower interest rate because of low risk to the investor).
⇒ Global Credit Rating Agencies gives ‘rating’ to sovereign bonds. “AAA” is the best🤩🤩 and
highest given to US Treasury Bonds. India’s rating is ~“BAA” = moderate risk of default😰😰.
⇒ World’s top three credit rating agencies- Fitch, Moody’s and Standard & Poor have pro-US/EU
allegiance. Critics allege these 3 agencies do not give adequate upgradation to the Govt bonds of
India, China, Russia despite the economic growth. भारत म� अ��-खासी आ�थक वृ�द्ध के बावजूद भी यह प�पाती
�वदेशी सं �ान भारत को खराब रेिटगं देते ह�

15.6.3 🗃🗃🗃🗃🧔🧔📈📈 Emerging Debt Market Bond Index- Indian G-Sec added
− It is an index prepared by JP Morgan Chase (an investment bank)
− It reviews/tracks bond prices of China, India, Brazil, South Africa, Russia etc.
− 2023: Indian government bonds also included in this index.
- � Benefits? More foreign investors will get interested to buy it. HOW/WHY? NOTIMP. But for
the sake of example- If KRK reviews a movie, then u’ll be attracted to watch it on OTT, even if u
don’t watch it in Cinema.

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15.6.4 🥇🥇🥇🥇🥇🥇Bonds by Modern day Govt. to curb Gold Consumption

⇒ Real Interest Rate (वा��वक �ाज दर) = Nominal (ना�मत) Interest minus Inflation.
⇒ When Real Interest is negative, purchasing power ⏬ despite ⏫ in money quantity in bank
account. Then people prefer to park money in gold/real estate- which is not very beneficial to
economy. So..RBI launched inflation indexed bonds <see the NEXT section>

15.6.4.1 🍅🍅🍅🍅🍅🍅🍅🍅 Inflation Indexed Bonds (IIB-मुद्रा���त सूचकांिकत बांड)

RBI launched IIB in 1997, 2013, 2018 to provide positive Real interest rate to household
��MCQ. Find correct about “Inflation-Indexed Bonds (IIBs)” in India (Prelims-2022)
1. Government can reduce the coupon rates on its borrowing by way of IIBs.
2. IIBs provide protection to the investors from uncertainty regarding inflation.
3. The interest received as well as capital gains on IIBs are not taxable.

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Codes: (a) 1 and 2 only (b) 2 and 3 only (c) 1 and 3 only (d) 1, 2 and 3
��MCQ. Find correct statements about Convertible Bonds (Prelims-2022)
1. As there is an option to exchange bond for equity, Convertible Bonds pay a lower rate of interest.
2. The option to convert to equity affords the bondholder a degree of indexation to rising consumer prices.
Codes: (a) 1 only (b) 2 only (c) Both 1 and 2 (d) Neither 1 nor 2

15.6.4.2 🥇🥇🥇🥇🥇🥇🥇🥇 Sovereign Gold Bond (2015: सं प्रभु �णर् बांड)

RBI issues them on behalf of govt. Denomination: gold grams. But, RBI/Govt doesn’t ‘promise’ to
give you gold. They only promise to give you ₹₹ equivalent of latest gold price on maturity. इस बांड का
मू� सोने के वजन के �च��त होगा. िक�ु प�रप�ता समय पर आपको सोना नहीं, उस सोने के वजन के िहसाब से मू� �जतना �पया द�गे।
- Annual interest 2.5-2.75% (depending on which year’s ‘batch’ you bought.)
- Tenure: after 8 years you get the amount equivalent to prevailing gold prices at that time. हर साल
�नयत �ाज, प�रप�ता समय पर बाजार म� यिद सोने का दाम बड़ा होगा तो आपको मूलधन से भी �ादा ₹₹ वापस िदए जाएं गे.
- Eligible investor categories: Indian resident individuals, Hindu Undivided Families (HUFs),
trusts, universities and charitable institutions. �सफर् यह लोग या सं �ान हीं खरीद सकते ह�
- How much can you buy? Minimum 1 gm to max upto 20kg depending on investor’s category.
- From where to buy? While RBI ‘sells’ it but customers buy it via following outlets: banks (only
selected types of banks), post offices, selected stock exchanges (NSE and BSE) and a few other
institutions.
- 🤩🤩Benefit ? reduce the import-demand for physical gold and shift a part of the domestic
savings -- used for the purchase of gold -- into financial savings. (More in 📑📑Pillar#3A along
with Gold Monetization Scheme. )

15.6.5 🔪🔪🔪🔪🔪🔪� Long term debt instruments by Companies

1) Bonds (British Term), Debentures (American Term): Internal difference not important.
2) If the company has high risk of default on repayment, the Credit Rating Agencies will mark it as
Junk Bonds (“BB to D” Grade) e.g. IL&FS. Such company will have to offer a very high interest
rate when issuing bonds next time. �ादा जो�खम पूणर् कं पनी ने �नवेशक को लुभाने के �लए �ादा �ाज देना होगा
3) Redeemable Bonds (मो�): will repay regular interest and will return principal on maturity.
4) Irredeemable Bonds (अमो�): will pay only interest but no principal returned. Sometimes issued
by PSB to meet BASEL-capital requirements. Although in reality they offer ‘redemption’ after 5-
10 years when holder has ‘option’ to redeem principal & exit. (Ref: Pillar1B2= AT1 Bonds)
5) Secured vs Unsecured. Secured = asset is pledged. Unsecured = not pledged.
6) Non-convertible Bond/Debenture = can’t be converted into shares.
7) Hybrid instruments: Issued as “Bond” but can be converted into Share. E.g. Optionally Fully
Convertible Debentures (OFCD).

15.7 🐸🐸 HYBRID FINANCING / MEZZANINE FINANCING

It has elements of both debt (loan) and equity (partnership).
Lender gets a right to convert the debt (bond) to an equity (share).
it is done via instruments such as Optionally fully convertible debentures (OFCD).
Venture Capitalists usually do it in the start-up companies.

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 Instrument Traditional Bonds / non- OFCD Share (Equity)
convertible debenture (NCD)
Interest/Return on Investment 12% 8% uncertain
(ROI)
Rights/Claim during liquidation first right middle last/residual
of company claim
^^ Numbers only for illustration that OFCD normally pay less interest than traditional
bonds(NCD).

15.7.1 🐸🐸 Hybrid: OFCD: Sahara Refund portal (2023)

Basic story explained in above chart: then

- Ministry of Cooperation → Central Registrar of Cooperative Societies (CRCS, a statutory body
under Multi-State Co-operative Societies Act 2002) → CRCS - SAHARA REFUND PORTAL
setup.
- 2023: Each investors given ₹10,000 refund from this portal.

15.7.2 🐸🐸 Hybrid: Foreign Currency Convertible Bonds (FCCBs):

- FCCB investor has option to convert his bond Into shares at pre-determined exchange rate.
- The FCCB’s are issued in a foreign currency and carry a fixed interest rate
- e.g. 2010: Data Motors issued FCCB worth $1 billion. (Investors gave dollar currency)
Terms Matter
Face Value $1000 for one bond
Tenure 5 years
Interest 5% on face value in dollars = 50 dollars.

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 Conversion if INVESTOR wanted he could convert 1 Bond (of $1000 value) -into 2 shares
option of ₹500 face value each.
Usually, FCCB’s interest rate lower than non-convertible debentures (NCD). (because company is
giving you the lollipop of conversion. So you cannot eat Laddu both ways ke I want high interest rate
and also I want conversion option.)

15.7.3 🐸🐸 Hybrid: Contingent convertible bond (CoCo)/ enhanced capital note (ECN)
Its features are hybrid Mix of i) AT1 Bonds (Ref 1B2) and iii) OFCD.
we’ll pay u “A%” interest rate But
- if Condition “B” happens, we’ll convert it into Shares
- If Condition “C” happens, we’ll write-off principal + Interest and will not even convert it into
share.
�� FAQ by Zhande-walle Babushone: now I’ve 500 jaat ke doubts. Ans.NOTIMP. Accept 3–4
lines & move to new topic.

15.7.4 🔪🔪🔪🔪🔪🔪Long Term Debt Instruments: Other issuers

Issuer Objective? उद्दे�?
- Urban Local Bodies Issue Municipal bonds to borrow money from public.
ULB - Ahmedabad was 1st to launch Municipal bonds (1998). 2020-Lucknow 9th city
in India & 1st in North India.
- 2014- BRICS Nations had setup the New Development Bank (NDB, HQ:
BRICS Bond Shanghai, China). Later it launched BRICS Bonds to mobilize money for its
infrastructure loans. Denomination: US Dollars
- 2018: launched world’s first Blockchain Offered New Debt Instrument called
World Bank Bond-i. Sold in Australia using Ethereum blockchain technology. Tenure: 2
🌐🌐 years @~2% interest. Denomination: Australian Dollars, hence also called
“Kangaroo Bond”.
- Evergrande is a Chinese real estate developer company. Facing trouble
Evergrande
repaying its bonds. Foreign investors panicked, resulting in crisis in Chinese
Crisis
and global financial markets. HOW?NOTIMP.

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15.7.5 🔪🔪🔪🔪🔪🔪Long Term Debt Instruments: Masala, Maharaja, Panda Bond
🌶🌶 Masala Bonds: These rupee denominated bonds issued outside India, to borrow money for
Indian companies. World Bank’s sister agency International Financial Corporation (IFC) launched
‘Masala Bonds’ to help Indian public sector and pvt sector companies.
⇒ 2015: RBI allowed Indian entities to launch such Masala Bonds.
⇒ 2017: National Highways Authority of India (NHAI) also issued Masala Bonds in London Stock
Exchange to mobilize money for Indian Highway projects.
⇒ 2019: Kerala became the first State of India to issue Masala Bonds. Its Kerala Infrastructure
Investment Fund Board (KIIFB) issued Masala Bond at the London Stock Exchange.
Denomination: ₹ ₹ Total Size: ₹ 21.5 billion. Tenure: 5 years. Masala Bonds are usually issued by
institutions with AAA rating. Since KIIFB has BB rating, hence offered higher interest rate:
~9.7% (वरना कोई खरीदता नहीं)
Table 2: rapid revision table for Bond types based on currency
🤲🤲Issuer → 🌐🌐 Borrowing from 💸💸 In currency → 🔪🔪🔪🔪 Is called
→
Non-Chinese → China → Renminbi (=yuan) 🐼🐼 Panda Bonds
Non-Australian Australia Australian dollar 🦘🦘 Kangaroo Bonds
Non-Indian India Rupee � Maharaja Bonds
(Indian or Outside India Rupee 🌶🌶 Masala Bonds
a non-Indian on
behalf of Indians)
Non-Taiwanese Taiwan OTHER than Taiwan Formosa Bond
entity dollar (इसके अलावावाली
मुद्रा)
15.7.6 🔪🔪🔪🔪🔪🔪 Long Term Debt Instruments: Special purpose: 🚦🚦🚦🚦 Surety Bonds

⇒ What does above chart mean? Ans. Refer to Video lecture

⇒ 👜👜👜👜Budget-2022 said we’ll allow Surety Bonds. IRDAI will regulate this.

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15.7.7 🔪🔪🔪🔪🔪🔪 Long Term Debt Instruments: Special purpose Bonds- Sovereign green bonds

⇒ RBI sells them via E-Kuber platform to investors.

⇒ Money will goto Government’s Consolidated fund of India-CFI (what is it? Ans. Ref Pillar2A)
⇒ From CFI → borrowed money will be used in following purposes
� Money will be used �Will not be used (यहां इ�ेमाल नहीं होगा)
Subsidies, Grants, Tax-Cuts For: ⇒ Nuclear power generation, landfill projects,
⇒ Renewable energy- solar, wind etc alcohol/weapons/tobacco/gaming/palm oil
⇒ Energy efficiency e.g. LED bulbs industries
⇒ Clean transportation e.g. Electric Vehicles ⇒ hydropower plants larger than 25 MW
⇒ Water and waste management
⇒ Pollution control
⇒ Green buildings
Equity (share) investment in metro projects N/A
Above investment projects will be reviewed by Finance Ministry → Green Finance Working
Committee (GFWC) headed by the Chief Economic Advisor (CEA) (इनके द्वारा समी�ा होगी).
15.7.8 🔪🔪🔪🔪🔪🔪 Long Term Debt Instruments: Special purpose Bonds- Misc.
For renewable energy, pollution control, environment friendly projects.
- World’s first Green Bond launched by World Bank (2007)
- India’s first Green Bond launched by Yes Bank (2015)
- BRICS-New Development Bank issued Yuan- green Bonds (2016)
�Green bonds - Indian Renewable Energy Development Agency (IREDA) launched India’s
(ह�रत बांड) first Masala Green Bond at London Stock Exchange (2018).
पयार्वरण सं र�ण और
- 2021: Ghaziabad Municipal Corporation (Uttar Pradesh), issued first-ever
�� ऊजार् सं बं धी
Green Municipal bond in India. (भारत का सवर्प्रथम ह�रत नगर �नगम बॉ�)
- 2021: India’s first ever euro currency- denominated green bonds by Power
Finance Corporation (PFC, an NBFC company under Power Ministry)
- 2022: Sovereign green bonds. Explained in previous section
A sub-type of green bond, where money borrowed for climate resilient water /
�Blue Bond
marine / fisheries projects. E.g. 2018- Seychelles issued world's first 'Blue Bond,' to
(नील बांड)
expand its marine protected areas and fisheries sector. (समुद्री सं र��त �ेत्र और म� �ेत्र)

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 Money is invested in bonds of companies having good track record of
ESG Bonds Environment, Social and Governance (ESG) बॉ� �नवेश उन कं प�नयों म� जो पयार्वरण, समाज
और शासन क� म� अ�ा काम कर रहे ह�
⇒ Govt / Insurance company issues such bond. Investor is promised with high
annual interest rate. But, if a natural disaster happens, his principal will not be
⛈Catastrophe returned.
Bond (आपदा) ⇒ If disaster doesn’t happen then principal will be returned.
अ�ा �ाज द�गे िकंतु आपदा �ई तो मूलधन वापस नहीं कर�गे �ोंिक वह सारा मूलधन आपदा प्रबं धन म� इ�ेमाल
कर�गे
Oil Bonds Explained in �Pillar#2- along with taxes on petrol and diesel.
⇒ US Govt (1870s) and British Govt (1917) had issued Consol bond.
⇒ Consol is short form for ‘consolidated annuities’.
���♾ ⇒ Consol bonds have no maturity date. They are perpetual bonds that paid 4-5%
(proposed) interest rate, for an infinite time period. In theory they don’t repay the
Consol Bonds principal amount back to investor. Thus, they’re Irredeemable Bonds (अमो�).
for Corona- ⇒ However, in reality, the Govt may redeem(/buyback) the bonds after certain
revival years, by paying principal to the investor. कु छ वष� बाद सरकार पुनः खरीद लेगी
⇒ Some economists suggesting Indian govt should issue Consol Bonds for Post-
corona economic revival. (अथर्�व�ा को पुनर्जी�वत करने के �लए)
⇒ 2019-May: Commerce ministry’s Dr. Surjit S. Bhalla Committee ‘to improve
� (Proposed) India’s share in global trade’ suggested ‘Elephant Bonds’. Tenure: 25-years.
Elephant Bonds ⇒ People declaring Black Money will be required to invest x%. → ₹ ₹ to be used
for black money only for infrastructure projects. �जनके पास काला धन िक�ु सजा से बचना है तो वे इसम� �नवेश
कर� और पैसा बु�नयादी अवसं रचना �नमार्ण म� उपयोग होगा
2019: SIDBI issued ₹ 300 cr. worth Women’s Livelihood Bonds (मिहला आजी�वका बॉ�)
with the help of World Bank, UN Women org etc.
- These bonds will be offered to High Net worth Individuals (HNI), Impact
� Social Investors (rich people interested in ‘indirect’ social service) etc. They’ll earn
Impact Bonds 3% annual interest rate for tenure of 5 years.
(सामा�जक प्रभाव - Money collected → SIDBI → Micro Finance Institutes (MFI) → loaned to
बांड) individual women entrepreneurs in food processing, agriculture, services etc.
2021: Skill Impact Bond: By National Skill Development Corporation (NSDC)
with help of global partners from UK, Dubai etc.
$14.4 million for skilling 50,000 Indian youth job.

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 Zero coupon
zero principal
issued by Not for Profit Organization (NPO), Non-governmental organization
instrument
(NGO) for social service. They repay NEITHER principal NOR interest.
🚩🚩🚩FAQ: Then why don't they simply accept it as 'donation'? Ans. May be PR /
media exercise. May be there is tax-saving in it. Newspaper didn't bother to explain
so I didn't bother to google. #🕰🕰थोड़ा-पढ़ो-आगे-बढ़ो
It is a sharia-compliant bond instruments used in Islamic finance. Was in News
�Sukuk because Pakistan Govt issued such bonds. How it works? In which currency is it
Bond/Islamic issued? How it’s different than ordinary bonds?
Bond
✋NOTIMP4Exam after looking at old papers.
🔠🔠❓ Find correct statement about ‘IFC Masala Bonds' (UPSC-Pre-2016)
1. The International Finance Corporation, which issues them, is an arm of the World Bank.
2. They are rupee-denominated bonds and are a source of debt financing for public & private
sector.
Answer Code: (a) 1 only (b) 2 only (c) Both 1 and 2 (d) Neither1 nor 2
🔠🔠❓ Which one of the following is a viable alternative to term-loans for raising debt finance by
large publicly traded firms? (UPSC-IEnggS-2018)
(a) Shares (b) Debentures (c) Asset loans (d) Gold loans
15.7.9 🗳🗳(🔪🔪🔪🔪)⏳Electoral bonds (चुनावी बांड, 2017 )

⇒ Announce in Budget 2017 → Notified by Dept. of Economic Affairs, Finance Ministry (आ�थक
मामलों का �वभाग). Only SBI can issue at present, and in multiples of Rs.1,000, Rs.10,000,
Rs.1,00,000, Rs.10,00,000 and Rs.1,00,00,000.
⇒ Controversy about the SBI’s commission, printing cost and GST on sale of electoral bonds. But
not much imp for exam. Enough to know Government pays [Commission + GST] to SBI for
selling these bonds.
⇒ When to buy? For ten days at the start of each quarter. (January, April, July and October).
However, during Lok Sabha election year, can sell for another 30 days.

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⇒ Who can buy? Only an Indian Citizen or Company registered in India → deposit money in
their bank account → use that ₹₹to buy Electoral Bond, after giving certain KYC-documents. So,
Electoral Bond can’t be bought anonymously or directly with cash.
⇒ Electoral Bonds can be donated only to a political party registered under Representation of the
People Act 1951 (RPA: लोक-प्र�त�न�ध� अ�ध�नयम) and which has secured 1% /> votes polled in last
Lok Sabha or Vidhan Sabha elections.
⇒ 🗓🗓Validity (वैधता अव�ध)? Only 15 days from date of purchase. Within that time, buyer must
donate, and political party must deposit in its SBI (current) bank account. No interest payable.
⇒ Characteristics of electoral bonds? (�वशेषताएँ )
○ Paper / Physical format (not DEMAT / electronic format).
○ Bearer instrument (Donor or Recipient’s name not mentioned),
○ Promissory Note (promises to transfer money in bank account)
○ Interest Free banking instrument (zero interest payable to anyone).
○ Can’t sell it to third party, can’t pledge it for loans. (�गरवी नहीं रख सकते)
⇒ 🤩🤩Benefits of electoral bonds?
○ Transparency in political funding. (राजनी�तक चं दे म� पारद�शता)
○ Reducing influence of cash and black money in election, (काले धन का प्रभाव)
○ Confidentiality to donor- he can give to any political party without his wife, staff, CA,
Lawyers, journalists, local goons etc. knowing the name of recipient political party. (दाता
को गोपनीयता)
15.7.10 🔪🔪🔪🔪: 🤑🤑 Bond Yield, Yield Inversion, Negative Yield
Bond Yield (Finished in �Pillar#1A2: Operation Twist)
Yield Inversion Not important but u can do PHD from this video:
youtube.com/watch?v=BDACRJAo-48
Negative Yield Not Important/outdated
15.8 ⚖🗃🗃 EQUITY INSTRUMENTS (इि�टी)
⇒ Equity holders are called owners / proprietors of the company.
⇒ If company makes profit → they get dividend. They’ve last claim during liquidation.
Keywords Features
Venture Capital VCF are professional firms helping startup companies with seed capital.
Funds (could be debt / equity / hybrid) (�ाटर्अप कं प�नयों को शु�आती पूंजी िदलवाते ह�)
Rich person helping startup companies out of his hobby, passion, profit
Angel Investors motive or time pass. e.g Ratan Tata in Urban Ladder app. (could be debt /
ऐंजल �नवेशक equity / hybrid).
Related topic: 📑📑Pillar#2: Angel Tax in Budget/blackmoney
Corporate Invests in startup company with goal of acquiring the company or its
Strategic Investor technology at later date. �ाटर्अप कं पनी म� �नवेश करता है तािक भ�व� म� उसक� टे�ोलॉजी पर

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 क�ा कर सके
Rajiv Gandhi Equity Savings Scheme= Govt gives income tax benefit to
RGESS people who invest in the share market for the first time. Discontinued by
Started in 2012 Budget-2017
म�मवगर् का नया �नवेशक पहली बार शेयर बाजार म� �नवेश कर� तो आयकर म� राहत

15.8.1 Share vs stock- what is the difference? NOTIMP

���
This academic-pedantry NOTIMP4EXAM�

15.8.2 🐲🐲 Share Types: Preference Shares vs ordinary shares

e.g. Jio 10% fixed dividend Preference Share on face value of ₹100. That means person is entitled to a
FIXED ₹10 dividend (if company makes profit.)
Parameter Preference Share Ordinary Share
अ�धमा� शेयर: साधारण शेयर:
Rate of dividend Dividend payout’s rate Dividend payout’s rate fluctuates
is fixed e.g. NIRMA depending on how much money LEFT
10%. AFTER giving dividend to pref.share
holders
if company makes ZERO No. जब मुनाफा �आ ही नहीं No.
profit, does this investor तो तं बुरे का िड�वड�ड �मलेगा!!?
have a right to get dividend? कु छ नहीं �मलेगा
Rights upon liquidation of they’ll get money they’ll get money AFTER
the company BEFORE ordinary pref.shareholders
shareholders
Voting rights Do not enjoy voting Yes have voting rights in company
rights. decisions.

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 Parameter Preference Share Ordinary Share
अ�धमा� शेयर: साधारण शेयर:
Convertibility Preferred stocks can be Equity stocks cannot be converted.
converted into
ordinary shares
Issuance It is not mandatory for A registered companies must issue
company to issue equity shares. (More Refer to Pillar1C2:
preference shares. Company Types)
Risk to investor? lower higher
�NOTE: preference shares have many sub-types e.g. (cumulative vs non cumulative), (redeemable
vs non-redeemable) but we will not PHD.

15.8.3 🐲🐲 Shares for Employees / VIPs / Special investors : ESOP, Equity Warrents

Note: In above chart- there are many finer aspects/differences between ESOP and Equity warrants.
But we’re doing only 1 liner GK.
Shares sold @discount to directors & employees for their value addition to company
Sweet [Amount is regulated under Companies Act]
Equity �FAQ: How is Sweet Equity similar / different than ESOP/Equity Warrant
Ans. NOTIMP. 1 liner GK. थोड़ा-पढ़ो-आगे-बढ़ो.
🎓🎓✋ - 1)What is this? NOT IMPORTANT.
Sweat - 2) How different from Sweet Equity? NOT IMPORTANT.
Equity 🚩🚩�FAQ: I’m a commerce graduate / hot-shot MBA-walla and I’ve 500 jaat ke
इसका कु छ Counter arguments. Ans. Good. Plz Keep it with yourself. This course for teaching
काम नहीं some basic one liners for seeking MCQ. UPSC not asking b.Com/M.Com PHD stuff
परी�ा म� from here. Then why burden brain’s memory card with extra info?

15.8.4 🐲🐲 Share types depending on risk / quality

Penny stocks Shares whose market price remain excessively low compared to its face value. Such

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 फालतू कं पनी का pathetic companies give zero or little dividend.

🚩🚩🚩FAQ: I’m a commerce graduate / sharemarket ka hot-shot trader and I’ve

500 jaat ke Counter arguments. Ans. Good. Plz Keep it with yourself. This course
for teaching some basic one liners for seeking MCQ. बाक़� आप अपना देख लो। UPSC
not asking b.Com/M.Com PHD stuff from here. Then why burden brain’s
memory card with extra info?
Blue Chip Shares of a nationally recognized, well-established and financially sound company
stocks with a history of generating good return for the investor. E.g. Reliance, TCS,
दमदार कं पनी का
Multi- When company’s share price climbs rapidly of time. e.g. IRCTC (2021) from ₹300
bagger Share to ₹1000 = 233% return on investment (ROI) within January to October 2021
Cyclical / When price of a company’s shares depend on the particular business cycle. e.g.
Seasonal automobile shares will generally rise during Navratri till Diwali shopping season.
Shares
🚩🚩🚩FAQ: tell me Similarity and difference between Blue chip vs Multibagger? ANS. Notimp.

15.8.5 ⚖🗃🗃 Share types: Floating vs Restricted Stocks

Q. are the shares available for buying/selling in secondary market?

15.9 🐾🐾 RATIOS / NUMBERS TO COMPARE THE COMPANIES

Note: If I’ve not covered a particular ratio e.g. Price to Book Ratio (PB) = means I'm not finding it
useful for exam. तो िफर झं डा लेकर पूछते मत आ जाना िक �ों नहीं पढ़ाया? भाई मेरे को काम का नहीं लगा, तो म�ने नहीं पढ़ाया.

15.9.1 Depending on Market Capitalization (Small Cap/Mid Cap/Large Cap)

Market capitalisation = {Total number of share multiplied with current price of every share.}
Market cap can change every day, depending on the price movement in sharemarket.
Apple Company (A) Total No. Of Shares (B) Price of 1 share Market Cap = A x B
2023-Jan 15.63 billion units $125 $1.9 trillion
2023-Sept 15.63 billion units $171 $2.6 trillion
In India, shares are classified based on market capitalization as follows:

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 Type Small Cap Mid Cap Large Cap
Market Capitalisation^^ less than ₹5000 cr between 5k- more than 20,000 cr
(General understanding) 20k cr
Market Capitalisation (exact below 250 rank 101–250 top-100 companies based
SEBI Rule) rank on Market cap
Examples VIP Suitcase Castrol Reliance, Infosys, TCS
etc giants
Risk to shareholder High Medium Low
Liquidity of shares (how easy to Low. Difficult to medium high. Easily u can re-sell
re-sell & Exit) find buyer to exit.
^^ Note: This crores rupee number varies from year to year depending on how much share prices
changed. We’ll not waste time memorising EXACT number.

15.9.2 🐾🐾 Valuation & Unicorn Startups

Term Market Capitalization Valuation
Meaning It is the total value of a It is the process of estimating the total value of a
company’s shares. company.
Formula Current share price (X multiply Complex formula involving company’s financial
with) total number of shares. performance, its assets and liabilities, and its future
growth potential.
Example See Apple Company in Byjus @ $22 Billion (2022-Oct)
previous section @$12 Billion (2023-Aug)
Unicorn Startup = has valuation of 1 billion U.S. dollars or more. e.g. Unacademy, Byjus, etc.

15.9.3 🐾🐾 Goodwill –while buying another company/brand

Item Price in Million $ (Not real. Just e.g.)
Company Whitehat’s assets (building, machine, software 250
copyrights etc.
Byjus buys Whitehat at price 300
Difference = Goodwill acquired by Byjus = 50
- Goodwill is an ‘intangible asset’ for the buyer company (Byjus in above example.)
- Goodwill represents Whitehat's reputation, customer base, brand, or other intangible factors- for
which Byjus paid 50 million extra, BEYOND the fair-market value of Whitehat’s assets.

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15.9.4 🐾🐾 Price-to-Earnings (P/E) Ratio and EPS (Earnings per Share)

Note: real formulas/ real interpretations are more complex. this is for basic understanding for MCQ.

15.9.5 🐾🐾 Leverage Ratio, Debt to Equity Ratio, ROCE, etc

Year 2022 Tata Motors Maruti

Debt:Equity 2 (means Tata borrowed 2x times more money than the 0 (debt-free
ratio amount of share capital it has) company)
Note: real formulas/ real interpretations are more complex. this is for basic understanding for MCQ.

15.9.6 🐾🐾Net Worth = Total Assets −(minus) Total Liabilities

Amount Mukesh Bhai’s Reliance Anil Ambani’s Reliance Capital Ltd. Company
Total Assets (A) ₹16 Trillion ₹63,000 crore
Total Liabilities (L) ₹ 6 Trillion ₹83,000 crore
NET Worth = A - 16-6=10 POSITIVE NEGATIVE 20,000 cr. Case going on in IBC
L code

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�FAQ: can we say NET-worth represents profit/loss of the company? Ans. It is more refined than
that. Because company may be profitable for present year. But IF its liabilities are too big then it may
have NEGATIVE net-worth. But we’ll not do PHD. थोड़ा-पढ़ो-आगे-बढ़ो.

15.9.7 EBITDA, Depreciation, Amortization

EBITDA It shows Company’s Earnings Before loan Interest repayment, Taxes payment,
Depreciation, and Amortization. Higher number is better.
Depreciation Represents wear and tear, repairs, or decrease in the value of physical assets like
machinery and buildings. भौ�तक सं प��यों का �घसाव
Amortisation Represents decrease in the value of intangible assets like patents and copyrights.
अमूतर् सं प��यों का �घसाव
15.10 ⚖🗃🗃 METHODS OF ISSUING SHARES
Share have printed price on the certificate called Face Value or Par Value (सममू�). If they’re sold at
higher price than face value, it’s called “Premium Value”- that usually happens when investor is
confident of getting high dividend/return on his investment.
Related keyword: Price Earnings Ratio (P/E Ratio)- what it means NOTIMP.

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�FAQ: When FPO is issued, is it primary market or secondary market? Ans. It is ultimately a
Petipack/brand new share = primary market. However, this pedantry NOTIMP4EXAM.

IPO and FPO ⇒ Explained in video using above chart.

Rights issue Company issues additional shares (FPO) but gives first right to existing
(अ�धकार �नगर्म): shareholders to buy them, if they refuse then offered to outsiders.
Qualified Institutional Placement (QIP): When company issues the shares
QIP only to qualified institutional buyers (QIBs) e.g. mutual funds, pension funds,
insurance companies etc
Private If Zee offers to sell its shares only to Ambani. But not to others retail investors.
Placement

15.10.1 Share-selling: Offer for sale (OFS) and share pledging

�FAQ: How is OFS different than IPO/FPO? Ans. Motives are different. IPO/FPO is when owner
wants money for the company by selling fresh shares. OFS is when owner wants money for himself
by selling his own shares. But this pedantry is NOTIMP.

15.10.2 Share-selling: Open Offer

�FAQ: now I'm confused between OFS vs Open offer? Ans. Khichdi mtt karo. Their objectives are
different. Observe the photos carefully. If you lack basic intellect to even to understand this much,
then better try some lower level exams instead of UPSC.

🔠🔠❓ What does ‘Venture Capital’ mean? (Asked in UPSC-Pre-2014)

A. A short-term capital provided to industries

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B. A long-term start-up capital provided to new entrepreneurs
C. Funds provided to industries at times of incurring losses
D. Funds provided for replacement and renovation of industries
🔠🔠❓ An individual investor who invests in the e-project usually during an early stage is (UPSC-
IES-2020) A) corporate strategic investor B) founder capital C) angel investor D) venture capital

15.10.3 🍃🍃Share Selling: Equity dilution

15.10.4 🍃🍃Share Swaping and De-listing

Terms in news after HDFC (NBFC) got merged into HDFC (Bank), in 2023.

15.10.5 🍃🍃Bonus Shares

Total Qty Price Total Value in ur DEMAT account

Before 1 Share ₹3000 x 1 No. ₹ 3000.00
After Bonus Share 2 Shares ₹3000 x 2 No. ₹ 6000.00

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15.10.6 🍃🍃Share Splitting

Qty Price Total Value in ur DEMAT

Before 1 Share ₹3000 x 1 No. ₹ 3000.00
After Share split (1:2) 2 share ₹1500 x 2 No. ₹ 3000.00 (Total Value of Asset
NOT increased. It’s unchanged.)
Note: Share splitting depends on marzi/ discretion of company’s board of directors. It is not done on
1-1 investor’s complaint/request. I have given an example only for illustration.

15.10.7 🍃🍃Share buyback by the Company

Total Share liabilities of TCS BEFORE AFTER Share buyback

Amount ₹ 12 lakh crores 12,00,000 - 18,000 = ₹11.82 lakh cr

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15.10.8 ⚖🗃🗃 🤵🤵 IPO → Special Purpose Acquisition Company (SPAC)
Faded topic. Removing from handout.

15.10.9 ⚖🗃🗃 🌐🌐 ADR/GDR: DESHI Shares in Videshi soil

Figure 1: �बना अमरीक� SEBI मे पं जीकरण िकए, उनके शेयरबाजार से पैसा उठाऊँ , तो कै से?
- A non-American company wants to mobilize money from American share market but does not
want to go through the lengthy & complex process of registration with the American
sharemarket regulator.
- Then such non-American company gives its shares to an American bank.
- Based on those (non-American) shares, the American bank will issue American Depositary
Receipts (ADR: अमरीक� �नपे�ागार रसीद) & sell them to American investors. Denomination: USD.
- Global Depositary Receipt (GDR): Same as above, but when single bank issues receipts for
investors in multiple countries. Denomination: usually USD or Euro.
Share issuing company → Deposits his company’s shares That bank issues -- in local
in a bank of → market in – currency
Non-American company American Bank → Issues ADR (in $) in American
→ Sharemarket
Non-Indian company → Indian Bank → Issues Bharat / Indian depositary
receipt (IDR) (in ₹) in Indian
Sharemarket

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15.10.10 🗃🗃 🌐🌐 Direct listing of Indian Companies in foreign stock exchanges (2023)

Note:
- This topic is still developing. It is allowed via Gift-City (Gujarat). (Ref: Pillar#3A)
- So, we’ll revisit it after /IF some concrete things happen, probably in Feb-2024’s Budget.
- So presently just prepare 1 liner and move to next TOPIC. Ke yes it’ll help Indian companies to
get money from foreign stock exchanges more easily.

15.10.11 🔗🔗🔗🔗 Initial Coin Offering (ICO)

Figure 2: Cryptocurrency मे पागल �ई प��क को िफरसे बेवकू फ बनाऊ, तो कै से?

⇒ Company wants investors’ money for launching new cryptocurrency, or service/app related to
an existing cryptocurrency.
⇒ Then, it’ll issue Initial Coin Offering (ICO) → Investor subscribes to it, and receives ‘tokens’
(and not SHARES). Investors can use the ‘tokens’ to buy companies coins/services or may sell it
to a third party.
⇒ RBI has cautioned Indians not to invest in such instruments, because of the dangers which we
already learned in the Handout Pillar#1A-1: Bitcoins.

15.11📈📈 STOCK EXCHANGES / SECONDARY MARKET: MEANING & EXAMPLES

Shares are issued through IPO @Primary market. Then, they can be resold at secondary market,
commonly known as Share market or Stock Exchange or Bourses.

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⇒ World’s Oldest: Amsterdam Stock exchange, Netherlands (1602)
⇒ Asia’s Oldest: Bombay Stock Exchange (BSE: 1875)
⇒ India’s stock exchanges chronology: BSE → A’bad → Kolkata → NSE (early 90s)
⇒ Just like Banks have Core Banking Solutions for e-banking, Stock exchanges have their electronic
platforms for trading. E.g. BOLT (BSE's On-line Trading System), NEAT (National Exchange for
Automated Trading). They communicate using VSAT (Very Small Aperture Terminal) Satellite.

15.11.1 📈📈 🌈🌈Social Stock Exchange

⇒ It is a market for buying/selling shares/bonds/mutual fund for projects/organizations related to
hunger/malnutrition, poverty, gender equality, LGBT welfare, rural sports, Slum Area
Development, affordable housing. Etc.
⇒ Budget-2019: we’ll set up a Social Stock Exchange under SEBI’s regulation. It’ll help social
enterprises and voluntary organizations to raise capital as share/bond/mutual funds for
eradicating hunger, malnutrition, poverty, gender equality,LGBTQIA+ communities, rural
sports, slum area development, affordable housing
⇒ Then SEBI setup Ishaat Hussain panel to study it. Then SEBI setup Harsh Bhanwala panel to
study is further. They’ve given recommendations but NOTIMP

15.11.2 📈📈 🌈🌈Social Stock Exchange: zero-coupon, zero-principal instrument

⇒ Refer to “debt instrument” section of the handout.

15.11.3 📈📈🤩🤩 Secondary Market: Significance? (िद्वतीयक बाजार का मह�)

⇒ ⏬ Cost of Transactions . You don't have to search around for buyers/sellers manually. सब लोग
एक जगह पे �मल जाते है। एक दू सरे को ढू ंढने मे �र�ा का खचार्/लागत बच जाता है।
⇒ Providing Liquidity to Financial Assets. तरलता बढती है �ोिक खरीदार �मल जाता है।
⇒ Facilitating Price Discovery of shares / bonds. औकात पता चल जाती है कं पनी क�।
⇒ Investor sells securities in secondary market→ ₹₹ could be re-invested to a new company’s IPO
in primary market → Contributes to Economic Growth. (पुरानी घिटया कं पनी म� से �नवेश क� रकम �नकाल
कर नई और बहेतर कं पनी म� �नवेश हो सकता है )
15.11.4 🗃🗃🗃🗃 DEMAT Account and Depositories

Figure 3: कागजी शेयसर् को चोरी/आग से बचाऊँ , तो कै से?

⇒ If shares and bonds are traded in paper-form, then transactions are slow & prone to the risk of
theft, forgery and fire. कागजी ��प म� शेर से रखे जाएं तो चोरी होने का जालसाजी का आग लगने का डर😰😰

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⇒ Depositary is an organization that holds the securities (like shares/bonds etc.) in electronic
(=DEMATERIALIZED) form. Then facilitates its trading online.
⇒ Upon client’s request, Depository can ‘rematerialize’ it as well (i.e. giving physical/hard copy of
share/bond etc) to client.
⇒ Customer must open a “Demat” account in a depository-partner (DP) which can be a bank or an
NBFC.
⇒ SEBI regulates them under the Depositories Act 1996. Notable examples:
- Central Depository services Limited (CDSL: owned by BSE, HDFC, Canara Bank etc.)
- National Securities Depository Limited (NSDL: owned by SBI, IDBI, UTI, NSE etc.)
NSDL also has RBI license to operate Payment Bank

Time New DEMAT Accounts created (in lakhs)

2021: April-Nov 220.7
2022: April-Nov 171.5

15.11.5 🛒🛒 (💻💻:�) DEMAT → ASBA Reforms

⇒ Scamster Rupal Panchal (2005) opened multiple fake DEMAT accounts to increase the chances
of getting share allocations in IPO. Then she’d sell such shares in stock-exchange for higher
prices.
⇒ Subsequently, SEBI made PAN Card (issued by Income Tax Dept) compulsory for opening
DEMAT Accounts. SEBI also introduced ASBA (Application Supported by Blocked Amount)- it
allows the underwriter to block the amount in IPO-investor-applicant’s bank account, but only
IF shares allotted to the applicant, his bank money will be deducted. ASBA-Benefits:
o only serious investors with sufficient bank balance can apply.
o investor continues to earn bank interest on his blocked amount until the process of IPO-
share allotment is over.

15.11.5.1 🗃🗃🔢🔢 ISIN Number

⇒ International Securities Identification Number (ISIN) is a Unique 12 characters, consisting of
both letters and numbers. प्र�तभू�तयों का अंतररा�ी� य पहचान सं �ांक
⇒ It’s a serial code to identify securities e.g. Reliance Industries Limited Shares ISIN:
INE002A01018; Infosys Shares: INE009A01021.

15.11.6 🤝🤝Central Counterparties (CCPs), Novation & ESMA controversy

Problem

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 Solution

- CENTRAL COUNTERPARTIES (CCPS) act as intermediary between the buyers and sellers in
financial market. E.g. G-Sec, T-bill, shares, bonds, derivatives, forex, commodities (what are
these things? Ref: Pillar#1C)
- They act as a central counter-party to every trade i.e. CCP becomes seller to the buyer, and
simultaneously CCP becomes buyer to the seller. This process is called “novation”. (HOW? Ans.
Observe the chart carefully.)
- so, if one of the party does not honour the agreement → CCP will take care of it. Thus, CCP
prevents system failure
- 😭😭Controversy? Indian CCPs also deal with international financial trades e.g. in Europe. But,
European Securities and Markets Authority (ESMA) is planning to cancel their license/
registration/ entry. What exactly is the matter? NOTIMP4Exam. Enough to know in 1 line ke
Indian CCPs facing some problem in Europe.

�FAQ: how exactly do they work in real life? How exactly when they cover the losses. ANS.
NOTIMP4EXAM.

15.11.7 🤝🤝CCP Examples in India

The Clearing Corporation of India (CCIL), Indian Clearing Corporation Ltd (ICCL), NSE Clearing
Ltd (NSCCL), Multi Commodity Exchange Clearing (MCXCCL), India International Clearing
Corporation (IFSC) and NSE IFSC Clearing Corporation Ltd (NICCL).

15.11.8 🤝🤝🐅🐅CCP Regulation in India: Who regulates CCP in India?

Matter Regulator
Money transfer between buyer RBI using powers of Payment and Settlement Systems Act, 2007
and seller

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 Foreign currency transactions RBI using powers of Foreign Exchange Management Act, 1999
Shares, Bonds, Commodities SEBI using powers of SEBI Act, 1992 and Securities Contract
(Regulation) Act, 1956 (SCRA)
�FAQ: I have counter arguments and faultu ke PHD/real-life questions about these laws. Ans.
🙏🙏NOTIMP4EXAM. Plz spare me from it. Ask chatGPT.मेरेको माफ करो और ब� दो

15.12�🛒🛒 INVESTORS KE TYPES

15.12.1 Types of Investors: Depending on Buying Capacity

1. � Qualified Institutional Buyers (QIB अहर्ता प्रा� सं �ागत �नवेशक): Investors with expertise and
financial muscle to make large investments in capital markets. E.g. Mutual Funds, Insurance
Company, Foreign Venture Capital Funds etc. SEBI has separate registration norms for them.
a. Anchor investors: They’re sub-type of QIBs who are offered shares before IPO-launch.
This gives confidence to other investors to subscribe the given IPO.
2. �Retail investor: An individual investor who is not a QIB. (आम/खुदरा �नवेशक)
Underwriter will keep quota for each category of investors, as per SEBI norms.

15.12.2 �🛒🛒 Types of Investors: Depending on Buying Behaviour

1. Jobbers (आढ़ती): Full time engaged in buying / selling securities using money from their own
pockets. (Whereas brokers / commission agents buy/sell using money/shares of their clients).
2. STAG (Male Deer): He buys newly issued securities from primary market & sells them in
secondary market for quick profit. प्राथ�मक बाजार से खरीद के िद्वतीयक बाजार म� मोटे मुनाफे पर बेचने क� इ�ा रखता
3. 🐮🐮Bull (तेज�ड़या ): Optimistic speculator who hopes share prices will rise⏫, so purchases (to sell
them later at much higher price). Just like a bull tends to throw his victim up in the air, the bull
speculator stimulates the price to rise.
4. 🐻🐻Bear (मं द�ड़या ) – A pessimistic speculator who fears prices will fall ⏬ so, he sells. A bear
usually presses its victim down to ground. Similarly, bear speculator tends to force down the
prices of securities.

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15.12.3 Style of Trading / Investing based on duration and risk
Margin Trading when a person is buying more shares, than he can afford to. usually done by
borrowing money from the broker. Risky because is the investment fails
then person will get into huge debt.
Day trading / Individuals buy and sell shares over the Internet over a period of a single
Intra-day trading day's trading, with the speculative intention of profiting from small price
fluctuations.
Swing Trader He’s buying a share for just few days or weeks then sells it for profit.
Long term investor He’s buying for himself and he holds the share for more than 1 year.
Block Deal When large value order placed e.g. ₹5cr or more. This is usually done by
institutional investors such as Mutual Fund, Insurance companies etc.
Contra Trading / - investor will do opposite of what everyone else is going. - e.g. in Corona-
investing lockdown, if everyone is buying Pharma shares and ignoring PVR-cinema
shares → then contra trader will begin investing in PVR-cinema shares
(with the hope that after Corona unlock down → cinema industry will
boom and contra-investor will make great profit)
Further subtypes with various animal / bird names can be found on Investopedia but with poor cost :
benefit in exam. #🕰🕰थोड़ा-पढ़ो-आगे-बढ़ो

15.13📈📈 SENSEX & OTHER NOTABLE INDICES (उ�ेखनीय सं के तक/ सूचकांक)

⇒ SENSEX?: Sensitive Index/ सं वेदी सूचकांक. It’s the weighted average of Free Float Market
Capitalization (FFMC) of 30 companies, selected by Bombay Stock Exchange (BSE)’s officials
⇒ NIFTY? National Stock Exchange (NSE)’s index of 50 companies.
⇒ Nikkei? Tokyo Stock Exchange index of 225 companies.
📈📈 SENSEX – when does it go up 📉📉 Goes down when
💦💦 RBI’s soft /easy monetary policy → cheap 💧💧 Tight monetary policy (More in
loan & credit cards → consumers to spend 📑📑Pillar#1A2)
more → more profit to company → more सं कु चन वादी मौिद्रक नी�त के दौरान स�से� नीचे �गरेगा
dividend : investor thinks “better I buy more
shares to get more dividend”: Bullish
Peace, Economic boom / prosperity, Political ⚔ War, recession, political instability →
Stability (शां�त, आ�थक समृ�द्ध, राजनी�तक ��रता) Bearish market. (युद्ध, मं दी, राजनी�तक अ��रता)
When govt. hikes foreign direct investment When govt reduces FDI limit
limits
Merger-Acquisition, New product launched, CEO/MD arrest/FIR, Courts slapping fine,
Environmental clearance given to factory media exposing scandal… (कोई कांड हो जाए)

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 📈📈 SENSEX – when does it go up 📉📉 Goes down when
If bond yield goes down in a manner where If bond yield goes up in a manner where share
bond investor thinks it’s better to pullout investor thinks it’s better to pullout money
money from bonds to buy shares. from Sharemarket & shift to bonds.
What is Bond Yield? Ans. Ref Pillar#1A2 What is Bond Yield? Ans. Ref Pillar#1A2

15.13.1 🐮🐮📈📈🐻🐻MSCI Emerging Market (EM) index

Faded topic. Deleting from handout.
15.13.2 🌬🌬🌬🌬:�⚖� Force Majeure (अभेद्य श��)

Figure 4: Corona के चलते �बजनेस प्रोजे� पूरा नही िकया, तो �ा जेल मे भेज दोगे, या फांसी पे लटका दोगे? कु छ नहीं उखाड़ सकते मेरा!
⇒ French word for ‘superior force’. It refers to unexpected external circumstances (अप्र�ा�शत बाहरी
प�र���तयाँ) that prevent a party to a contract from meeting their obligations. e.g. Acts of God
(natural disasters, epidemics), war, terror attacks.
⇒ In such cases, courts may not punish party for dishonoring contract. (करारनामे के दाय�� को न �नभाना)
⇒ E.g. Corona (COVID-19) Virus → Singapore Govt put restrictions on entry of Chinese →
Singapore construction firms facing labour crunch (श्र�मकों क� कमी) → invoked ‘Force Majeure’ to
clients, “we can’t finish building your homes/offices in time.” Coronavirus: >55million people
infected across the world (as of 2020-Oct).

15.14🐮🐮🐮🐮🐮🐮 SHAREMARKET: 2020- IMPACT OF CORONA

2020- Initial months of lockdown, ⏬⏬ due panic among investors, Force Majure but then
⏫⏫ because (शु�-शु� के महीनों म� �गरावट िकंतु बाद म� ब�त तेजी आई �ोंिक…)
1. Cheap Loans / Expansionary Monetary Policy → Some of that money may have entered the
share market through to large investors. (�व�ार वादी मौिद्रक नी�त)
2. 'work from home' + RBI loan Moratorium- may have encouraged many service sector employees
to invest ₹ in the sharemarket. (तालाबं दी के दौरान लोन क� िक� नहीं चुकानी थी तो कु छ ने वह रकम शेयर बाजार म�
�नवेश क� होगी)
3. Unprecedented demand and profit for IT and Pharma sector- Encouraged the investors to park
their money in such shares at very high price. (तालाबं दी के दौरान सूचना प्रौद्यो�गक� और औषधीय कं प�नयों म�
अप्र�ा�शत तेजी)
4. Youtubers/Reddit/Social media influencers giving online share trading Tips.

15.14.1 🐮🐮📈📈🐻🐻Sharemarket- 2022: IPO Bubble Burst: Case of Paytm (फू ट गया ग़ु�ारा)
Shifted to Mains.

15.14.2 🐻🐻📈📈🐂🐂Sharemarket: 2021-22 observation by 📙📙ES23

Indian share market fell / remained volatile 2022-23 due to

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⇒ Exit of the foreign portfolio investors because of the USA fed-tapering. (More ref: Pillar1A2:
monetary policy lecture.)
⇒ Russia-Ukraine war → 1) imported inflation 2) weakening of Indian and global economy.
⇒ But the fall/shock in the Indian sharemarket was less compared to China, Japan, South Korea etc.
⇒ 2023-Feb: Market fell because of Adani – Hindenburg controversy. (Explained in other section)

�वदेशी �नवेशक अमे�रक� फे ड टेप�रंग के चलते भारत से भाग रहे ह�. तथा �स-यूक्रेन युद्ध के चलते महंगाई म� बढ़ोतरी और वै��क
अथर्�व�ा म� मं दी क� ���त। इन सबके बीच भारत का शेयर बाजार �गर रहा है। िकंतु हमारे शेयर बाजार म� �गरावट, चीन जापान
द��ण को�रया इ�ा�द के शेयर बाजारो मुकाबले कम रही है। एसा आ�थक सव��ण ने पाया।

15.14.3 Proportion of money invested by retailers is falling- says 📙📙ES23

Time Retail Investor’s investment Institutional Investors** Total investment
(A: आम / खुदरा �नवेशक) (B: सं �ागत �नवेशक) = A+B
2021:Apr-Nov 42% 58% 100%
2022:Apr-Nov 37% 63% 100%
**institutional investor means: pension companies, insurance companies, mutual fund et cetera.

15.14.4 Retail investors have decreased participation in the share market due to
⇒ flop/loss-making IPOs in primary market e.g. PayTM (issued @₹2150-> fell @606 in Feb’23)
⇒ increased volatility (ups and downs) in the secondary market due to Fed Tapering , Foreign
investors’ exit etc. (शेयर बाजार म� अ��रता)
⇒ global uncertainties due to Russia Ukraine war. (युद्ध के बाद िक वै��क अ��रता)
⇒ Loss of income due to job-layoffs in IT/Startup sector. (नौक�रयों से �नकाले जाने पर आमदनी नहीं बची)

🔠🔠❓MCQ. In the parlance of financial investment, ‘Bear’ denotes [UPSC-CDS-2012]

(a) an investor, who feels that the price of a particular security is going to fall.
(b) an investor, who expects the price of a particular share to rise.
(c) a shareholder, who has an interest in a company, financially or otherwise.
(d) any lender, whether by making a loan or buying a bond.
🔠🔠❓ MCQ. Which of the following statements is/ are correct? [UPSC-CDS-2012-I]
1. NIFTY is based upon 50 firms in India.

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2. NIFTY is governed and regulated by the Reserve Bank of India.
3. NIFTY is the stock index of Bombay Stock Exchange.
Answer Codes: (a) Only 1 (b) Only 2 (c) Only 3 (d) 1 and 3

15.15👟👟EFFICIENT MARKET HYPOTHESIS /THEORY (EMH)

- financial markets are efficient in processing information and pricing securities. So one investor
CANNOT always KEEP earning more profits than the average trend in market.
- Gist: शेयर बाजार म� जो होना है, वह होकर रहना है. तुम क�नी का चाटर्/बेल�श-शीट पढ़कर तं बूरा कु छ नहीं उखाड़ सकते। भले
आपका एक दाव सही लग जाए, लेिकन दो-तीन गलत भी लग जाएं गे तो. िफर नफा मोटा नहीं सामा�(एवरेज) ही हो जाएगा.
- However, some experts disagree with it. We’ll not debate. थोड़ा-पढ़ो-आगे-बढ़ो.

15.15.1 Beta Value to monitor price volatility or risk of an asset

Indicator to monitor price-volatility/risk of an asset.

Value Meaning
β>1 This company’s share moves faster than sharemarket in both directions.
High Reward: if SENSEX moves upward at 1x speed, this company will move at may be
1.5x speed.
High Risk: If SENSEX falling at 1x speed, this company will fall at 1.5x speed.
Usually Tech/Startup/small-cap companies show this behaviour.
β<1 This company moves slower than SENSEX. Low risk, Low return.
β=1 This company’s share moves parallel to SENSEX.
β=0 uncorrelated to the market. Mona-Lisa Painting: its value changes independently of
SENSEX movement.
β less negatively correlated to the market. This asset moves in the opposite direction of the
than 0 SENSEX. e.g. Bond/Gold. If SENSEX goes up, people will shift money from gold/bonds
to shares so gold/bond will fall
MCQ. [CSP23-SET-A-Q073] In the context of finance, the term ‘beta’ refers to
(a) the process of simultaneous buying and selling of an asset from different platforms
(b) an investment strategy of a portfolio manager to balance risk versus reward
(c) a type of systemic risk that arises where perfect hedging is not possible
(d) a numeric value that measures the fluctuations of a stock to changes in the overall stock market

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15.15.2 Alpha value to compare performance of Mutual Funds

This indicator used mainly to compare a Mutual Fund / Hedge Fund manager’s performance against
a benchmark e.g. SENSEX
Value Meaning
Alpha > 0 This MF gives better profit than SENSEX.e.g. if HDFC-MF has 2% Alpha. Means
when SENSEX claimed 10%, then HDFC-MF gave 12% return.
Alpha = 0 This MF performing same as SENSEX
Alpha < 0 This MF gives less return than SENSEX

15.15.3 🚩🚩🚩 FAQ: Alpha vs Beta similarity / correlation / difference

Term Alpha Beta
Usage Mainly to compare performance of Mutual Mainly to find volatility/risk of a
Funds. share.
Beyond that we’ll NOT PHD. UPSC is only asking one liner from here. We’ll not spend more time.

15.15.4 ⚱Types of Analysis – fundamental vs Technical

Fundamental Analysis Technical Analysis
Investor Company’s profit, loss, Share price related charts-graphs & mathematical-
studies balance sheet, new indicators e.g. Simple-moving-average of the share
what? products-launch etc. price for last 200 days (200-day SMA).
More examples of indicators (listNOTIMP): Relative
Strength Index (RSI), Stochastic Oscillator, Moving
average convergence divergence (MACD) etc.
Suitable for Long term Investor (longer Intraday Trader (buy/sell within a single day)
than 1 year) Swing Trader (buy/sell for few days or weeks)

15.15.5 ⚱DEMAT Portfolio: Meaning, Types, Portfolio Diversification

Portfolio means the collection of assets held by an investor.
In financial market, “Portfolio” means the list of shares/bonds/ETF you’re keeping in your DEMAT
account.

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15.16🗃🗃🗃🗃SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI)

⇒ HQ- Mumbai भारतीय प्र�तभू�त और �व�नमय बोडर्,

⇒ (1988) Formed by an executive order → (1992) Became Statutory Body → powers increased
through amendments in 1999 & 2014. Now it can order search and seizure, attachment of
properties, arrest and detention. (खोज अ�भग्रहण, सं प��यों क� ज�ी/कु क�, �गर�ारी और �नरोध)
⇒ SEBI Board Composition: Chairman + 1 officer from RBI + 2 officers from Union Government
+ 5 members appointed by Union Government.
⇒ Chairman: upto 5 years / 65 age. Reappointment possible.
⇒ 2022: Madhabi Puri Buch-first woman chairperson in history of SEBI. She replaced Ajay Tyagi
(Ex-IAS). Selection was done by Financial Sector Regulatory Appointments Search Committee
(FSRASC) headed by the Cabinet Secretary (IAS).

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⇒ Regulates Process of issuing securities (Bonds, Shares, IPO, ETF, ReIT, INVITs, etc.) using the
Securities Contracts Regulation Act, 1956 [SCRA: प्र�तभू�त सं �वदा �व�नयमन]
⇒ Regulates Places (Depositories, Stock exchanges, Commodity Exchanges etc.)
⇒ Regulates Persons (Investors, Brokers, Fund Managers, Public Limited companies etc.)
⇒ Regulates any Collective Investment Scheme (CIS) of ₹100 cr/> [In the aftermath of SAHARA
scam & Chit Fund scams. सामूिहक �नवेश योजनाए ]
⇒ Further appeal: Securities Appellate Tribunal (SAT) → Supreme Court.
○ Same SAT also hears appeals against the orders passed by Insurance Regulatory
Development Authority of India (IRDAI) and Pension Fund Regulatory and
Development Authority (PFRDA).(More in 📑📑Pillar#1D)
⇒ SEBI has “SCORES” online portal for complaint. (�नवेशक इधर ऑनलाइन फ़�रयाद करे)
⇒ SEBI has Securities Market Trainers (SMARTs) Program for investor education (�नवेशक प्र�श�ण)
⇒ Saarthi app: Sebi’s app for investor awareness. (�नवेशकों म� जागृ�त के �लए सेबी का नया एप)

15.16.1 🗃🗃⚖📜📜Securities Market Code

⇒ 💼💼Budget-2021: we’ll create a single new law named "Securities Markets Code" by merging
older acts 1) SEBI Act, 1992, 2) Depositories Act, 1996, 3) Securities Contracts (Regulation) Act,
1956 4) Government Securities Act, 2007. (पुराने �व�भ� कानूनों का एक�करण �वलीनीकरण करके "प्र�तभू�त बाजार
सं िहता" नामक नया कानून बनेगा)
⇒ Benefits? Same as the bullet points written in conclusion of “SEBI Investor Charter.”

15.17🗃🗃💪💪 SEBI INVESTOR CHARTER (�नवेशक अ�धकार पत्र)

⇒ (Definition) A citizens’ charter (नाग�रक अ�धकारपत्र) is a document of commitments made by a
government agency to the citizens in respect of the services being provided to them. e.g. if "X"
problem is not solved in "Y" days then complain to "Z" officer on ABC Phone number / email
address etc.
⇒ (Origin) 💼💼Budget-2021: we’ll create an "investor charter" (�नवेशक अ�धकार पत्र) for financial
investors across all financial products (Share, Bond, derivatives, Commodities market etc).
⇒ SEBI notified this in 2021-November.
o This charter applies on Entities/actors e.g. investors, mutual funds, stock brokers, stock
exchanges, depositories, underwriters, real estate investment trusts (REITs),
infrastructure investment trusts (InvITS), & other collective investment schemes,
o This charter applies on Events e.g. initial public offerings (IPO), FPO, etc.
⇒ More details shifted to Mains-Handout. #RAFTAAR.

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15.17.1 🗃🗃🗃🗃: 🏃🏃 SEBI: why protect investors & ⏫investors participation?

Figure 5: पूंजी बाजार क� जड़ो को गहरा करना है तो �सफर् अमीरों का नही, गरीबो क� बचत का पैसा भी जाना चािहए!
⇒ Share market scams erode publics’ hard-earned savings → alcoholism, depression, suicide and
other social ills. (जनता क� बचत का पैसा घपले म� बबार्द तो जनता म� शराब, अवसाद, आ�ह�ा और अ� सामा�जक बुराई)
⇒ Duped investors will shy away from share market & they may invest in gold / real estate = not
very beneficial to economy as it our import-bill, creates black money opportunities.
⇒ If households don’t participate in capital market → companies will have to approach the banks
to get more loans. But banks’ lending capacity is limited by CRR, SLR, PSL, NPA, PCA.(REF in
📑📑Pillar#1B2)
⇒ If more retail investors participate in capital market = “Deepening of the capital market” →
factory expansion, job creation, and economic growth. (खुदरा �नवेशक क� मदद से पूंजी बाजार क� जड़ों क� ओर
गहरा करना- तािक रोजगार सृजन और आ�थक वृ�द्ध म� मदद �मले)

15.17.2 💼💼💼💼: measures to ⏫ retail investors participation- 25% public holding in Govt
Companies
⇒ Budget 2019: For all the listed government companies, we will strive for minimum 25% public
shareholding. (आम जनता को भी सरकारी कं प�नयों के शेयर खरीदने का मौका �मले)
⇒ SEBI to raise minimum public shareholding in listed private sector companies to 35%.
⇒ 👻👻ATMANIRBHAR: minimum shareholding related norms deferred under Corona crisis.

15.17.3 Tulip Mania (िकसी �नवेश के पीछे सामूिहक पागलपन)

− mid-1600s: Tulip flower was introduced in Holland/Netherlands.
− some people started buying Tulips in high quantity, with the hopes of re-selling it to customers at
much higher price. But ultimately this bubble collapsed.
− Today, if price of an asset (share, real-estate, Bitcoin) start climbing unreasonably high →
Columnist describe it as ‘Tulip Mania’.

15.17.4 📈📈 📉📉Volatility / ViX (क�मतों म� अ��रता)

− If the prices of a share changes rapidly in a short time span → we say it has “high volatility”. e.g.

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 Adani after Hindenburg report.
− Mathematically expressed thru an indicator called “ViX”

15.18🗃🗃🗃🗃: 🏃🏃 SEBI REFORMS TO BOOST INVESTORS’ CONFIDENCE?

15.18.1 🪓🪓Circuit breaker

⇒ Harshad Mehta (1992), Ketan Parekh (2001) arranged money from banks, used it for rigging the
share prices to make windfall gains during Bull-runs by other investors. Once the prices crashed,
small investors suffered. ब�कों से गबन बं द करके पैसा लाए �जससे कं प�नयों के शेयर जमकर खरीद के उसक� मांग और दामों
को बढ़ाया तािक लालच म� अ� �नवेशक भी उन कं प�नयों के शेयर ऊँ ची क�मतों म� खरीदने लगे अंत म� यह लोग अपने शेयर बेच कर
भाग गए
⇒ To prevent such scams, SEBI introduced Circuit Breaker System, wherein if fluctuation in the
share prices is more than “x%” than previous day, then stock exchange must stop trading for “y”
minutes.

15.18.2 🤝🤝⏰T+1 Settlement instead of T+2

⇒ Badla System/Carry forward system: Buying of shares using borrowed money & making
promises to carry forward the settlement for upto 72 days. scamsters misused (इसक� टोपी उसके सर पे:
सौदा आज करते लेिकन पैसों का भुगतान/शेयर क� िडलीवरी ७२ िदनो बाद होती- और इस समय के दौरान वही घपलेबाज उ�ी शेयर
बेचने क� टोपी दू सरों को पहेनाते रहेता)
⇒ so SEBI discontinued Badla System (in 2001) & introduced (T+2) rolling settlement system i.e.
after trade is conducted, the parties must settle it within two working days (= buyer pays money,
seller deliver shares/bonds/securities). -> 2022: T+1 settlement started.

15.18.3 🤝🤝⏰T+1 hour settlement

SEBI planning it from 2024. Let’s wait and watch.

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15.18.4 🛒🛒 (💻💻:�:😈😈) Illegal Trading: Dabba-trading, Insider Trading, Front Running
⇒ Dabba Trading / Bucketing / Box Trading: While share trade occurs at stock exchange linked
with DEMAT accounts, the Dabba Trades occur in the unofficial books/ledgers of an
unscrupulous broker. He may or may not execute those orders in actual DEMAT account.
Investor prone to scam, govt deprived of taxes. So, SEBI declared it illegal.
⇒ Insider Trading (भे�दया लेनदेन): Whenever company launches new products, wins unique patents,
or undergoes merger/acquisition- its share prices may ⏫. If a person associated with company
uses such confidential information for buying/selling shares to make windfall gains. Such insider
trading is illegal.
⇒ Front Running (illegal) : e.g. LIC Mutual Fund manager Yogesh knew that LIC-MF was going to
invest heavily in X company. So he bought the shares of that X company in advance in his
personal account (to make profit when price rises after LIC-MF starts buying). SEBI banned him.

�� FAQ by Zhande-walle Babushone: what is the difference between insider trading and front
running?? Can we say front running is a some type of insider trading? I want to think and reflect for at
least 50 minutes on this matter. Ans. If you are intelligent enough, then figure out yourself, otherwise
it is notimp. Move to next topic. थोड़ा-पढ़ो-आगे-बढ़ो.

15.18.5 🛒🛒 (💻💻�:�) Algo Trading & Co-Location

What does this mean? Explained in the video.

15.18.6 🧯🧯Investor Protection Fund (IPF)

⇒ SEBI requires Stock exchanges (BSE, NSE etc) and commodity exchanges (NSEL, MCX etc) to
setup Investor Protection Fund (IPF: �नवेशक सुर�ा कोष).
⇒ IPF covers investors’ ‘non-speculative’ type of losses. e.g. if the other party is not delivering
shares because of some court case. IPF also promotes investor education and awareness.
🚩🚩🚩 FAQ by Zhande-walle Babushone: if we’ve CCP then why is this fund required? Ans. ok
then please ask SEBI to shut it down. 1-linerGK hai. accept and move to next topic.

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15.18.7 🐻🐻📉📉Adani Hindenburg controversy (2023) & Flash Crash
⇒ Hindenburg Research firm (USA) alleged that Adani was doing stock manipulation, accounting
fraud, money laundering, taking too much loans beyond the capacity to repay etc. (HOW
exactly? Ans. Notimp after observing PYQ.)
⇒ then investors panicked and started exiting Adani shares at loss.
⇒ Shareprice fell from ₹3500 (2023-Jan) to ₹1500 (2023-Feb). Flash Crash = term to describe
sudden (and huge) fall in share price. e.g. Adani after Hindenburg report (2023)
⇒ Adani’s supporters argue that Hindenburg spreading negative news to make the share price fall,
to make profit thru short selling of Adani shares. (How? Explained in the next section:)
⇒ SC has setup Justice A M Sapre panel to investigate Adani share crash and other regulatory
aspects for stock markets.

15.18.8 📉📉Short selling (make profit from falling share price)

⇒ Short selling occurs when an investor borrows a share (�नवेशक शेयर उधार लेता है)
⇒ then sells it in the market (िफर बाजार म� बेच देता है)
⇒ with hope to buy it back later for lesser price. (इस उ�ीद म� िक बाद म� उसे स�े दाम म� वापस खरीद लेगा तािक उसे
मुनाफा हो जाए.)
⇒ See the graphics given below. & watch video lecture for better understanding:

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15.18.9 �Finfluencers: Bollywood star Arshad Warsi banned from Sharemarket
⇒ Finfluencer is an influenzer, who gives advice on financial investments via social media.
⇒ Sometimes they give wrong advice on behest of share market scamsters. SEBI formulating
guidelines to regulate this.
⇒ 2023: SEBI banned Bollywood actor Arshad Warsi for posting misleading videos on YouTube
channels encouraging investors to buy shares in Sadhna Broadcast. Exact scam = NOTIMP.

15.18.10 Sharemarket- company related documents

Guidance Guidance report contains company’s estimate of its future growth. Company releases
this report for investors/shareholders/analysts.
Prospectus it is the document containing all the information about the company which is issuing
IPO.

15.19🛒🛒 (🔪🔪🔪🔪) BOND MARKET REFORMS

15.19.1 🐯🐯🛒🛒 (🔪🔪🔪🔪: 🧔🧔🧔) G-Sec Trading- Retail investors’ RDG @RBI
⇒ RBI launched “Retail Direct Scheme” in 2021.
⇒ Under this scheme, RBI permits “Retail Direct Gilt (RDG) account” for retail investors on its E-
Kuber online platform. (आम �नवेशक �रज़वर् ब�क म� आरडीजी नामक खाता खोल पाएं गे)
⇒ Both Resident Indians & non-resident Indians (NRIs) can open this account. (गैर �नवासी भारतीय भी)
⇒ Then Retail investors can directly buy Treasury Bills (T-Bill), G-Secs (of Union Government),
State Development Loans (SDL are ‘G-secs’ of State Govts) and Sovereign Gold Bonds, from RBI
directly. (आम �नवेशक सीधा �रज़वर् ब�क से इन प्र�तभू�तयों को खरीद सकता है.)
⇒ Application fees to open the account = ₹ ZERO
− 🤩🤩Benefit? 1) Earlier retail investors bought G-sec “indirectly” through mutual funds wherein
mutual fund manager (MF) charged commission/fees. Now retail investor can buy directly so
does not have to pay such commission/fees to MF managers. (�बचौ�लयों को दलाली/कमीशन नहीं देना होगा)
− 🤩🤩2) Deepening of G-Sec market through ⏫retail participation (बाजार क� जड़ों को गहरा करेगा)

15.20🐯🐯🛒🛒 (🔪🔪🔪🔪: 🧔🧔🧔) G-SEC TRADING: RBI'S NDS-OM, OTC

⇒ RBI owns and regulates Negotiated Dealing System (NDS) for trading in G-Sec.
⇒ Clearing Corporation of India Limited (CCIL a company founded by SBI, IDBI, ICICI, LIC etc)
maintains this system.
⇒ NDS system for recording the transactions of G-Sec buy-sell. NDS has following components:
i.e. buyer/seller call each other on the telephone, make the deal about buying
Telephonic and selling and then inform the reserve bank's NDS system (ke we've done this
deal).
Over-The- Buyer physically walks into the seller's office (or vice versa) and conducts the
Counter (OTC) transaction. Later they report transactions to RBI's NDS System (ke we've done

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 this deal). (ऑिफ़स म� �ब� �मलके ख़रीद-�बक्र� कर�गे, बाद म� �रज़वर् ब�क को सू�चत कर�गे िक हमने ये
िकया था)
Negotiated Dealing System-Order Matching system (NDS-OM): electronic,
computer screen based, anonymous, order driven trading system for dealing in
NDS-OM G-sec's secondary market.
Buyer-seller places orders online without knowing names/phone numbers of
each other. (ख़रीददार और �वक्रेता एक दू सरे क� असली नाम पहचान नहीं जान पाएं ग)े
🚩🚩🚩FAQ: Then what is E-Kuber?
⇒ Ans. E-Kuber is the core banking solution (CBS: REF Pillar1A1) platform of RBI to digitally
handle all operations of RBI e.g. NEFT-RTGS, Repo, MSF, CRR, PSLC certificate trading, G-Sec,
Sovereign Gold Bond, Retail Direct Scheme (RDG) etc.
⇒ You may think of E-kuber as a Windows Operating system, & NDS as a sub-component/excel-
software inside of it that handles G-Sec buying-selling database management/account keeping.

15.20.1 📞📞Bid-Ask Spread

Player Jetha wants to buy at Bhide wants to sell at Spread / Gap
(Bidding price) (Asking price)
WIPRO Share 600 800 ₹200
In above situation, the deal can’t happen because the Bid-Ask Spread is high.
- Either buyer or the seller will have to make price-compromise, only then deal can happen.
- If bid-ask spread is HIGH = liquidity of the asset decreases. Because it becomes difficult to sell
such asset. (खरीददार क� बोली/क�मत और बेचने के भाव म� �जतना अंतर �ादा होता है तो उस सं प�� क� तरलता कम होने
लगती है �ोंिक उसको बेचना मु��ल हो जाता है)

15.20.2 📞📞Arbitrage: Making profit due to difference in to markets/location.

Location Delhi Mumbai Arbitrage

Gold Price (10gm) 60,900 60,800 ₹100

- In above example, a dealer can buy the gold from Mumbai and sell to Delhi and he will make a
profit (arbitrage) of ₹100.
- nowadays the arbitrage in financial assets (share/bond etc) is very low because of the online
trading.

🔠🔠❓MCQ. Find correct statement(s): (Asked in Prelims-2021)

1. Retail investors through demat account can invest in ‘Treasury Bills’ and ‘Government of India
Debt Bonds’ in primary market. [आम �नवेशक डीमैट खाते द्वारा प्राथ�मक बाजार म� सरकारी प्र�तभू�तयों म� �नवेश कर
सकता है]
2. The ‘Negotiated Dealing System-Order Matching’ is a govt securities trading platform of the
Reserve Bank of India. [NDS-OM सरकारी प्र�तभू�तयों म� खरीद �बक्र� करने के �लए �रजवर् ब�क द्वारा बनाया गया मं च है]
3. The ‘Central Depository Services Ltd.’ is jointly promoted by the Reserve Bank of India and the
Bombay Stock Exchange. [CDSL को �रजवर् ब�क और बॉ�े �ॉक ए�च�ज द्वारा सं यु� �प से बनाया गया था]
Codes: a) 1 Only b) 1 and 2 c) 3 Only d) 2 and 3

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15.21🌽🌽🧶🧶🧶🧶🧶🧶 COMMODITY MARKET, FMC, SEBI MERGER
- A commodity market / exchange (व�ु बाजार) is a place where buyers & sellers trade goods in bulk
- food grains, cotton, precious metals or energy resources (coal, oil gas)
- “Commodity Futures”: Type of contract for future delivery and settlement of commodity e.g.
“on 1/5/2021, I shall deliver you 500 quintals of wheat at X price”.
- Commodity exchanges were under a statutory regulator Forward Market Commission (FMC)
under the Ministry of Consumer Affairs and Public Distribution.
- But Jignesh Shah generated fake receipts without any commodities in the warehouses & traded at
NSEL-commodity exchange. FMC failed to prevent scam. (एक कांड हो गया था)
- So first FMC transferred to Finance Ministry and FMC ultimately merged with SEBI (2015).

15.21.1 💍💍🎖🎖🎖🎖🎖🎖Commodity Market: Gold exchanges & 💼💼Budget-2021

⇒ Gold exchange is a special type of commodity market devoted only to Gold trading.
⇒ 💼💼Budget-2021: We will undertake reforms in the regulation of gold exchange markets in India.
1) SEBI will be the regulator
⇒ 2) Warehousing Development and Regulatory Authority (WDRA- Statutory body under Dept of
Food and Public Distribution) Will be responsible for Warehousing/Vaulting, Assaying,
Logistics of gold exchanges. (भं डारण, गुणव�ा परी�ण, रसद के मामलों क� �ज�ेदारी)

15.21.2 💍💍💍💍💍💍💍💍Commodity Market: Electronic Gold Receipts (EGRs)

�णर् कं प�नयां “ड�ूडीआरए” नाम क� वैधा�नक सं �ा द्वारा पं जीकृ त गोदामों म� सोने क� ईट/�ब��ट जमा कर�गे, उसक� “इले��ॉ�नक
�णर् रसीद�” सेबी द्वारा पं जीकृ त इले��ॉ�नक गो� ए�च�ज पर बेची जाएगी। ग्राहक/�नवेशक ऑनलाइन तरीके से उसे खरीद पाएगा
- Stage1: Gold companies deposit their gold in the warehouses authorized by Warehousing
Development and Regulatory Authority (WDRA, it is a statutory body under Ministry of
Consumer Affairs, Food & Public Distribution.)
- Stage2: Warehouse manager generates Electronic Gold Receipts (EGRs).
- Stage3: EGR are listed on the SEBI regulated electronic gold exchanges. → Buyer can buy the
gold electronically and be assured of the quality. Later he may even sell this EGR to another
investor or he may goto warehouse to collect physical gold.
🤩🤩Benefits: 1) Assured quality. 2) Tax evasion is difficult due to online transactions monitored by
SEBI. इसे ग्राहक को �णर् क� गुणव�ा के बारे म� सु�न��त होगी। कर चोरी मु��ल होगी �ोंिक ऑनलाइन खातों क� �नगरानी होगी.

15.21.3 💍💍💍💍💍💍💍💍Commodity Market: India’s first bullion exchange (2022)

India International Bullion Exchange (IIBX) is India’s first bullion exchange @ GIFT City, Gujarat.
⇒ Bullion refers to physical gold and silver of high purity stored as coins, biscuits or bricks (ingots).

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⇒ A bullion market/exchange is a place where large quantity of gold and silver is traded for 24/7
basis. (बु�लयन माक� ट ऐसा �ान है जहां बड़ी मात्रा म� सोने और चांदी का िदनरात अ�वरल कारोबार होता है।)
15.22� RELATED BODIES WITH SIMILAR SOUNDING NAMES

Figure 6: अभी भी इतने सारे "कांड" �ो हो रहे है, गवनर्र साहब?- �व�मं त्री @FSDC meeting.
- Financial Stability & Development Council: Chairman – Finance Minister. Other
FSDC members – 1. RBI Governor 2. SEBI chief 3. IRDAI chief 4. PFRDA chief 5. IBBI
(2010) chief & govt officials
�व�ीय - Functions? Supervision of the economy & large financial conglomerates,
��रता coordination among the financial regulators, financial literacy and financial
और �वकास inclusion.
प�रषद - Secretariat assistance by: FinMin → Dept. of Economic Affairs (आ�थक मामलों का
�वभाग)
FSB - Financial Stability Board is a brainchild of G20. (�व�ीय ��रता बोडर्)
(2009) - Functions? Financial monitoring at global level, Coordination between national
HQ: financial regulators bodies. (अलग-अलग देशों के �व�ीय �नयं त्रक के बीच तालमेल)
BASEL - India has 3 seats in FSB: 1) Secretary of Department of Economic Affairs (IAS) 2)
Dy. Governor of RBI 3) SEBI chairman
FATF - Financial Action Task Force (�व�ीय कारर्वाई कायर्दल) is a brainchild of G7.
(1989) - India member in 2010. Function? Combating Money laundering and terror
HQ: Paris finance. (More 📑📑Pill#2) (धन शोधन और आतं क� �व�पोषण से लड़ना)
- International Organization of Securities Commissions (IOSCO) is the
IOSCO international body of world's securities regulators. SEBI is a member.
- Famous for its IOSCO Guidelines for Investors Protection & risk prevention
🔠🔠❓ 'Financial Stability and Development Council': find correct statement(s): (Pre-2016)
1. It is an organ of NITI Aayog.
2. It is headed by the Union Finance Minister
3. It monitors macro-prudential supervision of the economy.
Answer Codes: (a) 1 and 2 only (b) 3 only (c) 2 and 3 only (d) 1, 2 and 3

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15.22.1 🏫🏫�NISM- capacity building for financial market professionals - 👛👛Budget-2023

⇒ National Institute of Securities Markets (NISM) is an educational institute set up by SEBI. HQ:
Mumbai, Foundation Year-2006
⇒ �Budget-2023: NISM to conduct more training courses for financial Market
⇒ NISM will give them degrees, diplomas and certificates for finishing such courses
�व�ीय सं �ानों म� कायर्रत पेशेवरों के �मता वधर्न के �लए �व�वध �डग्री और �ातक, �ड�ोमा और स�ट�फके ट �श�ा कायर्क्रम रा��ीय
प्र�तभू�त बाजार सं �ान (एनआईएसएम) द्वारा चलाए जाएं गे

15.23📦📦 � � INVESTMENT FUNDS → MUTUAL FUND (MF) FOR AAM-AADMI

Figure 7: swag से कर�गे 'middle-class' का '�ागत'। Observe colors in logo, meant for attracting ordinary crowd
⇒ Mutual Fund is an Asset Management Company (AMC-NBFC) that pools savings of (retail)
investors and gives them “Units”.
⇒ MF Manager parks this money in securities & builds his ‘portfolio’.
⇒ Whatever dividend/ interest is generated from the portfolio, it is distribute among investors in
the proportion of their units.
⇒ Investor pays Entry Load (= fees for joining), Exit Load (= fees while quitting). SEBI regulates
these fees.
⇒ Due to low deposit rates in banks, people invested money in mutual funds however post-IL&FS
crisis, corona crisis, charm declining because mutual funds are subject to such market risks.
⇒ ⚾📻📻⚾🎙🎙✋ “Side pocketing”: SEBI ‘s technical guidelines to help MFs to separate their
IL&FS type stressed/toxic assets from their standard assets. Helps protecting the investors.
How?NOTIMP.

15.23.1 📦📦 � � Mutual fund → ESG, Shariya Mutual Funds

⇒ ESG Mutual Funds= These mutual funds will invest clients’ money in companies that have good
performance on Environmental, Social, And Governance (ESG) aspects.
⇒ Shariya Mutual Fund= These mutual funds will invest clients’ money in companies that are
compliant with Islamic Shariya law. E.g. They will not invest in alcohol, pork, gambling etc

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 related companies.

15.23.2 📦📦 � � Mutual fund → SIP, ELSS, ULIP

⇒ Traditional Mutual Fund = client invests entire amount at once. एक साथ पूरी रकम जमा करानी होती है
⇒ Systematic Investment Plan (SIP)= Mutual fund wherein client deposits small-small fixed
amounts at fixed interval e.g. month basis etc. ग्राहक छोटी-छोटी िक�ों म� रकम जमा करवाता है
⇒ Equity Linked Savings Scheme (ELSS)= It is a sub-type of mutual fund where money is locked in
for 3 years and invested in equities (shares). It’s eligible for certain benefits in Income Tax.
⇒ Unit linked insurance policy (ULIP)= client invest money in a scheme wherein → (1) some ₹₹
goes into Mutual Fund (2) some ₹₹ goes into insurance policy (📑📑Ref: HDT-Pillar#1D)

15.23.3 📦📦 � � Mutual fund → 🎛🎛 Mutual fund risk-o-meter

⇒ SEBI requires mutual fund company to disclose how much risk is present in their scheme, on a
monthly basis, thru a digital dashboard called 'risk-o-meter'. (िकतने जो�खम पूणर् तरीके से �नवेश कर रहा है)
⇒ It shows 6 categories of risk: low, low to moderate, moderate, moderately high, high, (#)very
high risk. (#) SEBI added this new category 'very high risk' in 2020-Oct.
⇒ This helps the investor to make decision- which Mutual fund he wants to joins depending on his
risk appetite. (उस िहसाब से �नवेशक तय कर� उसे कौन से सलामती पूणर् या जो�खमपूणर् �ूचुअल फं ड म� जाना है.)

15.23.4 📦📦 � � Mutual Fund: Backstop Entity- SEBI proposal for stressed MF

NOT YET formed. And outdated for 2024-25. So deleting it. #RAFTAAR for Prelims.
15.23.5 🛒🛒 (🔪🔪🔪🔪: 🧔🧔🧔) Bond Buying Institution in 💼💼Budget-2021
NOT YET formed. And outdated for 2024-25. So deleting it. #RAFTAAR for Prelims.
15.24📦📦 � � INVESTMENT FUNDS → HEDGE FUND (हेज फ�) FOR RICH-AADMI

Figure 8: Swag से नही कर�गे 'middle-class' का '�ागत'। Observe ‘premium’ logo-designs to attract rich people
⇒ Special type of Mutual Fund meant for HNI (High Net Worth Individual) who wants high risk
high return. SEBI norms: Minimum investment per person is ₹1 crore. (�सफर् अमीरों के �लए है)
⇒ Hedge Fund manager will invest their money in Junk Bonds, Risky assets; he’ll do risky trading
activities such as Arbitrage, Leverage, Short Selling, Future&Options(F&O) trading, Derivatives
Trading etc. to generate maximum return. (how is that done in real life, what do these words
mean? = UPSC-CSE not for recruitment of HF managers.)

15.24.1 📦📦 � � Investment Funds: “Accredited Investor”

Deleting from handout. I’m not finding it exam-worthy anymore.

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15.24.2 📦📦 � 🏬🏬 🛩🛩 Investment Funds → REITs / InvITs: for rich-aadmi
REITs: Real Estate Investment Trusts InvITs: Infrastructure Investment
-(भू-भवन-सं प�� �नवेश �ास ) Trusts-(अ�धसं रचना)
Who can HNI / institutions: Min. ₹2 lakh ₹10 lakh. ₹1 lakh
invest? ₹50,000 investment (SEBI ⏬ reduced minimum limits
in 2019 to attract more investors)
Manager parks in real estate projects that are soon to In airport, highway, thermal plants,
the money in? complete. gas grid etc. He’ll earn from toll
He’ll earn income from rent / sale. collection at highways, services fees
at airports etc.
Example Blackstone-Embassy group IRB, India-grid
✅Benefits of REITs and InvITs-
 Stressed developer gets new finance to finish the project while HNI gets new opportunity to
invest his money, and he may also sell the units to third party via stock exchange.
 SEBI permitted these instruments in 2014. Later SEBI relaxed technical norms related to capital,
leverage, issue size but they are not important for us. हर तकनीक� �नयम अपने �लए काम का नहीं

15.24.3 📦📦 � � Investment Funds → Sovereign Wealth Fund (सं प्रभु धन कोष)

⇒ State owned investment fund, wherein central bank, finance ministry and other public sector
financial intermediaries park their surplus fund. →money used for investment.
⇒ E.g. 2020-Jun: Abu Dhabi Investment Authority (ADIA) bought 1.16% of Reliance Jio for
₹5600+cr. Singapore's GIC sovereign wealth fund, Qatar Investment Authority (QIA) also active
in Indian market.
⇒ What is National Investment & Infrastructure Fund (NIIF) Ans. Ref: Pillar#5: Infrastructure

15.25📦📦 🏛🏛 INVESTMENT FUNDS → CPSE-EXCHANGE TRADED FUNDS (ETF: ईटीएफ)

⇒ Disinvestment (�व�नवेश): government sells it shares from Central Public Sector Enterprises
(CPSE: क� द्रीय सावर्ज�नक �ेत्र के उद्यम) but does not reduce its shareholding below 51%.
⇒ If Govt’s shareholding reduced below 51%, then it is called Privatization (�नजीकरण), although
NITI prefers the term ‘Strategic Disinvestment’. (More in Pill#2)
⇒ 2014: Govt wanted to disinvest 10 CPSE (ONGC, GAIL ltd etc). If govt tried to sell individual
company- shares, it would be more time consuming, and govt may not get good prices for each
company.
⇒ So, Govt gave CPSE-shares to a fund manager Goldman Sachs - who created new securities out
of it, called “Exchange Traded Funds (ETF)”, and made a “New Fund Offer (NFO)” to the
public to subscribe to these securities at ₹ 10 per unit.

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⇒ If an investor holds the ETF → he will get returns from the dividend generated by those CPSE-
companies in the backend. He may also sell these ETF to a third party via stock exchange, hence
called Exchange Traded Funds.

Figure 9: how do exchange traded funds (ETF) work?

⇒ BHARAT-22: Another CPSE-ETF when Govt wanted to disinvest shares from 22 companies
including CPSE, PSBs and UTI using ICICI Prudential as fund manager (2017-18). However,
PSB-NPA problem → poor dividends → BHARAT-22 not giving good returns, so, investors
response was initially lukewarm.
⇒ Later govt announced, “We’ll give the ELSS-walla income tax benefits to CPSE-ETF-investors as
well” to attract investors.
15.25.1 (🦁🦁🔪🔪)📦📦: (🏛🏛🛒🛒🛒🛒) Bharat Bond (Debt) ETF (2019)
⇒ Fund Manager (Edelweiss Asset Management ltd) → He’ll issue Bharat Bond-ETF.
⇒ Maturity: 3 yrs and 10 years. Unit Size: ₹1000 each. So even middle-class investors buy these
Bond-ETFs.
⇒ Fund managers will invest this ₹₹ into a basket of bonds issued by Central Public Sector
Enterprises, Central Public Financial Institutions (CPFIs such as public sector bank and
insurance companies) and other Government organizations. ETF will be tradable at the stock
exchange.
👍👍 Bharat bond ETF: Benefits?
 For Government companies = Easier and more efficient to borrow ₹₹ instead of individually
launching their bonds in the market. एक एक सरकारी कं पनी अलग से बांड जारी करती तो शायद �नवेशक सब को नहीं
�मल पाते
 For Investors = Safety, assured return on bonds, irrespective of Government company’s profit.
 ⏫retail participation → deepening capital market. (खुदरा �नवेशक क� मदद से पूंजी बाजार क� जड़ों क� ओर
गहरा करना)
 💼💼Budget-2020: given success of Bharat bond ETF, we are planning to launch another debt-
ETF containing G-sec. This will help the retail investors to invest in G-sec.

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Misc. : Gold-ETF: Investors give money → manager buys gold for safekeeping and trades it
depending on price movements → returns are divided among the unit-holders. In between, the
investor may sell his Gold-ETF to third party via Stock Exchange therefore they’re also Exchange
Traded Funds. How/why/NOTIMP

15.25.2 (🦁🦁🦁🦁)📦📦: (🏛🏛🏛🏛🏛🏛) CPSE-ETF vs Mutual Fund

Table 3: Sad that I’ve to spoonfeed this much
Mutual Fund CPSE-ETF
Objective = invest clients’ money in Objective different than Mutual Fund
shares/bonds (1) help Government for its disinvestment
(2) help Government company to borrow money
(Bharat-Bond ETF)
fund managers may buy/sell variety of He’s not doing that. His objective given above.
shares and bonds of Government
companies and private sector companies
for best returns through out the scheme.
a fund manager may also change the His portfolio (list of govt companies’ shares/bonds)
composition of the portfolio for example if is fixed. It’ll not change.
Infosys shares are not performing well →
he may sell them and fill up the box with
Wipro shares for better dividend.
15.26📦📦 INVESTMENT FUNDS → ALTERNATIVE INVESTMENT FUNDS (AIF)

It’s a technical classification by SEBI (वैक��क �नवेश कोष)

- AIF Category I: They generate positive spillover effects on the economy. Example: Venture
Capital Funds, Angel investors fund, SME Funds, social venture fund, Infrastructure funds. SEBI
keeps relaxed / lighter norms on them. जो िक अथर्तंत्र म� सकारा�क असर उ�� करते ह�
- AIF Category II: Neither in Cat-1 nor in Cat-3 E.g. Private Equity or Debt Fund. जो ना तो ऊपर क�
श्रेणी म� है ना नीचे क� श्रेणी म� है
- AIF Category III: They undertake excessive risk to generate high returns in short period of time.
E.g. Hedge Funds. SEBI norms are stricter/heavier on them, because otherwise they may
destabilize the capital market. जो िक अथर्तंत्र म� जो�खम बढ़ाते ह�, नकारा�क असर उ�� करते ह�

15.26.1 (🦁🦁🦁🦁):(🏗🏗🏠🏠) Govt’s AIF for Real Estate Sector (2019)

Outdated for 2023 so deleting.

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15.27🗃🗃 � FORWARD / FUTURE CONTRACTS & CALL / PUT OPTION

Figure 10: भ�व� मे खरीदने का सोदा तो िकया, लेिकन दाम �गर जाए, तो खुद को बचाऊँ तो कै से?
- A Forward / Future contract is a customized contract between two parties where settlement takes
on a future date at a price/quantity agreed upon today. E.g. on 1/5/2025 I shall sell you 100 nos. of
Infosys shares at ₹1000 each.
- In such contracts, there is a risk of other party not honoring commitment if he’s getting better
deal elsewhere in the future. So, for protecting (=hedging) themselves, they (=buyer or seller)
may buy “Option” from a third party by paying fees. नुकसानी से बचने के �लए बीमा �लया जाए
- Option is a type of insurance for executing the forward/future contract in a manner beneficial to
them e.g. I’ll sell you for ₹1000 on X date, & you must buy, but if I’m getting another buyer who
is willing to pay ₹1500 then I may not sell you & you can’t compel me. Such ‘insurance options’
are further subdivided into Call Option and Put Option, their internal difference & real-life
mechanism not imp. for UPSC.
- Hedging = Act of purchasing such options/insurance to prevent your losses.

🔠🔠❓Which one of the following terms is used in Economics to denote a technique for avoiding a
risk by making a counteracting transaction? [UPSC-CDS-2016-I]
(a) Dumping (b) Hedging (c) Discounting (d) Deflating

15.28🗃🗃 🔗🔗 DERIVATIVES & SWAPS (�ु�� प्र�तभू�तयां और अदला-बदली)

⇒ A derivative is a contract whose value is derived from the value of another underlying asset
which could be a share, bond, commodity or currency. इस प्र�तभू�त का मू� िकसी और सं प�� से उद्भ�वत होकर
आता है
⇒ They’re usually generated by the process of ‘securitization’. E.g. NHB taking loan papers from
banks, using them to generate new Mortgage Backed Securities. (प्र�तभू�तकरण क� प्रिक्रया से इसे बनाते ह�)
⇒ SWAP: is derivative instrument to swap one financial asset with another financial asset (usually)
to reduce the risk e.g. Currency Swap Agreement between two countries to protect themselves
against dollar volatility (more in 📑📑Pillar#3).
⇒ Similarly, there are Credit Default Swap (CDS) agreement against the risk of default, Interest
swap agreement to protect against volatility in interest rates. But their mechanisms NOT IMP.

15.28.1 🗃🗃🗃🗃: 🚛🚛🚛🚛🚛🚛 Bilateral Netting of Qualified Financial Contracts Act 2020
DELETED from 2022 because outdated/faded topic.

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15.29👻👻👻👻👻👻 PARTICIPATORY NOTES (P-NOTES: पा�ट�सपेटरी नोट्स)
⇒ A foreigner wishes to invest his money in India but does not want to go through the hassles of
registering with SEBI, getting PAN card number, opening a DEMAT account etc. So, he will
approach a SEBI registered foreign institutional investor (FII) / foreign portfolio investor (FPI)
such as Morgan Stanley, Citigroup or Goldman Sachs. He’ll pay them & instruct them to
purchase particular shares and bonds and store them in their Demat account.
⇒ Then FII will give him P-Notes, and he’ll receive interest and dividend accordingly.
⇒ He may also sell those P-notes to a third party. (िकसी अ� ��� को भी बेच सकता है)
⇒ P-Notes are Offshore Derivative Instruments that derive the value from the underlying Indian
shares and bonds. (अपतटीय �ु�� उपकरण)

�बना SEBI पं जीकरण के भारतीय पूंजी बाजार मे �नवेश क�, तो कै से?

😱😱P-Notes are harmful for Indian economy because:
⇒ P-note investors are not directly registered with SEBI. Identity of the actual investor, source of
funds remain disguised= chances of Tax evasion, money laundering, terror finance (इसके �नवेशक ने
�यं सेबी म� पं जीकरण नहीं करवाया वह पैसा िकधर से लेकर आया यह सब जानकारी नहीं �मल पाती, कर चोरी, काले धन को वैध
बनाना,आतं क� �व�पोषण)
⇒ If P-Note owner sells his P-Notes to another foreign investor, Government of India may be
deprived of taxes. (Compared to a scenario where Indian share owner is selling his shares to
another Indian investor at profit, then government gets securities transaction tax and capital
gains tax on his profit, & he can’t dodge it because DEMAT accounts linked with PAN card.
More on PAN card@Pillar#2 → BlackMoney)

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Therefore, SEBI tightening the control P-Notes e.g. “X” category of FPIs can’t issue P-Notes. “Y”
category of FPI can issue P-Notes but every time they issue P-notes-they’ll have to deposit $1,000 to
SEBI etc.

Table 4: Sad that even for such simple things I’ve to create such spoonfeeding-tables just to prevent FAQs from weak students
P-Notes Foreign investor wants to invest in Indian share/bond market without
registering with SEBI. He wants to buy Indian companies’ shares/bonds in
India. �फरंगी आदमी भारत क� कं पनी म� �नवेश करना चाहता है लेिकन सेबी से पं जीकरण नहीं
करवाना चाहता
Bharat-DR Foreign Company wants to Indian to invest in its foreign/firangi-shares,
without registering with SEBI. �फरंगी कं पनी अपनी कं पनी के शेयसर् भारतीयों को बेचना
चाहती है लेिकन सेबी से पं जीकरण नहीं करवाना चाहती
ADR/GDR Non-American Company wants to American people to invest in its shares
without registering with American SEBI. गैर-अमे�रक� कं पनी अपनी कं पनी के शेयर
अमरीक� जनता को बेचना चाहती है लेिकन अमे�रका के शेयरबाजार �नयं त्रक से पं जीकरण नहीं
करवाना चाहती.
GDR- similar concept, refer to respective segment.
Masala/Panda/ Foreign company/org wants to borrow money, in a particular currency from
Kangaroo Bonds a particular country. Refer to respective segment
etc
🔠🔠❓______ is issued by registered foreign portfolio investors to overseas investors who want to
be part of the Indian stock market without registering themselves directly? (Pre-2019)
(a) Certificate of Deposit (b) Commercial Paper (c) Promissory Note (d) Participatory Note

15.29.1 🔪🔪(�🏦🏦) Credit Default Swap (CDS)

⇒ CDS is an instrument to protect the lender/bond investors from the loan default by the borrower
⇒ PS: LIC is not 'insurer' in this case. I’ve used its logo only for easier visualisation.
⇒ Topic was in news, due to some scam involving a Swiss Bank “Credit Suisse”

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15.30🍋🍋 TAX ON INVESTMENT / FINANCIAL ASSETS
− Normally, whenever we make investment, it is subjected to variety of taxes such as income tax,
capital gains tax, securities transaction tax, commodities transaction tax, stamp duty etc.
depending on the type of investment/transaction. (Ref: Pillar#2A-Taxation for more)
− However, in following investments, government provide some relief in the taxes. How
much/when? NOTIMP.

15.30.1 🍋🍋😍😍 Tax relief given on

CATEGORY Examples
Bank FD (sp.type) - - 5-Year Tax Saving Fixed Deposit (FD) with Banks
Small Savings / - Public Provident Fund (PPF)
social security - Employee Provident Fund (EPF)
More in Pillar1D - Sukanya Samriddhi Yojana (SSY)- Fixed bank deposit in the name of
daughter
- National Savings Certificate (NSC)
- - Senior Citizen Savings Scheme (SCSS)
Pension/Insurance - Unit Linked Insurance Plans (ULIPs)
Pillar1D - National Pension System (NPS)
- EPFO
Share market Equity-Linked Savings Scheme (ELSS)
Bonds Tax-Free bonds by some (NOT ALL, only Some) of the Govt
companies/statutory bodies such as

- National Highways Authority of India (NHAI),

- Indian Railway Finance Corp (IRFC),
- Power Finance Corporation (PFC),
- Housing and Urban Development Corporation (HUDCO),
- India Infrastructure Finance Company Limited (IIFCL) etc.
Donations Electoral Bonds, PM-CARES fund (ref Pillar2), Army Welfare Fund etc.

Location based Investments made from GIFT City (Gujarat). (Ref: Pillar#3A: Intl. Trade)
Above list is NOT exhaustive/complete. There could be some more tax-free instruments also. But we
are not here for Chartered Accountant exam.

15.30.2 🍋🍋🥵🥵 Tax relief NOT given on

Now, if the name of an instrument is not mentioned in above list → then good chance, it is
subjected to some tax for example
− Bank Savings Account pe interest income.
− Sovereign Green Bond (Yes government has NOT given any tax benefit on it, YET)
− Municipal Bonds
− G-Sec, T-Bill; Shares, Company Bonds; Futures, Options, P-Notes

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− Mutual Fund, REITS, InVITS, ETF
− Bitcoins and Cryptocurrency (30% Tax)
− Property, Mona-Lisa Painting, Gold-Silver etc precious metals, Diamonds, Racehorses etc.
investments

MCQ. [CSP23-SET-A-Q021] Consider the following statements :

- Statement-I : Interest income from the deposits in Infrastructure Investment Trusts (InvITs)
distributed to their investors is exempted from tax, but the dividend is taxable.
- Statement-II : InvITs are recognized as borrowers under the 'Securitization and Reconstruction
of Financial Assets and Enforcement of Security Interest Act, 2002'.
Which one of the following is correct in respect of the above statements?
(a) Both Statement-I and Statement-II are correct and Statement-II is the correct explanation for
Statement-I
(b) Both Statement-I and Statement-II are correct and Statement-II is not the correct explanation for
Statement-I
(c) Statement-I is correct but Statement-II is incorrect
(d) Statement-I is incorrect but Statement-II is correct

Pillar 1C2: Corporate Governance

15.31🏙🏙🏙🏙 COMPANY TYPES

15.31.1 👶👶Company types based on incorporation

🤴🤴Chartered Setup by a charter given by a king / queen. E.g. East India Company in
Companies 1600. (चाटर्डर् कं प�नया)

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 ⚖Statutory Setup by special acts of Parliament or State legislature. E.g. RBI, LIC,
Companies SBI. (वैधा�नक कं प�नया)
✒Registered Registered under the Companies Act, 1956 (and later 2013)
Companies e.g. Tata Motors, Infosys. (पं जीकृ त कं प�नया)

15.31.2 🏙🏙🏙🏙 Company types based on number of members

Private ltd. Public Limited Company (Companies Act 2013)
Members Min. 2 to Min. 7 to Max. unlimited number (depending on how many
Max. 200 shares issued & purchased by the people)
can they Can’t ⇒ A public ltd. company can invite public at large, to subscribe
invite public to its shares and bonds.
at large, to
⇒ If their shares are listed on a stock exchange (BSE, NSE etc),
buy shares
/bonds? it’s a ‘Listed Public Limited Company’ (e.g. Reliance), else
�ा सामा� जनता it’s an ‘Unlisted Public Limited Company’ (e.g. India Post
को �व�ापन देकर Payment Bank : IPPB)
अपने शेयर-बांड
बेच सकते है?
Directors 2-15 ⇒ Min 3 to Max 15. out of them one must be Indian Resident,
(Min-Max) 1 must be Woman and 1/3rd of the directors must be
independent directors.
⇒ Independent directors are persons without any pecuniary
interest in company, they are supposed to protect minority
shareholders’ interests. (अ�सं �क शेयरधारकों के िहतों क� र�ा करने
के �लए �तं त्र डायरे�र)
Term limit N/A Their directors have age limit, term limit.
Corporate Norms Companies Act requires them
Governance either not ⇒ to hold specific number of annual meetings of board of
Norms applicable directors, norms for quorum, mechanism for e-voting,
or relaxed. ⇒ have to appoint Company Secretary,
UPSC- ⇒ Implement mechanism for protecting whistleblowers
CSE≠CA And so on…
FAQ: How can pvt limited company have shareholding?
⇒ Ans. They can ask friends and family, venture capital funds, angel investors and other type of
investors to invest in the company. They cannot put an advertisement in the newspaper that we
are inviting the public at large to buy our shares. IF they want to invite public at large, → they
need to convert registration from private limited company to public limited company.
⇒ Companies usually start as originally as private limited companies. e.g. Infosys (private ltd) in
early 80s → when their business grows and they want more capital they will convert into public
limited companies. → they will issue shares for the first time for the public at large → so we
call it Initial Public Offer (IPO) e.g. same infosys (public ltd) in early 90s launched IPO..

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⇒ In future same public ltd. company may also require more capital so again they will issue more
shares for the the second time, third time etc. → then we call it Follow on Public Offer (FPO)

15.31.3 🏙🏙🏙🏙 Company types based on Ownership

🧔🧔 Government / Public Sector / सावर्ज�नक �ेत्र 🤵🤵 Private Sector / �नजी �ेत्र क�
When Government owns 51%/> shares. When private parties own 51%>. E.g. Reliance,
Examples: Steel Authority of India (SAIL), Tata, Adani
India Post Payment Bank (IPPB)
Holding Company / �नयं त्रक कं पनी Subsidiary Company / �नयं �त्रत कं पनी
A company that owns majority shares in A company that is controlled by a parent
another company. E.g. Tata Sons ltd. holds holding company. E.g TCS, Tata Steel, Tata
majority shares of Tata Consultancy Services Sky are subsidiary co of Tata Sons.
(TSC), Tata Steel, Tata Sky etc.

15.31.4 🏙🏙🏙🏙 Company Types: Misc.

Under ⇒ One Person Company: special type of private ltd company having only
Companies Act one member. 💼💼Budget-2021: One Person Companies (OPCs)- Legal
reforms in Companies Act to [1) allow NRIs to easily register OPC in
India [2) OPC can be converted to other types of companies any time
⇒ Not for Profit Company: e.g. GSTN, NPCi etc. their profit is re-invested
in business expansion. They get certain tax benefits & relief in how
frequently they’ve to submit data to MCA. (लाभ-रिहत कं पनी, जो कं पनी मुनाफे के
�लए नहीं बनाई गई)
⇒ Dormant Companies: A) setup to start business in future B) setup to store
intellectual property C) not filled annual returns for two consecutive
years. (�न��य/सु� कं पनी)
👬👬👬👬Under ⇒ Limited Liability Partnership (LLP) Company is formed by minimum 2 or
LLP Act 2008 more partners.
सी�मत देयता ⇒ Individual partners are shielded from joint liability created by another
भागीदारी अ�ध�नयम partner's wrongful business decisions or misconduct. E.g. Vajiram and
Ravi IAS Study Centre LLP
⇒ LLP’s registration fees, auditing/reporting norms, tax liabilities, winding
up process etc. are more flexible than a (public or pvt) ltd. company
registered under Companies Act. उनके �लए �नयमो म� �रयायत/आसानी होती है।
Under Indian ⇒ A Partnership firm is formed by minimum 2 or more partners.
Partnership ⇒ Each partner is liable jointly with all the other partners for losses,
Act 1932 wrongful biz. decisions and misconduct.
15.31.5 🏙🏙🏙🏙 Corporate Governance → Small Companies given compliance relief
⇒ 💼💼Budget-2021: Companies with paid up capital not more than ₹2cr & annual turnover not
more than ₹20cr = treated as ‘Small Companies’.

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⇒ They’ll be given relief in Companies Act related compliance e.g. how frequently they’ve to
submit accounts and ownership related documents to the Ministry of Corporate Affairs etc.
15.31.6 🏙🏙🏙🏙 Commercial Organizations: Other Types
PSU, CPSE Ref: Pillar2: Disinvestment
MSME Ref: Pillar1D: financial inclusion, Pillar4B
Startups Ref: Pillar4B
15.31.7 👬👬👬👬👬👬 Corporate Governance → LLP settlement Scheme 2020
Faded topic. Deleting from handout
15.32🔨🔨 STATUTORY BODIES IN MINISTRY OF CORPORATE AFFAIRS (MCA)
15.32.1 🔨🔨 � Competition Commission of India (भारतीय प्र�त�धार् आयोग)
⇒ Competition among companies= consumer gets goods and services at the most competitive /
affordable prices. कं प�नयों के बीच �धार् होगी तभी तो ग्राहक को अ�� सेवा और िकफायती दाम म� चीजे �मल�गीं
⇒ Therefore, government must prevent cartelization (price fixing or production fixing by a group
of Companies), prevent monopoly (single company commanding the production / supply),
protect consumers’ interests and ensure freedom of trade.
⇒ 1970: Monopolies and Restrictive Trade Practices (MRTP) Act.
⇒ Later MRTP Act replaced with Competition Act, 2002- which has a statutory regulator
Competition Commission of India (CCI: 1 Chairman + 6 Members)
⇒ In past, CCI has imposed penalties on cement companies, real estate companies. It is also
investigating Airtel, and other telecom companies for alleged cartelization.
⇒ Competition (Amendment) Bill, 2022 to increase CCI’s powers further. But mostly technical so
I’m avoiding it for Poor cost:benefit. Still if Economic Survey 2024 praises it too much then I’ll
revisit.
⇒ Appeals against CCI are heard by National Company Law Appellate Tribunal (NCLAT)

15.32.2 Google pe Penalty by CCI

Refer to Pillar4B: service sector.

15.32.3 🔨🔨 � Insolvency and Bankruptcy Board of India (IBBI)

This too is a statutory body under the Ministry of Corporate Affairs (MCA). Read Pillar#1B-2: NPA
Table 5: Bodies under Companies Act 2013
Features National Company National Financial Investor Serious Fraud
Law Tribunal Reporting Education & Investigation
(NCLT) Authority (NFRA) Protection Fund Office (SFIO)

रा�ी� य क�नी �व�ध रा�ी� य �व�ीय प्र�तवेदन �नवेशक एवं �श�ा र�ण गं भीर धोखाधडी अ�ेषण
अ�धकरण प्रा�धकरण कोष कायार्लय
Members Judicial + technical. Chairman + Boss: Corp. Affairs Civil servants &
They’ve benches members Secretary (IAS). financial experts
@Delhi, Kolkata, Plus, members
Jaipur etc.

(Batch:PCB10-RAFTAAR-ONLY-Prelims) Mrunal’s Economy Pillar#1C: SEBI Share-market→ Page 244

 Features National Company National Financial Investor Serious Fraud
Law Tribunal Reporting Education & Investigation
(NCLT) Authority (NFRA) Protection Fund Office (SFIO)

from RBI, SEBI,

financial experts
Appeal NCLAT (Appellate NFRAA (Appellate Regular Courts Regular Courts
tribunal) Authority)
Cases Hear the cases Sets standards for They use Investigate white-
related to Companies Auditors & (CA), in unclaimed money collar (financial)
Act, Board room listed companies from shares/bonds frauds. Powers to
battles, Merger- and large unlisted for financial search, seize,
Acquisition, companies. If literacy and arrest.
Corporate malpractices-> awareness Once SFIO gets
Insolvency & investigate and case, other
Bankruptcy (I&B) debar them, Powers agencies (like CBI)
of civil court. can’t proceed.

15.32.4 Unclaimed shares and dividends of IEPF & 👛👛Budget-2023

Figure 11: Image source: Agnipath (2012)

Investor Education & Protection Fund Authority (IEPF) is a statutory body in Companies Act, 2013.
⇒ Secretary (IAS) of Ministry of Corporate Affairs is the ex-officio chairman of this IEPF body.
⇒ IEPF looks after the unclaimed shares, bonds, dividends, interest etc.
⇒ IEPF uses such money for investor awareness.
⇒ �Budget-2023: if a person wants to ‘reclaim’ the unclaimed shares and unpaid dividends from
IEPF → we’ll setup an IT portal to help him file such application.
लावा�रस शेयरों और लाभांश �नवेशक �श�ा और सं र�ण �न�ध प्रा�धकरण (आईईपीएफ) नामक वैधा�नक सं �ा म� रखे जाते ह�। य�द
इन लावा�रस शेयर/�ड�वड�ड क� पुन:प्रा�� के �लए कोई ��� अज़� करना चाहता है, तो एक ऑनलाइन पोटर्ल बनाया जाएगा
15.32.5 🔨🔨🔨 Ministry of Corporate Affairs also associated with:
Chartered Accountants Regulates the CA profession through a
Act 1949 Statutory body: Institute of Chartered Accountants of India (ICAI).
ICAI also has IPA status under I&B Code.
Company Secretaries Act, Statutory Body: Institute of Company Secretaries of India (ICSI).
1980 Also has IPA status. REF (More in 📑📑Pillar#1B2)

(Batch:PCB10-RAFTAAR-ONLY-Prelims) Mrunal’s Economy Pillar#1C: SEBI Share-market→ Page 245

 Cost and Works Statutory Body: Institute of Cost Accountants of India (ICAI). Also
Accountants Act, 1959 has IPA status. What does it mean? REF (More in 📑📑Pillar#1B2)
Legislative ⇒ 1860: Societies Registration Act- for registration of literary,
Responsibilities of MCA scientific and charitable societies. E.g. Sahitya Akademi,
National School of Drama etc. जो मुनाफे के �लए नहीं लेिकन कला सािह�
�व�ान के प्रसार के �लए बने
⇒ 1932: Partnership Act
⇒ Companies Act 1956 → 2013.
⇒ 2008: Limited Liability Partnership Act
E-governance initiatives ⇒ INC-29 online form to registration of new company. Later it
of MCA was replaced with Simplified Proforma for Incorporating
Companies (SPICe) online form.
⇒ MCA-21 portal, where companies can file online documents
related to Companies Act compliance. MCA21 Version 3.0=
this latest Version 3.0 portal will have additional modules for e-
scrutiny, e-Adjudication, e-Consultation and Compliance
Management.
Officers Indian Corporate Law service (ICLS) via UPSC CSE-exam

15.32.6 Companies Act: EoD- Central Data Processing Centre in 👛👛Budget-2023

⇒ In the past, Ministry of corporate affairs had launched many E-governance initiatives that helps
the company to register and upload documents. Example MCA21, SPICe, SPICe+ etc. How do
they work? What exactly do they do? NOT.IMP
⇒ �Budget-2023: well - setup Central Data Processing Centre for faster processing of various
forms filled by Companies under the Companies Act. How Exactly? Not.IMP
⇒ �Benefit? Ease of doing business for the companies.
कं पनी कानून के तहत कं प�नयों ने कॉप�रेट मामलों के मं त्रालय म� पं जीकरण तथा �व�वध द�ावेज जमा करने होते ह�। इस प्रिक्रया को
�ादा तेजी से �नपटाने के �लए एक क� द्रीय डाटा प्रोसे�सगं क� द्र क� �ापना क� जाएगी

15.32.7 �👬👬 Corporate Governance (कॉप�रेट शासन)

Figure 12: तुम मेरे पापा के दो� हो? - Cyrus Mistry

Shifted to Mains-QEP. Basically deals with how to ensure that company is run without any
scams/scandals.
⇒ Companies Act has various provisions for it. E.g.
⇒ Term limits on board of directors, provision for independent directors,
⇒ Reservation for women directors.
⇒ How many companies can one Chartered Accountant audit?
⇒ Protection for whistleblower, company secretary etc.

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⇒ SEBI can also issue some directives. E.g. splitting CMD post.
⇒ Notable committee for improving corporate governance in India: Uday Kotak (2017).
What does above things mean? Ans. shifted to Mains Handout.

15.32.8 Corporate Social Responsibility

Refer to Mains Handout.

15.32.9 NSE Prime regulation for corporate governance (2022)

- National Stock Exchange has developed this voluntary framework.
- It contains a set of higher standards of corporate governance for Companies listed on NSE stock
exchange.
- What is corporate governance? Ref. last section of this handout

MCQ.-EPFO-2023: ‘NSE Prime', sometimes mentioned in news, denotes:

(a) A high standard corporate governance initiative
(b) Long-duration Sovereign Green Bonds
(c) Concessions and tax-holidays for hi-tech startup companies
(d) Special privileges for certain categories of Non-Banking Financial Institutions

15.33👊👊🐤🐤 TAKEOVER RELATED TERMS

- Sometimes in news because of the Elon musk purchase of Twitter (“X”). - We will not DO to the
actual B.Com/MBA aspect of it. - We will get a very vague only, with some examples.

Friendly Takeover Hostile Takeover

When board of director approve where a person takes control of another company (the
selling the company to another target company) without the consent of the target
company. company’s board of directors.
e.g. Ranbaxy sold to Sunpharma e.g. How Elon Musk acquired Twitter (“X”)

15.33.1 👊👊🐤🐤 Leverage Buy-Out (LBO)

- e.g. Elon Musk borrows money to takeover/acquire majority shareholding in Twitter (“X”).
- Note: in real life, it is more complex, but we will not prepare MBA/B.Com here.

15.33.2 👊👊🐤🐤🐍🐍 Poison Pill against Takeover by Twitter

- it is a strategy adopted by a Company (Twitter) to defend itself against hostile takeover (By Elon
Musk).
- Generally involves giving extra shares to existing shareholder to make % shareholding
composition unfavorable to new buyer who is trying to take over (Musk). HOW?NOTIMP

(Batch:PCB10-RAFTAAR-ONLY-Prelims) Mrunal’s Economy Pillar#1C: SEBI Share-market→ Page 247

15.33.3 🤞🤞 De-Merger When a company subdivided into multiple companies.
BEFORE AFTER De-merger
1) Piramal Enterprises (Doing two biz: NBFC and Pharmaceutical) 1) Piramal (NBFC)
2) Piramal Pharma
1) ITC (Hotel, Cigarettes, FMCG^^) 1) ITC ( Cigarettes, FMCG)
2) ITC (Hotel)
^^ FMCG = Fast Moving Consumer Goods e.g. soap, shampoo, toothpaste, potato-chips etc.
🚩🚩🚩 FAQ by Zhande-walle Babushone: How will the share-swaping/share buyback/share
splitting work here? how is this similar or different than parent vs subsidiary companies?Ans.
handout is over and Aap abhi bhi nahi sudhre. Read boycott Notice in initial part of this handout.

15.33.4 ✍🎷🎷 Mock Questions for Mains

Mostly around measures for deepening the capital market, corporate governance, sovereign gold
bond etc instruments, investor’s charter etc. This handout deals with ONLY Prelims #RAFTAAR.
📑📑Next Handout: 1D: Insurance, Pension, Financial Inclusion

(Batch:PCB10-RAFTAAR-ONLY-Prelims) Mrunal’s Economy Pillar#1C: SEBI Share-market→ Page 248

 1D: ⚰Insurance, Pension & Financial Inclusion
�FAQ: So many schemes/facts/GK? Do I’ve to remember such long list and factual GK? Ans.
UPSC got into habit of asking microscopic facts from govt schemes since 2023, so I’ve given the
facts. आपसे होता है, उतना करो। म�ने फ़�स ली थी, तो म�ने आपको माल दे िदया। अब तु�ारे हवाले handout सा�थयों।

Table of Contents

16 �Insurance (बीमा): Meaning and Significance ......................................................................... 252

16.11.1 Insurance Principles (�सद्धा�: hindi not required) ....................................................................................... 252
16.11.2 Bancassurance is very great says �ES23 ................................................................................................. 253

16.12 �� History of insurance in India (भारत मे बीमा कं . का इ�तहास) ...................................................... 253

16.13 ��Life Insurance (जीवन बीमा) ................................................................................................. 255

16.14 �� � Life Insurance → public sector (सावर्ज�नक �ेत्र के जीवन बीमा सं �ान).................................. 255
16.14.1 �� � Post Office Life Insurance (डाक जीवन बीमा) ................................................................................. 255
16.14.2 Post Offices Services: G2C and B2C ........................................................................................................... 256

16.15 ��� � Life Insurance Corporation of India (1956) ................................................... 256

16.15.1 LIC is regulated under following acts ........................................................................................................ 257
16.15.2 LIC’s Aam Aadmi Bima Yojana (AABY) for BPL (2007)........................................................................ 257
16.15.3 ��� � LIC’s Disinvestment (2020, �व�नवेश) .................................................................................. 257
16.15.4 ��PM schemes for Life Insurance & Accidental (Gen) insurance (2015) ..................................... 257

16.16 � ���General Insurance (सामा� बीमा) ............................................................................ 258

16.16.1 ��� � Public Sector General Insurance Entities: Timeline (समय रेखा) ........................................ 258
16.16.2 ��� �: (� �) General Insurance Business (Nationalisation) Amendment Bill, 2021 ........... 259
16.16.3 Seasonal establishment, Casual Worker and some other words ............................................................. 259
16.16.4 �(� ��) Employees' State Insurance Corporation ........................................................................... 260
16.16.5 FAQ: Seasonal vs Temporary (Casual) ...................................................................................................... 261
16.16.6 An ESIC subscriber gets following benefits:.............................................................................................. 261
16.16.7 �(�
��) ESIC: 15% share investment ................................................................................................ 262
16.16.8 ���Gen Insurance → Corona Warrior ₹50 lakh cover by Govt (2020-March) ...................... 262

16.17 � Gen → Health Insurance Schemes (�ा� बीमा योजनाएं ) ........................................................... 262
16.17.1 � Types of Health insurance policies: Individual vs Floater Health Insurance ................................. 262
16.17.2 � Types of Health insurance policies: Fixed vs Indemnity based ....................................................... 262
16.17.3 ��Gen→ Health Insurance → Corona Kavach vs Rakshak .......................................................... 263
16.17.4 � �: �Arogya Sanjeevani Policy – standardized health insurance policies ................................ 263
16.17.5 � �: �SARAL JEEVAN BIMA-Standardized term Life Insurance policy .................................. 263
16.17.6 �� Niramya Health Insurance for PH. OLD SCHEME DONOT-LOOSE-SLEEP ....................... 263
16.17.7 ��IRDAI ordered companies to launch policies for HIV patients/PWD...................................... 263

16.18 ��5⃣L /�
�/�
� Ayushman Bharat / PM Jan Aroyga Yojana (PMJAY) ............................ 263

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 16.18.1 ���5⃣L /� �/� � PM Jan Arogya Yojana (PMJAY, 2018)?.......................................................... 264
16.18.2 PM-JAY Sub-schemes ................................................................................................................................. 265
16.18.3 Ayushman Bharat Digital Mission ............................................................................................................. 265
16.18.4 PM-JAY Challenges: .................................................................................................................................... 266

16.19 � ��� General Insurance → other than Health Insurance ....................................... 267
16.19.1 ��� Pradhan Mantri Fasal Bima Yojana (2016) ........................................................................... 267
16.19.2 ��� PM-FBY (2.0) reforms in 2020 ............................................................................................... 268
16.19.3 ��� Other Agriculture Insurance Schemes? (अ� कु छ फ़सल बीमा योजना) ............................................... 268
16.19.4 ⛴� ��) Insurance to Banks on Exporters’NPA → NIRVIC Scheme (2019) .......................... 268
�(�
16.19.5 �� Third Party Motor Insurance (थडर् पाट� मोटर इं �ोर�स) ............................................................................ 269
16.19.6 �� Own Damage Insurance (OD: मोटर सं बं �धत �यं के नुकसान का बीमा ) ........................................................... 269
16.19.7 Tech-driven add-ons in Motor-OD (own damage) cover....................................................................... 269
16.19.8 �ES23) ......................................................................... 269
De-tariffication in Chinese insurance sector (�
16.19.9 🏗🏗�
��Title Insurance (जमीन / इमारत का टाइटल बीमा) ....................................................................................... 270
16.19.10 ���Clinical Trial Liability Insurance ............................................................................................. 270
16.19.11 ���� Bharat Griha Raksha & other: Standardized home/factory insurance ......................... 270
16.19.12 🌬🌬🌬🌬(Proposed) Catastrophe Insurance (आपदा बीमा) ................................................................................... 270
16.19.13 🌬🌬🌬🌬 Catastrophe Bonds, Surety Bonds: ................................................................................................... 271
16.19.14 ��General Insurance → Cyber Insurance (साइबर बीमा) ........................................................................ 271
16.19.15 �eIA: e-Insurance account ...................................................................................................................... 271

16.20 ���Re-insurance (पुनब�मा) ................................................................................................ 271

16.20.1 �(�
���)PANDEMIC RISK POOL proposal by IRDAI ............................................................ 272

16.21 ��IRDAI: the insurance sector regulator (बीमा �ेत्र �नयं त्रक) .................................................... 272
16.21.1 ��Domestic Systemically Important Insurers (D-SIIs, (घरेलु प्रणालीबद्ध मह�पूणर् बीमाकतार्) ........................... 273
16.21.2 ��IRDAI- Bima Sugam Portal (2023) ............................................................................................... 273
16.21.3 �Insurance progress indicators (बीमा प्रग�त सं के तक) .......................................................................................... 273
16.21.4 FDI limits in Insurance sector? (बीमा �ेत्र मे प्र�� �वदेशी �नवेश क� सीमा) .................................................................... 274
16.21.5 � � Arguments in favour and against increasing FDI in insurance sector? .................................. 275

17 � → � (��) PENSION (प�शन) ........................................................................................ 275

17.11 �� Employee Provident Fund Org. (कमर्चारी भ�व� �न�ध सं गठन) ................................................... 275
17.11.1 EPFO : Higher pension rule = NOT IMP for Exam ................................................................................. 276
17.11.2 ��� (2016) Pradhan Mantri Rojgar Protsahan Yojana (Labour Min) ....................................... 278
17.11.3 �Atmanirbhar Bharat Rozgar Yojana= Subsidy from Central Govt in EPFO contribution............ 278
17.11.4 ��FAQ: “why not merge EPFO with ESIC!!? ” ............................................................................... 279

17.12 �→�
�Pension for Govt Employees & Middle Class? = NPS............................................. 279
17.12.1 NPS-Lite (Swavlamban) (2010) .................................................................................................................. 279
17.12.2 Old Pension Scheme (OPS) in Non-BJP States......................................................................................... 280
17.12.3 NPS: Andhra Guaranteed Pension Scheme (GPS) ................................................................................... 280
17.12.4 �→�
� Pension: NPS: Minimum Assured Return Scheme (MARS) ................................................ 280
17.12.5 �→�
� Pension: NPS: T V Somanathan committee (2023) ............................................................... 280

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 17.13 �→�
�Pension for Senior Citizens WITH CAPACITY to Invest? ..................................... 281
17.13.1 Pradhan Mantri Vaya Vandana Yojana (2017-DFS, LIC) ....................................................................... 281

17.14 �→�
�Pension for Poor People WITH capacity to INVEST? ............................................ 281
17.14.1 � → ���: � Pension: Three Maan Dhan Yojanas ................................................................ 283
17.14.2 ��FAQ: “why not merge all these schemes into one!?? ................................................................ 283

17.15 �→�
� Pension for Poor People WITHOUT capacity to INVEST? ................................... 283
17.15.1 Pension types: Defined Contribution vs Defined Benefit ........................................................................ 284

17.16 �� PFRDA, the Pension Funds’ Regulator ....................................................................... 284

17.17 ��Social Security for Overseas Indians (Pension / Insurance) ........................................ 285
17.17.1 ��Pravasi Bharatiya Bima Yojana, 2017 ............................................................................................ 285

18 (��:�)→�Financial Inclusion (�व�ीय समोवेशन) ............................................................ 285

18.11 ��:�
(� �)→�
� Fin. inclusion: Bank accounts for Everyone ............................................ 286
18.11.1 �(�
��:�
�)→�
� Pradhan Mantri Jan Dhan Yojana (PMJDY: प्रधान मं त्री जन धन योजना) ...................... 287
18.11.2 � Jan Dhan Darshak App (2018) ............................................................................................................ 288

18.12 ��:�
(� �)→ � Fin inclusion: Investments other than Bank .......................................... 288
18.12.1 ��Small Savings: Mahila Samman Bachat Patra (2023) .................................................................. 289
18.12.2 ��Small Savings: Senior Citizen Savings Scheme limits hiked ....................................................... 289
18.12.3 �:�
(� �)→(�
�:�
�)Sukanya Samriddhi Yojana (2015)....................................................................... 289
18.12.4 ��
� �� �
� �� � Five Star Village scheme by Dept of Post (2020) ............................................................. 289
18.12.5 ��� �� �
� �� � Sampoorna Bima Gram Yojana (2017) ...................................................................... 289
18.12.6 ��� �� �
� �� � Model Insurance Villages (MIV) proposal by IRDAI (2021) .................................. 290
18.12.7 ��:�
(� �)→ � Chit Funds................................................................................................................. 290

18.13 �� ←(�
��) Financial inclusion: Credit (Loans: ऋण) ................................................... 290
18.13.1 (� �🗃🗃=(�
��)� ��) Refinance (पुन�व�) ............................................................................................. 291
18.13.2 ��: � ←(� ��) Credit Guarantee (ऋण अदायगी गारंटी) ...................................................................... 291
18.13.3 Financial inclusion: Credit Guarantee Fund for Education Loans (CGFEL) ........................................ 292
18.13.4 � �� MSME: Definition changed in ATMANIRBHAR (2020)................................................... 292
18.13.5 �� �� MSME Non-NPA borrower → ECLGS 1.0 ................................................................... 293
18.13.6 �� �� MSME Non-NPA borrower → ECLGS 2.0 (Atma-Nirbhar 3.0) ................................ 293
18.13.7 ���� MSME NPA borrower → Subordinate Debt (गौण ऋण) .................................................... 294
18.13.8 �🗃🗃🗃🗃🗃🗃🏭🏭 MSME → Equity infusion via Fund of Funds (�न�धयो क� �न�ध) ................................................. 294
18.13.9 ����� NBFC → Mudra (2015, 100% SIDBI subsidiary) .................................................... 294
18.13.10 �� �� Mudra Loans → Shishu Loans pe 2% Interest subvention .......................................... 295
18.13.11 �� psbloansin59minutes.com (2018) ................................................................................................ 295
18.13.12 �Stand Up India Scheme, 2016 (उ��� भारत) .............................................................................................. 295
18.13.13 �Self-help group (�-सहायता समूह) → Credit ............................................................................................... 296
18.13.14 ��PM Street Vendors’s AtmaNirbhar Nidhi Scheme (PM-SVANidhi)........................................ 296
18.13.15 ��Street vendors’s PM-SVANidhi → Main Bhi Digital (2021) ..................................................... 297

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 18.13.16 �PaiSA Portal (2018) ............................................................................................................................... 297
18.13.17 �Jan Samarth Portal (2022)..................................................................................................................... 297
18.13.18 �� Kisan Credit Card (1998)............................................................................................................... 297
18.13.19 ��: � ←(�
��) Interest Subvention (�ाज सहायता) ........................................................................ 298

18.14 ����Farm Loan Waiver (कृ �ष ऋण माफ�) .......................................................................... 299

18.14.1 ����Agri-Finance → Loan waivers for the farmers................................................................ 299

18.15 �� Financial inclusion: Insurance & Pension ................................................................... 299

18.15.1 �� Micro Insurance (सू� बीमा)..................................................................................................................... 299
18.15.2 🏍🏍🏍🏍🏍🏍 Gig Workers’ social security code (�गग कम� क� सामा�जक सुर�ा सं िहता) ..................................................... 299
18.15.3 � UNORGANISED WORKERS’ SOCIAL SECURITY ACT, 2008 ................................................... 300

18.16 ��: �Financial Inclusion: Customer Protection (ग्राहक सुर�ा) ............................................ 301
18.16.1 �RBI’s 3 Ombudsman (ओमबड्समेन/ �शकायत �नवारण अ�धकारी/लोक प्रहरी) .................................................................. 301

18.17 ���
�Financial Inclusion: various reports (भारत का प्रदशर्न)................................................... 301

16 ⚰INSURANCE (बीमा): MEANING AND SIGNIFICANCE

- Meaning: insurance policy is a Debt instrument / Legal contract against eventualities of death or
damage. (मृ�ु या ��त क� घटनाओं के �खलाफ कानूनी अनुबंध).
- Indemnification = process of insuring someone/something & paying compensation, if any
death/loss. (��तपू�त)
- 2 parties in this contract: 1) Insured / client 2) Insurer / Underwriter.
- Insurance provide stability to the households (against death, disability, damage) and
entrepreneurs (against fire, theft, natural disasters etc.) बीमा प�रवार और उद्योगप�तयों को जो�खमों के सामने
��रता मुहैया कराता है
- Insurance companies invest clients’ premium in various public and private sector projects,
thereby channelizing savings towards investment & economic growth. बीमा-िक� के द्वारा लोगों क� बचत
�नवेश म� जाती है

16.11.1 Insurance Principles (�सद्धा�: hindi not required)

⇒ Uberrima fides- Good faith, hide nothing. (e.g. if client has HIV+ve, but hiding it before buying
health insurance)
⇒ Indemnity- Only “REAL” loss, not imaginary. (couldn’t join IIM-A, because CAT-books burned
in fire)
⇒ Subrogation- Insurer can recover from negligent 3rd party. E.g. client bought factory fire
insurance → fire accident due to faulty boiler → insurance company can recover money from
boiler maker.
⇒ Causa Proxima - Direct loss link. Bollywood fan can’t buy policy for Actor Bachchan.

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⇒ Insurable interest- If “risk-x” not happen, client remains in same position, “risk-x” happens
client in bad position. (e.g. I didn’t win lottery= Is not insurable interest. )

MCQ. The principle of subrogation in insurance allows (EPFO-2023) (a) investment of policy
amount (b) refund for insured and insured’s insurance company (c) auto-renewal of policy. (d)
indemnification of the insured.

16.11.2 Bancassurance is very great says 📙📙ES23

16.12 ⚰🏺🏺 HISTORY OF INSURANCE IN INDIA (भारत मे बीमा कं . का इ�तहास)

- (1818): Europeans started insurance companies in India, but they charged higher premium on
Indian clients with racist bias that Indians belong to an inferior race = higher probability to die.
(अंग्रेज कं प�नयां भारतीय लोगों पर �ादा बीमा िक� मांगते थे)
- (1870): Bombay Mutual Life Insurance was the first Swadeshi life insurance company and they
did not charge extra premium on Indian clients.
- (1912): Life Insurance Companies Act to regulate them, but lax norms, so just like the banking
industry, the insurance industry too faced problems in the aftermath of Great Depression in
USA. So, 1938: Insurance Act for tougher regulation. पहले कांड होते रहेते थी िफर क़ानून बनाया गया

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- Just like the banking, the insurance industry had to be nationalized after independence due to
scams, financial inclusion and Five-Year Plans. धांधली, �व�ीय समावेशन और पं चवष�य योजना के �लए रा��ीयकरण
Chronology �Bank ⚰ Insurance
1948-49 RBI nationalized -----
1955 SBI nationalized -----
1956 ---- LIC Act took over ~245 (private owned) Life insurance
companies.
1969 Nationalization of 14 ----
Private Banks
1972 ---- GIC Act: GIC and its 4 subsidiaries tookover ~107
(private owned) General insurance companies.
1980 Nationalization of 6 ----
Private Banks
Reforms Narasimham ‘91 & ‘98 Malhotra Committee 1993→ Private insurance
सुधार स�म�त companies were allowed, FDI was liberalized
Safeguards CRR, SLR, BASEL Investment Pattern, Solvency Margin. E.g. They must
सुर�ा के �लए invest minimum “x%” of premium in G-Sec, they can’t
कु छ मानदंड invest more than “y%” of premium in pvt companies
shares/debentures etc. They must not invest in
companies having less than “AA” credit rating etc.
Exact norms not imp.
Financial PSL norms Rural & Social Obligation Norms: every year “x”
Inclusion, 25% branches in number of policies must be sold in rural areas,
Welfarism unbanked rural areas PH/backward etc. Further Insurance companies
required to invest minimum “x%” in affordable
housing projects, State Govt’s fire equipment etc. Else
IRDAI imposes penalty. ग्रामीण और सामा�जक दा�य� मानदंड
Delivery - Bank branch, Insurance Intermediaries: (म��/ �बचौ�लया)
Channel - Business - Agents/brokers.
Correspondence - Bankers selling insurance (Bancassurance)
Agent (BankMitra) - Surveyor/Loss Assessor (सव��क).
- Third Party Administrators (e.g. Hospital where
treatment is given for health insurance जहां आप का
इलाज हो)

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16.13 ⚰💀💀LIFE INSURANCE (जीवन बीमा)

Life Insurance Type → Money returned? 📆📆At maturity 💀💀At death

Whole life= Longer policy: (e.g. 35-40 yrs) Yes, savings YES
Endowment= Shorter policy: (e.g. 10-20) returned with
interest
Term life= Short Policy, Low Premium e.g. PM Jeevan ✋No Yes
Jyoti Bima Yojana. मृ�ु नहीं �ई तो बीमा िक� वापस नहीं �मलेगी
ULIP: Unit Linked Insurance Plans: Part of money goes in Yes, savings YES
insurance, part in Mutual fund returned with some
profit

16.14⚰💀💀 🦁🦁 LIFE INSURANCE → PUBLIC SECTOR (सावर्ज�नक �ेत्र के जीवन बीमा सं �ान)

16.14.1 ⚰💀💀 📮📮 Post Office Life Insurance (डाक जीवन बीमा)

- They’ve developed “DARPAN” PLI (Postal Life Insurance) App.

Postal Life Insurance (PLI) Rural Postal
Life Insurance
Started from 1884 1995
Who can buy - Employees in Panchayat/municipal employees, Public For Villagers,
sector company, public sector banks, University, schemes like
Cooperative bodies,

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 - Private sector Professionals such as doctors, engineers, Gram
management consultants, charted accountants, architects, Suraksha,
lawyers, bankers etc. Gram Suvidha,
- Private sector companies employees IF it is a LISTED Gram Santosh,
company employees of listed company (Ref: Pillar#1C) Gram Priya,
Example Suraksha, Suvidha, Santosh, Sumangal, Yugal Suraksha, Bal Gram
schemes Jiwan Bima Sumangal, etc.
�FAQ: can “X” person buy or not? Ans. Refer the list and apply common sense. If not able to
apply common sense, THEN IGNORE this topic.

16.14.2 Post Offices Services: G2C and B2C

G2C (Government to Citizen) B2C (Business to Citizens)
- Application forms for Pradhan Mantri - Bharat Bill payment system bills (electric,
Fasal Bima Yojana, Pradhan Mantri Street gas, water bills, etc.), (Ref: Pillar#1A1)
Vendors' Atmanirbhar Nidhi Yojana; - renewal premium collection for Life
Pradhan Mantri Jan Arogya Yojana Insurance policies and General Insurance
(Ayushman Bharat); Pradhan Mantri such as motor vehicle, health and fire
Shram Yogi Maan-dhan Yojana; Pradhan insurance, etc.
Mantri Laghu Vyapari Maan-dhan Yojana;
National Pension Scheme;
- PAN card eKYC, Election Card Printing
- e-Stamp (i.e. buying stamp-paper for
property registration etc.)
�FAQ: What do about terms mean? Answer wait till pillar1 and 2 are over.

16.15⚰💀💀💀💀 🦁🦁 LIFE INSURANCE CORPORATION OF INDIA (1956)

⇒ To take over/nationalize the private life insurance companies → LIC Act, 1956. So, LIC is a
statutory corporation/statutory company. (वैधा�नक �नगम)
⇒ Rigveda: “योग�ेम” (Yogakshema: well being) = name of LIC HQ@Mumbai & its corporate
magazine.
⇒ Gita: “योग�ेमं वहा�हम्” (Yogakshemam Vahamyaham:- I ensure safety and well being (of my
devotees) = LIC motto.
⇒ 2018: LIC became majority shareholder in IDBI bank. (More in 📑📑Pillar#1B1- Classification)

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⇒ 2021: 1) Govt ⏫retirement age of LIC chairman from 60 to 62 years. 2) LIC launched ‘Ananda’
App for insurance agents.

16.15.1 LIC is regulated under following acts

1956 Life Insurance Corporation of India Act
1938 Insurance Act
1999 Insurance Regulatory and Development Authority (IRDAI) Act

16.15.2 LIC’s Aam Aadmi Bima Yojana (AABY) for BPL (2007)
Beneficiary? below poverty line (BPL) and marginally above poverty line (APL) citizens in various
occupations like carpenter, cobbler, blacksmith etc. What is BPL/APL? (Ref: Pillar#6: Poverty)

Death ₹30,000
Disability ₹37,500 to 75,000
Child scholarship for class9-12 and ITI courses ₹1200 per year
Who pays premium?

Contribution by Amount
Union Government's social security fund inside LIC ₹100
Beneficiary (OR State/Central Dept if they want to do it) ₹100
Total Premium ₹200

16.15.3 ⚰💀💀💀💀 🦁🦁 LIC’s Disinvestment (2020, �व�नवेश)

- 💼💼Budget-2020: LIC Act will be amended → LIC : Initial Public Offering (IPO) → Government
will sell part of its shareholding. 2022: SEBI permitted IPO.
- Govt sold 5% of its 100% shareholding. (more about this IPO: refer to Pillar1C: Sharemarket)

16.15.4 🧔🧔⚰PM schemes for Life Insurance & Accidental (Gen) insurance (2015)

Figure 1: शराब पी के मर गए देवदास बाबू तो PM-सुर�ा बीमा योजना मे कु छ नही �मलेगा!

Table 1: 2015: Finance Ministry → Dept of Financial Services launched these two schemes.
Features 🧔🧔⚰💀💀 🕯🕯✔♿✖ Pradhan Mantri 🧔🧔⚰💀💀♿✔🍾🍾✖
Jeevan Jyoti Bima Yojana (PMJJB) Pradhan Mantri Suraksha Bima
Yojana (PMSBY)
Age 18-50 years with bank account in India. 18-70 years. Remaining same as
NRIs eligible but payment in rupee PMJJB
currency only.

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 Features 🧔🧔⚰💀💀 🕯🕯✔♿✖ Pradhan Mantri 🧔🧔⚰💀💀♿✔🍾🍾✖
Jeevan Jyoti Bima Yojana (PMJJB) Pradhan Mantri Suraksha Bima
Yojana (PMSBY)
Purchase LIC or any empaneled pvt. life insurance 4 Public Sector, or any empaneled
from company. pvt. General Insurance company.
Premium - Rs. 436 per person/ annum. - Rs.20/- per person/
- (before 2022, it was ₹330) - (Before 2022, it was ₹12)
Type LIFE Insurance General Insurance
Nature of 1 year “term” LIFE insurance. 1-year “term” accident cum
Plan Term LIFE insurance = no death, no death insurance.
money returned.
Return? Any type of death: ₹ 2 lakhs Accidental Death: murder,
िकसी भी प्रकार क� मृ�ु पर प�रवार को मुआवजा �मलेगा natural disaster etc. ₹2 lakhs
- Loss 1 eye/hand/leg: 1 lakh
- Loss 2 organs/>: max. 2 lakhs
Suicide, alcohol-drugs related
death: not eligible
- Neither scheme gives hospitalization cost. (अ�ताल म� �चिक�ा खचर् के �बल क� अलग से कोई रा�श नहीं �मलेगी)
- In both scheme, premium money auto-debited from bank account, after person applies. (ब�क खाते
म� अपने आप फ़�स का पैसा कट जाता है)
16.16 ⚰ 💊💊💊💊💊💊GENERAL INSURANCE (सामा� बीमा)
An insurance policy other than ‘life insurance’, is called General Insurance. e.g. Accident Insurance,
Health Insurance, Crop Insurance, Fire-Theft-Marine & Vehicle Insurance. दघु टर् ना बीमा, �ा� बीमा,
फसल बीमा, आग-चोरी-समुद्री और वाहन बीमा

16.16.1 ⚰🚕🚕🚕🚕 🦁🦁 Public Sector General Insurance Entities: Timeline (समय रेखा)
1948 Employees' State Insurance Corporation (ESIC) under Labour Ministry – through an act
of Parliament to protect selected category of workers. मजदू रों का �ा� बीमा
1957 Export Credit Guarantee Corporation of India (ECGC: �नयार्त ऋण गारंटी �नगम) under
Commerce Ministry. Gives insurance cover to exporters, and credit guarantee to
Bank/NBFC who loan to exporters.
1961 DICGC Act: banks must buy deposit insurance from it. Although not considered a
General Insurance Company in textbook sense because doesn’t directly sell insurance
policy to any individual household/businessman. (पाठ्यपु�क क� प�रभाषा म� उसको बीमा कं पनी नहीं
बोल सकते)
1972 General Insurance Nationalization Act: 107 (private) general insurance companies were
taken over by GIC and its 4 subsidiaries (viz. National insurance, New India Assurance,
United India, Oriental).

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 2002 Agriculture Insurance Company ltd, (formed with funding of GIC, above 4 public sector
Gen. Insurance Cos and NABARD.) कृ �ष बीमा कं पनी
2018: Budget announced to merge (�वलीनीकरण) National Insurance Company, United India
Insurance Company, Oriental India Insurance Company- but the plan has not materialized yet.

16.16.2 ⚰🚕🚕🚕🚕 🦁🦁: (🤵🤵) General Insurance Business (Nationalisation) Amendment Bill, 2021
General Insurance Nationalisation Act 1972 General Insurance Business (Nationalisation)
(सामा� बीमा रा��ीयकरण कानून) Amendment Bill, 2021
Five General Insurance (GI) Companies To facilitate privatization of these public
brought under Govt control sector/Government owned GIs. सामा� बीमा �ेत्र क�
1) General Insurance Corp of India (GIC) सरकारी कं प�नयों के �नजीकरण का रा�ा आसान बनाने के �लए
2) National Insurance, �वधेयक
3) New India Assurance,
4) Oriental Insurance
5) United India Insurance.
Majority shareholding (minimum 51%) must Removed this rule. So, in future, govt may sell
remain under Government control (ब�मत its majority shareholding to private party (e.g.
शेयरहो��गं सरकार के हाथ म� अ�नवायर् �प से होनी चािहए) Adani/Ambani etc) [इन पांच कं प�नयों म� ब�मत
शेयरहो��गं सरकार के पास होना अ�नवायर् नहीं यानी िक �नजी
�ेत्र का आदमी भी मा�लक बन सकता है]
- 🤩🤩Pro-Arguments? Privatization will help in Professionalism, Profitability, Customer
responsiveness of these Govt companies (�नजीकरण के प� म� तकर् : पेशेवर तरीके से सं चालन होगा, मुनाफा बढ़ेगा,
ग्राहकों क� सु�वधा बढ़ेगी)
- 😰😰Anti-Arguments? Shifted to Mains Handout.

16.16.3 🏭🏭Seasonal establishment, Casual Worker and some other words

Word Meaning ESIC (health EPFO (Pension)
insurance)
Seasonal Where the factory/shop is not working for Not covered Salient / not
establishment whole year e.g. marriage orchestra, salt-pan openly mentioned.
मौसमी इकाई on seashore, horse-ride operators in hill And I'm not in
station, sugarcane farms, Diwali- habit of doing
firecrackers, tea plantation etc. James-Bond study
Casual When worker employed for only a few Covered* Covered*
worker days/weeks by the boss. e.g. construction
अ�नयत श्र�मक worker, sugarcane mill worker, temporary
gardener in Infosys office etc.
Unorganized e.g Cobblers, blacksmith, carpenter, coolie No. No
sector worker etc. More in Pillar4C: unemployment

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 Word Meaning ESIC (health EPFO (Pension)
insurance)
असं गिठत �ेत्र
Organized e.g. those working in registered factory, Yes* Yes*
sector company, etc. More in Pillar4C:
workers unemployment
Informal When worker doesn’t have paper/formal No No
worker job contract with employer (अनौपचा�रक)
Formal When worker has paper/formal job contract Yes* Yes*
worker with employer (औपचा�रक श्र�मक)
*provided ke other conditions are met abt minimum number of workers in a factory, salary level etc.

16.16.4 🦁🦁(💉💉💉) Employees' State Insurance Corporation

- 1948: Employees' State Insurance Act → 1952: ESIC corporation (ESIC) setup under Labour
Ministry. (कमर्चारी रा� बीमा �नगम, श्रम मं त्रालय)
ESIC applicability? BEFORE 👻👻ATMA-NIRBHAR (2020)
any non-seasonal establishment with Compulsory Compulsory (अ�नवायर्)
10/> employees
If establishment less than 10 workers Voluntary Compulsory (खतरनाक उधोगों के मजदू रो
→ but it’s a hazardous industry e.g. (�ै��क/वैक��क) का क-रा-बी-�न मे पं जीकरण अ�नवायर्)
(firecrackers, toxic chemicals, acid)
If establishment less than 10 workers Voluntary Voluntary
→ Non-hazardous industries (�ै��क/वैक��क) (�ै��क/वैक��क)
- 👷👷 Who are ESIC subscribers? Employee in above establishment, with monthly salary less than
₹21,000/-
- 👷👷 � Who pays ESIC premium? “x%” of employee’s wages+ “y%” from employer’s side.

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- What is X and Y? notimp unless preparing for ESIC/Insurance Exams. Furthermore, Factoids
like ESIC vision-2022 to enrol 100 million workers. notIMP4UPSC
- ESIC covers both permanent employees & casual/temporary employees (= employed only for a
few days/weeks/months.) �ायी-कम� और अ�ायी/अयाथव�ध-कम� दोनो को लाभ �मलता है।
- 💼💼Budget-2021: we’ll expand this to cover more workers. But exact details yet to be disclosed.

16.16.5 FAQ: Seasonal vs Temporary (Casual)

Seasonal industry (Casual) Temporary worker in non-seasonal
Farm laborer, salt-pan worker, marriage ⇒ e.g. worker employed in a newspaper
orchestra, marriage catering etc. factory for 1 month.
⇒ Newspaper company itself is non-seasonal.
⇒ But worker is ‘temporary’.
NOT Eligible for ESIC YES Eligible for ESIC

16.16.6 🤩🤩An ESIC subscriber gets following benefits:

1) Medical insurance for the worker and his family from day#1 of joining (�ा� बीमा)
2) Maternity Benefit to women employees (मातृ� लाभ)
3) Monthly pension to family, if worker dies by employment related injuries. Corona-2020-21→ if
worker died of Corona, family member to be given pension. (originally such pension was to be
given for workers’ death in factory employment related accident, and not for corona illness.)
नौकरी करते व� ऑिफस/फै ��ी म� हादसे के चलते मजदू र मर गया तो प�रवार को प�शन। नया सुधार: कोरोना क� बीमारी म� मर गया
तो भी प�रवार को प�शन
4) Sickness benefit: partial wages during medical leave. (बीमारी प्रसु�वधा)
5) Monthly payment on disability (�वकलांगता मा�सक भुगतान)
6) Unemployment allowance if involuntary loss of employment- through the scheme ‘Atal Bimit
Vyakti Kalyan Yojna’. Previously it was called: “Rajiv Gandhi Shramik Kalyan Yojana” (अटल-
बी�मत क�ाण = अनै��क �प से उसक� नौकरी चली गई तो बेरोजगारी भ�ा)
One IP-Two e.g. if insured person (IP) is a migrant worker in Surat, while his family
Dispensaries living in Bhubaneshwar then they can take benefit in two hospitals 1) at
Surat 2) at Bhubaneshwar
E-Pehchan Digital id cards for ESIC beneficiaries
Abhiyan ensuring the change of bed sheet according to rainbow pattern during the
Indradhanush week, i.e., to be changed everyday;
Nirman Se Shakti/ ‘initiative to modernize the infrastructure of ESIC hospitals
ESIC 2.0
�Project digitization and automation of ESIC processes by WIPRO (2017)
Panchdeep
� �Project Modernization of India Post (2008) डाक �वभाग का आधु�नक�करण
Arrow

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16.16.7 🦁🦁(💉💉💉) ESIC: 15% share investment
�BEFORE � After 2022-Reform
ESIC invested subscribers premium/fees/corpus upto 15% of the fund will be invested in
in 1) fixed deposits in the banks 2) debt equities (shares). Remaining 85% in G-Sec,
instruments (e.g. G-Sec, Companies’ bond Bond, FD etc fixed return debt instruments.
debentures)
Problem: return on investment (ROI) not very � Benefit? If the share market performance
high; because BankFD/ G-Sec/Bonds etc are positively, then ESIC could earn more profits.
fixed interest instruments. This will help ESIC to cover the cost of running
hospitals in a sustainable manner

🔠🔠❓ Consider the following: [Asked in UPSC-Pre-2012]

1) Hotels and restaurants 2) Motor transport undertakings
3) Newspaper establishments 4) Private medical institutions
The employees of which of the above can have coverage under ESIC?
(a) 1, 2 and 3 only (b) 4 only (c) 1, 3 and 4 only (d) 1, 2, 3 and 4
16.16.8 👻👻🤧🤧⚰Gen Insurance → Corona Warrior ₹50 lakh cover by Govt (2020-March)
Deleting because outdated.
16.17💊💊 GEN → HEALTH INSURANCE SCHEMES (�ा� बीमा योजनाएं )

16.17.1 💊💊 Types of Health insurance policies: Individual vs Floater Health Insurance

Individual health insurance policy Floater health insurance policy
Covers 1 person Cover person and his family members.

16.17.2 💊💊 Types of Health insurance policies: Fixed vs Indemnity based

Fixed Benefit (�न��त लाभ) Indemnity Based (��तपू�त आधा�रत)
Fixed payment given depending on illness. Upto to the “actual hospitalization cost” from the
⇒ If the Policy agreement said “if you get total insured sum.
cancer, we’ll give you ₹50 lakhs.” ⇒ "Indemnity" = upto actual cost in treatment,
⇒ So, even if a patient spends ₹10 lakh subject to max limit. so, if ₹5 lakh ki policy=
on hospitalization, still the company ⇒ Actual treatment cost ₹2 lakh → company pays
will pay ₹50l. only ₹2 lakh
इससे कोई फकर् नहीं पड़ता िक हॉ��टल का �बल िकतना ⇒ Actual treatment cost ₹7 lakh→ company pays
आया आपको एक �न��त रकम दी जाएगी max ₹5 lakh
Further Subtypes
⇒ Cashless policy: patient simply goes to an
empanelled hospital = free treatment.

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 Fixed Benefit (�न��त लाभ) Indemnity Based (��तपू�त आधा�रत)
⇒ Non-Cashless policy: patient first pays hospital
bill from own pocket → submits bills to
insurance company → gets refund.
e.g. SBI Corona Rakshak Policy Rs. 700 e.g. (1) SBI Corona Kavach Policy. Premium ₹4848,
premium → fixed benefit of ₹50,000 coverage upto ₹5 lakh. (2) PM-JAY schemes for poor
16.17.3 💊💊💊💊Gen→ Health Insurance → Corona Kavach vs Rakshak
Read above table carefully.

16.17.4 💊💊 😵😵: 🧐🧐Arogya Sanjeevani Policy – standardized health insurance policies

Sufficient to know, these are health insurance policies by public and private sector insurance
companies. More details deleted because topic faded/outdated for 2023/24 exam cycles.

16.17.5 ⚰ 😵😵: 🧐🧐SARAL JEEVAN BIMA-Standardized term Life Insurance policy

Sufficient to know, these are life insurance policies by public and private sector insurance
companies. More details deleted because topic faded/outdated for 2023/24 exam cycles.

16.17.6 💊💊♿ Niramya Health Insurance for PH. ✋OLD SCHEME DONOT-LOOSE-SLEEP
- Boss? By Dept. of Empowerment of Person with disabilities (िद�ांगजन सश��करण �वभाग)→
Oriental Insurance Company. 🤩🤩Benefit? upto ₹1 lakh health insurance for handicapped
- Premium? Orphan Minor PH= ZERO; Other PH: ₹250-500, depending on poverty level

16.17.7 💊💊♿IRDAI ordered companies to launch policies for HIV patients/PWD

2022 Many insurance companies don’t have any scheme/policies for for HIV/PWD. then Delhi
HC ordered IRDAI to do solve it.
2023 IRDAI made it mandatory for general insurance companies to launch health insurance
policies to cover people with mental illness, physical disability, and HIV/AIDS.

16.18💊💊💊💊5⃣L /👪👪/📆📆 AYUSHMAN BHARAT / PM JAN AROYGA YOJANA (PMJAY)

in Budget 2018 launched Ayushman Bharat with two components:
A) 1.5 lakh Primary Health Care Centers (PHC) to be transformed into Health & Wellness Centres
with Free drugs, checkup, mother-child care etc. (�ा� और क�ाण क� द्र)
B) National Health Protection Scheme (AB-NHPS) → Later renamed ‘PM Jan Arogya Yojana
(PMJAY)’ and launched with Motto “Swasthya Aapka, Saath Hamara” from Ranchi, Jharkhand
(2018, Sept).
a. It has subsumed Rashtriya Swasthya Bima Yojana (RSBY) & Senior Citizen Health
Insurance Scheme (SCHIS).

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16.18.1 🧔🧔🧔🧔🧔🧔5⃣L /👪👪/📆📆 PM Jan Arogya Yojana (PMJAY, 2018)?
⇒ What is given? A FREE insurance cover upto ₹ 5 lakh per family, per year for secondary and
tertiary hospitalization.
⇒ All pre-existing disease covered from day 1.
⇒ Also covers 3 days of pre-hospitalisation and 15 days of post-hospitalisation expenses.
⇒ Cashless and paperless access [NITI Aayog running web portal, with privacy protection]
⇒ � Beneficiaries? Socio-Economic Caste Census (SECC: सामा�जक आ�थक जा�त जनगणना) data → + 8
cr rural + 2 cr urban = 10 cr families= ~50 crore people.

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⇒ No limit (= No cap) on family size. No limit on age. (प�रवार म� िकतने सद�, उनक� �ा उम्र है- कोई सीमा नहीं)
⇒ Where to get treatment? (इलाज कहां पर होगा)= All public hospitals and empaneled private hospitals
(by the respective States). [इलाज होगा सरकारी अ�ताल और रा� सरकार द्वारा अ�धकृ त �नजी अ�ताल म�]
⇒ Hospitals to have Pradhan Mantri Aarogya Mitras (PMAMs/hospital-receptionist-type-ke-log)
to help/guide patients in this scheme. These PMAMs are trained by Ministry of Skill
Development. (कौश� �वकास मं त्रालय द्वारा आरो� �मत्र को तालीम)

16.18.2 PM-JAY Sub-schemes

1. PM SEHAT (Social Endeavour for Health and Telemedicine) 2020- ज�ू क�ीर के सभी �नवा�सयों के �लए
a. BEFORE: 6 lakh families of the J&K getting Ayushman Bharat Scheme. (= poor family
selected through socio economic caste census 2011)
b. AFTER PM SEHAT: All residents of J&K (=21 families, rich-poor everyone) eligible for
₹5 lakh health insurance of PM-JAY scheme. Even if they are traveling outside Jammu
Kashmir, in other parts of India, they can avail treatment at PM-JAY-walli hospitals.
2. Ayushman CAPF scheme (2021-Jan) क� द्रीय सश� पु�लस बल
a. Joint initiative of Home Ministry & National Health Authority
b. Assam Rifles, Border Security Force ( BSF), Sashastra Seema Bal (SSB), Central Reserve
Police Force (CRPF), Central Industrial Security Force (CISF), National Security Guard
(NSG), and Indo-Tibetan Border Police (ITBP)
c. Their Personnel & their family members also covered

16.18.2.1 �PMJAY → National Health Authority (रा��ीय �ा� प्रा�धकरण)

- Originally it was an “Agency”, then restructured & renamed into “Authority” (2019).
- NHA oversees the implementation of PM-JAY, operational guidelines, collaborate with
insurance companies & IRDAI, running web-platform etc. (योजना को िक्रया��त करेगा बीमा कं प�नयों के साथ
तालमेल �बठाएगा)
- NHA is an ‘attached (adjunct) office (सं ल� कायार्लय)’ with health ministry (�ा� मं त्रालय). i.e. Health
Ministry only looks after parliamentary matters like replying in question hour, annual reports
etc. thus giving NHA more freedom in day to day functions. (रोजाना काय� म� मं त्रालय क� दखल कम)
- NHA has a Chief Executive Officer (CEO) with status of Secretary to Govt of India (स�चव).
- Above NHA → “Governing Board” (शासक-मं डल) with following composition:
- Chairman: Minister of Health & Family Welfare (�ा�-प�रवार क�ाण मं त्रालय)
- Members: NITI Ayog CEO, NHA-CEO & other govt officials and experts (�वशेष�).
- States will be represented in the Governing Board on rotational basis (चक्रानुक्रम).

16.18.3 Ayushman Bharat Digital Mission

NHA also implements “Ayushman Bharat National Digital Health Mission” (Basically Sarkaari-
google-drive mein x-ray report store kro yojana!) More in �Pillar#6:health schemes

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16.18.3.1 PMJAY → State Health Agency (SHA)
- Each State to form a State Health Agency (SHA: रा� �ा� एज�सी) to get the scheme
implementation.
16.18.3.2 PMJAY → Funding / Cost:sharing
Category (श्रेणी) Cost sharing (खचर् क� साझेदारी)
"Special Category States" (�वशेष श्रेणी के रा�): Union contributes 90%: while
- North-Eastern States, and State contributes 10% of the
A
- TWO Himalayan Hilly States: Himachal Pradesh and cost
Uttarakhand#
- Other States: who are not in above category (UP, Bihar, 60:40
etc.)
B - Union territory (UT) with legislature: Delhi,
Puducherry, Jammu & Kashmir. (�वधा�यका वाले क� द्र शा�सत
प्रदेश)
- UT without legislature: Ladakh, Andaman Nicobar etc. 100%
C
(�बना �वधा�यका के क� द्र शा�सत प्रदेश)
- #
Before the removal of Article 370 (in 2019), the State of J&K was previously in Special category,
so it got 90:10 funding.
- Afterwards: J&K is UT with legislature, so, J&K will get 60:40. So, 2019-Aug: Central
Government considering creating a new category ‘Hill Union Territory (पहाड़ी क� द्र शा�सत प्रदेश)’ so
J&K may continue to received 90:10 funding. But, no need for 🎓🎓✋#🕰🕰थोड़ा-पढ़ो-आगे-बढ़ो

16.18.4 😰😰PM-JAY Challenges:

Shifted to Mains Handout. Gist given in above image.

16.18.4.1 🍋🍋PM-JAY- taxes to build hospital?

 Govt to setup hospitals in aspirational (=backward) districts for treatment of PM-JAY
beneficiaries.
 Hospital construction Funding: Public private partnership (PPP) → Public side’s funding will
be provided using ₹₹ from health cess on imported medical devices.
 (More about health cess in 📑📑Pillar#2-Taxation) (आयात होने वाले �चिक�क उपकरणों पर �ा� उपकर
लगाकर उस पैसों से �पछड़े �जलों म� अ�ताल बनाएं गे)

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🔠🔠❓ MCQ. Which is not a feature of the Ayushman Bharat Scheme? (CDS-i-2020)
(a) There is no cap on family size and age. (प�रवार क� सद�ों क� सं �ा और आयु पर कोई सीमा नहीं)
(b) The scheme includes pre- and post-hospitalization expenses.
(c) A defined transport allowance per hospitalization will also be paid to the beneficiary.
(d) The scheme provides a benefit cover of Rs. 10 lakh per family.
🔠🔠❓ MCQ. Ayushman Bharat is a national health insurance system for: (UPSC-Geologist-2020)
a) women b) every citizen c) old age people d) poor and vulnerable.
🔠🔠❓ MCQ. Which are the benefits of the Pradhan Mantri Jan Arogya Yojana? (CDS-i-2019)
1. Free treatment available at all public and empanelled private hospitals.
2. Cashless and paperless access to quality health care services. नकदी रिहत और कागज रिहत प्रशास�नक प्रिक्रया
3. Govt provides health insurance up to ₹ 5 lakh per family per year.
4. Pre-existing diseases are not covered. पहले से मौजूद बीमा�रयों को कवर नहीं िकया जाता है
Codes: a) 1 and 3 only b) 1 , 2 and 3 c) 2 and 4 only d) 2, 3 and 4

16.19 ⚰ 💊💊💊💊🌽🌽 GENERAL INSURANCE → OTHER THAN HEALTH INSURANCE

16.19.1 🧔🧔⚰🌽🌽 Pradhan Mantri Fasal Bima Yojana (2016)

- Nodal Ministry: Agri Min → Public sector general insurance companies, and empanelled private
sector insurance companies. सरकारी सामा� बीमा कं प�नयां तथा �नजी �ेत्र क� ऐसी सामा� बीमा कं प�नयां �जनको कृ �ष
मं त्रालय ने इस योजना लागू करने के �लए सूचीबद्ध िकया है

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- Against natural calamities, pests, diseases; (प्राकृ �तक आपदाएँ , क�ट, बीमा�रयाँ;)
- Protects before, during and after harvest (फसल क� कटाई).
- Premium (बीमा-िक�) paid by farmers against the total insured amount: Rabi winter crops (1.5%)
– Kharif summer monsoon crops (2%) –Horticulture & Commercial crops other than oilseed &
pulses (5%). Remainder premium is paid by Union: State Gov. It’s optional for States to join.

16.19.2 🧔🧔⚰🌽🌽 PM-FBY (2.0) reforms in 2020

Before-2020 From 2020-Kharif
Suppose a kharif crop insurance premium Suppose a kharif crop insurance premium = ₹100.
= ₹100. ⇒ Farmer pays ₹2 of the premium
⇒ Farmer paid ₹2 of the premium ⇒ Union pays only ₹25 to 30 based on whether it’s
⇒ Union paid ₹49 + State paid ₹49. In irrigated or unirrigated respectively.
other words, Union and States shared ⇒ State may have to pay ₹68-73. So, states’ burden
their premium burden half-half increased.
(50:50). ⇒ However, the Union will bear 90:10 of the
burden in case of North Eastern States.
Compulsory for farmer to buy this Voluntary (�ै��क) for farmers. (ब�क लोन पास करवाने के
insurance policy, IF he wanted crop loans �लए िकसान को यह योजना यह बीमा �नकलवाना अ�नवायर् निह)
from bank
------ Updated methodology for assessment of crop loss
🔠🔠❓MCQ. Find correct statements about ‘Pradhan Mantri Fasal Bima Yojana': (Prelims-2016)
1. Under this scheme, farmers will have to pay a uniform premium of 2% for any crop they
cultivate in any season of the year. िकसी भी फसल म� �सफर् 2% बीमा िक� िकसान ने चुकानी होगी
2. This scheme covers post-harvest losses arising out of cyclones and unseasonal rains.
Codes: (a) 1 only (b) 2 only (c) Both 1 and 2 (d) Neither 1 nor 2

16.19.3 🧔🧔⚰🌽🌽 Other Agriculture Insurance Schemes? (अ� कु छ फ़सल बीमा योजना)
- Apart from PM Fasal Bima, there is Restructured Weather Based Crop Insurance Scheme
(RWBCIS, 2016)- protects against weather only. (so not pests/diseases).
- There was a National Agricultural Insurance Scheme and Modified (NAIS), but PM Fasal Bima
subsumed it. लेिकन वो सब याद रखने से परी�ा म� बहोत लाभ नहीं.
16.19.4 ⛴🔪🔪(�🏦🏦) Insurance to Banks on Exporters’NPA → NIRVIC Scheme (2019)

Figure 2: �नयार्तक ब�क का कजार् नहीं चुकाएगा तो नुकसान क� भरपाई कौन करेगा

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Boss? Commerce Ministry → Export Credit Guarantee Corporation (ECGC)
⇒ NIRVIK (Niryat Rin Vikas Yojana) is an Export Credit Insurance Scheme (ECIS).
⇒ Exporter takes a loan from a bank. But if he defaults then ECGC will cover upto 90% of his
principal + interest losses to the bank. (Before NIRVIC scheme, it was only 60%)
⇒ Exporters pay ‘premium (बीमा-िक�)’ to the bank → bank pays it to ECGC. (Exporter need not
goto ECGC office himself. He can get the application form from the loan giving bank itself.)
⇒ Premium rates depend on sector e.g. diamond, chemical etc. exact figures=NOTIMP
16.19.5 🚕🚕🚕🚕 Third Party Motor Insurance (थडर् पाट� मोटर इं�ोर�स)

- Motor Vehicles Act (1988) requires all motor vehicle owners to purchase it. (कानूनी �प से अ�नवायर्)
- Third party (TP) insurance: When your vehicle hits another vehicle, person or property → that
victim (third party) registers a case, gets compensation. IRDAI regulates premium rates & other
norms.
- SC judgement (2019): TP insurance validity should be 3-5 years, so even if owner forgets to
renew annually, the third party is protected. (अवधी �ादा होनी चािहए)

16.19.6 🚕🚕🚕🚕 Own Damage Insurance (OD: मोटर सं बं �धत �यं के नुकसान का बीमा )
- It protects owner of vehicle against theft, vandalism, accident, fire.

16.19.7 🚗🚗Tech-driven add-ons in Motor-OD (own damage) cover

IRDAI has allowed insurance companies to launch Tech-based add-ons in in motor own-damage
policies for two-wheelers and private cars e.g. "pay as you drive," "pay how you drive,"

16.19.8 🚗🚗De-tariffication in Chinese insurance sector (📙📙ES23)

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 Normally, in a vehicle insurance After De-tariffication
motor vehicle insurance companies to charge fixed premium based on risk profile of the
premiums based on type of the bike/car. This premium is driver e.g. age, physical fitness, past
usually decided by the Government/insurance regulator car-accidents, alcohol addiction etc.
�ES23 said Chinese vehicle insurance sector witnessed De-tariffication. (सामा� �प से वाहन बीमा कं पनी
क� फ�स/प्री�मयम िफ़�/सब के �लए एक समान होते है। हालांिक डी-टे�रिफके शन ऐसी प्रणाली है जहां जो�खम क� सं भावना के िहसाब से
फ़�स/प्री�मयम अलग अलग हो सकता है।)

16.19.9 🏗🏗⚖📜📜Title Insurance (जमीन / इमारत का टाइटल बीमा)

Figure 3: जमीन मकान �ववादों के कानूनी लफड़ो म� नुकसान से बचने का �बमा img source: Gulabo Sitabo movie (2020)
- 'Title' (अ�धकार-�वलेख) means a legal document showing ownership of a property. 'Title dispute':
usually happens when multiple persons are claiming ownership of the same land / building.
- 'Title Insurance' protects the new buyer in case of such legal disputes (by refunding the money he
had spent in buying land, construction, legal expenses etc).
- Real Estate Regulation and Development Act 2016 (RERA) requires the builders to buy this type
of insurance. More on RERA in 📑📑pillar#5: urban infrastructure.

16.19.10 💉💉⚖📜📜Clinical Trial Liability Insurance

⇒ Type: General Insurance Cover
⇒ Objective: To protect the pharmaceutical company From legal expenses/Lawsuits, if a volunteer
patient suffers damage/death in clinical trials. (यिद कोई ��� नैदा�नक परी�णों म� ��त / मृ�ु तो फ़ामार् क�नी
को बीमा क�नी मदद करेगी।)

16.19.11 🔥🔥🔥🔥🏡🏡🏭🏭 Bharat Griha Raksha & other: Standardized home/factory insurance
- IRDAI ordered @General Insurance companies to sell 1) Bharat Griha Raksha, 2) Bharat
Sookshma Udyam Suraksha 3) Bharat Laghu Udyam Suraksha from 1/4/2021 onwards.
- Type? Standard Fire and Special Perils (SFSP) Policy.
- Beneficiaries? protect homes and factories of micro, small and medium enterprises (MSMEs).
- What damages are covered? fire, natural catastrophes, riot, strike/hartal, malicious damages,
terrorism,, etc upto ₹50 crores.

16.19.12 🌬🌬🌬🌬(Proposed) Catastrophe Insurance (आपदा बीमा)

⇒ Protects the client from natural and manmade disasters.

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⇒ Presently, farmers’ crops are protected from natural disasters through PM-Fasal Bima Yojana.
But, if his own home was destroyed in floods, it’s not covered → Union & State Governments
forced to use taxpayers' money for paying compensation to victims of floods, cyclones etc.
⇒ IRDAI doing some studies to launch catastrophe insurance (or CAT cover) for poor people.
16.19.13 🌬🌬🌬🌬 Catastrophe Bonds, Surety Bonds:

📑📑Refer Pillar#1C: SEBI-Sharemarket-यह हम पहले ही पढ़ चुके ह�

16.19.14 👿👿👿👿General Insurance → Cyber Insurance (साइबर बीमा)

- It covers the losses related to malware attack, phishing and data, identity theft, ransom payment
demand made by the hackers, data restoration costs, business interruption losses due to
cyberattacks. The loss of reputation, damage to mental health etc.
- Corona lockdown → home-from-home through computer → demand for such policies ⏫.
- Bajaj Allianz and HDFC ERGO are notable general insurance companies offering such products.

🔠🔠❓In India, under cyber insurance for individuals, which of the following benefits are generally
covered, in addition to payment for the loss of funds and other benefits? (UPSC-Prelims-2020 SetB.Q90)
1. Cost of restoration of the computer system in case of malware disrupting access to one’s
computer
2. Cost of a new computer if some miscreant wilfully damages it, if proved so
3. Cost of hiring a specialized consultant to minimize the loss in case of cyber extortion
4. Cost of defence in the Court of Law if any third party files a suit
Answer Codes: [a) 1, 2 and 4 only [b) 1, 3 and 4 only [c) 2 and 3 only [d) 1, 2, 3 and 4

16.19.15 💻💻eIA: e-Insurance account

⇒ Shares/Bonds are stored digitally in DEMAT accounts. (More in 📑📑Pillar#1C)
⇒ Similarly, Insurance policies can be stored digitally in e-Insurance accounts e.g. NSDL's National
Insurance Repository (NIR). (बीमा द�ावेजों को िड�जटल �प से सं ग्रिहत करना)
⇒ 🤩🤩Benefit? convenience to customers especially if he bought insurance policies from different
companies e.g. Vehicle insurance, fire insurance, Health Insurance, Life Insurance. He can easily
track their expiry date/ online renewal etc. in one portal. (सद�ता का ऑनलाइन नवीनीकरण आसान होगा)
16.20⚰↗⚰RE-INSURANCE (पुनब�मा)
- DICGCI Act (1961) requires banks to take deposit insurance from DICGCI.
- Similarly, Insurance Act (1938) requires insurance companies take ‘re-insurance’ on their biz.
बीमा कं पनी ने �यं का "धं धा चौपट बचाओ" बीमा लेना होगा
- Previously, only GIC was the sole-reinsurer, but then norms liberalized in 2015.
- Now private re-insurance cos allowed. e.g. India’s ITI Reinsurance Ltd.

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- Even foreign re-insurers such as Swiss Re, Munich Re, General Reinsurance (Warren Buffet,
USA), Lloyds (UK) are permitted. (पहले के वल जीआईसी, लेिकन अब अनेक कं प�नयों को अनुम�त दी गई)
- 🤩🤩Benefits of multiple re-insurance cos? GIC’s monopoly in dictating re-insurance premium
rates is gone. So, insurance cos’ cost of operations to decline → biz. expansion, launch
innovative products etc.

16.20.1 😷😷(🤵🤵🤵🤵🤵🤵)PANDEMIC RISK POOL proposal by IRDAI

⇒ Corona= many people died/sick = insurance companies required to pay large sum of
compensation. This is putting lot of Business stress/losses on insurance and reinsurance
companies. (महामारी म� काफ� लोग बीमार �ए/मर गए. बीमा कं प�नयों ने मुआवजा देना पड़ा, मुनाफ़े पर गहरा तनाव)
⇒ PANDEMIC RISK POOL = Insurance companies and government will contribute ₹₹ into this
fund to help in insurance companies in future pandemics. (बीमा कं प�नयां और सरकार �मलकर एक
�न�ध/कोष/फं ड म� पैसा जमा कर� तािक भ�व� म� महामारीज� तनावपूणर् ���तयों म� बीमा कं पनी क� मदद हो सके ।)

16.21 ⚰�IRDAI: THE INSURANCE SECTOR REGULATOR (बीमा �ेत्र �नयं त्रक)
- 1996: IRDA setup→ given statutory status in 1999 (वैधा�नक सं �ा बनी)
Org - 2014: Its name changed to Insurance Regulatory and Development
सं गठन Authority of India (IRDAI: भारतीय बीमा �व�नयामक एवं �वकास प्रा�धकरण)
- HQ: @Hyderabad, Telangana. (Whereas RBI & SEBI HQs @Mumbai.)
Structure 1 Chairman: Dr. Debasish Panda (Ex-IAS) (5/65),
सं रचना 9 members (5/62) = Total 10. They can be re-appointed. (पुन�नयु�� सं भव है)
⇒ IRDAI gives separate licenses for life, general & re-insurance companies.
Functions ⇒ Prescribes norms for insurance companies for accounting, solvency, audit,
कायर् commission to agents etc. It can penalize companies, suspend or cancel
registration. Appeal → Securities appellate Tribunal (SAT) (More in
📑📑Pillar#1C)

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 ⇒ Norms for agents & brokers, banks selling products (Bancassurance), Surveyor/
Loss Assessor, and Third-Party Administrators (e.g. Hospital)
⇒ Consumer grievance redressal via Insurance Ombudsman (�शकायत �नवारण अ�धकारी).
IRDAI is member of Financial Stability & Development Council (FSDC). Ref: 📑📑1C

16.21.1 ⚰�Domestic Systemically Important Insurers (D-SIIs, (घरेलु प्रणालीबद्ध मह�पूणर् बीमाकतार्)
- IRDAI prepares a list of big insurance companies that are “too big to fail” i.e. they feel it will
create very great economic distress for India. (यिद ये बीमा कं प�नयां �गर गयी तो अथर्तंत्र म� भारी तबाही होगी)
- IRDAI labels them as D-SIIs & imposes additional rules/monitoring/supervision on them.
- Latest List: 1) Life Insurance Corporation of India (LIC), 2) General Insurance Corporation of
India (GIC), 3) The New India Assurance Co. Ltd. (NIACL) (उनपर �ादा स� �नयम/�नगरानी रख�गे)

16.21.2 ⚰�IRDAI- Bima Sugam Portal (2023)

16.21.3 ⚰📈📈Insurance progress indicators (बीमा प्रग�त सं के तक)

Insurance penetration (%: बीमा प्रवेश) Insurance Density ($:बीमा घन�)
=Premium divided by GDP =Premium divided by population

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For India, these indicators are low compared to Malaysia many other developing countries. (उ�
सूचकांकों म� भारत अ� �वकासशील देशों के मुक़ाबले मे काफ़� पीछे है)

16.21.4 🇺🇺🇸🇸💸💸FDI limits in Insurance sector? (बीमा �ेत्र मे प्र�� �वदेशी �नवेश क� सीमा)
⇒ Foreign Direct Investment (FDI) is the (more than 10% equity / share) investment made by a
foreign entity into an Indian company, with the objective to get involved in the management /
production of that Indian company. (िकसी �वदेशी इकाई द्वारा एक भारतीय कं पनी म� 10% से �ादा शेयर �नवेश
करना उसे कहते ह� प्र�� �वदेशी �नवेश) (More on FDI 📑📑Pillar#3A)
⇒ e.g. 2018: Walmart-USA bought 77% shares in Flipkart-India @$16 billion.

FDI limits in insurance sector→ 😰😰BEFORE 🤩🤩AFTER (Automatic Route)

State owned/public sector Life insurance NO RULE 20% (done in 2022)
corporation i.e. LIC (सावर्ज�नक �ेत्र का जीवन बीमा �नगम)
Insurance company itself (Except LIC) 49% 74%** (done in 2021)
Insurance intermediaries e.g. agent/broker, 49% 100% (done in 2020)
surveyor/loss-assessor, third party
administrators (hospital who give treat to health
insurance clients) (बीमा �ेत्र के �बचौ�लये/द�े)
** 💼💼Budget-2021: announced to amend Insurance Act, 1938 to ⏫ FDI limit from 49% to 74% in
Insurance Companies. With following safeguards: हालांिक कु छ शत� के साथ →

⇒ the Majority of Directors on the Board and key management persons must be Resident Indians.
बोडर् ऑफ डायरे�र तथा कं पनी प्रबं धन के व�र� पदा�धका�रयों म� ब�म�त भारतीय �नवासी होने चािहए
⇒ At least 50% of Directors must be Independent directors. (�तं त्र डायरे�र) (Ref#1C)
⇒ Certain % of profits must be retained as general reserve. मुनाफे का कु छ प्र�तशत सामा� आर��त �न�ध के �प
म� अलग से रखना होगा, ताक� अगर कोई कांड हो जाए तो इन पैसों से ��तपू�त हो सके .

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16.21.5 🤗🤗 � Arguments in favour and against increasing FDI in insurance sector?
Shifted to Mains. #Prelims-RAFTAAR-🏎🏎

17 � → � (💰💰💰💰) PENSION (प�शन)

- ⚰Insurance: person/his family eligible to receive ₹ ₹ if he suffers death / damage. e.g. PM
Jeevan Jyoti: ₹ 2 lakhs on death. जीवन बीमा का लाभ लेना है तो ��� का मरना ज�री है
- �Pension: Person eligible to receive monthly ₹ ₹ when he retires. And when he dies, his wife
(is usually) eligible to receive monthly ₹ ₹. When she also dies, scheme stops. बुढ़ापे म� प�शन �मलता रहे.
आपके मरने पर आपके प�त या प�ी को भी प�शन �मलता रहे।
17.11�🦁🦁 EMPLOYEE PROVIDENT FUND ORG. (कमर्चारी भ�व� �न�ध सं गठन)
- 1951-52: EPFO was setup initially by ordinance & then Act.
- Nodal: Labour Ministry (श्रम मं त्रालय).
- EPFO governed by Tri-partite “Central Board of Trustees” �त्रदलीय के �ीय �ास बोडर् -
I. Government (Union + state) – 15 nominees (मनोनीत सद�)
II. Employers (industrialists) - 10 nominees
III. Employees (workers) – 10 nominees
- They make policy decision about where to invest money (usually G-sec>C-Bonds>Shares; with
minimum and maximum slabs) and they decide how much interest should be paid to
subscribers.
Chronology Scheme (Tech. norms not written here as they’re not imp4IASexam)
1952 Employee Provident Fund (EPF)
⇒ Principal + interest returned upon retirement age/ death. Interest Rate:
8.5%(2020-21) → ⏬ Reduced to 8.1%(2022-23)- lowest in last 40 years.
⇒ Partial withdrawal upto “X%” allowed for education, marriage, illness and
house construction. (अव�ध से पहेले आं�शक �प से पैसा �नकालना)
⇒ 2020: 👻👻ATMANIRBHAR → PM Garib Kalyan Package→ labour ministry
allowed EPFO subscribers’ to withdraw upto “X%” of EPF fund to help the
workers during lockdown. (कोरोना के चलते ज़�रतमं द मज़दू र अपने खाते से प�रप�ता-अव�ध से
पहेले आं�शक �प से पैसा �नकाल सके )
1976 Employees Deposit Linked Insurance Scheme (EDLI)
⇒ Boss pays Premium. If worker dies → family gets insurance.
⇒ 2020-Reform: if worker died of Corona family member will be given insurance
(min 2.5 lakh to max 7 lakh). कोरोना मृतक श्र�मक के प�रजनो को बीमा रा�श
1995 Employee Pension Scheme (EPS)
⇒ Monthly pension on retirement (once they attain the age of 58 years old) /
permanent disability (वय-�नवृ�त/�ायी �वकलांगता म� प�शन �मलेगा).

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 (𝐴𝐴𝐴𝐴𝐴𝐴 𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠 𝑜𝑜𝑜𝑜 𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙 5 𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦 𝑋𝑋 𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛 𝑜𝑜𝑜𝑜 𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦 𝑖𝑖𝑖𝑖 𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠)
EPS pension =
70
- Note1: Different websites give different formulas. Formula is not imp, but
sufficient to know that it is not linked with SHAREMARKET performance
(unlike NPS scheme.)
- Note2: If the worker dies before retirement (=while in job) → the minimum
guaranteed pension to the spouse = ₹ 1,000 per month.

17.11.1 EPFO : Higher pension rule = NOT IMP for Exam

- EPFO covers both permanent employees & casual/temporary employees (= employed only for a
few days/weeks/months.) �ायी कम� और अ�ायी/अयाथव�ध कम� दोनो को लाभ �मलता है।
- EPFO Act doesn’t apply to cooperative society with less than 50 workers, if such cooperative
society not using power (electricity, coal etc). [Why? Ans. NOTIMP.]
- EPFO subscriber worker has UAN (Universal Account Number) that remains unchanged even if
he changes job from one organization to another. (मजदू र का खाता नं बर- नौकरी बदलने पर भी वही रहता है)

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- Previously, employee himself couldn’t generate his UAN, he had to request his boss to send
forms to EPFO. But 2019: EPFO allowed employees to generate UAN online by simply giving
Aadhar & Mobile Number. (एक जमाने म� मजदू र ने मा�लक द्वारा फॉमर् �भजवाना होता, लेिकन अब मजदू र खुद अपना
खाता खोल सकता है)
- Factory owner/Employer has LIN (Labour Identification Number)- which he uses while
uploading EPFO documents on Shramsuvidha webportal of Labour Ministry.
- EPFO & ESIC transactions can be done through:
o Through public and pvt sector banks (ब�क खाते द्वारा पैसा भेज सकते ह�)
o through Ministry of Electronics and Information Technology (MeitY)’s UMANG App
(Unified Mobile Application for New-age Governance).

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17.11.1.1 ��EPF Commutation (2020)
⇒ EPFO: Employees’ Pension Scheme (EPS: कमर्चा�रयों क� प�शन योजना) = worker gets pension after
retirement age (58 years).
⇒ EPF Pension commutation= Worker can partially withdraw his pension in advance before
reaching retirement age. But, then EPFO will pay him less pension afterwards when he actually
reaches retirement age. (प�शन �पांतरण: वय�नवृ�� उम्र/प�रप�ता समय से पहले पैसा उठाना। हालाँिक ऐसा करने पर बाद
के वष� म� प�शन कम �मलेगा)

17.11.2 🧔🧔🧔� (2016) Pradhan Mantri Rojgar Protsahan Yojana (Labour Min)
- Too outdated for 2023 so deleting it.
- Under the scheme government contributed some money to EPFO, on behalf of the factory
owner, when factory owner recruited new persons. (फ़ै ��ी मा�लक जब नए आदमी को नौकरी पे रखेगा तो कु छ
वष� के �लए सरकार उसका EPF का पैसा भरेगी, ऐसी पुरानी ने योजना के )

17.11.3 👻👻Atmanirbhar Bharat Rozgar Yojana= Subsidy from Central Govt in EPFO contribution
It was launched during the Atmanirbhar Bharat 3.0 package (November 2020)
Beneficiary eligibility: Worker's Monthly wages LESS THAN ₹15,000 AND
1) Fresh EPFO-Worker got new job in an EPFO registered firm OR
2) Past EPFO-Worker had lost job between March1 to Sept30 of 2020, BUT got a job on/after
October1, 2020 in an EPFO registered firm
🤩🤩Entitlement: यह योजना म� फायदा �ा �मलेगा
EPF scheme �worker (मजदू र) �Boss (मा�लक)
if the firm has up to 12% of wages → 🧔🧔 12% → 🧔🧔 Govt to contribute to EPFO
1000 employees Govt to contribute to (सरकार देगी)
EPFO
if the firm has >1000 12% of wages → 🧔🧔 ✋12%: Boss has to contribute from his
employees Govt to contribute to pocket. Govt will not contribute. (सरकार नहीं
EPFO देगी)
🤩🤩Benefit? Formal Job creation, more money in the hands of workers → demand⏫ → Post
corona economy Revival. (औपचा�रक रोजगार सृजन, मजदू र के हाथ म� �ादा पैसा आएगा �जससे बाजार म� मांग म� बढ़ोतरी)
🗓🗓Scheme validity? (यह योजना िकतने �दनों तक वैद्य/जारी रहेगी)
⇒ Scheme registration open till June 2021.
⇒ Registered worker will continue to receive benefit for two years. e.g. if registered in January 2021
→ then ₹₹ upto January 2023.
🎓🎓Note: for faster revision I have used the term worker and boss (मजदू र और मा�लक) But, in real mains
exam, you should write employee and employer/Entrepreneur (कमर्चारी और नोकरीदाता / उद्यमी)

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17.11.4 🚩🚩🚩FAQ: “why not merge EPFO with ESIC!!? ”
Their laws are different. To merge them you’ve to merge two laws. But this is not some priority for
govt like Article 370. So, prepare facts as given in the handout. #थोड़ा-पढ़ो-आगे-बढ़ो

17.12 �→�PENSION FOR GOVT EMPLOYEES & MIDDLE CLASS? = NPS

Govt Employees (from 2004) Middle Class (from 2009)

- 2004: New Pension Scheme (नवीन प�शन योजना) - In 2009, the Government employee-walla
→(2009) renamed into National Pension National Pension System was made open
System. (रा��ीय प�शन प्रणाली) for all citizens (and NRIs) aged 18-55 on
- Subscriber? Those who joined govt. service voluntary basis. You contribute money till
on or after 01/01/2004 (except Armed age of 60, as per your capacity →invested
forces) →pension.
- Mechanism? Employees (10 % of basic -
pay) + Govt. contribution (14% of basic
pay: since Interim-Budget-2019) → goes to
PFRDA →NPS Trust → empaneled NPS-
Fund-manager → Invested G-sec,
Corporate Bonds and Shares depending on
your preference in Tier1/Tier2 accounts.
- NPS subscribers have PRAN: Permanent Retirement Account Number, Just like EPFO
subscriber has UAN Number.

17.12.1 NPS-Lite (Swavlamban) (2010)

If poor person from unorganized sector joined NPS, then govt to contribute ₹1000 per year or five
years in their account. (असं गिठत �ेत्र म� कायर्रत ग़रीब आदमी के खाते म� सरकार द्वारा पाँच साल के िकए १-१ हज़ार �पये वा�षक
का योगदान)

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17.12.2 ✋Old Pension Scheme (OPS) in Non-BJP States
⇒ Union Govt believes 1) we don’t have enough money to sustain OPS. 2) better to use tax payers’
money for poor.
⇒ However some non-BJP states such as Rajasthan reverting to OPS.
⇒ Experts argue that OPS is unsustainable because State govts don’t have enough money to run it
forever. More elaboration / bolbachchan = shifted to Mains. #Raftaar-for-Prelims.

17.12.3 NPS: Andhra Guaranteed Pension Scheme (GPS)

State Govt Employee State Govt Guaranteed Pension
10% of salary 10% 33% of last salary before retirement
14% 14% 40% of last salary before retirement

17.12.4 �→� Pension: NPS: Minimum Assured Return Scheme (MARS)

⇒ PFRDA yet to release the guidelines so for the sake of simple example ….
⇒ suppose you contribute ₹100 & PFRDA gave MARS of 8% on the NPS account
⇒ Then if NPS unable to give u 8% return on ₹60 of subscription then whatever loss- will be paid
by PFRDA/other org to subscriber. 😍😍Benefit? It’ll attract more people to join NPS.
�ूनतम सु�न��त वापसी योजना (MARS) - मान ली�जए PFDRA कहता है िक कम से कम 8% सालाना मुनाफ़ा िदया जाएगा और
अगर शेयर /बोंड बाज़ार �सफ़र् 7% दे पाता है तो 1% नुक़सान क� भरपाई PFRDA या कोई और अ� सं �ा द्वारा क� जाएगी। असल म�
�नयम बनने बाक़� है, इस�लए ये तो एक का��नक उदाहरण िदया है)

17.12.5 �→� Pension: NPS: T V Somanathan committee (2023)

Finance Ministry has setup T V Somanathan to review the NPS pension scheme for government
employees and suggest any changes, if needed.

17.12.5.1 �📜📜 → � Jeevan Pramaan (2014)

- Previously, a pensioner (in any Govt / public sector org.) had to submit a physical life certificate
in November each year to prove that he’s alive = hardship, bribery.
- "Jeevan Pramaan" – an "Aadhar-based Digital Life Certificate“ by Ministry of Electronics &
Information Technology (MEITY) (आधार काडर् और अंगठू ा लगा के �ज़दं ा होने का प्रमाण पत्र तािक प�शन �मलता रहे)

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- Pensioner's Aadhar number + biometric reading device→ PC, Mobile→ “Digital Life
Certificate”→ submit to the authority → pension released.
- 2020: Jeevan Pramaan system also expanded to EPFO subscribers.
- 2022: EPFO also allows facial recognition system because in some very old pensioners, difficult
to scan finger-print/iris.

17.13 �→�PENSION FOR SENIOR CITIZENS WITH CAPACITY TO INVEST?

17.13.1 Pradhan Mantri Vaya Vandana Yojana (2017-DFS, LIC)
⇒ Boss- Dept of Financial Services
⇒ 2023-March-31st: this is the last date to join the scheme. Then registration will close.
⇒ Other similar schemes: Senior Citizen Savings Scheme, LIC Varistha Pension Bima Yojana but
they are old schemes so poor cost: benefit in preparing for UPSC.

🔠🔠❓ [Asked in UPSC-CDS-2019-1] Consider the following passage about a scheme : It was
launched to provide social security during old age and to protect elderly persons aged 60 years and
above against a future fall in their interest income due to uncertain market conditions. The scheme
enables old age income security for senior citizens through provision of assured pension / return
linked to the subscription amount based on government guarantee to Life Insurance Corporation of
India (LIC). Identify the scheme. Answer Choices:
a) Pradhan Mantri Swasthya Suraksha Yojana b) Pradhan Mantri Vaya Vandana Yojana
c) Liveability Index Programme d) Rashtriya Vayoshri Yojana
17.14 �→�PENSION FOR POOR PEOPLE WITH CAPACITY TO INVEST?
ग़रीब आदमी जो ख़ुद क� जेब से थोड़ा पैसा �नवेश कर सके - उनके �लए प�शन योजना

👴👴Atal Pension Yojana (APY) 🧔🧔Pradhan Mantri Shram-Yogi Maandhan

By Dept of Financial Services, 2015 By labor Ministry, 2019
Only 18-40 age Indian citizen residing in India Income Tax-payer, NPS,EPFO,ESIC-
subscribers not eligible.
No minimum or maximum income limits. unorganized sector workers with monthly
Mukesh Ambani can also join, but given that fact income upto ₹15k. E.g. street vendors,

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 👴👴Atal Pension Yojana (APY) 🧔🧔Pradhan Mantri Shram-Yogi Maandhan
that maximum pension is ₹5,000 a month so rickshaw pullers, construction workers, rag
target-audience is poor people, unorganized pickers, agricultural workers, beedi workers
workers outside EPFO security. etc. in the age of 18-40
Monthly pay ₹42-210 rupees till the age of 60 Monthly invest ₹55-200 (depending on age of
joining). Govt to co-contribute equal amount.
Till the age of 60
₹1k-5k monthly pension- depends on @which Fixed ₹3k pension per month after 60.
age joined, how much contributed?
- If subscriber dies after 60, then spouse If subscriber dies after 60, spouse
(Husband/wife) continues to receive same (husband/wife) gets ₹1500pm as family
amt. pension. pension.
- Both Husband & Wife die → Nominee (e.g. Both Husband & Wife die → Nominee (e.g.
their child) receives the entire principal their child) get nothing.
(premium) back. (माँ बाप दोनो मर गये तो ब�े को �नवेशक-प�त/प�ी के देहांत पर उसके प�ी/प�त को आधा ही
मूलधन वापस) प�शन �मले। दोनो मर गये तो ब�े को कु छ नहीं �मलेगा।
One person-1-subscription account only. (एक Same as left cell.
��� का �सफ़र् एक ही खाता खुल सकता है)
💡💡Note: 1) Atal Pension Yojana 2) PM Jivan Jyoti Yojana and 3) PM Suraksha Bima Yojana are
collectively known as Pradhan Mantri Jansuraksha Schemes.

🔠🔠❓ [Asked in Prelim 2016] Find correct statement(s) regarding ‘Atal Pension Yojana’:
1. It is a minimum guaranteed pension scheme mainly targeted at unorganized sector workers.
2. Only one member of a family can join the scheme.
3. Same amount of pension is guaranteed for the spouse for life after subscriber's death.
Codes: (a) 1 only (b) 2 and 3 only (c) 1 and 3 only (d) 1, 2 and 3

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17.14.1 � → 👴👴👴👴👴👴: 🧔🧔 Pension: Three Maan Dhan Yojanas

18-40 Age; ₹ 55-200 fees; LIC Fund manager Who?

Pension @60=3000 → family + This Ministry
pension ₹ 1500 co-contributes
1) Pradhan Mantri Shram-Yogi Labour Ministry unorganized sector workers with
Maan-dhan (Feb’19) monthly income upto ₹15k
2) PM Laghu Vyapari Maan- Labour Ministry Small trader / shopkeepers whose annual
dhan Yojana (Jul’19)# also turnover does not exceed Rs 1.5 crore,
known as ‘NPS-Traders’ based on self-declaration.
3) Pradhan Mantri KISAN Agri small / marginal farmers with upto 2ht
Maan-dhan Yojana (Aug’19) land.
- 1 person can join only 1 type of above scheme. (एक ��� का �सफर् एक बार ही पं जीकरण होता)
- Income Taxpayers & those who joined EPFO/ESIC are not eligible for any of these schemes.
- 💼💼Budget-2020: we’ll launch a Universal Pension coverage with auto enrolment for workers.
It’ll cover workers even when they change jobs. <update when actually done>
17.14.2 🚩🚩�FAQ: “why not merge all these schemes into one!??
- More schemes = more speech points during election-rally for the minister. िफर चुनाव म� बोल�गे �ा?
- So, you may send merger-suggestion to Prime Minister. But until your suggestion is
implemented, prepare the facts as given in the handout. #थोड़ा-पढ़ो-आगे-बढ़ो

17.15 �→� PENSION FOR POOR PEOPLE WITHOUT CAPACITY TO INVEST?

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- For Below Poverty Line (BPL) people, Rural Development Ministry’s National Social Assistance
Programme (NSoAP: रा��ीय सामा�जक सहायता कायर्क्रम) in 1995, where direct money is given without
asking for any premium from the beneficiary (लाभाथ�).
- It’s a core of the core scheme (अ�त-मह�पूणर् योजना) with 100% cost is paid by Union.
- It’s optional for state govt. to contribute money- They may contribute, if they want to enhance
the scheme’s features. (More in 📑📑Pillar#2D- Schemes types)
NSoAP Components 🧔🧔Union �State (Optional to give extra)
Indira Gandhi Old ₹200-500* State Govt may give extra ₹₹ & rename
age pension @60 (depending on how old) it. e.g. Samajwadi Pension in UP
Indira Gandhi ₹300-500 State Govt may give extra ₹₹ and
Widow pension (depending on how old) rename it e.g. UP Vidhva Pension @1k
Aged 40 onwards
Indira Gandhi Same as widow pension State Govt may give extra ₹₹ and
Disability pension: rename it e.g. Guj: Sant Surdas Scheme
Aged 18 onwards
National Family Death of bread winner: e.g. Guj: Sankat Mochan
Benefit INSURANCE ₹20,000
Annapurna (2001) If To BPL senior citizens not N/A
receiving old age pension then
10kg grain / pm for FREE.
⇒ 2020: 👻👻🤧🤧ATMANIRBHAR→ PM GaribKalyan → single time ₹1,000 to poor senior citizen,
poor widows & poor disabled (total 3cr person covered)

17.15.1 Pension types: Defined Contribution vs Defined Benefit

Pension Type Defined Contribution Defined Benefit
Pension is fixed or Pension depends on Pension is fixed. Doesn’t matter what
not? performance of happens in sharemarket.
sharemarket
Example - NPS - EPS (a scheme of EPFO),
- Private pension - OPS (Old Pension Scheme for govt
companies investment employees),
plans - Atal Pension Scheme (APY), Sharm Yogi
Maan-dhan, NSoAP

17.16�� PFRDA, THE PENSION FUNDS’ REGULATOR

2003: Executive order to setup PFRDA- Pension Fund Regulatory and Development
Org Authority (प�शन �न�ध �व�नयामक एवं �वकास प्रा�धकरण)
2013: given statutory status. HQ: New Delhi, just like IBBI.

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 1 Chairman: (5years / 65age), 5 members (5/62) = 6 people.
Structure
Re-appointment is possible.
⇒ Implement National pension system (NPS), select its fund-managers.
⇒ Regulate all public and private pension funds except EPFO, Seaman, Coal miners,
Assam tea plantations related pension schemes as they’ve their separate acts /
mechanisms.
Functions ⇒ Protect Clients, Pensioners
⇒ Prescribe liquidity, auditing, investment norms for Pension funds.
⇒ Powers of civil court. (दीवानी अदालत क� स�ा/अ�धकार िदए गये है)
⇒ financial awareness generation through pensionsanchay.org.in
⇒ Pension FDI is linked with insurance FDI (49%) so not decided by PFRDA.
Website pensionsanchay.org.in = for awreness generation around pension and retirement.
17.17🛫🛫🛫SOCIAL SECURITY FOR OVERSEAS INDIANS (PENSION / INSURANCE)

17.17.1 🛫🛫🛫Pravasi Bharatiya Bima Yojana, 2017

Some nations do not have strict laws regulating the entry, employment or safety of foreign workers.
So, the Indian Government classifies them under Emigration Check Required (ECR: उ�वास जांच क�
आव�कता) countries. e.g. Saudi, Qatar, UAE, Libya, Malaysia, etc.
 It’s compulsory for Indian workers going ECR nations to join Pravasi Bharatiya Bima Yojana.
(ईसीआर देशों म� जाने वाली प्रवासी भारतीय मज़दू रों के �लए ये ख़रीदना अ�नवायर् है)
 Insurance cover of Rs. 10 lakhs if accidental death/permanent disability while abroad,
 Maternity expenses (प्रसू�त खचर्) cover for women worker, Family Hospitalization etc.
 Scheme boss? Ministry of External Affairs (�वदेश मं त्रालय)

18 (��:💰💰)→💳💳FINANCIAL INCLUSION (�व�ीय समोवेशन)

⇒ Financial Inclusion: providing access to banking, investment, pension, insurance and credit
(loan) facilities to each citizen. This ensures social, economic and transaction security (लेनदेन म�
सुर�ा) (S-E-T), improves social harmony, women empowerment, helps reaping the benefit of
“LESS CASH Economy” (📑📑Ref: Handout#1A1) सभी नाग�रकों को ब�िकंग, �नवेश, प�शन, बीमा और ऋण क� सेवा
प्रदान करना= उसे �व�ीय समोवेशन कहेते है
⇒ Social Security (सामा�जक सुर�ा): a system of payments / assistance by the government to citizens
who are ill, handicapped, poor, aged or unemployed. (बीमार, �वकलांग, गरीब, वृद्ध या बेरोजगार को आ�थक
मदद करना)

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 o The foundation of SS in our constitution @DPSP Article 41- State to provide public
assistance to its citizens in case of unemployment, old age, sickness and disablement; and
o DPSP Article 42- The State shall make provision for securing just and humane
conditions of work and for maternity relief. (राजनी�तक पथदशर्क �सद्धांतों म� �जक्र)

⇒ Social Justice (सामा�जक �ाय): distribution of wealth, opportunities, and privileges within a
society- through reservation in jobs, admissions and election and through legal safeguards for
protection of civil rights, prevention of atrocity and personnel laws. (समाज के �व�भ� जाती/वग� म�
आर�ण चुनाव तथा कानूनन अ�धकारों द्वारा सं प��, अवसरों और �वशेषा�धकारों का �वतरण= उसे समा�जक �ाय कहेते है)
⇒ Collectively, these three (FI,SS,SJ) help in human development, inclusive economic growth and
Sustainable Development Goals (SDG). (More in 📑📑Pillar#6) [कु ल �मलाकर �व�ीय समावेशन, सामा�जक
सुर�ा और सामा�जक �ाय इन तीनों क� मदद से मानव-�वकास,समावेशी आ�थक वृ�द्ध, और सतत् �वकास ल�ों को हां�सल करने मे
हम� मदद होगी]

18.11 (��:💰💰)→💳💳 FIN. INCLUSION: BANK ACCOUNTS FOR EVERYONE

⇒ Nationalization of Banks (1955, ‘69, ’80)  1961: DICGC Act 1966 Cooperative Banks under
RBI’s Ambit  1969 Lead Bank Scheme (SCB:Pvt or Public) given lead role in district. They
prepared credit plan with ‘Service Area Approach’, and coordinate with the efforts of
Government, banks and NBFCs.
⇒ 1971: State level Bankers’ Committee to moniter progress of financial inclusion
⇒ 1976: Regional Rural Bank (RRB) setup through Act. (�ेत्रीय ग्रामीण ब�कों क� �ापना)
⇒ Further, RBI requires commercial banks to setup atleast 25% of their branches in unbanked rural
areas. Similar norms for White label ATM Companies. (एक चौथाई शाखाएं गाँव म� खोली होगी)

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⇒ 2005: RBI permitted no-frills savings account with no penalties on zero balance
⇒ 2006: RBI permitted Banking Business Correspondent Agents (BCA)
⇒ 2011: Government’s Swabhiman to increase banking presence in rural area.
⇒ 2013: e-KYC permitted.e.g. write Aadhar number, put fingerprint in biometric reading device,
no photocopies/xerox required. (काग़ज़ी नक़ल जमा करने क� ज़�रत नहीं, ऑनलाइन प्रमाणीकरण)
⇒ 2014: JanDhan Yojana, new Private Commercial Banks (Bandhan, IDFC First)
⇒ 2015: Small Finance Banks and Payment Banks.(लघु �वत् ब�क और भुगतान ब�क क� �ापना)
⇒ 2017-18: India Post Payment Bank(More in 📑📑Pillar#1B1)

🔠🔠❓ MCQ. Service Area Approach was implemented under the purview of (UPSC Prelims-2019)
(a) Integrated Rural Development Programme (b)✅ Lead Bank Scheme
(c) Mahatma Gandhi National Rural Employment Guarantee Scheme
(d) National Skill Development Mission
18.11.1 🧔🧔(��:💰💰)→💳💳 Pradhan Mantri Jan Dhan Yojana (PMJDY: प्रधान मं त्री जन धन योजना)

⇒ 2014: launched by FinMin → Dept of Financial Services with

⇒ Motto “Meraa Khaataa, Bhagya Vidhaataa”. Scheme in two phases, 6 objectives:
PM JDY – phase I (2014-15) प्रथम चरण म� PM JDY – phase II (2015-18) िद्वतीय चरण
1. Financial literacy (�व�ीय सा�रता) 1. Credit Guarantee Fund (For Overdraft
2. Banking within 5 kms defaults) उधर से ब�क के नुक़सान क� भरपाई
3. Account for every family with overdraft, 2. Direct Benefit Transfer (DBT)
with Rupay ATM-cum-DEBIT Card 3. Sell Micro insurance & pension products
through bank.
⇒ PM-JDY bank account can be opened in any Commercial or Cooperative Bank provided that (1)
bank has CBS (2) bank is tied with Rupay Payment Gateway. अब िकसी वा�ण��क या सहकारी ब�क म� खाता
खोल सकते ह�
⇒ Basic Savings Bank Deposit Account - Age 10/>; Zero balance- no penalty. But, Chequebook
only with “balance”; (नाबा�लगों के भी खाते खोले जा सकते ह�। �बना एक �पया बचत जमा िकए भी खाता खोल सकते ह�।)
⇒ There are restrictions on max. number of money withdrawals per month. (पैसे �नकालने पर कु छ सीमाएं )
⇒ Overdraft upto ₹ 10k (originally ₹5k) depending on balance history of min. 6 months. Overdraft
given on only one account holder in household (preferably woman). (प�रवार क� मिहला को 10,000 �पये
तक क� ओवरड�ा�)
⇒ Overdraft Money has to be returned with interest within 3 years. Banks to decide the loan
interest rate. (ओवरड�ाफ़्ट म� िदया पैसा �ाज के साथ वापस करना होगा। ओवरड�ा� कोई दान-ख़ैरात निह है।)

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⇒ EVERY Jan Dhan account comes with FREE Accident Insurance of ₹1 lakh; Premium paid by
NPCi, it’s therefore necessary to regularly use card- atleast for checking balance. Union
Government employees, and income tax payers not eligible for this free insurance. (दघु टर् ना/अक�ात्
सुर�ा बीमा भी मु� म� �मलता है)
⇒ 🤩🤩Significance? JAM trinity (JanDhan, Adhar, Mobile) for targeted and direct transfer of
subsidies, scholarship and payments to beneficiaries. (लाभाथ� के खाते म� सीधा /प्र�� लाभ ह�ांतरण)
⇒ 😰😰Criticism? PM-JDY accounts used as money mules during demonetization.
⇒ 2020: 👻👻ATMANIRBHAR→ PM GaribKalyan → ₹500 per month to 20 crore women Jan
Dhan accounts for 3 months. (कोरोना म� मिहलाओं के जन धन ब�क खातों म� 3 महीनों के �लए थोड़ी-थोड़ी रकम जमा क�)
⇒ 2023: Total money deposited in PM-JDY crosses ₹2 trillion.

🔠🔠❓ [Asked in Pre-2015] Pradhan Mantri Jan-Dhan Yojana’ has been launched for:
(a) providing housing loan to poor people at cheaper interest rates
(b) promoting women’s Self-Help Groups in backward areas
(c) promoting financial inclusion in the country
(d) providing financial help to the marginalized communities

18.11.2 � Jan Dhan Darshak App (2018)

Jointly developed by Department of Financial Services (DFS) & National Informatics Centre (NIC).
It helps people find the nearby financial touch points such as Bank branches, ATMs, Post Offices etc.

18.12 (��:💰💰)→ 📮📮 FIN INCLUSION: INVESTMENTS OTHER THAN BANK

What if poor / lower middle-class person wants better returns than bank deposit? He may opt for…
Act Small Savings Schemes: लघु बचत योजनाएं
Govt Savings Bank Act 1873 📮📮 Post Office schemes: monthly, 5 year, savings, time
deposit
Govt Savings Bank Act 1873 Senior Citizen Savings (2004)
Government Savings Certi Act ’59 National Savings Scheme (NSC)’59
Government Savings Certi Act ’59 Kisan Vikas Patra 1988-11, 2014
PPF Act 1968 Public Provident Fund (PPF)
No Act → Sukanya Samriddhi Yojana ‘2015
- Individual eligibility, upper-lower limits etc. poor cost: benefit…except Sukanya Samriddhi.
- Money (usually) goes into National Small Savings Fund (NSSF)→ loans to Union and (selected
States), with technical norms which not imp for us.
- Here, interest rates are decided by FinMin’s Dept of Economic Affairs on quarterly basis. (�व�
मं त्रालय का आ�थक मामलों का �वभाग इन योजनाओं क� �ाज दर तय करता है हर 3-3 महीने पर)

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18.12.1 👛👛👛Small Savings: Mahila Samman Bachat Patra (2023)
It is a new small savings certificate scheme announced in the �Budget-2023.

Tenure Two-year period up to 2025-Mar

Max. Deposit upto ₹2 lakh per girl/woman
Interest 7.5%

18.12.2 👛👛👛👛Small Savings: Senior Citizen Savings Scheme limits hiked

Matter Before After �Budget-2023
How much money can be deposited in an account? Upto ₹15 lakhs Upto ₹30 lakhs
18.12.3 (�:💰💰)→(�:💳💳)Sukanya Samriddhi Yojana (2015)

- Parents open a (fixed deposit type) bank account in the name of a 0-10 years girl child, and
deposit annually ₹ 250 to ₹ 1.5 lakhs till she reaches age of 14.
- FinMin’s Dept of Economic Affairs announces interest rate (originally 9.1%, presently ~8.5%)
- Money (principal and interest) can be withdrawn @ the age of 18-21 depending on whether
married or not. So, it indirectly prevents child marriages & empowers the grown-up daughter
with money to pursue higher education, small business etc.
- 1 daughter = ONLY 1 account can be opened in this scheme. (एक बेटी के नाम पर �सफर् एक)
- Maximum two daughters can be enrolled by parents/legal guardians.

18.12.4 ⭐📫📫 ���

� ��� Five Star Village scheme by Dept of Post (2020)
गाँव वालों को �व�वध लघु बचत योजना और बीमा योजनाओं से जोड़ने क� डाक �वभाग क� को�शश

⇒ by Ministry of Communications Department of Post (सं चार मं त्रालय → डाक �वभाग)

⇒ Post offices will spread more awareness, enrol more villagers in the following schemes:
⇒ Small saving schemes such as Post office Savings Bank accounts, National small savings
certificate Kisan Vikas Patra, Sukanya Samridhi Accounts, public provident fund (PPF)
⇒ Insurance schemes such as Rural Postal Life Insurance Policy, Pradhan Mantri Suraksha Bima
Yojana Account, Pradhan Mantri Jeevan Jyoti Bima Yojana Account.

18.12.5 ⚰💀💀📫📫 ���

� ��
� Sampoorna Bima Gram Yojana (2017)
⇒ by Ministry of Communications Department of Post (सं चार मं त्रालय → डाक �वभाग)
⇒ In every district, atleast 1 village identified → In that village, cover all households with a
minimum of one RPLI (Rural Postal Life Insurance) policy. (गांव के हर प�रवार को कम से कम एक ग्रामीण
डाक बीमा पॉ�लसी बेची जाए)

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18.12.6 ⚰💀💀🌽🌽 ��� � ��� Model Insurance Villages (MIV) proposal by IRDAI (2021)
- Insurance Regulatory and Development Authority of India (IRDAI) proposed this
- To give complete insurance coverage to a village for its people’s life insurance, health insurance,
farm/crop insurance, animal (livestock) insurance, tractor/vehicle insurance etc.
- Funding/Subsidy by Union, State, Companies CSR Funds, NABARD & other AIFIs.
- (गाँववालों के �लए म� सभी प्रकार के जीवन बीमा, सामा� बीमा पॉ�लसी उपल� हो, तािक वह एक आदशर् बीमा ग्राम बन जाए। ऐसी
बीमा पॉ�लसी खरीदने के �लए सरकार तथा अ� सं �ानों द्वारा गांव वालों को स��डी/�रयायत दी जाए)

18.12.7 (��:💰💰)→ 📦📦 Chit Funds

⇒ Scam and its subsequent judgements have become too oudated for 2023. So deleting it for
#Prelims-RAFTAAR-🏎🏎
⇒ Sufficient to know: Chit fund is a collective investment scheme.
⇒ Members contribute small, small amount of money, every month. And members are given loan
from this fund. (सद� उसम� छोटी छोटी रकम जमा करते ह� और िफर सद�ों को उसी म� से लोन िदया जाता है)
⇒ Chit fund is a type of “contract” = subject to Concurrent list. So, both Union and State govt have
laws for it. (समवत� सूची म� होने के कारण क� द्र और रा� दोनों इस पर कानून बनाते ह� लेिकन ढंग से �नगरानी कोई कर नहीं पाता)
⇒ Scams happened due to lack of proper supervision / nexus with politicians. (इस�लए कांड होते रहते ह�)

18.12.7.1 ⚖ 📦📦📦📦 Banning of Unregulated Deposit Schemes Act, 2019

- अ�नय�मत जमा योजनाओं पर प्र�तबं ध कानून
- If an entity is soliciting public to deposit /invest money, then it could be regulated by RBI (Bank,
NBFC-D, Home loan NBFCs etc), SEBI (MF, ReITs, InvITs etc), IRDAI & PFRDA, Corporate
Affairs ministry (NIDHI), State Governments (chit fund), EPFO, etc.
- A deposit-taking scheme is defined as ‘unregulated’ if person is asking people to deposit/invest
money but he has not registered with any of the above organizations. E.g. builders, jewellers, etc.
Act prohibits advertisement & money collection in it. (ऐसी कोई भी बचत योजना जो िकसी भी �व�ीय �नयं त्रक
के दायरे म� नहीं आती उसे गैरकानूनी माना जाएगा)
- Penalty upto ₹50 crores and jailtime upto 10 years + attaching the assets to refund depositors
within prescribed timelines. (जुमार्ना, कारावास, सं प�� क� ज�ी)
- Union to setup an online central database of deposit-taking activities in the country.

18.13�� ←(💰💰💰💰) FINANCIAL INCLUSION: CREDIT (LOANS: ऋण)

Self Study? Pillar#1A2: Monetary Policy → PSL. Pillar#1B1: Classification → microfinance

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18.13.1 (💰💰💰💰)↗🗃🗃=(💰💰💰💰) Refinance (पुन�व�)

- When an AIFI (or MUDRA) gives new finance to Banks/NBFCs based on the quantum of
finance they (Bank/NBFC) have already given to end-borrowers.
- Usually works via t securitization of the previous loan papers. ? NOT IMP.#🕰🕰थोड़ा-पढ़ो-आगे-बढ़ो

18.13.2 ��: 🧔🧔 ←(💰💰💰💰) Credit Guarantee (ऋण अदायगी गारंटी)

Organization Credit Guarantee Fund Loans covered
SIDBI + Govt Credit Guarantee fund trust for Loans to Micro & Small Enterprise
Micro & Small Enterprise (CGTMSE)
Dept. of Financial National Credit Guarantee Trustee ⇒ Mudra, ECLGS, Stand up India,
Services Company (NCGTC) Skill & Education loans.
⇒ Education loan upto Rs.7.50
lakhs is backed by this org.
NCGTC Credit Guarantee Scheme for MFIs ⇒ Loans given by Microfinance
(CGSMFI) (2021) institutions to poor people.
NCGTC Credit Guarantee Fund Scheme for ⇒ Loans for skill development.
Skill Development (CGFSSD)
Commerce Export Credit Guarantee Corporation Exporters
Ministry of India fund (ECGC)
- Credit Guarantee Meaning? if borrower defaults, then losses of banks/NBFCs will be covered by
credit guarantor. So, Bank/NBFC can lend confidently without requiring borrower to pledge
collaterals.
- Earlier DICGC used to give credit guarantee for PSL borrowers, but now this work is done other
organizations mentioned in above table.

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18.13.3 Financial inclusion: Credit Guarantee Fund for Education Loans (CGFEL)

18.13.4 👻👻 �🏭🏭 MSME: Definition changed in ATMANIRBHAR (2020)

- 2006: Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 gave definition
of micro, small and medium enterprises
- 2020: ATMANIRBHAR → MSME ministry changed the definition as following: �नवेश और कु ल
�बक्र� के िहसाब से उधयोगों को वग�कृ त िकया जाएगा. �व�नमार्ण (mfg) और सेवा (services) �ेत्र के उधोगों के �लए एकसमान
�ा�ा।

💡💡 Note: This handout only deals with ‘loan’ component of MSME. For other MSME
issues/challenges, refer (More in 📑📑Pillar#4B → MSME)

✋in above image, read "<" sign as "NOT MORE THAN (से अ�धक नहीं)
Investment: �नवेश annual turnover: वा�षक कारोबार

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18.13.5 👻👻🔪🔪 �🏭🏭 MSME Non-NPA borrower → ECLGS 1.0
ऋण अदायगी गारंटी -उन उधोगों के �लए �जनके लोन-खाते अभी एनपीए/अनजर्क प�रसं प�त क� श्रेणी मे नही है

⇒ Corona Lockdown → MSME business hurt → need loans to restart business → Emergency
Credit Line Guarantee Scheme (ECLGS: आपातकालीन क्रेिडट लाइन गारंटी योजना).
⇒ �Eligibility?
o MSME Previous outstanding loan account can’t be more than ₹25 crores, and can’t be
not an NPA.
⇒ New/ Extra Loan Amount? 20% of the outstanding loan.
⇒ Loan Tenure? 4 Years (�मयादी/समयकाल)
⇒ Loan Interest? 9.25% (Bank), 14% (NBFC).
⇒ Collateral? Not required. (�गरवी कु छ भी नही रखना होगा)
⇒ If the borrower doesn’t repay loan principal or interest→ Credit guarantee covered by NCGTC
(National Credit Guarantee Trustee Company Limited), a company under the Dept of financial
services in FinMin.

18.13.6 👻👻👻👻 �🏭🏭 MSME Non-NPA borrower → ECLGS 2.0 (Atma-Nirbhar 3.0)
It was launched during the Atmanirbhar Bharat 3.0 package(November 2020)
�Eligibility? (Two conditions must be fulfilled simultaneously)
1) MSME as well as Non-MSME(large) firms operating in
(a) Healthcare sector (�ा� �ेत्र) OR
(b) 26 stressed sectors Identified by RBI is KV Kamath committee (e.g automobiles,
tourism, cement, gems and jewellery etc तनावग्र� �ेत्र) AND
2) Its outstanding loans are > ₹50 crore - upto ₹ 500 Crore (as on 29.2.2020)
🤩🤩Benefit?
 Extra 20% loans against outstanding loans. (कजार् बकाया है उसके सामने 20% अ�त�र� कजर् िदया जाएगा)

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 Interest Rate not explicitly mentioned in Press-Statement. (योजना क� प्रेस �व��� म� �� �प से खुलकर नहीं
बताया, तो हमने खुद से गूगल सचर् मारने क� कोई ज�रत नहीं है#🕰🕰थोड़ा-पढ़ो-आगे-बढ़ो )
 Repayment tenure of above loan: 5 years including 1 year moratorium on principal repayment.
(5 साल म� कजर् चुकाना होगा और उसम� भी 1 साल तक मूलधन चुकाने पर रोक)
👜👜👜👜Budget-2022: This scheme is continued, with more funds.

18.13.7 👻👻🔪🔪🔪🏭🏭 MSME NPA borrower → Subordinate Debt (गौण ऋण)

ऋण अदायगी गारंटी- उन आ�थक तनावग्र� उधोगों के �लए �जनके लोन-खाते पहेले से एनपीए श्रेणी मे आ चुके है।
⇒ Beneficiary? MSME whose loan account is in NPA/ stressed category. लघु/
⇒ Such stressed MSME to be given subordinate loan Upto ₹75 lakhs to revive business.
⇒ Tenure/Interest? Not clearly mentioned.
⇒ If the borrower doesn’t repay loan principal or interest→ Credit guarantee by CGTMSE (Credit
Guarantee Trust for Micro and Small enterprises, an org funded by SIDBI + Govt).

18.13.8 👻👻🗃🗃🗃🗃🗃🗃🏭🏭 MSME → Equity infusion via Fund of Funds (�न�धयो क� �न�ध)
⇒ Govt will set up a Fund of Funds with ₹10,000 crore.
⇒ This FoF will invest in daughter funds (who’ll supply ₹40k cr from their funds). So, total
10k+40k=50k equity funding/infusion to MSME. (इ��टी के �प म� कं पनी म� जान फूं कना)

18.13.9 🚫🚫🚫🚫🚫🚫🚫🚫 NBFC → Mudra (2015, 100% SIDBI subsidiary)

- Micro Units Development & Refinance Agency. (सू� इकाई �वकास एवं पून: �व�पोषण एज�सी)
- Objective? provides indirect lending via SCB, RRB, Cooperative Banks, MicroFinance Inst &
other NBFCs. (अनुसू�चत वा�ण� ब�क �ेत्रीय ग्रामीण ब�क सहकारी ब�क गैर ब�क �व�ीय कं प�नयों द्वारा परो� �प से कजर् देता है)
- Ownership? It’s wholly owned by SIDBI, and also receives the funding from PSL-shortfalls via
RBI, and budgetary support via Department of Financial Services.
- Beneficiary? Micro Enterprises from Agri-allied sectors, mfg & service sector who are not
registered under the companies act = Non-corporate type. (�ज�ोंने कं पनी कानून म� पं जीकरण नहीं करवाया)

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 Table 2: Mudra-Products:
Pradhan Mantri MUDRA Yojana MUDRA Rupay Card
1) Shishu : loans upto 50,000/- - ATM cum Debit Card issued against MUDRA loan
2) Kishor : >50,000/- upto 5 lakh account.
3) Tarun : > 5 lakh and upto 10 - For working capital component.
lakhs - Can be accessed in all modes like a routine debit card
(ATM, MicroATM, PoS, Online)
- Mudra loans are collateral-free (जमानत से मु�). If borrower defaults on loan, then lender’s losses
are covered through Credit Guarantee Fund for Micro Units [CGFMU] which is operated by
National Credit Guarantee Trustee Company Ltd. [NCGTC, 2016]- which is a private ltd
company by Dept of Financial Services in Finance Ministry.
- 😰😰MUDRA Challenges? (1) Loan Interests are high (2) Rising NPA/Bad loans.

18.13.10 👻👻👻👻 �🏭🏭 Mudra Loans → Shishu Loans pe 2% Interest subvention

⇒ 👻👻ATMANIRBHAR-2020: Shishu loan borrowers = 2% Interest subvention (�ाज-अदायगी मे
सरकारी-मदद) IF they’re prompt payees (=repaying the loans regularly).
⇒ This offer is valid for 12 months.

🔠🔠❓ Pradhan Mantri MUDRA Yojana is aimed at (Asked in UPSC-Pre-2016)

a) bringing the small entrepreneurs into formal financial system
b) providing loans to poor farmers for cultivating particular crops.
c) providing pensions to old and destitute persons.
d) funding the voluntary orgs involved in the promotion of skill development and employment
generation.

18.13.11 ⏰🔪🔪💻💻 psbloansin59minutes.com (2018)

portal by SIDBI & 5 PSBs. GST-registered MSME get loans 10L to 1 cr. Without collaterals. if loan
approved then ₹1000 fees need to be paid

18.13.12 �Stand Up India Scheme, 2016 (उ��� भारत)

- Boss? FinMin’s Dept of Financial Services (�व�ीय सेवा �वभाग)
- Objective? Each SCB bank branch to give Greenfield Loans between ₹10 lakh and ₹1 Crore to at
least 1 SC/ST and atleast 1 Woman entrepreneur with tenure upto 7 years.
- Collateral? Bank can ask collaterals. If loan without collaterals, then Credit Guarantee Fund for
Standup India (CGFSI) operated by NCGTC.
- Budget-2019: this scheme extended till 31/3/2025.

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- Margin money =is the amount of money that a bizman has to arrange by himself from his own
pocket/savings for the given biz-project. Remaining amount is given as a loan by the bank.
💼💼Budget-2021: 1) ⏬ margin money requirement from 25% to 15%. 2) Agri-biz projects also
eligible.

18.13.13 👭👭Self-help group (�-सहायता समूह) → Credit

- is an informal group of 10-20 local people to combine their savings/ resources, engage in biz
activity like weaving, agarbatti etc अपनी बचत और सं साधनों क� मदद से कु छ छोटा उ�ादन करने वाला गरीब लोगों का
एक अनौपचा�रक समूह
- and not registered in as a firm / company under partnership act or companies act etc.
- 1992: NABARD started SHG-Bank linkage program wherein SHG given loans without collateral.
- Self-Help Groups are formed under the government schemes like National rural livelihood
mission (NRLM). More in 📑📑Pillar#6]
- Budget-2019:
o 1 woman in each self-help group (SHG) will be made eligible for ₹ 1 lakh loan under
Mudra scheme.
- 👻👻ATMANIRBHAR → PM GaribKalyan → Women Self Help Groups (SHGs) to be given ₹20
lakh collateral free loans. Further,
o Government will procure masks and sanitizers prepared by SHG = ₹₹ income for
poor families. (सरकार इनसे मा� और से�नटाइज़र ख़रीदेगी)

� MCQ: Find Correct [Prelims-23-SET-A-Q074]

1. The Self-Help Group (SHG) Programme was originally initiated by the State Bank of India by
providing microcredit to the financial deprived. (�यं सहायता समूह [से�-हे� ग्रुप (एस. एच. जी.)] कायर्क्रम मूलत:
भारतीय �ेट ब�क द्वारा �व�ीय �प से वं �चतों को लघु ऋण प्रदान कर प्रारंभ िकया गया था।)
2. In an SHG, all members of a group take responsibility for a loan that an individual member takes.
(िकसी एस. एच. जी. म�, समूह के सभी सद� उस ऋण के �लए उ�रदा�य� लेते ह�, जो ऋण कोई अके ला सद� लेता है।)
3. The Regional Rural Banks and Scheduled Commercial Banks support SHGs. (�ेत्रीय ग्रामीण ब�क और
अनुसू�चत वा�ण��क ब�क एस. एच. जी. को मदद देते ह�।)
Codes: (a) Only one (के वल एक) (b) Only two (के वल दो) (c) All three ( सभी तीन) (d) None
18.13.14 🤑🤑🤑PM Street Vendors’s AtmaNirbhar Nidhi Scheme (PM-SVANidhi)
⇒ Boss? Ministry of Housing and Urban Affairs (MoHUA)- आवास और शहरी मामलों का मं त्रालय
⇒ Loan Tenure: 1 year. Repayment to be done on a monthly basis.
⇒ Loan Interest? approx @7.25% & if vendor repays in timely fashion → govt will give 7% interest
subsidy in his bank account. (फे रीवाला ने �ण अदायगी �नय�मत �प से क� तो �ाज म� सरकार राहत/स��डी देगी)

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⇒ If vendor repays the loan on time, then he can apply for more loans, as follow:
Cycle 1st cycle 2nd cycle 3rd cycle
Loan Amt ₹10,000 ₹20,000 ₹50,000

18.13.15 🤑🤑🤑Street vendors’s PM-SVANidhi → Main Bhi Digital (2021)

⇒ MoHUA to give ₹₹ to Urban Local Bodies (ULBs: नगरपा�लका को शहरी मं त्रालय पैसा देगा)
⇒ To spread digital literacy among street vendors who took SVANidhi Loans e.g. How to use UPI,
BHIM, Netbanking. Connect food-street vendors with online e-commerce players like Swiggy-
Zomato etc to expand street-vendors’ sales etc. (सड़क �वक्रेताओं को िड�जटल भुगतान और िड�जटल �बक्र� मा�मों
क� जानकारी देना)
18.13.16 �PaiSA Portal (2018)
Outdated for 2024. Deleting it.

18.13.17 �Jan Samarth Portal (2022)

⇒ Finance Ministry’s single portal to help beneficiaries to apply for various Government loan
schemes for Education Loans, Agriculture Loans, Business Activity (livelihood) Loans, etc.
⇒ It connects borrower with 125+ banks and NBFCs for loan application.
⇒ When person applies for business loan, the portal cross-checks his UIDAI-Aadhar number,
income tax, GST, UDYAM (MSME registration number), CIBIL credit score etc data/scores for
faster loan processing
18.13.18 �💳💳 Kisan Credit Card (1998)

1998: Launched by RBI +NABARD. Farmer gets credit card from PSB, RRB, State Coop Banks for:
- Can swipe it to buy farm inputs (seeds, fertilizers, pesticides etc.)

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- Investment credit requirement for agriculture
- Working capital for maintenance of farm assets
- Post-harvest expenses, (फसल काटने के बाद होने वाले खचर्)
- Consumption requirements of farmer household; (घर म� उपभोग हेतु खच�)
- Can withdraw cash (as loan).
- Money to be repaid with interest. Accidental insurance also given.
- Budget-2018: Kisan Credit Card (KCC) extended to Animal Husbandry and Fisheries farmers.
Interim-Budget-2019: they (animal/fisheries-walla) too will get the interest subvention
- Interim-Budget-2019: comprehensive drive with a simplified application form to get all farmers
under KCC cards.

🔠🔠❓ MCQ. Under the Kisan Credit Card scheme, short-term credit support is given to farmers
for which of the following purposes ? (UPSC-Prelims-2020)
1. Working capital for maintenance of farm assets
2. Purchase of combine harvesters, tractors and mini trucks
3. Consumption requirements of farm households
4. Post-harvest expenses
5. Construction of family house and setting up of village cold storage facility
Codes: [a) 1, 2 and 5 only [b) 1, 3 and 4 only [c) 2, 3, 4 and 5 only [d) 1, 2, 3, 4 and 5

18.13.19 ��: 🧔🧔 ←(💰💰💰💰) Interest Subvention (�ाज सहायता)

Govt pays part of the interest rate for borrower. (farmer, MSME, affordable housing etc) such as:
- Farm loans upto 3 lakhs→ 9% MINUS 2% (to all farmers) MINUS 3% (regular paying farmers)=
only 4% loan interest farmer has to pay.
- Budget-2019:
o KCC-card-walla Animal Husbandry and Fisheries farmers also eligible.
o If natural disaster- then crop loans are rescheduled, we’ll streamline the subvention
norms there.
o MSME: incremental loans upto ₹1 crore to GST registered MSME industry= 2%
subvention. (As such already announced by Modi in 2018)

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18.14🌽🌽🌽🌽🌽🌽🌽🌽FARM LOAN WAIVER (कृ �ष ऋण माफ�)
18.14.1 🌽🌽🌽🌽🌽🌽🌽🌽Agri-Finance → Loan waivers for the farmers
Shifted to Mains. Gist of the matter is that economic survey is opposed to loan waivers because then
farmer become irregular in returning the loans, whenever the elections are near.

18.15⚰� FINANCIAL INCLUSION: INSURANCE & PENSION

- Various schemes are given in previous sections: But just to quickly recall the notable terms:
Insurance: Postal Life, ESIC, PM Jeevan Jyoti & Surkasha Bima (₹2 lakh), PM-JAY (₹5 lakh
annual health insurance per family), PM-Fasal Bima (1.5-5% premium);
- Pension: EPFO, NPS, Atal Pension (1-5k), PM Shram Yogi Mandhan (3k), PM Vay-Vandana
(8%@LIC), Maan-Dhan Yojanas (3k/pm)

18.15.1 ⚰🔬🔬 Micro Insurance (सू� बीमा)

⇒ Insurance policy may be Life / General Insurance with a very low premium.
⇒ When small sum insured (upto ₹50k) & target audience is poor / villagers / farmers.
⇒ It may be an individual / group based insurance. Intermediaries such as NGO, SHG, MFI help in
selling such policy. Policy/ Contracts are given in local language. e.g. LIC’s Jeevan Madhur and
Jeevan Mangal

18.15.2 🏍🏍🏍🏍🏍🏍 Gig Workers’ social security code (�गग कम� क� सामा�जक सुर�ा सं िहता)

⇒ Informal workers (अयथा�व�ध कम�)= doesn’t have formal job contracts with employers. E.g.
Domestic Maids, Brick Kiln Workers, Construction Labourers, Chowkidar, Dhaabaa
cooks/waiters etc.
⇒ Gig workers (�गग कम�)= Uber Taxi Drivers, Amazon/Zomato Delivery boys, Urbanclap’s
beauticians/ plumbers/ AC repairman, Unacademy Educators etc. They are freelancers /
independent contractors (�तं त्र ठे केदारों) hired by startup or digital companies for short-term
engagements. While they may have some written contract to deliver services to the company, but
the contract is worded in such manner they are not “regular employees” of a company = not
eligible for EPFO, ESIC etc.
⇒ 2019-Sept: Labour Ministry drafting a “social security code for all informal & gig workers”. It
aims to provide ‘insurance on death/disability/sickness’, maternity benefit, pension, scholarship
for their children etc. (मृ�ु / �वकलांगता / बीमारी पर बीमा, मातृ� लाभ, प�शन, �गग कम� के ब�ों को छात्रवृ��)

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18.15.3 ⚖ UNORGANISED WORKERS’ SOCIAL SECURITY ACT, 2008
- Requires union to setup National Social Security Board under chairmanship of Labour Minister
(श्रम मं त्री क� अ��ता म� रा��ीय सामा�जक सुर�ा बोडर्।)
- Requires the States to setup similar boards at State level- to look after the social security benefit
of the unorganised sector workers. (रा� �र पे भी ऐसे बोडर् का गठन)
- require setting up set up a National Social Security Fund for unorganised sector workers with an
initial allocation of Rs 1000 crore. (रा��ीय सामा�जक सुर�ा कोष)
- Similar funds at State level.
- requires the union government to enact various schemes for (a) life and disability cover; (b)
health and maternity benefits; (c) old age protection for these workers. ()
Sr Name Description
1 Indira Gandhi National Old Age Pension learned under NSoAP
Scheme
2 National Family Benefit Scheme learned under NSoAP
3 Janani Suraksha Yojana BPL women given money to delivery child
@hospital. (Ref: Pillar#6A for more)
4 Handloom Weavers’ Comprehensive not enough exam worthyGK
Welfare Scheme
5 Handicraft Artisans’ Comprehensive not enough exam worthyGK
Welfare Scheme
6 Pension to Master craft persons not enough exam worthyGK
7 National Scheme for Welfare of Fishermen not enough exam worthyGK
and Training and Extension
8 Janshree Bima Yojana this was merged with Aam Admi Bima Yojana
in 2013
9 Aam Admi Bima Yojana LIC + Govt of India’s scheme for unorganised
sector workers.
10 Rashtriya Swasthya Bima Yojana subsumed/merged inside the PM-JAY ₹5 lakh
health insurance.
�� FAQ: Most of these schemes are low-profile / outdated / merged → then why government
not updating the law with latest schemes’ list? Ans. Send suggestion to PM.

MCQ. Which one of the following schemes is not a Social Security Scheme under the Unorganised
Workers’ Social Security Act, 2008? (EPFO-2023) (a) National Family Benefit Scheme (b) Janshree
Bima Yojana (c) Employees’ Pension Scheme (d) Rashtriya Swasthya Bima Yojana

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18.16��: �FINANCIAL INCLUSION: CUSTOMER PROTECTION (ग्राहक सुर�ा)
😾😾Bank/NBFC 📈📈Share/Bond ⚰Insurance (IRDAI) �Pension
(under RBI) (SEBI)
Ombudsman: Bank, SCORES ⇒ Insurance - If EPFO- then its
NBFC, Digital Portal→ Ombudsman via internal machinery
Transaction (given SEBI→SAT IRDAI Act ‘1999, - If NPS: NSDL→
below) hears matters upto PFRDA.
₹30 lakhs. If higher - If pvt sector pension
claim then consumer company’s scheme:
courts / other courts. PFRDA → SAT.
⇒ Higher appeal against
IRDAI → SAT
18.16.1 😾😾RBI’s 3 Ombudsman (ओमबड्समेन/ �शकायत �नवारण अ�धकारी/लोक प्रहरी)
- 2021-Feb: 😰😰BEFORE: RBI appointed 3 types of ombudsman for consumer complaints: (i)
Banking Ombudsman Scheme (ii) NBFC Ombudsman (iii) Digital Transaction Ombudsman.
🤩🤩After: Integrate these 3 into a One Nation One Ombudsman / Integrated Ombudsman
Scheme (एक�कृ त �शकायत �नवारण अ�धकारी योजना)
18.17📈📈🌐🌐🦁🦁FINANCIAL INCLUSION: VARIOUS REPORTS (भारत का प्रदशर्न)
I'm not writing the ranks here because it will be very poor cost benefit memorising it for exam.

Report By
Global Microscope Report The Economist Magazine’s Economist Intelligence Unit, Accion
global NGO &partners like Bill & Melinda Gates Foundation,
Metlife foundation etc.
Global Findex Database World Bank with help of Bill & Melinda Gates Foundation
Global Pension Index Mercer CFA Institute, Canada
Indian Government’s Indian Finance Ministry’s Department of Financial Services (DFS).
Financial Inclusion Index
RBI’s Financial Inclusion - RBI launched in 2021. Focuses on 3 parameters: Access, usage
Index and quality of the financial services in an area.
- Score ranges from between 0 and 100.
- 0% = total pathetic. 100% = full financial inclusion.
- Present score for India 60.1% (2023)
National Strategy for RBI
Financial Inclusion
NEXT Handout: Pillar2: Budget, Taxation

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 PILLAR #2: BUDGET, TAXATION, Subsidies, Disinvestment, Deficit, Public Finance
Table of Contents

20 �� Pillar #2: Budget: Relevance in UPSC? ......................................................................... 303

20.1 � Fiscal Policy (राजकोषीय नी�त): Meaning & significance ............................................................. 303
A well planned Fiscal Policy can help in following arenas:............................................................................................ 304

20.2 � Budget (बजट): Meaning............................................................................................................ 305

20.2.1 �Three Funds related to Budget (Self-Study= Laxmikanth chapter on Parliament) ....................... 305
20.2.2 ��Donation Funds: PMNRF vs PM CARES (दान) ............................................................................. 306
20.2.3 �� Three Documents related to Budget (बजट के साथ प्र�ुत तीन द�ावेज) ...................................................... 307

20.3 ��SIX Stages of Passing the Budget in Parliament (6 चरण) ..................................................... 309
20.3.1 �Financial Year (FY: �व�ीय वषर्) ................................................................................................................... 309

20.4 �����Vote on Account- (लेखा अनुदान) ......................................................................... 309

20.5 ���)=�
(� �� Interim Budget (अंत�रम बजट) ....................................................................... 310
20.5.1 ��Budget’s THEME (बजट क� �वषयव�ु) ..................................................................................................... 311

20.6 �� Economic Survey (आ�थक सव��ण) ........................................................................................ 311

20.6.1 ���Chief Economic Advisor (CEA: मु� आ�थक सलाहकार) ............................................................. 313

20.7 �Finance ministry and its departments: (�व� मं त्रालय और उसके �वभाग) ......................................... 313
20.7.1 ��Department of Economic Affairs (DEA: आ�थक कायर्/ आ�थक मामलो का �वभाग) .......................................... 313
20.7.2 ��FinMin#2: Department of Expenditure (�य �वभाग)......................................................................... 314
20.7.3 ��RBI’s Next Generation Treasury Application (NGTA), 2020-Oct ............................................ 314
20.7.4 ��FinMin#3: Department of Revenue (राज� �वभाग)............................................................................. 314
20.7.5 ���FinMin#4: Department of Financial Services (DFS: �व�ीय सेवाएँ �वभाग) ...................................... 315
20.7.6 ��FinMin#5: DIPAM (�नवेश एवं लोक प�रसं प�� प्रबं धन �वभाग) ............................................................................. 315
20.7.7 ��FinMin#6: Department of Public Enterprises (DPE: सावर्ज�नक उपक्रम �वभाग) ...................................... 315
20.7.8 ��FinMin#6: DPE → National Land Monetization Corporation (NLMC-2022) ...................... 316

20.8 � Indian Audit and Accounts Department ................................................................................ 317

20.8.1 � IAAD-OIOS by CAG (�व�भ� मं त्रालयों क� लेखा परी�ण के �लए िड�जटल पोटर्ल) .............................................................. 317

20.9 �Budget→ �Revenue Part→ �Receipts→ �Tax Receipts ............................................ 317

20.9.1 � Types of taxes: direct / indirect: प्र�� कर/ अप्र�� कर.......................................................................... 318
20.9.2 Types of taxes: Progressive vs Regressive vs Proportional ...................................................................... 318
20.9.3 � Adam Smith’s 4 canons of taxation (कराधान के चार �सद्धांत) ................................................................... 319

21 �� Direct Taxes: Types (प्र�� करों के प्रकार) ........................................................................... 319

21.1.1 �� Paper Taxes ..................................................................................................................................... 320

21.2 ��Direct taxes: merits and demerits (प्र�� करों के लाभ व् नुकसान)............................................. 320

21.3 ��Union Tax, Cess and Surcharge (क� द्रीय कर, उपकर और अ�धभार) ............................................. 321
21.3.1 ��: ��Cess pe FAQ & PHD......................................................................................................... 321
21.3.2 ��: � Direct Tax → Cess: �Pradhan Mantri Swasthya Suraksha Nidhi (PMSSN) ............... 322
21.3.3 Laffer Curve, Tax elasticity, Tax Buoyancy etc ......................................................................................... 322

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 21.4 ��: � Direct Tax → Corporation Tax (�नगम कर) ................................................................. 323

21.5 ��: �� Minimum Alternate Tax (MAT) & AMT (�ूनतम वैक��क कर) ............................. 323
21.5.1 ��: �� Corporation Tax on Startups .......................................................................................... 324
21.5.2 ��� Angel Tax on Startup Investments (2012) .................................................................................. 324

21.6 ��: � Equalisation Levy / Google Tax (समकारी लेवी/ गूगल टै�) ............................................. 325

21.7 ��: � Dividend Distribution Tax (DDT: लाभांश �वतरण कर) .................................................. 326

21.8 ��: �� Buyback Tax (शेयर क� वापसी-खरीद पर कर) ....................................................................... 326

21.9 �� : ���Capital Gains Tax (CGT: पूंजीगत लाभ कर) ........................................................ 327
21.9.1 Indexation benefit / cost inflation index (CII) benefit ............................................................................. 328
21.9.2 ��: Bitcoin Profit pe 30% Tax and transfer pe 1% TDS in ��Budget-2022 ........................... 329

21.10 ��: � Income Tax on Individuals (���क आयकर) ............................................................ 329

21.10.1 Revenue Forgone / Tax Expenditure (प�रत्य� राजस्व/कर खचर्) .............................................................................. 330
21.10.2 Income Tax: no tax upto ₹7 lakh after �Budget-2023 = Boosting Economy.................................... 331
21.10.3 Income Tax: switching between NTR vs OTR after �Budget-2023 ................................................... 331
21.10.4 Surcharge on Income Tax ........................................................................................................................... 332
21.10.5 Effective Tax on super-rich person earning >5 cr .................................................................................... 332
21.10.6 ��Income Tax Slabs -> old tax regime -> senior citizens................................................................ 332

21.11 ���Direct Tax Code (DTC) Task Force (2017-2019) ................................................... 332

21.12 ��Direct Taxes: Misc. Concepts (इधर उधर के �छटपुट मुददे) .......................................................... 333
21.12.1 ��Hindu Undivided Family (HUF) (िहदं ू अ�वभा�जत प�रवार): ............................................................... 333
21.12.2 ��Presumptive Taxation (प्रक��त कराधान) .......................................................................................... 333
21.12.3 ��Advance Tax ? (अ�ग्रम कर)................................................................................................................. 333
21.12.4 � ATMA NIRBHAR BHARAT → Tax Ordinance 2020 [कर अ�ादेश] .................................................. 334

21.13 ���TDS & TCS ............................................................................................................... 334

21.14 ���Tax Deducted at Source (TDS): (स्रोत पर कर कटौती) ................................................... 334

21.14.1 ���) TDS → ATMA NIRBHAR BHARAT REFORMS .................................................... 335
� (�
21.14.2 ���Tax Collected at Source (TCS): (�ोत पर सं गृहीत कर) ................................................................. 335
21.14.3 ��Tax refund? (कर वापसी) ..................................................................................................................... 336

21.15 �Misc. Direct Taxes - Financial Transaction Taxes (�व�ीय लेनदेन कर).................................... 336
21.15.1 �� (Concept) Tobin Tax / Robinhood Tax ....................................................................................... 336
21.15.2 ��STT & CTT (प्र�तभू�त लेनदेन कर और व�ु लेनदेन कर) .............................................................................. 336

20 💼💼🍋🍋 PILLAR #2: BUDGET: RELEVANCE IN UPSC?

Year 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027
MCQ 3 3 4 1 1 2 3 1

20.1 💼💼 FISCAL POLICY (राजकोषीय नी�त): MEANING & SIGNIFICANCE

- ‘Fiscal’ is a word derived from Greek. Means ‘basket’ and symbolizes the public purse.

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- Fiscal Policy is the set of Govt. decisions regarding taxation, expenditure, subsidies and other
financial operations. (कराधान, �य, स��डी और अ� �व�ीय सं चालन हेतु सरकार द्वारा �लए गए �नणर्य)
- Using fiscal policy, Govt influences the savings, investment and consumption in an economy, to
accomplish certain national goals such as income redistribution, socio-economic welfare,
economic development and inclusive growth. (बचत, �नवेश और खपत को सरकार को प्रभा�वत करती→ आय का
पुन�वतरण, सामा�जक-आ�थक क�ाण, समावेशी �वकास हो सकता है)

A well planned Fiscal Policy can help in following arenas:

 Full Employment: through welfare schemes/ rural employment programmes like MGNREGA
�More in pillar6) (लोक क�ाणकारी योजनाओं द्वारा पूणर् रोजगार)
(�
 �To Fight Inflation (मुद्रा���त): Higher Income tax → �disposable income (�य यो� आय) →
demand curbed, To fight deflation= �direct and indirect taxes to boost demand. (�
�More in
pillar4: Inflation) (अप���त से लड़ने के �लए करों म� कटौती करे माँग को बढ़ाएँ )
 � To Boost Economic Growth: Provide income tax benefits on household savings in
LIC/Mutual Fund etc. → industries get new capital investment → factory expansion, jobs, GDP
�More in pillar4: GDP) (करों म� �रयायत� दे कर �नवेश को बढ़ोतरी, आ�थक वृ�द्ध को बढ़ोतरी देना)
growth. (�
 �To Boost Inclusive Growth (समावेशी �वकास): Higher taxes on rich → use money for health,
�More in pillar6: Human Dev)
education, women, poverty removal programs. (�
 � To Boost Regionally Balanced Growth: Give tax benefits to industrialists for setting up
factories in North East, Naxal/Left-wing Extremism (LWE) & other backward areas. (उद्योगप�तयों को
उ�र पूव� रा� तथा न�ल प्रभा�वत रा�ों म� फै �री लगाने पर करो म� �रयायते देकर सभी प्रदेशो का सं तु�लत �वकास)
 �Exchange Rate Stability (�व�नमय दर ��रता): Give tax benefits to exporters to boost exports;
while impose higher taxes on imported items to reduce imports → Current Account Deficit
(CAD: चालू खाता घाटा) controlled → ₹ :$ Exchange rate volatility controlled. (�
� pillar3:BoP)

🔠🔠❓ MCQ. “Fiscal policy” means (UPSC-Indian-Engg-Service-2018)

a) Balancing the revenue collection and expenditure
b) Establishing equilibrium between demand and supply of goods and services

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c) Use of taxation, public borrowing and public expenditure by Government for purposes of
stabilisation or development. d) Deficiency as an instrument of growth

20.2 💼💼 BUDGET (बजट): MEANING

Budget is an annual financial statement containing estimated revenues and expenditures for the next
financial year. Budget is the primary tool used by Govt to implement its fiscal policy. (अनुमा�नत राज�
और �य का वा�षक �व�ीय �ववरण, �जसक� मदद से सरकार राजकोषीय नी�त को लागू िक्रया��त है).
20.2.1 🔐🔐Three Funds related to Budget (Self-Study= Laxmikanth chapter on Parliament)
Art. 🔐🔐Consolidated Fund Incoming taxes, loans raised, loans recovered. Withdrawal
266 Of India (CFI) (सं �चत �न�ध) need Parliament Permission (- except for Charged
Expenditure like Judges’ salaries).

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 Art. 🔐🔐Public Account Incoming ₹ ₹ from provident fund, small savings, postal
266 of India (लोक लेखा) deposit etc. Govt acts similar to a banker transferring fund
�सफर् पहली बार बनाते व� सरकार from here to there so parliament permission ✋not
ने सं सद क� अनुम�त लेनी है. िफर हर necessary.
बार इसम� से पैसा खचर् करते व� IF separate fund is to be created for the first time, for a specific
सं सद क� अनुम�त नहीं लेनी है. expenditure, then needs parliament permission to “create” it
e.g. Central Road Fund Act 2000, where Road Cess on Petrol,
Diesel would be deposited.
Art. 🔐🔐Contingency Fund ⇒ Unforeseen events. Held by Finance Secretary (IAS) in
267 of India (आक��कता �न�ध) Dept of Economic Affairs, on behalf of President.
⇒ Parliament approval is “subsequently” obtained, after
expenditure. Money refilled from CFI.
👜👜👜👜Budget-2021 reforms
1. Amount � from Rs 500 crore to Rs 30,000 crore
2. 40% of this amount will be kept with Dept of Expenditure
& 60% by Dept of Economic Affairs (DEA).
🔠🔠❓ Authorization for the withdrawal of funds from the Consolidated Fund of India must come
from: (Pre-2011) (a) President of India (b) Parliament of India (c) The PM of India (d) The Union
Finance Minister
🚩🚩🚩FAQ: What is Cess? Ans. Finish entire Handout first.
20.2.2 🤧🤧🤧🤧Donation Funds: PMNRF vs PM CARES (दान)

👴👴PMNRF by Nehru 1948 🧔🧔PM CARES Fund by Modi 2020

⇒ Prime Minister’s National Relief Fund Prime Minister’s Citizen Assistance and
(PMNRF) रा��ीय राहत कोष Relief in Emergency Situations Fund
⇒ Originally for helping Pak-refugees. For dealing with any kind of emergency or
Nowadays for floods, cyclones, earthquakes, distress situation, e.g. COVID-19 pandemic
accidents, heart/kidney transplant, cancer, िकसी भी िकस्म क� आपातकालीन प�र���तयों से लड़ने के
acid attack, riots etc. िलए
⇒ Not setup by Parliament. ⇒ Same। इसे सं सद द्वारा नहीं बनाया गया, बजट म� से इसे
⇒ No support given from the budget. पैसा नहीं िदया जाता, सामा� लोगों के और �व�वध
⇒ Only runs from donations of ordinary people सं �ानों के दान से ये चलता है,
and institutions & foreigners donations.
⇒ Donors get Income tax exemption. ⇒ Same. दान देने पर आयकर म� छू ट मीलती है .यिद
⇒ If company donates ₹₹=counted in Corporate कं पनी दान देगी तो उसे कॉप�रेट सामा�जक दा�य� म�
Social Responsibility (CSR, Ref#1C ). �गना जाएगा
⇒ Prime Minister’s Office (PMO) operates ⇒ same.प्रधानमं त्री कायार्लय सं चा�लत करता है

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 👴👴PMNRF by Nehru 1948 🧔🧔PM CARES Fund by Modi 2020
⇒ PM is the ex-officio chairman. He’s assisted ⇒ Prime Minister is the ex-officio
by officers. (पदेन अ��) Chairman. (पदेन अ��)
⇒ Ex-officio Trustees (पदेन ट��ी): Ministers of
Defence, Home Affairs, Finance
⇒ 3 Nominated Trustees (मनोनीत): experts
from health, science, social work, law etc.
PM selects �ा�, �व�ान, सामा�जक कायर्, कानून
Notes:
⇒ 1962: A separate ‘National Defence Fund’ under PM to help military & paramilitary forces’
families. Other features mostly similar to above funds. (ऊपर के टेबल म� हमने पढ़े वो दो फ� के अलावा एक
तीसरा रा��ीय र�ा कोष/ �न�ध भी है)
⇒ Usually, such Govt donation funds are registered under Indian Trust Act, 1882. But, some legal
experts / critics suggest these donations should be brought under Public Account / Consolidated
Fund to bring accountability & transparency. (पारद�शता और जवाबदेही क� कमी)
⇒ 😰😰Controversy? PM CARES Fund officials refused to give information to a person under Right
to information Act (RTI), so now court case about applicability of RTI on this. (सरकार इस फं ड का
िहसाब िकताब “सूचना अ�धकार कानून म�” देने से इं कार कर रही थी तो कोटर् म� के स चला)

20.2.3 💼💼📃📃 Three Documents related to Budget (बजट के साथ प्र�ुत तीन द�ावेज)
- Budget comes from a French word 'bougette' meaning a leather bag / suitcase.
- Finance Minister (FM: �व� मं त्री) would keep documents in it → present in parliament.
- 2019: FM Nirmala Sitharaman ended this colonial practice by presenting the budget in a
traditional four-fold red cloth called “Bahi-Khata”. (लाल रंग के कपड़े म� लपेट के पेश िकया)
- While the term ‘budget’ not given in our constitution, but for each financial year, the Govt is
required to present following: (सं �वधान म� इस श� का �जक्र नहीं हालाँिक हर साल तीन द�ावेज सं सद म� रखे जाते ह�। )

📃📃Art. 112 📊📊Annual Financial Statement (AFS: वा�षक �व�ीय �ववरण) containing receipt and

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 expenditure of last year (and projections for the next year).
1) The revenue expenditure data must be shown separately from other
expenditures data (e.g. capital expenditure)
��FAQ: What does this mean? Ans. Finish pillar2D: to learn about
capital expenditure. Presently we are at pillar#2A.
2) No compulsion to show railway budget separately from general budget.
3) No compulsion to show plan expenditure separately from non-plan.
📃📃Art. 265 Taxes can’t be imposed without law so Finance Bill to obtain Parliament's
📃📃Art.117 permission to collect taxes. (िव� �वधेयक कराधान के िलए।)
Further, Parliament can reduce or abolish a tax proposed by the Govt. but
�Read
Parliament cannot increase tax beyond what Govt has proposed in the Finance
more about
them in bill. E.g. If Modi Govt’s Finance bill proposes “we want to ⏫tax on imported
Laxmikanth shoes from 25% → 35%”. Then
or UA Notes ⇒ Members of parliament can vote to allow tax@35%/reduce/remove it.
⇒ �Members of parliament CANNOT vote “let’s �tax to 45%”.
📃📃Art. 114 🛒🛒Appropriation Bill (�व�नयोग �वधेयक) to obtain Parliament's permission to spend
money from Consolidated Fund of India(CFI: Art 266). Such expenditure can be
�Read of two types :
more about 1) The expenditures ‘charged’ upon the Consolidated Fund of India e.g. Judges
them in salaries. They can be discussed but they are non-votable & automatically
Laxmikanth approved. (भारत क� सं �चत �न�ध पर भा�रत �य. सं सद म� उसक� चचार् हो सकती है, िक�ु मतदान नहीं।
or UA Notes वरना यिद सांसद मतदान से, जज क� तन�ाह ⏬कर द�गे तो जज �न�� �प से काम नहीं कर पाएं गे)
2) The expenditure ‘made’ from CFI. E.g. ₹ ₹ for a scheme. They’re discussed
and voted. (भारत क� सं �चत �न�ध से िकये गए �य. सं सद म� इसपर चचार् भी होगी और वोिटंग भी)
⇒ The finance bill and appropriation bill are considered money bills (धन �वधेयक) under article 110.
Therefore Rajya Sabha (RS) approval is not necessary. (रा� सभा क� अनुम�त अ�नवायर् नहीं)
⇒ At maximum Rajya Sabha can discuss it for 14 days and give suggestions to Lok Sabha for
amendments, but it’s not binding on the Lok Sabha to accept Rajya Sabha’s suggestions. (धन
�वधेयक के मामले म� रा�सभा द्वारा िदए गए सुजाव मानना लोकसभा के �लए बा�कारी नहीं है)
⇒ Sometimes, the ruling party does not have majority in Rajya Sabha to pass other type of ordinary
bills (e.g. a bill to transfer National Housing Bank (NHB)’s ownership from RBI to Govt. or
abolishing some low-profile statutory body or enacting a law to make Aadhar card compulsory)…
⇒ Then, ruling party packs those ordinary bills’ proposals inside Finance Bill to get it approved
without Rajya Sabha’s obstruction. (कु छ बार सामा� �वधेयक के मामले भी �व� �वधेयक म� डालकर, �बना रा� सभा
क� अनुम�त के पास करवाने क� हरकते स�ाप� द्वारा क� जाती है, जो नै�तक नहीं)
⇒ In such scenarios, whether a given bill is money bill or not?= Ans: Lok Sabha Speaker’s decision
is final [Art.110(3)]. Speaker’s decision cannot be enquired by any Court [Art.122].

🔠🔠❓ MCQ. What will follow if a Money Bill is substantially amended by Rajya Sabha? (Pre’13)
a. Lok Sabha may still proceed with the Bill, accepting or not accepting recommendations of Rajya Sabha.
b. The Lok Sabha cannot consider the Bill further.

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c. The Lok Sabha may send the Bill to the Rajya Sabha for reconsideration.
d. The President may call a joint sitting for passing the Bill.
🔠🔠❓ MCQ. Find correct statement(s): (UPSC Pre’15)
1. The Rajya Sabha has no power either to reject or to amend a Money Bill.
2. The Rajya Sabha cannot vote on the Demands for Grants.
3. The Rajya Sabha cannot discuss the Annual Financial Statement.
Codes: (a) 1 only (b) 1 and 2 only (c) 2 and 3 only (d) 1, 2 and 3

20.3 💼💼�SIX STAGES OF PASSING THE BUDGET IN PARLIAMENT (6 चरण)

1. 🎙🎙Presentation of budget (बजट का प्र�ु�तकरण)
2. 🤬🤬General Discussion (आम बहस)
3. 🗳🗳Scrutiny by departmental committees (�वभागीय स�म�तयों द्वारा जांच)
4. 🗳🗳✂Voting on demands for grants, cut motions, guillotine. (अनुदान क� मांग पर मतदान )
5. �🛒🛒Passing of Appropriation Bill (�व�नयोग �वधेयक का पा�रत होना)
6. �🍋🍋Passing of Finance Bill (�व� �वधेयक का पा�रत होना )
📗📗 Self-Study from Indian Polity by M.Laxmikanth’s chapter on Parliament or Unacademy
Polity Notes/Lecture

20.3.1 📆📆Financial Year (FY: �व�ीय वषर्)

⇒ 1867: British Indian Govt started financial year 1st April to 31st March to align with their home
country’s financial year. �ोंिक इं �ड� म� ऐसा �व�ीय वषर् था, इस�लए भारत म� �व�ीय वषर् ऐसा िकया
⇒ Constitution has not specified any months for FY but we continued the British legacy.
⇒ 2016-17: Finmin setup Shankar Acharya Committee: Whether we shd change FY (like Jan-Dec
or Rabi-Kharif Cropping seasons) for better estimation of tax collection and expenditure?
⇒ �2017: All states not in favor because accounting practices /softwares need to be changed. Its
challenges outweighed the benefits. So, Modi Govt not implementing. इसको लागू नहीं कर रहे
⇒ �2020: some fake news that FY changed due to Corona, but it was FAKE-NEWs (झठू ा समाचार)
20.4 📃📃🛒🛒🛒🛒📆📆⏳VOTE ON ACCOUNT- (लेखा अनुदान)
The Constitution does not mandate any specific date for presentation of the Budget, but it is
presented to the Lok Sabha on such day as the President directs.
⇒ Before 2017: Presented in the last working day of February. Then it’ll pass through
aforementioned six stages- consuming all the time upto May month.
⇒ But while those six stages were going on, the financial year will be over (on 31st March) so
previous year’s Appropriation Act’s validity will be over.
⇒ Then govt cannot withdraw money from the Consolidated Fund of India even for the routine
expenditure like staff salary, electricity bills.

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⇒ So, to avoid such crisis, government will put a motion for vote on account.
⇒ Here, parliament (= practically Lok Sabha) will allow the govt to spend some money from the
CFI, till the (next) Appropriation Act for next financial year is passed.
⇒ Vote on Account is generally granted for two months for an amount equivalent to one-sixth of
the total budget estimation.
✋Vote on Account is no longer necessary because (अब इसक� ज�रत नहीं)
⇒ Constitution has no compulsion to put budget on a specific date. So, 2017 onwards, Modi Govt.
began tabling the budget on the first working day of February.
⇒ All the six stages are completed by the last week of March.
⇒ Appropriation bill gets passed and signed by President before completion of 31st March. So they
did not require vote on account in 2017, 2018.
⇒ (###) However, in 2019’s Interim Budget, Modi Govt demanded “vote on account” because they
planned to place full-budget after general elections and perhaps they wanted to keep the ‘option’
open for tabling a big-sized appropriation bill after winning the election. (2019 के अंत�रम बजट म�
हालांिक मोदी सरकार ने लेखानुदान क� मांग क� थी �ोंिक चुनाव के बाद बड़ा सामा� बजट प्र�ुत कर उसम� मोटी रकम का
“�व�नयोग �वधेयक” डालने का �वक�/ऐसी �खड़क�/रा�ा वे खुला रखना चाहते थे)

🚩🚩🚩FAQ: (###) I’ve 500 types of counter arguments / doubts on this (###) bullet point. Ans. Govt
did not bother to give long reasoning behind their decision. Nobody filed a PIL SC. Economic
survey, NITI Aayog and columnist did not bother to comment much on it. So, I did not bother to
think/reflect more on it, Because it is NOT an efficient way to complete syllabus. #🕰🕰थोड़ा-पढ़ो-आगे-बढ़ो

20.5 (🤴🤴🤴🤴🤴🤴)=🥛🥛💼💼 INTERIM BUDGET (अंत�रम बजट)

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⇒ Our constitution does not define or require interim budget. (अंत�रम बजट का सं �वधान म� �जक्र नहीं है)
⇒ But, during election year or extreme situation (E.g. when coalition government may collapse
before its term) then it’s considered unethical for such Govt. to make drastic/populist changes in
budget like “2gm gold for the marriage of every BPL-girl.”
⇒ So, while they’ll present a budget in the regular fashion i.e. 3 documents (AFS, FinBill,
Appro.Bill) & 6 Stages of Passing. But it (should) not have grand populist announcements. (ऐसी
प�र���तमे लोक-लुभावन क� योजनाओ के साथ बजट प्र�ुत करना नै�तक नहीं होगा, वरना �वप�ी नेता जीत नहीं पाएं गे चुनाव)
⇒ Such budgets are called Interim Budgets, and were presented in 2004 (Yashwant S.), 2009
(Pranab M.), 2014 (Chidambaram P.) and 2019 (Piyush G.)
⇒ Just like a Regular General Budget, an Interim budget is valid for the whole financial year,
however in between if new government is formed, they may present another budget to change
the provisions. (वैसे तो पूरे वषर् के �लए वैध होता है)
⇒ E.g. 2014-Feb: FM Chidambaram presented (interim) budget in 15th Lok Sabha, but then
UPA/Congress defeated in general election→ 2014-July: BJP’s FM Arun Jaitley presented (Full)
General Budget in 16th Lok Sabha.
⇒ 2019-Feb: FM Piyush G. presented Interim budget in 16th Lok Sabha → 2019-May: Modi won
General Election → 2019-July: FM Nirmala S. presented (Full) Gen Budget in 17th Lok Sabha.
✋Note: throughout the handout, I’ve used the term “Full” budget to
differentiate it from “Interim” Budget for easier revision & visualization. But in
Mains, you should use the word ‘General Budget’(सामा� बजट)
20.5.1 👜👜👜👜Budget’s THEME (बजट क� �वषयव�ु)
Constitution doesn’t require, but sometimes FM will do it to create media-hype:
Budget Year Did FM Speech mention a specific theme (�वषयव�ु)?
7. No specific theme mentioned in speech but focus on AtmaNirbhar Bharat
2021 (Full)
8. Paperless/Digital Budget in a Samsung tablet made in India, covered in
Paperless
Red-colored cover.
⇒ Azadi ka Amrit Kaal, the 25-year-long leadup to India@100.
⇒ Four priorities: 1) PM GatiShakti, 2) Inclusive Development 3)
Productivity Enhancement & Investment, Sunrise Opportunities, Energy
2022 (Full) Transition, and Climate Action 5) Financing of Investments
Paperless ⇒ Paperless/Digital Budget in a tablet, covered in Red-colored cover.
‘Saptarishi’ (7 priority) for Amrit Kaal, namely:
2023 (Full) 1) Inclusive Development , 2) Reaching the Last Mile, 3) Infrastructure and
Paperless Investment, 4) Unleashing the Potential, 5) Green Growth, 6) Youth Power ,
7) Financial Sector
20.6 📘📘📘📘 ECONOMIC SURVEY (आ�थक सव��ण)
- A document prepared by (usually) by the Chief Economic Adviser (CEA) in FinMin.
- ✋No constitutional obligation to prepare or present it but usually it’s tabled in the parliament a
day before the Union Budget. (सं �वधा�नक �प से ऐसा करना अ�नवायर् नहीं)

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- 2019-Feb: No economic survey was presented before the interim budget.
- 2019-July: Economic Survey presented before the (Full) General Budget.
- While Budget is labelled after next financial year (e.g. 2019-20), the Economic survey is labelled
after previous Financial Year. e.g. The survey tabled on Jan-2018 labelled as “Economic Survey
2017-18”, the Survey tabled in July-2019 is labelled “Economic Survey 2018-19”.
- For faster revision/easy visualisation, throughout my handout, I’ve used following labels:
- “📙📙📙📙ES22” means Economic Survey 2021-22 presented on 31/1/2022
- “📙📙📙📙ES21” means Economic Survey 2020-21 presented on 31/1/2021. & so forth.
Table 1: Theme / Format of Economic Survey?

Till 2013-14 ⇒ Single Volume survey. (�सफ़र् एक अंक म� प्रका�शत िकया जाता था)
⇒ Adopted Two Volume Systems like “IMF’s World Economic Outlook”. (दो-अंक)
2014-15 ⇒ Vol1= future suggestions | Vol2= Past data.
2 volumes ⇒ Explicitly mentioned Theme in preface (प्रा�थन): “Creating opportunity and
reducing vulnerability” (through JanDhan-Aadhar-Mobile = JAM trinity)
Paperless / Digital Survey. No theme explicitly mentioned in preface. but focus areas /
2020-21
major talking points were 1) #SavingLives&Livelihoods 2) V-shaped Recovery 3)
2 volumes
Countercyclical fiscal policy 4) Bare Necessities Index
⇒ Released both in digital and paper (hardcopy) on 31/Jan/2022
⇒ THEME in Preface: Art and science of policy-making under conditions of
extreme uncertainty using “Agile” approach. ("फु त�ली" ���कोण का उपयोग करते �ए
2021-22 अ��धक अ�न��तता क� ���तयों म� नी�त-�नमार्ण क� कला और �व�ान)
1 Volume ⇒ Not published by CEA. Published by Principal Economic Adviser. (Reason is not
important, but explained in video lecture so save page space in handout.)
⇒ Shifted from TWO Volumes to ONE Volume. (Reason is not important, but
explained in video lecture so save page space in handout.)
⇒ Released both in digital and paper (hardcopy) on 31/Jan/2023, by CEA.
⇒ No theme explicitly mentioned in preface. but focus areas were
⇒ India’s Post-Corona economic recovery is complete
2022-23
1 Volume ⇒ GDP growth likely to be 6% to 6.8% for 2023-24
⇒ 2022’s survey: the social sector was covered in chapter number-10.
⇒ 2023’s survey: social sector chapter was shifted to chapter number 6- to highlight
that Modi Govt is very serious about social sector (health, edu etc.)

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20.6.1 📙📙📙📙�Chief Economic Advisor (CEA: मु� आ�थक सलाहकार)
- Works under Finance ministry’s Department of Economic Affairs
- Usual tenure 3 years, reappointment possible, but not a constitutional or statutory body. Has
control over Indian Economic Service (IES) officers. (तीन साल का कायर्काल पुन�नयु�� सं भव)
- Notable CEAs in Past: Manmohan Singh, Raghuram Rajan, Arvind Subramanian (2014-18).
- 2018-2021: Krishnamurthy Subramanian served as the CEA.
- 2022-Jan: Dr V. Anantha Nageswaran as its Chief Economic Advisor (CEA). Nageswaran MBA
from IIM-A. His famous books: 1) Can India grow? 2) The Rise of Finance: Causes,
Consequences and Cures
20.7 �FINANCE MINISTRY AND ITS DEPARTMENTS: (�व� मं त्रालय और उसके �वभाग)

20.7.1 �💼💼Department of Economic Affairs (DEA: आ�थक कायर्/ आ�थक मामलो का �वभाग)
Functions of DEA:
⇒ Fiscal policy, Preparation and presentation of Union budget including the Railway component of
budget. Budget for union territories without legislature, budget for States under president rule.
⇒ DEA announces the Interest rates of small saving schemes. (Ref:1D, लघु बचत योजनाओं क� �ाज दर)
⇒ DEA maintains a website www.pppinindia.gov.in, to provide information related to Public Pvt
Partnership (PPP). (📑📑Ref-Pill5: Infrastructure for more)

Organizations under/related to DEA

1) Constitutional Body: Art. 280: Finance Commission. DEA liaisons with it.
2) Chief Economic Advisor (CEA) that we learned in previous section.
3) Financial Stability and Development Council (FSDC): is neither Constitutional nor statutory
body. FM is chairman. Members include the chiefs of all financial regulatory bodies- such as RBI,
SEBI, IRDAI, PFRDA and the chief of IBBI (📑📑Ref: 1C)
4) Govt Company: Security Printing and Minting Corporation of India Ltd. (SPMCIL). Registered
under the Companies Act responsible for printing currency notes, coins, commemorative coins,
cheques, postage stamps, non-judicial stamps, passports/visa and other travel documents etc.
5) Infrastructure Finance Secretariat (IFS) for infra projects.

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20.7.2 �🛒🛒FinMin#2: Department of Expenditure (�य �वभाग)
⇒ Controller General of Account (CGA: महालेखा �नयं त्रक from Indian Civil Accounts Service (ICAS)
service, recruited by UPSC-CSE) prepares estimate of how much money to be spent from
consolidated fund of India.
⇒ Implements Finance Commission report, Pay Commission reports, Pension to employees (in old
pension scheme Ref 1D)
⇒ Org: Arun Jaitley National Institute of Financial Management (AJNIFM), Faridabad: for
training/research.
⇒ Web Portals of Expenditure Department:
 Public Financial Management System (PFMS): for disbursing money to various
Ministries and departments at Union and State level
 Bharatkosh- Non Tax Receipts Portal (NTRP): For selling India yearbook Yojana
Kurukshetra mags etc products and services by the government of India
 PARAS: portal for pension related accounts.

20.7.3 💸💸💸💸RBI’s Next Generation Treasury Application (NGTA), 2020-Oct

Outdated / faded topic. They’re yet to implement it. So, I’m deleting from handout.
🔠🔠❓ MCQ. Public Financial Management System (PFMS) is a web-based online software application
designed, developed , owned and implemented by the (UPSC-CDS2019-II)
A) Department of Financial Services B) Institute of Government Accounts and Finance
C) Controller General of Accounts D) National Institute of Financial Management

20.7.4 �🍋🍋FinMin#3: Department of Revenue (राज� �वभाग)

Looks after the taxation matters using bodies: <Hindi terms not given because it’ll take too much
printout space, but they’re given in indirect tax section of this handout>
 Central Boards of Revenue Act 1963 : 2 bodies →
Statutory
oCentral Board of Direct Taxes (CBDT)→ Dept of Income Tax
Bodies
o Central Board of Indirect Taxes and Customs (CBIC). Before-2018-
& Quasi-
March, it was known as Central Board of Excise and Customs (CBEC).
judicial bodies
It implements GST from 1st July 2017, under the 101st Constitutional
Amendment Act, 2016.
वैधा�नक सं �ाएं
 Authorities for Advance rulings for IT, Customs & Central Excise, GST
अधर् �ा�यक
 Various Tribunals and appellate bodies related to taxation.
 Enforcement Directorate (for enforcing PMLA and FEMA Act)
Attached /  Central Economic Intelligence Bureau
Subordinate##  Central Bureau of Narcotics
 Financial Intelligence Unit
Companies / - Goods and Service Tax Network (GSTN)
factories - Government Opium and Alkaloid Factories (GOAF)
Special Opium related matters. Madhya Pradesh, Rajasthan and Uttar Pradesh have
functions permitted cultivation of Opium for medicinal/pharma purpose. Such Opium is used

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 for manufacturing morphine (pain relief for cancer patients and soldiers injured in
war), codein (cough-syrup) and thebaine (used in industrial chemicals). [अफ़�म]
##🚩🚩🚩FAQ: What is the meaning of Attached/Subordinate/Autonomous Body? Ans.
https://unacademy.com/lesson/mrunals-yearbook-ministries-and-departments-forms-of-
government-organisations-in-hindi/7KCEZHT4
20.7.5 �💳💳💳💳FinMin#4: Department of Financial Services (DFS: �व�ीय सेवाएँ �वभाग)
Functions of DFS:
Schemes for Financial Inclusion (📑📑Ref-1D), PSB supervision and recapitalization, Public Sector
Financial Intermediaries, including their regulators (Except EPFO, ESIC etc.)
Organizations under/related to DFS:
 Bank Board Bureau: Neither Constitutional / statutory. Setup through gazette notification for
selection of top officials (MD, CEO, Chairman and full-time Directors) for PSBs, LIC and other
public sector financial institutions. (📑📑Ref:1B-2)
 Govt Company:
o National Credit Guarantee Trustee Company (NCGTC): For providing credit guarantee
for loans in Mudra, certain MSME loans, Stand up India, education-skill development
related loans. (इस सरकारी योजनाओं म� लाभाथ� कजार् वापस नहीं कर� तो ब�क के नुकसान क� भरपाई ये कं पनी
करेगी)
o National Bank for Financing Infrastructure and Development (NABFID)
 �E-Bikray Portal: for online-auction of attached assets by public sector banks, in cases of loan
default.

20.7.6 �🏭🏭FinMin#5: DIPAM (�नवेश एवं लोक प�रसं प�� प्रबं धन �वभाग)
 Department of Investment and Public Asset Management (DIPAM) looks after Disinvestment /
privatization of Govt Companies / Central Public Sector Enterprises (CPSE- सावर्ज�नक �ेत्र के क� द्रीय
उद्यम) (Ref �#2D: Disinvestment)

20.7.7 �🏭🏭FinMin#6: Department of Public Enterprises (DPE: सावर्ज�नक उपक्रम �वभाग)

BEFORE 🤩🤩AFTER 2021-July Reform
Department of Public Enterprises (DPE) - DPE shifted to Finance Ministry. (सावर्ज�नक
functioned under Ministry of Heavy Industries उपक्रम �वभाग अब से �वत् मं त्रालय के अंतगर्त काम करेगा)
and Public Enterprise - �Benefit? DPE can work with more
(पहले ये सावर्ज�नक उपक्रम �वभाग “भारी उद्योग तथा सावर्ज�नक synergy / coordination with DIPAM
उपक्रम मं त्रालय” के अंतगर्त काम करता था) Department. (तालमेल सं कलन म� बेहतर होगी)
- DPE looks after Government Companies/Central Public Sector Enterprises (CPSEs)’s
administration, expenditure, financial health, survey/performance monitoring etc. (सरकारी कं प�नयों
के प्रबं धन, ख़च� �व�ीय �ा�, सव��ण/प्रदशर्न क� �नगरानी के बारे म� देखता है)
- DPE gives 'Ratna' status to CPSEs’ that are making good profits. (Ref �#2D: Disinvestment)
- DPE looks after CPSEs’ employees’ training, rehabilitation (Voluntary Retirement Scheme: VRS)
and other personnel matters What is VRS = Explained in Pillar1B1 lecture in public sector bank
merger lecture. (सरकारी कं प�नयों के कमर्चा�रयों के तालीम, �ै��क �नवृ�� इ�ािद का�मक प्रशासन)

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- DPE DOESNOT look after selection/recruitment of employees in CPSE. There are separate
organizations for it -given in table below:
Selection/Interview of Managing Director, Who is responsible?
Chairman & other Top-Officials in _ _ (इन उ� पदा�धका�रयों का चयन कौन करता है)
Public Sector Banks/NBFCs/AIFI e.g. SBI, BBB was there. Then BBB replaced by
PNB, LIC, NABARD, NHB etc (What are FSIB (More in 📑📑Pillar#1B2) (सरकारी
they? Ref: 1B1: Classification) → → ब�कों/सरकारी �व�ीय सं �ान म� उ� अ�धका�रयों के
चयन के �लए अलग सं �ा है)
Government companies Other than Public Enterprises Selection Board
[Public Sector Bank/NBFC/AIFI] e.g. (PESB) under the Ministry of personnel
ONGC, Coal India, Hindustan Copper, (सरकारी ब�क/ सरकारी �व�ीय सं �ान के अलावा
Hindustan Aeronautics Limited (HAL) etc वाली सरकारी क��नयों म� उ� अ�धका�रयों के चयन
के �लए अलग सं �ा PESB है)
RBI Governor, SEBI Chief etc regulators Separate Committee headed by Cabinet
→. →. → Secretary (IAS)
The highest official in each of above 6 depts is called ‘Secretary’ (usually an IAS)
→ senior-most among them is designated as Finance Secretary=signs ₹ 1 note.
Finance Secretary usually heads the Dept of Economic Affairs (DEA)

20.7.8 �🏭🏭FinMin#6: DPE → National Land Monetization Corporation (NLMC-2022)

⇒ ��Budget-2021 announced this → 2022-March: Govt said we’ll setup NLMC under Dept
of Public Enterprise. This company 100% owned by Govt with paid up capital of ₹150 cr.
⇒ Function? Renting/selling surplus land-assets of govt depts/govt companies etc. It will hire
experienced professionals from private sector to ensure efficient management.
⇒ Related topics: PM Gati Shakti, National Monetization Pipeline, National Infra Pipeline: (REF: in
�Pillar#5: PPP / public private partnership)

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(सरकारी कं प�नयों क� अ�त�र� ज़मीन / इमारत /सं प��यों को �नजी �ेत्र के उधोयपतीयो को िकराये पे देना/बेच देना- इन सबके �लए एक
“रा�ी� य भू-मौिद्रकरण �नगम” क� �ापना।)

20.8 � INDIAN AUDIT AND ACCOUNTS DEPARTMENT

 As per Press Release FinMin = 6 departments that we learned above.
 This (lesser known) dept is headed by Constitutional Body: Comptroller and Auditor General
(CAG: भारत के �नयं त्रक-महालेखापरी�क इस के मु�खया होते ह� तो इस �वभाग को �व� मं त्रालय का िह�ा नहीं माना जाता)

20.8.1 � IAAD-OIOS by CAG (�व�भ� मं त्रालयों क� लेखा परी�ण के �लए �ड�जटल पोटर्ल)
- One Indian Audit & Accounts Department (IAAD) One System (OIOS)
- Made by CAG- for paperless administration.

🔠🔠❓ MCQ. Find correct Statement(s): (MCQ-Prelims-2015)

1. The Dept of Revenue is responsible for the preparation of Union Budget.
2. No amount can be withdrawn from the Consolidated Fund of India without authorization from
Parliament of India.
3. All the disbursements made from Public Account also need the authorization from Parliament
Codes: (a) 1 and 2 only (b) 2 and 3 only (c) 2 only (d) 1, 2 and 3
🔠🔠❓ MCQ. Which one of the following is responsible for the preparation and presentation of
Union Budget to the Parliament? (MCQ-Prelims-2010)
(a) Department of Revenue (b) Department of Economic Affairs
(c) Department of Financial Services (d) Department of Expenditure
🔠🔠❓ MCQ. Fiscal Policy in India is formulated by: (MCQ-CDS-2012)
(a) the Reserve Bank of India (b) the Planning Commission (c) the Finance Ministry (d)SEBI

20.9 💼💼BUDGET→ ⏳REVENUE PART→ 📥📥RECEIPTS→ 🍋🍋TAX RECEIPTS

बजट→ राज� भाग→ प्रा��यां→ कर प्रा��यां

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20.9.1 🍋🍋 Types of taxes: direct / indirect: प्र�� कर/ अप्र�� कर

Parameter 🍋🍋🍋Direct Tax 🍋🍋🍋🍋🍋Indirect Tax (e.g.

(e.g. 5% Tax on your 18% GST on purchase of
income) Biscuit)
🤲🤲Incidence of Tax: Point from where Income Tax Assessee Shopkeeper/seller (�वक्रेता )
government collects the tax. (करापात) (प्र�� करदाता खुद)
😰😰Impact of Tax: point where the burden Income Tax Assessee Customer/buyer (ग्राहक )
of tax is ultimately felt and can’t be (प्र�� करदाता खुद)
transferred elsewhere. (कराघात/कर का प्रभाव)
The incidence and impact of tax is…. On the same person Not on the same person.
🎓🎓Note: Above table’s deeper interpretation also involves how ‘burden’ is shifted from seller to
buyer, But we’ll not waste time learning its GRAPH/PHD. #🕰🕰थोड़ा-पढ़ो-आगे-बढ़ो

20.9.2 Types of taxes: Progressive vs Regressive vs Proportional

Type of Tax Example

Proportional If Govt. had a single 10% flat rate direct tax on income irrespective of whether
समानुपाती🔂🔂 you’re a poor, middle class, upper middle class or a rich person. Then each
taxpayers’ same proportion of income(10%) will go into taxes.
Progressive - 5%-20%-30% income tax slabs depending on your income.
(प्रगामी) - Thus, richer the person, bigger proportion of his income will go into taxes.
�😁😁 Thus, direct taxes are progressive in nature.
↗�😥😥 - Misc. term: Degressive tax: It is a blend of progressive tax and proportional
अमीर पे ज्यादा गरीब पे tax. If a direct tax increases upto a point & after that limit, a uniform rate is
कम

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 Type of Tax Example
charged (5-5-10-10-...10). So, its partly proportional because tax rate remains
unchanged even if income increases. (✋but further PHD/hairsplittery not
req on this term. If MCQ asks then Ans= income tax is PROGRESSIVE TAX)
Regressive - 18% GST on Biscuits worth ₹100 = ₹18 paid as (indirect) tax.
(प्र�तगामी) - When Mukesh Ambani buys one packet, and a poor man buys one packet,
�😁😁 greater proportion of poorman’s income is gone in taxes. Thus, indirect taxes
↗�😥😥 are regressive in nature. (गरीब आदमी क� वेतन का �ादा िह�ा जाता है)
MCQ. Which one of following is a progressive tax structure? [UPSC-CDS-2015-II]
(a) Tax rate is the same across all incomes (b) Tax rate increases as income increases
(c) Tax rate decreases as income increases (d) Each household pays equal amount of tax

20.9.3💣💣 Adam Smith’s 4 canons of taxation (कराधान के चार �सद्धांत)

1. Canon of Equality (समानता का �सद्धांत): Tax should be equal /proportionate to income. Rich people
should pay more taxes than poors.
2. Canon of Certainty (�न��तता का �सद्धांत): dates, slabs, % should be definite & told in advance.
Randomly govt should not demand “x%” tax to build statue, temple or mosque.
3. Canon of Convenience (सु�वधा का �सद्धांत): tax payer shouldn’t be made wait for a kilometre long
queue & fillup 50 pages worth tax forms.
4. Canon of Economy (�मत��ता का �सद्धांत): to collect ₹ 100 crore tax, govt shouldn’t be spending ₹ 99
crores in salaries of tax officials.

🔠🔠❓ MCQ. Which of the following was not advocated by Adam Smith? (UPSC-CDS-2019-1)
a) Canon of equality b) Canon of certainty c) Canon of convenience d) Canon of fiscal adequacy
🔠🔠❓ MCQ. Find Correct Statements (UPSC-CDS-2016-1)
1. Ability to pay principle of taxation holds that taxes people pay should relate to their income or wealth
2. The Benefit Principle of taxation states that individuals should be taxed in proportion to the benefit they
receive from Government programmes
3. A progressive tax takes a larger share of tax from poor families than it does from rich families
4. Indirect taxes have the advantage of being cheaper and easier to collect
Answer Codes: (a) 1 and 3 only (b) 2 and 4 only (c) 1, 2 and 4 only (d) 1, 2, 3 and 4

21 🍋🍋🍋 DIRECT TAXES: TYPES (प्र�� करो ं के प्रकार)

Direct Taxes 🧔🧔 of Union Govt. * Means Abolished �🕉🕉 Of State Govt.
👜👜On income - Corporation Tax, Minimum Alternate 1. Agriculture Income tax
(आय पर) Tax (MAT) 2. Professional Tax
- Income Tax on income except agri. (Constitutional ceiling of
- Capital Gains Tax (CGT) max ₹2500 per year)
- ❌ *Dividend Distribution Tax (DDT)
🏠🏠On assets, - Securities Transaction Tax (STT) 1. Land Revenue (भू राज� )
transactions & Commodities Transaction Tax (CTT) 2. Stamp/Registration duty

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 Direct Taxes 🧔🧔 of Union Govt. * Means Abolished �🕉🕉 Of State Govt.
(सं प��, लेनदेन पर) - ❌ *Wealth Tax (संपि� कर) 3. Property tax in urban areas
- ❌ *Banking Cash Transaction Tax (शहरी �ेत्रों म� सं प�� कर)
- ❌ *Estate Duty
🛒🛒On − ❌ *Hotel Receipt Tax, *Gift Tax #Road Tax (although debatable
expenditure (खचर् − ❌ *Fringe Benefit Tax i.e. When the as in some States/categories of
पर) employer give benefits to employee apart vehicles- the seller will collect &
from salary e.g. subscription to gymkhana submit)
or golf-club.
🚩🚩🚩FAQ: How much money collected from these taxes? Ans. REF: Pillar2A2: GST Handout

21.1.1 🍋🍋🍋 Paper Taxes

Govt never earned large amount of money from wealth tax, gift tax and estate duty. So these taxes
were informally called as ‘paper taxes’- says NCERT. (सरकार को कभी भी संपि�कर, भेंट कर, और एस्टेट ड्यटू ी में से
बह�त ज्यादा मात्रा में आमदनी नहीं ह�ई इसिलए इनको “कागजी कर” कहा जाता था.)

🔠🔠❓MCQ. Corporation tax is imposed by _ _ _ [UPSC-CDS-2013-II]

(a) State Government(b) Central Govt (c) Local Government(d) State as well as Central Govt
21.2 🍋🍋🍋DIRECT TAXES: MERITS AND DEMERITS (प्र�� करों के लाभ व् नुकसान)
😀😀Merits of Direct Taxes 😓😓Demerits (नुकसान)
1. Progressive (प्रगामी: richer the person higher 1. Externality (बाह्यता) not counted: Academic
the tax): income inequality ⬇ Books Author vs Film star promoting cigars
2. Promotes civic consciousness (नाग�रक चेतना) [30% Income Tax on both].
since citizen directly feels the ‘pinch of tax’ 2. Hardship not counted: Working Carpenter
(चुभन महसूस करना). [5%] vs sleeping landlord [5%] (किठन प�रश्रम के
3. To ⬆ savings & investment: Income tax �लए कोई �रयायत नहीं )
deduction/exemptions on NPS/ LIC etc. 3. High level of direct tax= laziness, less foreign
4. Elasticity (लचीलापन): As public’s income level investment. (उची दरे लोगों को आलसी बनाती है)
4. Narrow base: poor people not covered. If we
⬆ then tax revenue ⬆
try then very large Income tax staff will
5. Certainty (when and how to pay IT, �न��तता)
required to supervise over poor people. (सं क�णर्
6. Can ⬇ volatility in International currency
आधार)
exchange rates by imposing Tobin Tax
5. Prone to litigation & loopholes, tax evasion,
(📑📑More in Pillar#3) (मुद्रा �व�नमय दर क� अ��रता
avoidance. (📑📑More in #2B: Blackmoney)
को कम िकया जा सकता है )
(मुकदमेबाजी, कर-चोरी, कर-प�रहार)

(Batch:PCB10-Prelim) Mrunal’s Economy Pillar#2A1: Budget → Revenue Part → Direct Tax-Receipts → Page 320
21.3 🍋🍋🍋UNION TAX, CESS AND SURCHARGE (क� द्रीय कर, उपकर और अ�धभार)

Any Union - Computed on taxable income, profit, transaction. Goes to Consolidated Fund of
Tax India → Later divided between Union and states as per the Finance Commission
(सं घ कर) formula. (IGST’s distribution matter slightly different. Refer to Pillar2B:GST.)
Surcharge - Computed on Tax amount. So, it is a ‘tax on tax’. This ₹₹ will also goto CFI.
- Surcharge is not shared with States using Finance Commission Formula.
(अ�धभार) - Usually, surcharge doesn’t have any clear objective in ‘prefix’, so it may be used for
any purpose. Exception is 10% Social Welfare Surcharge (समाज क�ाण अ�धभार) on the
customs duty on imported goods. → ₹₹ specifically used for social welfare schemes
of the Union. (सामा� �प से इन पैसों का उपयोग िकस खास काम म� होता है उसे �� बताया नहीं जाता)
Cess - Computed on [(Tax) + (Surcharge, if any)]
(उपकर) - Clear objective is mentioned. E.g. Road & infrastructure cess, Health & Education,
GST compensation cess etc.
- By default, cess goes to CFI→ from there, cess goes to Public Accounts. Sometimes
there may be separate fund inside public account for it, e.g. Central Road Safety
Fund, Prarambhik Shiksha Kosh etc.
- Finance Commission can’t prescribe formula to share cess with States. (Although
some of the cess money will invisibly goto states as a part of scheme implementation
e.g. Pradhan Mantri Fasal Bima Premium share, etc. but that depends on discretion
of Union) (इस रकम को �व� आयोग रा�ों के साथ नहीं बाँट सकता. क� द्र सरकार अपने �ववेक से अलग अलग
योजनाओं म� शायद इस उपकर का कु छ पैसा रा�ों को दे सकती है )
- GST Compensation Cess matter is little different. <explained in the GST segment of
next handout>

21.3.1 🍋🍋🍋: 🚩🚩🚩Cess pe FAQ & PHD

🚩🚩🚩FAQ: Why does Govt levy cess/surcharge, why is Finance Commission Kept out of it?
Ans. So Ruling party@Union can use money for their favourite schemes without having to share the
money it with State Govt. (तािक कें द्र का स�ा प� अपनी मज़� से उस पैसे को इस्तेमाल कर सके । िबना राज्यों को उनका िहस्सा िदए)

🚩🚩🚩FAQ: IS it compulsory that every tax MUST have Cess and Surcharge on it?
Not compulsory. Depends on Govt’s mood / discretion. (सरकार क� मज़� पर िनभर्र)

🚩🚩🚩FAQ: Is Cess applicable only on direct taxes OR on indirect taxes?

(Batch:PCB10-Prelim) Mrunal’s Economy Pillar#2A1: Budget → Revenue Part → Direct Tax-Receipts → Page 321
Some of them applicable on direct taxes. Some of them applicable on indirect taxes.
Cess examples → Applicable on
Health & Education Cess → Levied on Direct Taxes such as Income Tax, Corporation Tax
Health Cess → Levied on Customs Duty on Imported Medical Devices
Agriculture Infrastructure Levied on Customs Duty on some products
and Development Cess Levied on Excise Duty on some products
Road & Infrastructure Cess Levied on Excise Duty on Petrol, Diesel
GST Compensation Cess Levied on GST on some products e.g. Vimal Gutkha, cars etc.

🚩🚩🚩FAQ: Is “Health Cess” and “Health & Education Cess” same or different?
Ans. Different. Observe table given above.
🚩🚩🚩FAQ: I’ve 500 other doubts. Ans. Not important for UPSC exam.#🕰🕰थोड़ा-पढ़ो-आगे-बढ़ो

21.3.2 🍋🍋🍋: 🏦🏦 Direct Tax → Cess: 🍋🍋Pradhan Mantri Swasthya Suraksha Nidhi (PMSSN)
प्रत्य� करों पर लगाए गए उपकर का पैसा इस फंड में डालेंगे और िविवध स्वास्थ्य योजनाएं चलाएंगे
⇒ Govt levies 4% Health & Education Cess on direct taxes such as income tax & corporation tax.
(प्र�� करों पर �ा� व �श�ा उपकर)
⇒ 2021-March: govt created a new “Non-Lapsable” fund under Public Account. (What is “Non-
Lapsable fund? Ref: Pillar#2D). लोक लेखा म� एक ग़ैर-��गत �न�ध बनायी जाएगी
⇒ This fund will receive ₹ ₹ from above cess.
⇒ Health ministry will use this money for (More in �Pillar#6)
o 1) Ayushmann Bharat & its sub schemes like PM-JAY (5L-Health insurance),
o 2) Pradhan Mantri Swasthya Suraksha Yojana (setting up AIIMS-like institutions in
every state & upgrading government medical colleges).
o 3) National Health Mission (NHM) रा�ी� य �ा� �मशन
o 4) Health emergencies like Corona �ा� आपदाएँ

21.3.3 Laffer Curve, Tax elasticity, Tax Buoyancy etc

Refer to �2B: black money handout.

(Batch:PCB10-Prelim) Mrunal’s Economy Pillar#2A1: Budget → Revenue Part → Direct Tax-Receipts → Page 322
21.4 🍋🍋🍋: 🏦🏦 DIRECT TAX → CORPORATION TAX (�नगम कर)

Figure 1: �नचोड़ �नचोड़ के कर/टे� ल�ग,े िकसी को नहीं ब��गे!

⇒ Also known as “Corporate Income Tax (CIT: �नगमो पे लगने वाला आयकर)”
⇒ It’s levied on Company’s profit, under the Income-tax Act, 1961. (Technically called “NET
Income” but we’re not here for CA-exam’s pedantry.)
Sr Type of Company Corporation Tax on profit
Sr1 � New INDIAN MFG company registered from 15 % +surcharge & cess as given
1/10/2019 onwards. (but they must start above = 17.01%
manufacturing by 31/3/2024)
Sr2 � other Indian companies not mentioned in Sr.1 22 % tax +10% surcharge on (tax)
(अ� भारतीय कं प�नयों पर ) +4% health edu cess (on tax +
surcharge) = 25.17%
Sr3 � Foreign Company’s profit from India 40%
Sr4 � Zero Profit companies 15% MAT
21.5 🍋🍋🍋: 🏦🏦🏦🏦 MINIMUM ALTERNATE TAX (MAT) & AMT (�ूनतम वैक��क कर)

- Some industrialists make profit but use tax-deduction, exemptions, depreciations and
accounting tricks to show ₹0 taxable income to escape paying Corporation Tax. So,
- Budget-1996 (Chidambaram) introduced 18.5% MAT on book profit of such ‘ZERO TAX
Companies’, using a different type of formula. (What was the formula, not important).
- Modi govt ⏬ reduced MAT from 18.5% → 15%
- Alternative Minimum Tax (AMT: 15%) is a similar type of tax on Cooperative societies e.g.
Amul, IFFCO. (we will not waste more time on it. Beyond this 1 line GK.)

🚩🚩🚩FAQ: if it is showing zero taxable income, then how can we complete the tax on it?
Ans. Explained in the video lecture. Beyond that you may feel free to do PhD & Chartered
accountant-giri from https://www.incometaxindia.gov.in/tutorials/10.mat-and-amt.pdf

(Batch:PCB10-Prelim) Mrunal’s Economy Pillar#2A1: Budget → Revenue Part → Direct Tax-Receipts → Page 323
21.5.1 🍋🍋🍋: 🏦🏦🏦🏦 Corporation Tax on Startups

Figure 2: “अभी अभी धं धा शु� िकया है, थोड़ा ब� दो, मा�लक!” IT Dept: “ठीक है, �सफर् थोड़े वष� के �लए ही!”
Startup is a company not older than 10 years and not having turnover more than 100 cr. & is doing
innovation in goods/services. Govt helps them through Startup India Scheme (📑📑more in Pillar4B).
 Startup can claim 100% deduction (=Tax Holiday) on its profits, for 3 years out of the first 10
years of registration incorporation. (Tax Holiday = no need to pay tax.)
21.5.2 🍋🍋🍋🍋🍋🍋 Angel Tax on Startup Investments (2012)

⇒ 2012: UPA/Congress Govt ordered the suspicious startup Companies to pay 30% Tax + Penalty
on the investment which they received from Angel investor. (सं िद� �ाटर्अप कं प�नयों को आदेश िदया िक
आपको जो �नवेश म� पैसा �मला है उस पर 30 प्र�तशत एं जल टै� और जुमार्ना भरना होगा)
⇒ This was called ‘Angel Tax’. But then controversy that Angel Tax will discourage the growth of
startup companies so norms relaxed. (आलोचकों ने बोला ऐसी स�ी के चलते �ाटर्अप के �वकास को अवरोध होगा)
Budget-2019: made from reforms:
STARTUP REGISTERED WITH DPIIT STARTUP NOT REGISTERED WITH DPIIT
NO need to pay Angel Tax YES, need to pay Angel Tax
�Budget-2023: made some reforms
Angel tax applicable when startup not BEFORE �BUDGET-2023
registered with DPIIT, & got funding from _ _ _
Local Investors YES, pay Angel Tax YES, pay Angel Tax
Foreign Investors NO need to pay YES, pay Angel Tax
Angel Tax
DPIIT = Dept for Promotion of Industry and Internal Trade (DPIIT) under Commerce Ministry.

(Batch:PCB10-Prelim) Mrunal’s Economy Pillar#2A1: Budget → Revenue Part → Direct Tax-Receipts → Page 324
21.6 🍋🍋🍋: 🏦🏦 EQUALISATION LEVY / GOOGLE TAX (समकारी लेवी/ गूगल टै�)

What does above chart mean? Ans. Explained in Video Lecture.

Related terms:
1. ‘Global Minimum Tax’ regime : (More in �Pillar#2B: Black Money)
2. Significant Economic Presence (SEP: उ�ेखनीय आ�थक उप��ती): Concepts basically means if a
foreign company is making money from Indians through digital ads / streaming services (e.g.
NETFLIX videos from overseas servers) then the company has ‘SEP’ in India, therefore, Indian
govt has powers to tax it. �Budget-2020 made some technical changes into it. But, poor
cost:benefit chasing it for MCQs.
3. OECD used a phrase ‘Tax challenges of digitization’ to denote above problems where digital
services type Multinational Corporation (MNC) are avoiding taxes. (ब�रा��ीय �नगमो द्वारा कर को टालना)
4. France has implemented tax on large technology companies called GAFA Tax (Google Apple
Facebook Amazon) from 1st Jan 2019. Other nations also doing similar.
5. ��FAQ: What is the difference between tax, duty, levy?= if you get selected in IRS (Indian
revenue service) they’ll teach you in training. ��Not-imp here. #थोड़ा-पढ़ो-आगे-बढ़ो.
6. ��FAQ: What is onshore/offshore safe harbor regime? ��Not-important
7. What is Global Minimum Tax, DTAA, GAAR, PoEM etc? Ans. �Pillar#2B: Black Money.

🔠🔠❓ MCQ. With reference to India’s decision to levy an equalization tax of 6% on online
advertisement services offered by non-resident entities, Find correct statements? (Pre-2018)
1. It is introduced as a part of the Income Tax Act.
2. Non-resident entities that offer advertisement services in India can claim a tax credit in their
home country under the “Double Taxation Avoidance Agreements”.

(Batch:PCB10-Prelim) Mrunal’s Economy Pillar#2A1: Budget → Revenue Part → Direct Tax-Receipts → Page 325
Answer Codes: a) 1 only b) 2 only c) Both 1 and 2 d) Neither 1 nor 2

21.7 🍋🍋🍋: 🗃🗃 DIVIDEND DISTRIBUTION TAX (DDT: लाभांश �वतरण कर)

- 1997: FM Chidambaram started to levy DDT on a shareholder’s dividend income.

- Shareholder did not have to pay separate Income tax on such dividend
- DDT Rate: 15% + cess + surcharge = 20.56% on dividend paid.
- 💼💼Budget-2020: abolished DDT. But, dividend will be taxable in the hands of shareholder (i.e.
he’ll pay income tax on it). 🤩🤩Benefits?
 Previously even lower middle-class shareholder’s ~ 20% dividend was cut in the name of
DDT. But now he may have to pay barely 0-5% income tax on income from dividend.
 Thus, Shareholders get to keep more ₹₹ for spending→ shopping spree → demand,
production, economic growth. (म�म वगर् क� जेब पर कर-बोझ कम होगा.)
21.8 🍋🍋🍋: 🗃🗃🗃🗃 BUYBACK TAX (शेयर क� वापसी-खरीद पर कर)

�What does above chart mean? Ans. Explained in the video lecture. �

(Batch:PCB10-Prelim) Mrunal’s Economy Pillar#2A1: Budget → Revenue Part → Direct Tax-Receipts → Page 326
21.9 🍋🍋🍋 : 🏠🏠🏠🏠🏠🏠CAPITAL GAINS TAX (CGT: पूंजीगत लाभ कर)

- When an owner makes profit by selling his capital assets such as non-agro-land, property,
jewellery, paintings, vehicles, machinery, patents, trademarks, shares, bonds & other securities-
then he has to pay CAPITAL GAINS TAX (CGT).
- Depending on how long did the owner keep that asset before selling it, he will pay:
- EITHER Long Term Capital Gains tax (LCGT: x% दीघार्व�ध) OR
- OR Short Term Capital Gains tax (SCGT: y% अ�ाव�ध)
- Depending on the time of sale, you have to pay either long-term or short-term. You don’t have
to pay both of them.

(Batch:PCB10-Prelim) Mrunal’s Economy Pillar#2A1: Budget → Revenue Part → Direct Tax-Receipts → Page 327
 Equities (Shares) If sold within 1 year of purchase If sold after 1 year of purchase
Long Term Capital Gains N/A 10%
(LTCG)
Short Term Capital Gains 15% N/A
(STCG).
- Note: above time(year) and tax% are different for different types of assets.

�FAQ: Isn’t this a loss to government, they are charging less amount of tax for long-term? Ans. It
encourages the investors to hold the shares for longer duration, and thereby preventing unnecessary
speculation/volatility in market. (िनवेशक रोज उठ कर शेयर बेच के भागने लगेगा तो शेयर बाजार में अिस्थरता बढ़ जाएगी.
इसिलए िनवेशक ठहर के बैठे इस वास्ते बेचने से पहले लबं ी अविध तक �कने पर कम टैक्स लेते हैं)

- 👜👜👜👜Budget-2022: Bitcoin, NFT and other virtual digital assets (VDA): profit pe 30% CGT.
Trade/Transfer pe 1% TDS (Refer to 📑📑Pillar1: 1A1 about cryptocurrency theory)
- 👛👛Budget-2023: nothing exam-worthy.

21.9.1 🧅🧅Indexation benefit / cost inflation index (CII) benefit

- Indexation benefit = adjusting the profit as per changes inflation. So that person has to pay less
amount of Long term Capital Gains tax. (This is not available in short-term capital gains tax)
Indexation benefits on capital gain tax? BEFORE AFTER 1/APRIL/2023
profits made from Debt mutual funds (they Yes given Stopped
invest the clients money in Company bonds/
G-sec/debt instruments.)
Normal shares / bonds NO NO
Sovereign gold bonds (Ref#1C) Yes Yes
real estate (building/property) Yes Yes
Bitcoin/cryptocurrency profit NO NO
�FAQ: is Indexation benefit given in XYZ other instrument? Ans. I don’t know. We are not here
for Chartered Accountant exam.

(Batch:PCB10-Prelim) Mrunal’s Economy Pillar#2A1: Budget → Revenue Part → Direct Tax-Receipts → Page 328
21.9.2 🔗🔗🔗🔗:🍋🍋 Bitcoin Profit pe 30% Tax and transfer pe 1% TDS in 👜👜👜👜Budget-2022

🔠🔠❓MCQ: In which of the following circumstances may ‘capital gains’ arise? (Prelims-2012)
1. When there is an increase in the sales of a product.
2. When there is a natural increase in the value of the property owned.
3. When you purchase a painting & there is a growth in its value due to increase in its popularity.
Answer Codes: (a) 1 only (b) 2 and 3 only (c) 2 only (d) 1, 2 and 3
21.10🍋🍋🍋: 👪👪 INCOME TAX ON INDIVIDUALS (���क आयकर)
James Wilson (financial member of the Council of India, founder of the Economist magazine and
Standard Chartered Bank) introduced income tax in India on 24 July 1860 to compensate the British
losses during 1857’s Sepoy mutiny. So, 24th July is celebrated as Income Tax Day (Aaykar Diwas).

You can use any ONE of the given system OTR or NTR.

(Batch:PCB10-Prelim) Mrunal’s Economy Pillar#2A1: Budget → Revenue Part → Direct Tax-Receipts → Page 329
 Sr Matter OTR NTR-2023
Sr.1 (Non-Agriculture) Gross Income of salaried employee aged 750000 750000
less than 60YR
Sr.2 minus Standard deduction -50000 -50000
Sr.3 minus NPS deduction -50000# N/A*
Sr.4 minus LIC, ELSS (Ref#1C), Home Loan etc deduction -150000# N/A*
Sr.5 Taxable Income: (Sr.1-2-3-4) 500000 700000
Sr.6 Income Tax on taxable income (Sr.5) 12500 25000
Sr.7 REBATE on Income Tax (Sr.6) -12500** -25000**
Sr.8 Income tax to be paid (Sr.6-7) 0 0
Sr.9 surcharge on IT if taxable income >Rs.50 lakh 0 0
Sr.10 4% health & Education Cess on (Sr8+9) (0+0)x4%=0 (0+0)x4%=0
Total Tax to be paid 0 0
⇒ # These are max deduction limits. So if u invest more money in LIC/NPS beyond these limits,
still you’ll NOT get more deduction than this. (इससे �ादा पैसा डालोगे तो भी �ादा माफ़� नहीं �मलेगी)
⇒ *in NTR-2023, whether person saves money in LIC/NPS etc or not, he’ll not get any deduction
benefit (except 50k Std deduction). So N/A = not applicable.
⇒ **Tax rebate allowed only if taxable income upto Rs.5 lakh in OTR OR Rs.7 lakh in NTR. So if
Akshay Kumar having 200 crore income = he’ll not GET REBATE. See next table.

21.10.1 Revenue Forgone / Tax Expenditure (प�रत्य� राजस्व/कर खचर्)

Sr Matter OTR NTR-2023
1 non-agro Gross salary income Rs.5.50 cr Rs.5.50 cr
2 Std. Deduction (-) 50,000 (-) 50,000
3 NPS (-) 50,000 N/A
4 LIC, Home Loan etc (-) 2,00,000 N/A
5 Taxable income: 1-2-3-4 5,47,50,000 Rs. 5,49,50,000
6 Tax rebate N/A bcoz income >5 lakh N/A bcoz income >7 lakh
7 Tax+Surcharge+Cess on Sr5= Rs.2,31,35,190 Rs. 2,10,40,500
⇒ in above case, Tax Payer has to pay Rs.20,94,690 LESS in NTR compared to OTR.
⇒ So from Tax-payer's point of view, this is 'Tax savings'.
⇒ From the Govt's point of view this is 'revenue forgone / tax expenditure' (सरकार के नए �ेब/�नयमो के
चलते �जतना कर कम आया, सरकार उस नु�ान को ‘राज� प�र��/कर खचर्’ कहते है.)
⇒ Govt deliberately makes such 'revenue forgone' to boost the economy indirectly. (How? Next
section) (अथर्तत्रं क� बहेतरी के िलए सरकार जानबुज कर ऐसा राजस्व प�रत्य� करती है.)

(Batch:PCB10-Prelim) Mrunal’s Economy Pillar#2A1: Budget → Revenue Part → Direct Tax-Receipts → Page 330
21.10.2 Income Tax: no tax upto ₹7 lakh after 👛👛Budget-2023 = Boosting Economy

Sr Matter OTR NTR-2023

Sr.1 (Non-Agri) Gross Income of salaried employee aged less than 60YR 750000 750000
Sr.2 Money LOCKED in NPS -50000 0**
Sr.3 Money LOCKED in LIC, EPFO, etc -150000 0**
Sr.4 Income tax to be paid 0 0
Sr.5 Money LEFT for spending/ disposable income? 550000 750000
⇒ **Assuming that person did not SAVE any money in LIC/NPS etc.
⇒ 50k Std. Deduction doesn’t LOCK your money. It’s just mathematical subtraction for tax
purpose.
⇒ Disposable income = income left for spending, after deduction of direct taxes and social security
(LIC, NPS etc.) (खचर् करने यो� आय वो आय है, जो प्र��-कर और प�शन-�बमा वगेरा भरने के बाद आपके पास रहती है)
⇒ Thus, The new tax regime increases the disposable income in the hands of taxpayers, and this is
likely to boost the shopping, demand, production, jobs and economic growth. (नई प्रणाली में करदाता के
िलए खचर् करने योग्य आमदनी बढ़ रही है जो िक आिथर्क वृिद्ध में मदद करे गी)

21.10.3 Income Tax: switching between NTR vs OTR after 👛👛Budget-2023

(Batch:PCB10-Prelim) Mrunal’s Economy Pillar#2A1: Budget → Revenue Part → Direct Tax-Receipts → Page 331
21.10.4 Surcharge on Income Tax
Surcharge if taxable income is OTR (Old Tax Regime) NTR (New Tax Regime)
More than ₹50 lakh upto 1 cr. 10% 10%
More than ₹1 cr upto 2 cr. 15% 15%
More than ₹ 2 cr upto 5 cr. 25% 25%
More than ₹5 cr 37% 25%

21.10.5 Effective Tax on super-rich person earning >5 cr

Sr Item OTR NTR
Sr1 Income Tax Highest Slab 30% 30%
Sr2 Surcharge on Income Tax 37% of 30%IT = 11.1% 25% of 30%IT = 7.5%
Sr3 Heath Edu Cess on (Sr1+Sr2) 4% (30%+11.1%)=1.64% 4% (30%+7.5%)=1.5%
Effective Tax = Sr1+2+3 42.74% 39%

21.10.6 ��Income Tax Slabs -> old tax regime -> senior citizens
- (OLD Tax Regime) Income tax slabs for senior citizens are slightly relaxed. i.e.
OTR income tax 0% 5% 20% 30%
Less than 60 age Upto 2.50 lakh 2.50-5 lakh 5-10 lakh >10 lakh
60 or more but Upto 3 lakh 3-5 lakh Same as above Same as above
less than 80 age
>80 age Upto 5 lakh =0% N/A
21.11🍋🍋🍋🌱🌱DIRECT TAX CODE (DTC) TASK FORCE (2017-2019)

⇒ 2017: Finance Ministry setup this taskforce under CBDT member Arbind Modi. Later, he retired
so another CBDT member Akhilesh Ranjan was made Chairman.
⇒ Taskforce had noted IRS officer, Chartered Accountant, Tax Lawyer, Corporate Consultant etc.
⇒ While Government did not disclose full report in public domain, but according to journalists, it
contains following suggestions:
1. Replace the Income Tax Act 1961 with a simpler Direct Tax Code (प्र�� कर सं िहता).
2. Reduce the corporation tax further. �नगम करों म� और कटौती क� जाए
3. Tax rates for domestic and foreign companies should be same. This will encourage ease of doing
business in India. (भारतीय और �वदेशी कं प�नयों पे एक समान �नगम कर लगे तािक �ापार म� सुगमता)
4. Give additional tax relief for the startup companies. (More in Pillar4B)
5. Increase the number of tax slabs from present three (5%,20%,30%) to four (10%, 20%, 30% and
lastly 35% for super-rich earning ₹ 2 crore />).
6. Abolish Dividend Distribution Tax (DDT). [which is actually done in �Budget-2020]

(Batch:PCB10-Prelim) Mrunal’s Economy Pillar#2A1: Budget → Revenue Part → Direct Tax-Receipts → Page 332
7. Setup Litigation Management Unit to look after the tax related court cases in an efficient
manner. (मुकदमों क� प्रबं धन इकाई बनाई जाए तािक कराधान के के सों का प्रभावी �प से �नपटारा हो सके )
++ many other reforms, but poor cost:benefit chasing them. #थोड़ा-पढ़ो-आगे-बढ़ो

21.12🍋🍋🍋DIRECT TAXES: MISC. CONCEPTS (इधर उधर के �छटपुट मुददे)

21.12.1 🍋🍋👪👪Hindu Undivided Family (HUF) (िहंदू अ�वभा�जत प�रवार):
- A Hindu, Buddhists, Jains, or Sikhs family members can come together, pool their assets and
form an HUF under the Income Tax Act. (उनको आयकर बचाने म� कु छ फ़ायदे होते ह�)
- HUF is taxed separately from its members, & helps saving taxes due to certain
provisions/loopholes of Income Tax Act. How exactly? Ans. not here for CA exam.

21.12.2 🍋🍋�Presumptive Taxation (प्रक��त कराधान)

- Salaried employees can easily compute their taxable income from their annual salary, & pay
income tax. (तन�ाह-शुदा/ वेतन-भोगी कमर्चारी के �लए आयकर �गनना ब�त आसान होता है)
- Companies hire full time Chartered Accountants to computer their taxable income and pay
Corporation tax. (और कं पनी के मा�लक तो िहसाब िकताब रखने के �लए CA को नौकरी पे रख�गे)
- But self-employed freelance consultants / professionals such as lawyers, doctors, fashion
designers, DJ-walle-babu etc. face difficulty in keeping such account books. (लेिकन �रोजगा�रयों के
�लए िहसाब िकताब रखना थोड़ा मु��ल होता है )
- So, for above persons, Income Tax Act has Presumptive Taxation System. It is not a separate tax
but a ‘method/formula’ to calculate their income tax. How it works? NotIMP. (यह कोई अलग कर नहीं
है िकंतु आयकर �गरने का एक अलग िक� का सूत्र है. वह �ा सूत्र है हम पढ़ने नहीं बैठ�गे)
Table 2: ✋don't confuse the terms and at the same time no need for CA-giri
Income Tax on income ⇒ A direct tax levied by Union.
other than agri → ⇒ Every resident has to pay it on his taxable income.
(आयकर ) ⇒ Within that income tax: lawyers, doctors, fashion designers etc.
self-employed/freelance professionals do calculation of income
tax using Presumptive Taxation
Professional tax ⇒ It is a separate direct tax Levied by State Govt on the
(�वसाय कर) →[गैर-िकसान professionals (who are not farmers).
पेशेवर पर राज्य सरकार का कर] ⇒ Constitution says it can’t be more than ₹2,500 per yr per person.
21.12.3 🍋🍋⏰Advance Tax ? (अ�ग्रम कर)
- New financial year starts from 1st April 2019 and ends on 31st March 2020.
- If everyone paid all of their direct taxes at 11:59PM on 31st March 2020, then govt. will face
money-shortage for the whole year till 31st March midnight comes.
- So, Advance Tax mechanism requires people to pay their Income tax and Corporation tax in
advance-instalments on quarterly basis (every 3-3 months), If their annual tax liability is ₹10,000
or more. (बड़े आयकरदाता और कं प�नयों ने हर तीन तीन महीने पर िक�ों म� कर जमा करना होगा)

(Batch:PCB10-Prelim) Mrunal’s Economy Pillar#2A1: Budget → Revenue Part → Direct Tax-Receipts → Page 333
21.12.4 👻👻 ATMA NIRBHAR BHARAT → Tax Ordinance 2020 [कर अ�ादेश]
Outdated. Deleted from handout

21.13🍋🍋🍋✂TDS & TCS

To keep track of income/payment & reduce opportunities of tax-evasion/blackmoney, Government
requires TDS/TCS to be collected in certain payments.
Who collects/cuts it? From whose payment?
TDS (खरीदार) Buyer of goods/services/investment ⇒ Seller’s fees (e.g.
TAX before making payment to the seller/investor. wedding-DJ/Catering
DEDUCTED Examples: walla)
AT SOURCE ⇒ University paying salary to ⇒ Employee’s salary,
employee/professor ⇒ Depositor/ lender’s
⇒ Book Publisher paying royalty to author interest
⇒ Banker/Bond-Issuer paying Interest ⇒ Shareholder’s dividend
⇒ Company paying dividend to shareholder etc.
TCS: (�वक्रेता) Seller of Goods/Service e.g. Luxury Car Customer who is buying
TAX Showroom Owner, Foreign Currency Seller specified types of
COLLECTED goods/services/foreign
AT SOURCE currency. (चु�नदं ा व�ुओ ं और
सेवाओं के ग्राहक)
⇒ ��FAQ: Whether TDS/TCS applicable on “X” thing or not? �Ans. not important beyond
examples given in table.
⇒ ��FAQ: Can we call TDS and TCS indirect taxes? Ans. �No, they are administrative
mechanisms to discourage black money. TDS/TCS are not separate taxes. E.g. TDS that is cut
from salary/dividend/bank interest= ultimately that TDS ₹₹ goes into the income tax
computation of respective employee/shareholder/depositor. So TDS is not a separate tax.
21.14🍋🍋�✂TAX DEDUCTED AT SOURCE (TDS): (स्रोत पर कर कटौती)

- Suppose a college pays ₹10,000 to a freelance visiting faculty.

(Batch:PCB10-Prelim) Mrunal’s Economy Pillar#2A1: Budget → Revenue Part → Direct Tax-Receipts → Page 334
- Suppose a bank/NBFC/post-office pays ₹10,000 as interest to a depositor, then how to ensure
that payment-recipient (visiting faculty) reports his income to the tax authorities, otherwise he
could avoid paying taxes!!
- So, Income Tax Act requires such organizations (college) to deduct a portion of the payment at
source and deposit it to IT-dept. along with PAN card number of the recipient.
- Then, payment-recipient (visiting faculty) will be forced to file his tax return form, to unlock his
TDS amount.
- 😰😰On one side, TDS helps fighting tax evasion but on the other side, TDS also creates hardship
for lower middle-class persons, because part of their payment is cut in advance. So, in each
budget, Govt will finetune the norms.(कभी स�ी क� जाती है, कभी �रयायत दी जाती है)
- Budget-2019: TDS on cash withdrawal to encourage digital payments
- 2% TDS if total cash withdrawn during a financial year exceed 1 crore from a single user-
account in bank or post-office. This will encourage digital payments.
- Related? Banking Cash Transaction Tax (BCTT: 2005-09) in 📑📑Pillar#2B:Black Money
- �Budget-2020, 2021: some technical changes. NOTIMP for Exam#�
�थोड़ा-पढ़ो-आगे-बढ़ो
- ��Budget-2022: 1% TDS on Bitcoin and other Virtual Digital Assets (VDA)’s transfer/trade.

21.14.1 👻👻 (🍋🍋🍋✂) TDS → ATMA NIRBHAR BHARAT REFORMS

Faded/ outdated. So deleting from handout.
21.14.2 🍋🍋🏎🏎✂Tax Collected at Source (TCS): (�ोत पर सं गहृ ीत कर)

- If a rockstar buys an SUV car worth ₹25 lakhs, then it means he must be a rich man. How to
ensure he is paying Income Tax regularly (apart from TDS mechanism)?
- So, the car showroom owner (seller) is required to collect extra 1% from Rockstar (Buyer) and
deposit to IT-dept. Rockstar will have to file tax-return to unlock this amount.

(Batch:PCB10-Prelim) Mrunal’s Economy Pillar#2A1: Budget → Revenue Part → Direct Tax-Receipts → Page 335
21.14.3 🍋🍋🍋🍋Tax refund? (कर वापसी)

- A person is eligible to receive income tax refund from IT-dept IF he has paid more tax to the govt
than his actual tax liability. e.g. If college deducted 10% TDS from freelance visiting faculty
payment, but what if he was in 0% or 5% Income Tax slab? Then, Income Tax Department will
refund his money with interest.
- Similarly, GST refund can be claimed by an entrepreneur from GSTN webportal.

21.15 🍋🍋MISC. DIRECT TAXES - FINANCIAL TRANSACTION TAXES (�व�ीय लेनदेन कर)
21.15.1 🍋🍋🍋🍋 (Concept) Tobin Tax / Robinhood Tax
- 1970s: Nobel recipient American economist James Tobin proposed a small tax everytime
currency is converted into another currency (e.g. $ to ₹).
- Such tax will discourage short term speculative investment and flight of capital from one country
to another = stabilizing the global economy and currency exchange rates and share market.
- In India, foreign currency conversions subjected to GST (which is in indirect tax). However,
some other nations collect it as direct tax. (More in 📑📑Pillar#3A)

21.15.2 🍋🍋🍋🍋STT & CTT (प्र�तभू�त लेनदेन कर और व�ु लेनदेन कर)

- Securities Transaction Tax (STT: प्र�तभू�त लेनदेन कर) is levied on the sale and purchase of shares,
ETF-units, derivatives and other securities at stock-exchanges.
- Its rate (0.001%-2%) varies as per the nature of the securities.
- Commodities Transaction Tax (CTT: व�ु लेनदेन कर) is levied on non-agricultural commodities
traded at Commodities-Exchanges. Rate ~0.01%.

(Batch:PCB10-Prelim) Mrunal’s Economy Pillar#2A1: Budget → Revenue Part → Direct Tax-Receipts → Page 336
 Table 3: Not here for C.A. Exam, #थोड़ा-पढ़ो-आगे-बढ़ो
Direct Tax By Description
Capital Gains Union Applicable when any capital asset e.g. home/share/bond/bitcoin is “sold
Tax Govt at profit” by its previous owner.
Securities Union ⇒ Applicable on the selling price of share, bond and other securities.
Transaction Govt ⇒ Irrespective of whether seller is making profit or loss.
Tax
Dividend Union ⇒ Applicable on the dividend paid by by company to a shareholder.
Distribution Govt ⇒ �Budget-2020 abolished this tax. (ये टे� तो रद्द/बं ध हो गया है)
Tax
State ⇒ Applies on value of share/bond/securities, immovable properties
Govt (e.g. building) and certain types of legal agreements e.g. rent
agreement etc.
⇒ Irrespective of whether seller is making profit or loss.
⇒ 2020: Union govt amended the Indian Stamp Act, 1899 so that the
Stamp Duty
Stamp duty rates on share/bonds/securities become uniform across
(�ा� शु�)
the states. (प्र�तभू�तयों पर �े� शु� के दरों को सभी रा�ोमे एकसमान िकया).
Union collects → distributes it to State Govt of domicile of the
buyer. (प्र�तभू�त खरीदार �जस रा� का है, उधर क� रा�सरकार को �मलेगा)
⇒ Corona crisis → Union Govt postponed implementation date.
⇒ ��Further operational mechanism/rules= poor cost:benefit.
Upcoming Handouts in Pillar#2
2A1) ✅ Direct Taxes
2A2) Indirect Taxes & GST
2B) Black Money, 15th Finance Commission
2C) Subsidies, Salaries, Revenue Expenditure, Revenue Deficit
2D) Disinvestment, Deficit, FRBM Act, Fiscal Council, Budgeting-Railway budget, plan-non plan
budget, & scheme types etc.

(Batch:PCB10-Prelim) Mrunal’s Economy Pillar#2A1: Budget → Revenue Part → Direct Tax-Receipts → Page 337
 PILLAR #2A2: BUDGET: TAXATION: Indirect Taxes & GST
Table of Contents
22 💼BUDGET→ ⏳REVENUE PART→ 📥RECEIPTS→ 🍋TAX →🛒 Indirect Taxes...............339
22.1 🍋🛒 Indirect Taxes: types (अप्रत्यक्ष करों के प्रकार)..........................................................................................339
22.2 🍋🛒 Indirect Taxes: merits and demerits (लाभ व् नुकसान )........................................................................340
22.3 🍋🛒🥂🚭 (Concept) Pigouvian Tax (पिगोवियन कर)...................................................................................340
👛
22.3.1 Customs Duty in Budget-2023...........................................................................................................................341
22.3.2 🍋🛒🏋🏻‍♀️
Cess and Surcharges on Excise & Customs.............................................................................................341
22.3.3 🍋🛒⛽️ ⛽️
Indirect Tax ⛽️ Petrol & Diesel price high because...........................................................................342
22.3.4 🍋🛒⛽️Indirect Tax → additional differential excise duty on Unblended Petrol ............................................342
22.3.5 ⛽️🛳Windfall Tax on export of petrol/diesel/ATF fuel (2022)..........................................................................342
22.3.6 🍋🛒⛽️ 🗓
: GST on Petrol Diesel Electricity: NITI Aayog 6 year roadmap......................................................343
⛽️
22.3.7 Petrol-Diesel: Dynamic Fuel Pricing System & oil bond repayment .............................................................344

22.4 🍋🛒🏋🏻‍♀️↗️🏋🏻‍♀️Cascading Effect of Indirect Taxes...................................................................................345

22.5 🍋🛒💊📆: Indirect Taxes: A Timeline of Reforms..............................................................................346
22.6 🍋🛒📆 Indirect Taxes → GST: Timeline (समयरेखा)................................................................................347
22.7 🍋🛒:📙🔨 GST: 101st Constitutional Amendment Act, 2016...........................................................348
22.8 🍋🛒: 🧔👩‍🦲🕉 GST Council: Composition? जीएसटी परिषद.........................................................................348
22.8.1 🧔👩‍🦲🕉 GST Council: Functions? They’ll decide following-..............................................................................349
22.8.2 🔨⚖️GST Council Decision not binding on States...............................................................................................350
22.9 🍋🛒🤑 GST Input Tax Credit (ITC: इनपुट कर प्रत्यय)..................................................................................350
22.9.1 🍋🛒↩️👚 Inverted Duty Structure Problem in GST on Textile........................................................................352
22.9.2 💿GST: Exempt vs ZERO RATED.........................................................................................................................352
💉Vaccine GST can’t be 0% ZERO RATED or “EXEMPTED” because............................................................353
22.9.3

22.10 🍋🛒🧔🌬 Centre’s Indirect Taxes subsumed in CGST....................................................................354

22.11 🍋🛒(👩‍🦲🕉)🌬 States’ Indirect Taxes subsumed in SGST..................................................................356
22.11.1 📈 GST Revenue Collection Figures: जीएसटी राजस्व प्राप्ति के आंकड़े..................................................................................357

22.12 🍋🛒👨‍🏫 GST Rates on Services =0%: सेवाओं पर जीएसटी की दर.......................................................................358

22.13 🍋🛒GST on Actionable Claims..........................................................................................................359
22.13.1 → GST on Actionable Claims → Lottery / Online Gaming.............................................................................360
🎲
22.13.2 GST → Lottery / Online Gaming → GST on full bet value (gross value)? .................................................361
🎲
22.13.3 GST → Lottery / Online Gaming → on ‘entry bets’ but not on ‘winnings’ ...............................................361

22.14 🍋🛒🍋 GST Rates on Goods : 0%: सामान पर जीएसटी की 0% दरें...................................................................361

22.14.1 🍋🛒🍋 GST Rates on Goods : 0% removed.......................................................................................................362
22.14.2 🍋🛒🍋 GST on goods- various slabs..................................................................................................................362
22.14.3 🥂GST on Extra Neutral Alcohol (ENA)?...........................................................................................................363
22.14.4 🌾GST on Millets? (2023)......................................................................................................................................364
22.15 🍋🛒⏰🗓 GST Composition Scheme (जीएसटी सं रचना योजना)....................................................................364
22.15.1 🍋🛒: 💸🤏(✋😈) 1% GST deposit in cash for controlling fake ITC claims.................................................364
22.16 🍋🛒↩️ Reverse Charge Mechanism (विपरीत प्रभार की व्यवस्था).....................................................................364
22.17 🚛🧾 E-way Bill System (ई-वे बिल प्रणाली) from 2018 onwards.................................................................365

(Batch:PCB10-Prelims) Mrunal’s Economy Pillar#2A2: Budget → Revenue Part → Indirect Taxes & GST → Page 338
 22.17.1 🧾E-Invoice from 2022 onwards..........................................................................................................................365
22.18 → ( ) Compensation to States: WHY? ...............................................................................365
22.18.1 🧔 → 🤑(👩‍🦲👳‍♀️) Compensation to States: HOW?..............................................................................................366
22.19 →: (👩‍🦲 👳‍♀️) GST Compensation & Back2Back Loans........................................................367
22.19.1 🤧😷🔪[🧔 → 🔪(👩‍🦲👳‍♀️ Back to Back loans: Beneficiary States.......................................................................368
22.19.2 🤧😷🔪:⚖️ GST Compensation Cess Extended till 2026..................................................................................368
22.20 🍋🛒🕵️‍♂️ GST Related Organizations (सं स्थाए).........................................................................................368
22.20.1 🕵️‍♂️👩‍🦲👳‍♀️ Group of Ministers (GoM: )...................................................................................................368
मं त्रियों का समूह
22.20.2 ⚖️🕵️‍♂️🍕 National Anti-Profiteering Authority (NAA/NAPA).........................................................................368
22.20.3 🕵️‍♂️🍼 Authority for Advance Ruling (AAR- ).....................................................................368
अग्रिम फै सलों के लिए प्राधिकरण
22.20.4 🕵️‍♂️ 🕵️‍♂️ 🕵️‍♂️ GST tribunal (GSTAT) (2023).............................................................................................................369
22.20.5 🕵️‍♂️ GST Fitment Committee ( ).....................................................................................................369
जीएसटी फिटमेंट समिति
22.20.6 🕵️‍♂️💻GSTN Network (Not for Profit Company- ).........................................................................370
मुनाफ़ा रहित कं पनी
22.20.7 📲 💻 Project Saksham: Digital integration (2016)............................................................................................370
22.20.8 🔢🔠 HSN and SAC Codes....................................................................................................................................370
22.21 🔢💳🔠 PAN vs GSTIN vs Aadhar......................................................................................................371
22.21.1 🔢💳🔠 PAN/GSTIN vs UID (=Aadhar Card)...................................................................................................372
22.22 🍋🛒🥰 GST: Benefits (लाभ)..................................................................................................................373
22.22.1 🍋🛒🥰: ⚓️ GST Benefit: Zero Rated Exports ( शून्य रेटेड निर्यात )...............................................................................373

22.23 GST: Ease of Doing Biz (EoD): decriminalisation.....................................................................374

22.23.1 🚨👮🏻‍♀️ GST-EoD: criminal prosecution threshold...............................................................................................374
22.23.2 🚨👮🏻‍♀️GST-EoD: obstructing officers.....................................................................................................................374
22.24 🍋🛒😢 GST: Challenges for Mains (चुनौतियां)........................................................................................374
22 💼BUDGET→ ⏳REVENUE PART→ 📥RECEIPTS→ 🍋TAX →🛒 I NDIRECT TAXES

बजट→ राजस्व भाग→ प्राप्तियां→ कर→ अप्रत्यक्ष कर

- 🤲Tax incidence (करापात)= @Person from whom govt collects the tax. (e.g. shopkeeper)
- 😥Tax impact (कराघात/कर का प्रभाव) = @Person who finally bears the tax & can’t pass its burden on
further. (e.g. Consumer)
- In the indirect taxes, tax incidence and tax impact does not fall on the same person. E.g. Customs
Duty on import and export, Excise duty on manufacturing of goods, Service tax on services, Sales
Tax, Value Added Tax (VAT), and Goods and Services tax (GST).
- Indirect taxes fall under the Ambit of FinMin→ Department of Revenue (राजस्व विभाग)→ Central
Board of Excise and Customs (CBEC): (कें द्रीय उत्पाद एवं सीमा शुल्क बोर्ड) → Budget-2018 renamed it as
Central Board of Indirect Taxes and Customs (CBIC): (कें द्रीय अप्रत्यक्ष कर और सीमा शुल्क बोर्ड)
22.1 🍋🛒 I NDIRECT TAXES: TYPES (अप्रत्यक्ष करों के प्रकार)
🥤 Ad- Valorem tax (यथामूल्य कर) 🚭 Specific Tax per unit (विशिष्ट कर प्रति यूनिट)
Taxes based on the value of something. E.g. Tax based on quantity of items. E.g. ₹ 260 Excise duty
35% Customs Duty on import of orange on production of every 1000 cigarettes of 65-70mm
juice. So, if juice priced at ₹1000 imported, length. Here we’re taxing them irrespective of their
then ₹350 as tax. manufacturing price or selling price.

(Batch:PCB10-Prelims) Mrunal’s Economy Pillar#2A2: Budget → Revenue Part → Indirect Taxes & GST → Page 339
 🥤 Ad- Valorem tax (यथामूल्य कर) 🚭 Specific Tax per unit (विशिष्ट कर प्रति यूनिट)
Easier to administer. Difficult to administer, leads to inspector-raj &
[इसे क्रियान्वित करना ज़्यादा आसान है] litigation. But, if slight increase in this tax, then greater
burden passed on to the consumer so it helps reducing
harmful consumption. (How exactly? Ans.
microeconomics graph is not imp)
22.2 🍋🛒 I NDIRECT TAXES: MERITS AND DEMERITS (लाभ व् नुकसान )
😀 Merits लाभ 😥 Demerits नुकसान
➔ Convenient (सुगम) to collect because the ➔ Regressive (प्रतिगामी) in nature, both poor and
traders act as honorary (=unpaid) tax rich taxed equally for the same item then
collectors. Wider base because everyone poor people end up paying more portion of
covered e.g. 18% GST on Biscuit. their income in indirect taxes.
➔ Elastic (लचीला): small ⬆brings large revenue, ➔ This tax is hidden in the price. Customers do
because everyone is affected. Although they’re not always feel the pinch of paying indirect
“relatively” less elastic than Direct taxes. tax so it promotes less civic consciousness
(Poor cost benefit interpreting its than direct taxes.[नागरिक चेतना नहीं जगाता]
Microeconomics graph) ➔ Indirect taxes ⬆→ product becomes
➔ 🚭 Can ⬇harmful consumption by imposing expensive → demand ⬇ so uncertainty
higher taxes on cigar, alcohol, soft drinks & involved in how much ₹ ₹ will Govt actually
fast food. (हानिकारक पदार्थों का उपभोग कम करवा सकते earn?[वास्तव में कितनी आमदनी होगी निश्चितता नहीं]
हैं) ➔ High level of corruption, evasion, cascading
effect if input credit is not given e.g. erstwhile
sales tax system.[भ्रष्टाचार, कर चोरी के अवसर]

22.3 🍋🛒🥂🚭 (C ONCEPT) PIGOUVIAN TAX (पिगोवियन कर)

- An externality (बाह्यता) is a positive or negative consequence of an economic activity experienced
by unrelated third parties. E.g. Cement company (related parties: labourers & consumers
benefit); whereas unrelated third parties (local community, flora and fauna) are harmed by
cement company’s air-pollution. [ग़ैरसं बं धित तीसरे पक्ष पर सकारात्मक या नकारात्मक असर]
- English economist Arthur C. Pigou proposed taxing the companies that create such negative
externalities: e.g. polluting industries, cigarettes (passive smoking), alcohol (social disharmony).
- We HAVE high level of indirect taxes on petroleum, tobacco and alcoholic products.
- We HAD “Clean environment cess” on Rs 400 per tonne of coal (but abolished in GST)
- Sin tax? Similar concept- imposing tax on immoral things like alcohol, tobacco. Difference
between Sin Tax vs Pigouvian tax = that pedantism/hairsplittery NOT IMP 🎓✋

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22.3.1 Customs Duty in 👛Budget-2023

👛Budget-2023- some notable announcements:

- reduced customs duty on import of various components / parts required to mfg Electric vehicle
batteries, mobile phones, TV, lab grown diamonds, etc.
- increased customs duty on imported kitchen chimney, imported gold & platinum jewellery, etc.

22.3.2 🍋🛒🏋🏻 ‍♀️Cess and Surcharges on Excise & Customs

Cess / Surcharge Description
Social Welfare  💼Budget-2018 introduced 10% SWS on Customs Duty on imported
Surcharge (SWS) goods.
On Customs
(समाज कल्याण अधिभार)
 💼Budget-2021- SWS will no longer be applicable on the gold and
silver. (Because additional burden of Agriculture Infrastructure and
Development Cess (AIDC) on gold-silver. So, if SWF also levied = too
much tax burden on people= Which may encourage more smuggling
and black money, so govt exempted these goods from SWS)
Health Cess  💼Budget-2020 Introduced 5% Health Cess on the (customs duty
On Customs +Surcharge) on imported medical devices (आयातित चिकित्सा उपकरण).
(स्वास्थ्य उपकर)  This Cess ₹₹ will be used for building (Ayushman Bharat scheme ke)
hospitals (to treat PM-JAY ₹5lakh health insurance-walle poor
patients) in Aspirational Districts (आकांशी-जिले=backward districts
identified by NITI Aayog.)
Agriculture  💼
Budget-2021 introduced this (कृ षि अवसं रचना और विकास उपकर)
Infrastructure and  This cess will be applicable on the Excise duty on petrol
Development Cess (cess@₹2.5/litre) and diesel (cess@₹4/litre)
On Customs  This cess will be applicable on Customs Duty on Gold silver, alcoholic
And beverages, certain types of edible oils, certain fruits, certain Pulses,
Excise Cotton, Urea/fertilizer. (Cess varies from 1.5-100% depending on item)

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22.3.3 🍋🛒⛽️Indirect Tax → ⛽️Petrol & Diesel price high because
⛽️🚗PETROL (Approx taxes in middle of 2021) ⛽️🚛DIESEL
A) 🧔Union Basic excise ₹1.40 + Special additional excise ₹11 + Basic excise ₹1.80 + Special
Tax ₹18 Road Infrastructure cess +₹2.50 Agriculture additional excise ₹18 + ₹18
infrastructure and development cess (AIDC) Road Infra cess +₹4 AIDC
B) 👨‍🦲State State VAT ₹20 per litre. State VAT ₹15 per litre.
Tax
Total in India 135% taxes on base price 116% taxes on base price
=A+B
elsewhere Taxes on fuel: EU (45-60%), Canada 15-30%, USA (15%)
 If above fuels are replaced with highest GST slab (28%) → hardly ₹5-6 per litre each for Union
and State = Loss of over 4 lakh cr on petrol and diesel taxes in GST system compared to present
(Excise VAT) regime.
 So, cheap petrol-diesel is not possible, unless Union and State govts are willing to take deep cuts
in their revenue. Corona= direct tax collection ⏬. So govt not eager to reduce tax% on fuel.
22.3.4 🍋🛒⛽️Indirect Tax → additional differential excise duty on Unblended Petrol
Govt wants 20% ethanol blending with petrol by 2025 to ⏬GHG emission. 👜🥻Budget-2022
announced one MORE TAX to force the oil refineries to accomplish this target in a timely fashion:
Fuel Ethanol Blended Unblended petrol
Petrol
Basic excise + Special additional excise + Road Yes these tax and cess applicable on both type
Infrastructure cess + Agriculture infrastructure of fuel.
and development cess (AIDC) →
Additional Differential Excise Duty → Rs.₹0/ litre Rs. 2/litre
Announced in 👜🥻 Budget-2022
इथेनॉल मिश्रित पेट्रोल पर अतिरिक्त विभेदक उत्पाद शुल्क नहीं लगाया जाएगा जबकि इथेनॉल-अ-मिश्रित-पेट्रोल पर ₹2 प्रति लीटर के दर
पर यह टैक्स लगेगा।

22.3.5 ⛽️🛳Windfall Tax on export of petrol/diesel/ATF fuel (2022)

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 Windfall Tax is a nickname given to a tax when it is levied on an unforeseen / unexpectedly large
profit (अप्रत्याशित मुनाफ़े की स्थिति में यदि कोई टैक्स लगाया जाए तो उसे विंडफ़ोल टैक्स की सं ज्ञा दी जाती.)
 2022: Fuel prices increased sharply in global market. So when Indian refineries export
petrol/diesel → They will make a lot more profit compared to previous years. (विश्व बाज़ार में ईंधन के
बढ़ी क़ीमतों के चलते भारत के ईंधन निर्यातकर्ताओं को अप्रत्याशित मुनाफ़ा हो रहा था)
 And also if Indian refiners export more quantity to foreign nations, then it will reduce supply of
fuel for local Indians = more inflation in fuel.
 2022-Jul: government imposed Special Additional Excise Duty (SAED) on export of Petrol
(₹6/litre) and Diesel (₹12/ litre) and Aviation Turbine Fuel (₹6/litre).
 Newspapers nicknamed this as “windfall tax”.
 2022-Aug onwards: fuel prices started to fall in the global market. So now Indian government
gradually changing/ deleting / reducing this tax. Then ball by ball cricket commentary notIMP
⚾️📻⚾️🎙✋ (अभी धीरे धीरे इसमें कटौती की जा रही है.)
🚩👶🏻FAQ: can windfall tax be imposed only on indirect taxes / petrol diesel?
Ans. If government is imposing any direct or indirect tax because of some unforeseen profits to a
party, then journalist may label as Windfall Tax.
🚩👶🏻FAQ: then can’t we say bitcoin profit pe Capital Gains Tax is also windfall tax?
Ans. Journalists/Newspaper/Govt/Chief Economic Advisor/NITI etc have not used this word yet. So
I would not use it.

22.3.6 🍋🛒⛽️ 🗓: GST on Petrol Diesel Electricity: NITI Aayog 6 year roadmap
2021-Aug: NITI Aayog proposed following formula:
 28% GST on petrol and Diesel. + Compensation Cess for States (this compensation will be
given to states for a period of six years)
 18% GST on Electricity.
✋However this is a proposal stage. Separately a case is going on at Kerala High Court. We’ll update
when/if something big happens. (अभी यह सब प्रस्तावित है.असल में लागू होना बाकी है. जब कु छ बड़ा होगा, तो देखेंगे)

Related topic: OPEC Cartel, crude prices? Ans. ( 📑Ref: HDT-Pillar#3A: BoP)

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22.3.7 ⛽️Petrol-Diesel: Dynamic Fuel Pricing System & oil bond repayment

 1970s to 2002: Administered Price Mechanism (APM: प्रशासित/नियंत्रित मूल्य तंत्र): Wherein the
government fixed the prices of petroleum fuels and paid subsidy to the oil marketing companies
(OMC: तेल विपणन कं पनियां) for their losses by issuing Oil Bonds to them.
⏬
 2002-2014: Govt gradually began decontrolling fuel prices, its own subsidy burden.
 Present system= Dynamic Fuel Pricing System (ईंधन की गतिशील रूप से बदलने वाली मूल्य प्रणाली): wherein
OMCs decide the prices of petrol and diesel on DAILY basis, based on the movement in
international prices. Associated keyword/formula/methodology is “Trade parity price (TPP)”.
⚾️️📻⚾️️🎓✋What is means, how it works? = Poor cost benefit chasing that.
 😍 Benefit of dynamic pricing? In theory, If the oil prices lowered in the international market,
petrol diesel should become cheaper in India. विश्व बाजार में दाम गिरने पर इंजन के दाम भारत में भी कम होने
चाहिए. But, Union and State govt keep ⏫⏫ taxes on it so it remains expensive for common
people.

- 2021-Aug: FM Sitharaman says we cannot reduce excise duty on petrol and diesel, because we
have to repay principal + interest on the oil bonds issued by the previous UPA-II government to
subsidise fuel prices in 2012-13.(मोदी सरकार ने कहा पेट्रोल डीज़ल पे उत्पाद शुल्क नहीं काट सकते क्योंकि कांग्रेस सरकार
ने जो पेट्रोल डीज़ल पर सब्सिडी देने के लिए ऑयल मार्के टिंग कं पनियों को ओईल-बॉण्ड जारी किए थे उसका बकाया पैसा चुकाना है)
- ⏬
2021-Nov: First time in last 3 years, Modi govt cuts Petrol excise duty down by Rs 5/litre,
diesel by Rs 10/litre. Possible Reasons? 1) UP State Election 2) farmers require diesel for
irrigation pumpsets in Rabi/winter season. (उत्तर प्रदेश चुनाव से पहले कें द्र सरकार ने पेट्रोल डीज़ल के उत्पाद शुल्क में
की कटौती)

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🚩👶🏻 FAQ: if past Congress govts issued 10-20 year bond then they’d be repaid by now. And or if
tenure is 20 years then lot of time available before repayment deadline comes. So why isn’t BJP govt
reducing taxes? And/OR I’ve X counter arguments. Ans. NotIMP4Exam. My job was to give explain
the terms for exam. I’m done with it. थोड़ा-पढ़ो-आगे-बढ़ो.

22.4 🍋🛒🏋🏻‍♀️↗️🏋🏻‍♀️C ASCADING EFFECT OF INDIRECT TAXES

 If a government levies 10% indirect tax every time an item is sold, but doesn’t provide input tax
credit (ITC) to the businessman, for the taxes he paid in previous stage, then final-customer will
have to to pay tax on tax.
 This ‘cascading effect’ of indirect taxes raises the price of final product. (अप्रत्यक्ष करों का सोपानी प्रभाव)

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22.5 🍋🛒💊📆: I NDIRECT TAXES: A TIMELINE OF REFORMS

Boss? System Provided ITC on Provided ITC on

Union’s Taxes States’ Taxes
Union MODVAT (1986-2004) Yes on excise paid by No
bizman
Union CENVAT (2004-2017) Yes on excise & services No

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 Boss? System Provided ITC on Provided ITC on
Union’s Taxes States’ Taxes
tax paid by bizman
State VAT (2005-2017) No Yes on VAT paid by
Bizman
Union & State GST (2017) Yes Yes
combined
(GST Council)
🔠❓MCQ-UPSC-Pre-2014. The sales tax you pay while purchasing a toothpaste is a:
(a) tax imposed by the Central Government
(b) tax imposed by the Central Government but collected by the State Government
(c) tax imposed by the State Government but collected by the Central Government
(d) tax imposed and collected by the State Government
🔠❓MCQ-UPSC-CDS-2013-I. Which of the following are direct tax in India?
1. Corporation tax 2. Tax on income 3. Wealth tax 4. Customs duty 5. Excise duty
Ans. Codes: (a) 1, 2 and 3 (b) 1, 2, 4 and 5 (c) 2 and 3 (d) 1, 3, 4 and 5

22.6 🍋🛒📆 I NDIRECT TAXES → GST: TIMELINE (समयरेखा)

2004 Vijay Kelkar Task Force on Fiscal Responsibility and Budget Management (FRBM)
recommends GST. [विजय के लकर समिति ने GST लागू करने की सिफ़ारिश की]
2006 In Budget speech, P.Chidambaram announces the launch of GST from 2010
2011 UPA government introduces 115th Amendment Bill 2011 to implement GST lapsed with
the dissolution of 15th Lok Sabha. (लोकसभा विघटन चलते ये विधेयक पास नहीं हो पाया)
2014-16 Modi govt. introduces 122nd Constitutional Amendment Bill 2014 in 16th Lok Sabha.
Since GST aimed to change federal financial relations, so under Art.368, this
constitutional bill required:
- @Union Parliament Lok Sabha and Rajya Sabha each:_50% majority of the total
membership, and 2/3rd majority of all members present and voting.
- @State Vidhan Sabha: approval by majority of state assemblies (i.e. 15 Vidhan-
sabhas of India at that time)
Ultimately, it passed & became
- 101st Constitutional Amendment Act, 2016 (सं वैधानिक सं शोधन अधिनियम/ क़ानून)
SIDE NOTE: other imp amendments Acts
- 102nd , 2018: Constitutional status to National Commission for Backward Classes
(NCTC को सं वैधानिक दर्जा दिया जाए)
- 103rd , 2019: 10% EWS reservation (आर्थिक रूप से पिछड़े वर्ग के लिए आरक्षण)
- 104th , 2020: Anglo Indian reservation removed in LS & Vidhan shaba but SC/ST
continued till January 25, 2030. (एं ग्लो भारतीय समुदाय का आरक्षण हटाया)
- 105th, 2021: To restore states' power to make their own OBC lists- After SC

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 judgement (राज्य सरकार अपनी OBC सूची बना सके )
22.7 🍋🛒:📙🔨 GST: 101 ST CONSTITUTIONAL AMENDMENT ACT, 2016
101 वां सं वैधानिक सं शोधन अधिनियम, 2016 amended following articles in our Constitution.
246-A - States given power to tax goods and services. (previously, they couldn’t tax services.)
- But only UNION will have the power to tax inter-state supply of goods and services
in the form of “IGST” (एक राज्य से दूसरे राज्य में वस्तु और सेवा की आपूर्ति पर के वल कें द्र सरकार टैक्स माँग
सकता है जिसे IGST कहा जाएगा)
268-A Previously, this article empowered Union to levy Service Tax. But, since tax on services
has been brought under GST, this article was deleted. (सेवा कर को हटाया गया)
269-A IGST (on inter-state trade) will be distributed between Union and states, as per the
formula by the GST Council (जीएसटी परिषद)
270 CGST (=new indirect tax of Union, which replaced Excise Duty & Service Tax)..this
CGST will be distributed between union and states as per the formula by the Finance
Commission (वित्त आयोग सिफ़ारिशों के अनुसार CGST को कें द्र और राज्यों में बाँटा जाएगा)
279-A President of India to appoint a constitutional body, “GST Council headed by Finance
Minister. ” (जीएसटी परिषद कि नियुक्ति राष्ट्रपति करेंगे, और वित् मंत्री इस परिषद का अध्यक्ष होगा)
366 🥂 Alcoholic liquor for human consumption (मदिरा) is kept out of GST. (i.e. State govt
continue to levy State Excise on its production and State VAT on its sale.)
From 1st July, 2017: Goods and Services Tax (GST: वस्तु एवं सेवा कर) became effective. Here, supplier
gets input tax credit for indirect taxes of Union & States (CGST,SGST) that he paid in the previous
stage. [GST प्रणाली में पिछले चरण में चुकाए गए परोक्ष करों के ऊपर माफ़ी/टैक्स क्रे डिट मिलता है]
22.8 🍋🛒: 🧔👩‍🦲🕉 GST C OUNCIL: COMPOSITION? जीएसटी परिषद
🧔Union representatives (2 प्रतिनिधि) 👩‍🦲🕉 States’ representatives (31)
1. Finance Minister as the -
Each state government (including UT with legislature:
Chairman J&K, Delhi & Puducherry) can nominate 1minister to GST
2. Union Minister of State for council- it may be their minister of finance or Dy.CM or
finance or revenue. (वित्त या any other minister as per their wish.
राजस्व के कें द्रीय राज्य मंत्री)
- One of them will be selected as the Vice-Chairman of GST
council.
🗳 Voting power: 1/3 (एक तिहाई)
rd
🗳
Voting power: 2/3rd
✓ If all members don’t no unanimously agree over a proposal (यदि किसी प्रस्ताव पर सर्वसम्मति नहीं, तो वोटिंग
होगा) → it’ll be put for voting → then minimum 3/4th votes required to pass the proposal.
✓ Council Meetings to proceed only with quorum of 50% of total membership.(अनिवार्य न्यूनतम हाज़िरी)

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22.8.1 🧔👩‍🦲🕉 GST Council: Functions? They’ll decide following-

1. List of indirect taxes, cess, surcharge of the union and states to be subsumed under GST-regime.
(पुराने करो को जीएसटी-व्यवस्था में सम्मिलित/ विलीन करना)
2. Decide the date from which Crude oil, Petrol, Diesel, Aviation Turbine Fuel and Natural Gas will
be put under GST regime. (Until then excise-VAT on these five hydrocarbon fuel products, will
be unilaterally decided by Union and individual States). [कौन सी तारीख़ से इन पाँच चीज़ों पर GST लगाना है]
3. Decide Standard rates (सामान्य दर) for GST (i.e. CGST, SGST and UTGST). IGST = {CGST +
(SGST or UTGST depending on destination)}
4. Decide Special rates (विशिष्ट दर) for GST, during natural disaster / calamity if required.
a. E.g. 2019-Jan, GST-Council also allowed Kerala to levy a 1% calamity cess (आपदा उपकर)
on intra-state trade for next two years, for the rehabilitation of 2018’s flood-victims.
5. Integrated GST (IGST) system during interstate commerce, and its tax-sharing.[]
6. Norms related to GST registration of businessmen. If a goods selling Bizman has turnover above
“x” lakhs, he must register @GSTN online portal, he must collect GST from consumers and
deposit it there. Originally the “x” was ₹20 lakhs for ordinary states; ₹10 lakhs for Sp.cat states &
Telengana. However, in 2019-Jan the GST council doubled this limit to ₹40l & ₹20l respectively.
Within this, some technical relaxation given to merchants selling products on E-commerce
website. (Turnover limits for service seller bizmen in Manipur, Mizoram etc separate but
hairsplittery not REQ, not here for C.A. Exam).[व्यापारी/उद्योगपति/आपूर्तिकर्ता के पंजीकरण के लिए नियम
बनाएगा]
7. Protecting the interests of the special category states (खास श्रेणी के राज्य) i.e. 8 North Eastern states
and Himalayan states (Himachal and Uttarakhand.) e.g. 2021-Sikkim proposed to levy Covid
Cess on pharmaceutical companies and electricity companies to collect money for Corona wave
2.0. But, GST Council’s group of ministers (GoM) committee rejected Covid Cess proposal.

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 However GoM committee recommended Union Govt to give ₹250 crore grant/compensation to
Sikkim for fighting Covid Wave 2.0. (कोरोना की दूसरी लहर से लड़ने के लिए सिक्किम को मुआवज़ा/अनुदान)
8. Compensation to the states for their revenue loss in switching from VAT to GST regime
(through Cess mechanism: राज्यो को उपकर द्वारा मुआवजा)
9. Dispute settlement between Union vs state(s), state(s) vs state(s). (विवाद निपटान)
So, Constitutional Amendment→ set up GST council → GST council’s meeting→ laws passed by
Parliament and Vidhan Sabhas, to implement the GST related mechanisms.
1. 🧔 Parliament has passed:
✓ Central Goods & Services Tax Act (CGST: कें द्रीय वस्तु एवं सेवा कर अधिनियम)
✓ Integrated Goods & Services Tax Act (IGST: एकीकृ त माल और सेवा कर अधिनियम)
✓ Union Territory Goods & Services Tax Act (UTGST: कें द्र शासित प्रदेश माल और सेवा कर
अधिनियम): Finance Act 2020 → amends UTGST Act to update list of UTs:
i. (new) Ladakh without legislature.
ii. (merged) 1) Dadra and Nagar Haveli + 2) Daman and Diu = treated as single UT
(because Govt merged them in 2019).
✓ Goods and Services Tax (Compensation to States) Amendment Act. माल और सेवा कर (राज्यों
को मुआवजा) सं शोधन अधिनियम
✓ Parliament originally passed them 2017, later amended in 2018 As per the
recommendations of the GST Council.
2. 👩‍🦲🕉 State Legislatures have passed State Goods and Services Tax Acts. (SGST)
3. 👳‍♀️☪️Jammu & Kashmir passed SGST Act on 8th July, 2017→ then GST system became
effective there as well. JAMMU AND KASHMIR REORGANISATION ACT, 2019 has not
abolished this SGST act. Present status is:
✓ SGST applicable on J&K (UT with Legislature:विधायिका युक्त कें द्रशासित प्रदेश)
✓ UTGST on Ladakh (UT without Legi: विधायिका-हीन कें द्रशासित प्रदेश)

👩‍🦲🕉👳‍♀️☪️Stereotyping icons for faster revision. Take no offense.

22.8.2 🔨⚖️ ️GST Council Decision not binding on States
 2022- Supreme Court observed that GST Council’s decisions are not binding on the states.
 This may create challenges in the future, if (non-BJP) states do not comply with the GST council
decisions. (सुप्रीम कोर्ट ने पाया कि GST परिषद के आदेशों को मानना- राज्य सरकारों के लिए अनिवार्य/बाध्य नहीं है.)
22.9 🍋🛒🤑 GST I NPUT TAX CREDIT (ITC: इनपुट कर प्रत्यय)

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Let’s understand with an example

in same the State (or UT without legislature) = in another State (or UT w/o LSR)
Intra-state supply (अंत:राज्य) = Inter-state supply (अंतरराज्यीय)
🧔(👩‍🦲🕉 → 👩‍🦲🕉) 🧔(👩‍🦲🕉 → 👳‍♀️☪️)
1. 🧔Union levies →CGST 1. 🧔Union levies IGST =CGST + (SGST or
2. 👩‍🦲🕉 State levies → SGST UTGST depending on destination).
3. UT without legislature levies → UTGST 2. From this IGST→ CGST goes to Union, and
👳
the other portion goes to the ‍♀️☪️
Destination State/UT without legislature.
 GST is a ‘destination based’ indirect tax on consumption of goods & services.(GST उपभोग पर लगने
वाला ‘स्थान-आधारित’ अप्रत्यक्ष कर है)
 GST is applicable on supply of goods or services. (वस्तुओं और सेवाओं की आपूर्ति पर लगता है)

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22.9.1 🍋🛒↩️👚 Inverted Duty Structure Problem in GST on Textile

An inverted duty structure in GST arises when the taxes on output or final product is lower than the
taxes on inputs, creating an inverse accumulation of input tax credit- then government has to refund
the GST to the business man. = administrative & accounting inconvenience for the govt.
Input Raw material Output Final Product Implication
Fiber (रेसा) 18% GST Apparel shirt/pants etc. Trader will accumulate
= 5% GST (वस्त्र) 13% GST credit. Govt
will have to refund.
AFTER Reform: GST council imposed Uniform 12% GST on manmade fibre (MMF), yarn, fabrics
and apparels, footwear. However, after the protests from textile industry, this decision was
postponed. (जीएसटी में एक उल्टा शुल्क सं रचना: यदि कच्चे माल जेसे के कपड़ा ख़रीद पर उधयोगपति ने 18 पर्सेंट जीएसटी टैक्स देना
पड़े और उसमें से तैयार किए गए शर्ट-पतलून की बिक्री पर 5% GST लगता हो तो, तो असल में सरकार ने उस उधयोगपति को 13%
GST refund देना होगा। इस हिसाब-किताब और रिफ़ं ड की माथापच्ची से बचने के लिए कपड़ा-जुते के कच्चे माल और अंतिम उत्पाद पर
एक समान 12% जीएसटी लगाया जाएगा । हालाँकि कपड़ा व्यापारीऑ के विरोध के चलते इस निर्णय को टाल दिया गया है।)

22.9.2 💿GST: Exempt vs ZERO RATED

💿GST ZERO RATED (0%) GST EXEMPT/NIL RATED 🥂NON-GST Supply

IF Govt levies 0% GST on IF Govt levies 0% GST, & ✋ These goods/services are NOT
the Goods/Services & DOESNOT allow Bizman to subjected to GST. They are
✅ ALLOWS bizman to claim claim ITC. E.g. Jaggery (गन्ने का subjected to other taxes. E.g.
ITC. For example: गुड़).  Petrol, Diesel etc 5
 18% GST on laptop  So if Bizman bought a hydrocarbon products=
bought by Infosys machine for crushing Excise & VAT.

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 💿GST ZERO RATED (0%) GST EXEMPT/NIL RATED 🥂NON-GST Supply
Company (Input) sugarcane → he’ll not get  🥂Alcohol for human
 0% GST on EXPORT of ITC consumption = State
Software Services  So, then. to recover the Excise & VAT
(Output). cost+tax on input, Bizman
 Here, Indian software may charge more selling
company will price of jaggery on
accumulate / gain 18% customer.
GST. ##
GST-ITC Given = YES 🤩 GST-ITC Given = NO ✋GST-ITC Given = NO ✋
 In Software EXPORT case, Infosys Company gained ITC. So, A) Govt will REFUND and/or B)
Infosys can use this ITC for adjusting/offsetting future sales within India.
 In both case A and B case, ultimately govt will not be able to earn GST from Infosys, however
government benefits from the increased exports→ jobs, GDP. Besides, more profit for Infosys in
export = more Corporation Tax for Govt. 🤩
22.9.3 💉Vaccine GST can’t be 0% ZERO RATED or “EXEMPTED” because
Present situation ✈️Export of Vaccine 🚛Domestic Sale of Vaccine
Vaccine → 0% GST (Zero Rated)
5% GST
 If Vaccines domestic sales pe 0% GST (ZERO RATED) = Businessman will accumulate large
amount of ITC. Govt will have to refund. = Less tax collection for Govt. 😰
 If Vaccines’ domestic sales pe GST EXEMPT/NIL RATED = Businessman will NOT get any ITC
⏫ 😰
on raw material /machines → he’ll price of vaccine on patient. (similar to Sugarcane
machine-Jaggery case).
वैक्सीन को GST दायरे से बाहर नहीं किया गया क्योंकि ऐसा करने पर फार्मास्यूटिकल कं पनी को कच्चे माल की ख़रीदारी पर अदा किया गया
GST माफ़ी भी नहीं मिलेगा तो ग्राहक पर क़ीमतों का बोझ बढ़ता है.
😤MORAL Outrage: Isn’t there an inconsistency in logic/will there not be inverted duty structure
problem in Vaccine mfg similar to Textile? Ans. GST council decides rates based on variety of factors
like what are the tax rates on the inputs and how much GST-losses for the government versus the
benefit to the ordinary patients etc. If you get selected in IRS they will teach it to you there. (सरकार
अपना दिमाग़ लगाकर रेट निर्धारित करती हे, अपने को झं डा लेके आंदोलन करने की ज़रूरत नहि है।)

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22.10 🍋🛒🧔🌬 C ENTRE’S INDIRECT TAXES SUBSUMED IN CGST

Table 1: कें द्र के अप्रत्यक्ष कर जो कें द्रीय वस्तु एवं सेवा कर (सीजीएसटी) में विलीन हो गए
Indirect Tax of Union Whether replaced by CGST?
⚓️For import-export: Basic - No, Customs Duty is NOT replaced with GST. It’s
Customs Duty, cess / surcharge on separate from GST-regime. So, imported goods are
it. subjected to Customs duty + IGST.
सीमा शुल्क और विभिन्न उपकर / अधिभार - Previously, imported goods were subject to Customs
Duty + education cess (शिक्षा उपकर) but Budget 2018
Related Act: Customs Act 1962
replaced it with Customs Duty + 10% Social Welfare
Surcharge (समाज कल्याण अधिभार).
- 💼Budget-2020: 5% Health CESS (स्वास्थ्य उपकर) on
imported medical devices (चिकित्सा उपकरण) for hospitals
construction in Aspirational (=backward) Districts.
⚓️On imports: Special Additional They’re not ‘replaced’ with CGST. More about them in (More
Customs Duty (SAD), in 📑Pillar#3B: World Trade Organization)
Countervailing Duty (CVD), Anti-
Dumping Duty (ADD)
Central Sales Tax CST was the Union tax levied on sale of items in inter-state
(CST-कें द्रीय बिक्री कर) trade, and it was assigned to the ‘Origin state’. It’s replaced
with IGST (= CGST + SGST) एक राज्य से दूसरे राज्य में माल सामान
बेचने पर ये कर लगता था हालांकि उद्गम राज्य को कें द्र सरकार यह रकम देता था

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 Indirect Tax of Union Whether replaced by CGST?
👨‍🏫On providing services: Service - 1994: FM Manmohan Singh introduces 5% Service Tax
tax (सेवा कर) and Krishi Kalyan Cess (सेवा कर) on telephone bills, non-life insurance and stock-
and Swatchh bharat Cess brokers [शेयर बाज़ार के दलाल].
- Over the years, more services were subjected to Service
Tax. This service tax was NOT applicable on some
services e.g. Postal service, School fees etc.
- Ultimately, Service Tax+Cess = total 15%. Abolished
after GST. [GST आने पर ये सारी चीज़ ख़त्म हो चुकी है]
👩‍🏭On manufacturing/production - Yes, completely replaced by CGST (except 5
of goods: Excise duty and various hydrocarbon fuels: petrol, diesel etc.)
Cess / surcharges on it.(उत्पाद शुल्क और - Excise on manufacturing medicinal & toiletry
विभिन्न उपकर / अधिभार) preparations containing alcohol (e.g. Cough syrups,
deodorants and perfumes) also replaced by CGST.
Related Act: Central Excise Act 1944
- Alcoholic Liquor for human consumption- falls in States’
purview so Union Excise / CGST not applicable on it.
🚭Excise duty on Tobacco products - It’s replaced with 14% CGST. Further, Union also levies
[तंबाकू उत्पादों पर उत्पाद शुल्क] + GST Compensation Cess + National Calamity
Contingent Duty** (NCCD:-राष्ट्रीय आपदा आकस्मिकता ड्यूटी) on
them.
- ** 101st Constitutional Amendment allows Union to tax
tobacco products separately.
- NCCD money goes to Public Account → National
Disaster Response Fund set up under Disaster
Management Act, 2005.
- 👛Budget-2023: increased NCCD (National Calamity
Contingent Duty) on cigarettes
⛽️Excise duty on - Once GST council decides the date they’ll be brought
production/refining of Crude oil, under GST-regime. अभी जीएसटी नहीं लगता. भविष्य में जीएसटी
Petrol (Motor Spirit), Diesel, परिषद तय करेगी उसके बाद लगेगा.
Aviation Turbine Fuel and natural - Until then refineries / oil-drilling companies have to pay
gas: कच्चे तेल, पेट्रोल (मोटर स्पिरिट), डीजल, excise duty+cess/surcharges to Union for production /
विमानन टरबाइन ईंधन और प्राकृ तिक गेस पर
manufacturing of these items. (and petrol pump owner,
उत्पाद शुल्क
etc will have to pay VAT to states on their sale.)
- Presently, Petrol & Diesel are also subjected to Union’s
Road and Infrastructure Cess (सड़क और बुनियादी ढांचा उपकर)
its ₹₹ goes into Public Account→ Central Road &

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 Indirect Tax of Union Whether replaced by CGST?
Infrastructure Fund under Central Road Fund Act 2000.
🍋🤷‍♀️Corporation Tax, Income  👿Arre Bhai, they’re 🍋🤷‍♀️DIRECT Taxes of Union, so
Tax, Capital Gains Tax etc [निगम कर, they are not replaced by GST. ये सब प्रत्यक्ष कर है.
आयकर और पूंजीगत लाभ कर]  The GST is meant to replace 🍋🛒🤷
‍♀️INDIRECT Taxes
only. जीएसटी के वल परोक्ष करों के साथ जुडा है

22.11 🍋🛒(👩‍🦲🕉)🌬 S TATES’ INDIRECT TAXES SUBSUMED IN SGST

Table 2: राज्यों के अप्रत्यक्ष कर जो राज्य वस्तु एवं सेवा कर (एसजीएसटी) में विलीन हो गए

👩‍🦲🕉: Indirect Tax of State Govt. → whether replaced by SGST?

🛒On sale of goods: State Value Added Tax ✅Yes, By default VAT is replaced by SGST, but read
(VAT) (In some states called “Commercial below:
tax” वाणिज्यिक कर)
🛒⛽️State VAT on selling of Crude oil, ✋Once GST council decides the date, these’ll be
Petrol (Motor Spirit), Diesel, Aviation brought under GST-regime. Until then, petrol pump
Turbine Fuel and natural gas [ईंधन बिक्री पर राज्य owners, LPG gas distributors etc. will have to collect
सरकार की वेट कर] VAT (+ any cess / surcharges) from the customers
and deposit to the state government.
- 🥂 State Excise on production of liquor ✋No, they're completely kept out of GST. [unlike
for human consumption (मानव उपभोग के above ⛽️petro items where GST council will
लिए बनी शराब के उत्पादन पर राज्य उत्पाद शुल्क) implement it after “x” date]. Since inception of our
- 🥂 State VAT on sale of liquor for Constitution, the power to tax 🥂 liquor was with

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 human consumption. (मानव उपभोग के लिए 👩‍🦲🕉:States, & it constituted a major source of
बनी शराब/ मदिरा की बिक्री पर राज्य वैट) revenue for them, so States were unwilling to hand it
🧔
over in GST regime. Had Modi govt tried to bring
liquor in GST-regime, then majority of the Vidhan-
Sabhas may not have passed this Constitutional
Amendment Bill.
⚡️Electricity Duty बिजली शुल्क ✋No, it’s not replaced by SGST
🚗Road Tax on vehicles. ✋No, it’s not replaced by SGST. Its status as
direct/indirect tax is vague because in some states/
vehicle categories: buyer himself deposits while in
some cases, seller required to collect & deposit.
🚗Purchase tax on vehicle, boats, and ✅Yes replaced by SGST
animals-खरीद कर
🏗Advertisement tax on hoarding, banners ✅Yes replaced by SGST
⛱Luxury tax at Hotels, Spas, Resorts etc.-
etc.- विज्ञापन कर
✅Yes replaced by SGST
अय्याशी विलासिता कर
🚛Entry tax/Octroi for entry of goods in an ✅Yes replaced by SGST
area -प्रवेश के लिए कर , ऑक्ट्रोई
🐎Taxes on Lottery, horse race betting, ✅Yes replaced by SGST. Since they’re ‘sinful/demerit
gambling etc. लॉटरी, घोड़े की दौड़ सट्टेबाजी, जुआ goods’, they’re subjected to highest slab : 14% SGST
+ 14% CGST = 28%
📽Entertainment Tax on Cinema, Live ✅Yes, replaced by SGST unless levied by a local body.
Performance shows etc.- मनोरंजन कर e.g. Kerala local bodies 10% on movie tickets.
🍋🤷‍♀️Income tax on Agriculture, 👿Arre Bhai, they’re 🍋🤷‍♀️DIRECT Taxes of State so
Professional tax, Property tax, Stamp Duty, not replaced by GST. The GST is meant to replace
Land revenue [कृ षि आय कर, व्यावसायिक कर इत्यादि] 🍋🛒🤷‍♀️INDIRECT Taxes only.
📈
22.11.1 GST Revenue Collection Figures: जीएसटी राजस्व प्राप्ति के आंकड़े
GST registered suppliers have to deposit the GST at the GSTN portal on monthly basis. In monthly
collection of GST, there are ups and downs based on seasonality.
Year/Month 2021-May 2022-May 2022-Dec
GST collection ₹97,000 cr ₹1,40,885 cr ₹1,49,507 cr

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 Table 3: कौनसे करो में सबसे ज्यादा आमदनी होगी सबसे ज्यादा आमदनी होगी

👜🥻Budget-2023 🛒GST> 🏢 Corporation>👨🏻IT >⛽️Excise> ⚓️ Customs

👛Budget-2022 Same as above.
Budgets from 2019, Sometimes Corporation tax was #2, sometimes income tax was #2 but
2020, 2021 poor cost benefit memorizing all that so I am deleting.
Budgets Before 2019 🏢 Corporation> 🛒GST>👨🏻IT >⛽️Excise> ⚓️ Customs
22.12 🍋🛒👨‍🏫 GST R ATES ON SERVICES =0%: सेवाओं पर जीएसटी की दर
Which of following is ZERO Rated & which one is NIL Rated/EXEMPT? Ans. Poor cost:benefit.
1. Services provided by union government, state government, local bodies, constitutional bodies,
department of post (except premium services like speed post), Railways (except premium
services like first class AC ticket)
2. Services by Reserve Bank of India and other financial regulators.
3. Services by Banks/NBFCs in connection with Government sponsored banking, insurance and
pension schemes. (Refer to financial inclusion handout)
4. ESIC, EPFO services to the subscribers, Group insurance schemes for paramilitary forces
5. Religious, charitable activities, cooperative societies, Public libraries, Public toilets,
Crematorium, Burial grounds.
6. Rent on residential accommodation (किराए पर लिया गया रिहायशी मकान)
7. Aviation Services in North-eastern States (उत्तर पूर्व में उड्डयन सेवा)
8. Transport services to milk, (physical/paperbased) newspaper, defence equipment, disaster relief
material
9. Doctors, para-medics, Ambulance, Blood bank.
10. Agriculture warehouse, cold storage, renting of Agro machinery, Contractor who is supplying
farm labourers, APMC (Agricultural produce market committee)
11. Agriculture pre-processing of food e.g. ripening, waxing, retail packing, labelling of fruits and
vegetables which do not change essential characteristics of the said fruits or vegetables.
12. Veterinary doctor, Animal husbandry related services except racehorses

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13. 👨‍🏫 Educational services by Educational Institutes (like schools colleges universities Vocational
institutes. NOT COACHING Institutes)
14. Entrance Exam fee collected by Union or state government orgs.
15. Private training partners in government skill development schemes
16. Sports training and events by recognised sports body
17. Sports, Art, Culture etc. clubs with member-fees less than “X” rupees.
18. Circus, dance, drama or ballet, award function, concert, pageant, musical performance or any
sporting event where admission fees is less than “X” rupees.
19. Admission to a museum, national park, wildlife sanctuary, tiger reserve, zoo, ASI-recognized
Heritage sites.
20. 2020-Oct decision: satellite launch services supplied by ISRO, Antrix Corporation Ltd. and NSIL
📑
would be exempted. (More about these organizations in (More in Pillar#5: communication
infrastructure)
21. Any service EXPORTED outside India (THEY ARE “ZERO RATED Export”)
In the Pre-GST era, most of above services were having 0% Service Tax. वर्तमान में उक्त पर 0% जीएसटी
लगता, उसी प्रकार भूतकाल में जब ‘सेवा-कर’ था तो वो भी इनमें से ज्यादातर सेवाओं पर 0% था.

If a given service is not in the above list, then it will be subjected to GST: <see next table>
Example of services (कु छ उदाहरण सेवाओं के जिन पर GST लगता है) iGST Rate

Plumbing, carpentering, Ads in print media, Ebooks 5%

- Accommodation in hotels, inns, guest houses with daily charges upto ₹7500/- 12%
- Movie tickets, Engineering related services

 👨🏫
‍ Coaching Services, E-Books, e-newspaper, e-music, 18%
 WebSeries/OTT platforms-AmazonPrime, Hotstar etc.
 Ads in digital media, Legal and accounting services
 DTH/TV channels, Movie tickets above Rs.“x”, 5 star Hotel rooms

🏇Gambling, Horse Race club, Casino, online gaming. 28%

For more, you may refer to: https://cbec-gst.gov.in/gst-goods-services-rates.html

22.13 🍋🛒GST ON ACTIONABLE CLAIMS

 An actionable claim represents a legal right to demand/recover something (money, goods,
services) from another party- subject to terms and conditions.
 e.g. loan given by bank, credit card, Insurance policy, unpaid invoices, rent, etc.
 Actionable claims are subjected to GST. But SOME OF THEM may have separate calculation
methods.

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 Matter Amount GST
(A) Loan given / credit card spending ₹10 lakh N/A
limit given
(B) Application processing fee of Bank ₹500 18% GST
loan/credit card
(C) Late fees / penalty fee (if/when ₹100 18% GST
applicable)
Total A+B= ₹10,00,600 GST only on the application fees (₹500)
and penalty ( ₹100)
🚩👶🏻 FAQ: How is GST counted on rent and unpaid invoices etc? Ans. We are not here for C.A.
exam. 🐎Be a race-horse. Only focus on the track. 🐂Don’t loiter like a street-bull.

22.13.1 🎲 GST on Actionable Claims → Lottery / Online Gaming

Casino and online gaming apps owner had started court-litigation regarding the definition itself - to
avoid paying taxes. Their argument is as follows:

🧛‍♂️Casino/Gaming Owners’ demand 👩🏻‍⚖️GST council decision

🙏Lottery/online gaming is not actionable claim. Because ✋It is an actionable claim and we
there is no guarantee of winning. So don’t ask for GST. will demand GST.
🙏ok then plz have 18% GST on game of skill (e.g. Chess) ✋28% GST on everything. We
and 28% GST on 🎲 game of luck (e.g.Roulette, Dice) don’t care if it is a game of skill or
game of luck.
🙏still if u want to charge GST on it → then GST should be ✋We’ll charge 28% GST on entire
only on the fees. Plz don’t ask GST on the entire amount amount. See next section 👇
(=full bet value).

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22.13.2 🎲GST → Lottery / Online Gaming → GST on full bet value (gross value)?
Components Amt 🧛‍♂️Companies’ demand 👩🏻‍⚖️GST council
Bet ₹ 80 🙏Plz don’t ask GST on this rejected
Platform Fees ₹ 20 🙏Plz ask only 18% Gst on this rejected
Total (Full Value of
₹ 100
🙏Plz don’t ask GST on this full 28% GST on ₹100
Bet) / gross revenue bet value!

22.13.3 🎲GST → Lottery / Online Gaming → on ‘entry bets’ but not on ‘winnings’

22.14 🍋🛒🍋 GST R ATES ON GOODS : 0%: सामान पर जीएसटी की 0% दरें

Which of following is ZERO Rated & which one is NIL Rated/EXEMPT/0%? Ans. Poor cost:benefit.
1. Fresh milk, Pasteurized Milk
2. Live animals (except race horses), poultry, pigs, shrimps, fishes, insects etc
3. FRESH, “UNBRANDED” and not ‘Prepacked’ animal products eggs, meat, honey, rawsilk etc.
4. FRESH, “UNBRANDED” and not ‘Prepacked’ flowers, leaves, fruits vegetables, unroasted coffee
beans & tea leaves, Salt.
5. Bread (**except when served in Restaurant/ pizza)
6. Prasadam supplied by religious places. (धार्मिक स्थानों द्वारा दिया जाने वाला प्रसाद/गंगाजल/पूजा सामग्री)
7. Deities made of stone, marble or wood;
8. Puja Samagri like Rudraksha, Panchamrit, Gangaajal
9. Rakhi, Kumkum, Bindi, Sindur, Plastic / glass bangles without precious metal.
10. Human blood, contraceptives, sanitary napkins, tampoons, hearing aid
11. Tocilizumab (Corona Drug), Amphotericin B (Black Fungus Drug) (From 2021-Jun)
12. Electricity, Firewood (बिजली और जलाने की लकड़ी)

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13. Judicial / Non-judicial stamp papers, Court fee stamps, ordinary post cards etc.
14. Printed Books; physical edition of Newspapers, journals, periodicals irrespective of whether they
have advertisement or not.
15. Khadi sold by Khadi and Village Industries Commission(KVIC) certified outlets
16. Gandhi topi, Charkha, national flag, Earthen pot, clay idols
17. Agricultural hand tools like spade, axes, sickle.
18. When a constitutional / public authority auctions the gifts received by him.
19. Spacecraft, satellites and their launch vehicles.
20. Import of specified defense goods not manufactured in India
21. Free sample or gift given. E.g. “Offer: Toothpaste pe toothbrush FREE” then only Toothpaste
subjected to GST. No gst on that free-toothbrush. (ग्राहक को लुभाने के लिए मुफ़्त में दिया जाने वाला सैंपल)
22. Any Goods EXPORTED outside India (technically called “ZERO RATED Export”)
If a given goods is not in the above 0% list (and not kept out the GST-regime like Petrol-Diesel-
Daaru), then it will be subjected to GST: such as following:

22.14.1 🍋🛒🍋 GST Rates on Goods : 0% removed

BEFORE-2022 From 2022
0% GST on cereals (wheat rice etc), flour (aata), 5% GST if they’re
pulses (daal), curd, Lassi, puffed rice (poha) ✅ PREPACKED and
✅ Labelled and
✅ packet size is smaller than 25KG or 25 litres
0% Maps and Bank’s Chequebooks 18% GST
FAQ: Apart from above items, which other XYZ food item pe above rule applicable or not?
Ans. Newspapers did not bother to highlight but you can satisfy curiosity by doing self-PHD on this
list: https://cbic-gst.gov.in/gst-goods-services-rates.html

22.14.2 🍋🛒🍋 GST on goods- various slabs

SOME Example of Goods iGST

Semi-precious stones like agate, amber, topaz, lapis lazuli etc. 0.25%

Diamonds cut and polished (this new slab created in 2022-Jul) 1.50%

Jewellery, Pearls, Gold, platinum, silver etc. 3%

Milk powder, Baby food, Pizza bread, Mineral ores, liquid jaggery (raab), 5%
Ethyl Alcohol used in blending with petrol. Certain medicines
💊Corona related drugs/devices: 💉Vaccines, Remdesivir, Oxygen Concentrator,
Ventilator, Covid Testing Kits, Pulse Oximeters, 🌡 Temperature check equipment, 🧴
Hand Sanitizer, crematorium furnaces, Ethanol meant for blending with petrol

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 SOME Example of Goods iGST

Fruit Jams, Butter, Cheese, Canned Fish, Sugar cubes, Textile, certain medicines & 12%
surgical items, Railway wagon, electric car & its chargers
🚑Ambulances, 🧱Bricks
➢ Ice cream, cakes, biscuits; 18%
➢ Soap, perfume, paint; Electronics, Computer & Mobile accessories
➢ Certain medicines, Alcohol based hand sanitizers
➢ Paint, Polish, Wax and similar petroleum products

Luxury goods, Sin Goods, Demerit goods (विलासिता /पाप/ अवगुण सामान): 28%
🚭
➢ Caffeinated Beverages e.g. Red bull, Tobacco products, Pan Masala
➢ Cement, Granite, Marble, Air Conditioners, TVs of “x” size
➢ Motor vehicles, Aircrafts, Yacht, Guns, Lottery ticket, online games

🥂
22.14.3 GST on Extra Neutral Alcohol (ENA)?
 ENA is made from foodgrains and sugarcane molasses (molasses is a byproduct left after
crushing of sugarcane.)
 ENA has neutral smell and taste. (कोई स्वाद/सुगंध नहीं)
 ENA is colourless liquid, it has no impurities. (रंगहीन. कोई अशुद्धि नहीं)
 ENA is used as raw material in cosmetics, medicines, ink, and liquor.

Earlier there was confusion about taxes on ENA. But 2023-Oct: GST Council has given above
clarification. That’s why news-headlines saying “GST Council cedes right to states on taxing ENA used
in liquor for human consumption” (जीएसटी परिषद ने मानव उपभोग के लिए बनाई जाने वाली दारु/मदिरा में इस्तेमाल होने
वाले ईएनए पर कर लगाने का अधिकार राज्यों को सौंप दिया)

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 🌾
22.14.4 GST on Millets? (2023)
 Millets = foodgrains such as Jowar (sorghum), Bajra (pearl millet), ragi (finger millet),Kodra
(Kodo millet)
 2023 celebrated as International year of millets by Food and Agriculture Organization (FAO)
and United Nations (UN). So, GST council gave following clarification
Millet flour / its products (e.g. biscuits) pe GST BEFORE AFTER
Pre-packed & branded e.g. Britannia Ragi biscuit, Patanjali-Atta 18% 5%
Loose /unbranded (छु ट्टा/खुल्ला बेचा जाए. बिना ब्रांडेड थैली में पैक किए) 0% 0%
🔠❓MCQ. Consider the following items:(Asked in UPSC-Pre-2018)
1) Cereal grains hulled 2) Chicken eggs cooked
3) Fish processed and canned 4) Newspapers containing advertising material
Which of the above items is/are exempted under GST (Good and Services Tax)?
(a) 1 only (b) 2 and 3 only (c) 1, 2 and 4 only (d) 1, 2, 3 and 4
22.15 🍋🛒⏰🗓 GST C OMPOSITION SCHEME (जीएसटी सं रचना योजना)

A relief given to small traders. Instead of depositing GST money to Govt on monthly basis, they may
deposit it 3-3 months. (It has more technical rules. But we’ll NOT WASTE TIME in CA-giri).

22.15.1 🍋🛒 💸🤏 ✋😈
: ( ) 1% GST deposit in cash for controlling fake ITC claims
Faded/outdated. Deleting this topic for Prelims-RAFTAAR
22.16 🍋🛒↩️ R EVERSE CHARGE MECHANISM (विपरीत प्रभार की व्यवस्था)

कु छ ख़ास मामले जहाँ विक्रे ता नहीं बल्कि ग्राहक ने खुद सरकार को GST जमा करना पड़ेगा
- Normally, a seller must collect the GST tax from buyer & deposit to the govt.
- However, in selected cases when seller is not registered with GST number, while buyer is
registered with GST number, then buyer will have to deposit the tax to government.
- How / when / why = NOT IMP, EXCEPT the MCQ word Association that ‘Reverse Charge
Mechanism’ is associated with GST, just like ‘E-way bill’ mechanism is associated with GST.

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22.17 🚛🧾 E- WAY BILL SYSTEM (ई-वे बिल प्रणाली) FROM 2018 ONWARDS

Figure 1: checkpost पे उत्पीड़न कम होगा. Img source: Gangaajal movie

- When goods worth ₹50,000/> are moved within a state (intrastate) or from one state to another
(inter-state), then the truck/transport/cargo/shipping/aeroplane company must generate E-way
Bill from GSTN Portal / App / SMS.
- E-way bill’s self-declaration (that our truck is carrying “x” type of goods worth “y” value) reduces
the scope of bribery, delay, red-tape, harassment at the check post, thereby ensuring a hassle-free
rapid movement for transporters throughout the country.
- E-way bill system became effective from 2018.

22.17.1 🧾E-Invoice from 2022 onwards

E-Bill E-Invoice
 Businessman selling goods/services. It’ll
Who generates Cargo/courier/transport
also contain info about E-bill (courier
it? company delivering goods
company)
 😍Separate E-bill not required. Its info
embedded inside E-Invoice itself!
😍Objective? 😍Ease of transporting goods  😍improve the tax-surveillance and fight
against false ITC-credit claims through
fake invoices.
GST council announced E-invoice (=bill generation through govt’s online portal) from January-2020
with following deadlines
GST merchant’s annual turnover more than _ _ _ then E-Invoice compulsory from _ _ _
more than ₹500 cr 2020^^
more than ₹10 cr 2022^^
^^Note: above deadlines from Government’s India Yearbook. However, due to Corona, deadlines
have been deferred. Deadlines keep changing, notIMP. (स्थगित किया, बाद में लागू करेंगे)

22.18 🧔 → 🤑(👩‍🦲👳‍♀️) C OMPENSATION TO STATES: WHY?

Recall Definition: GST is a destination based indirect tax on consumption of goods and services.
(जीएसटी वस्तुओं और सेवाओं के खपत-स्थान पर आधारित अप्रत्यक्ष कर है।)
✓ For the Union govt, largest source of tax collection were corporate tax and personal income tax.
Both are direct taxes and therefore kept out of the GST regime.

(Batch:PCB10-Prelims) Mrunal’s Economy Pillar#2A2: Budget → Revenue Part → Indirect Taxes & GST → Page 365
✓ For the state governments, VAT was largest source of tax income, but it is to be subsumed under
GST, along with other indirect taxes, cess and surcharges levied by the states. Therefore, states
were afraid their revenue income will ⬇.[राज्यों की आमदनी का मुख्य साधन “वैट” हटा दिया इसलिए वे चिंतित थे]
✓ Secondly, GST is a destination-based tax, therefore industrialized states are not happy with it.
Consider a Nano car manufactured in Tata's Plant in Gujarat and sold in Uttar Pradesh.
(Destination) UP gets SGST, While (Source) Gujarat gets nothing. Although reverse is also true-
UP's bicycle sold in Gujarat, then Gujarat will earn SGST and UP will get nothing.
✓ But the industrialized states such as Gujarat, Maharashtra, Tamil Nadu, Haryana feared they’d
get less SGST revenue in absolute terms compared to erstwhile VAT regime.
22.18.1 🧔 → 🤑(👩‍🦲👳‍♀️) Compensation to States: HOW?

Parliament enacted GST Compensation to States Act 2017 (राज्यों को मुआवजा अधिनियम)
✓ Under its provisions, GST council recommended Union Govt to impose “GST Compensation
Cess” (जीएसटी क्षतिपूर्ति उपकर ) on specified luxury & demerit goods, like
○ pan masala (60%), tobacco products (cess varies as per product),
○ aerated water & Caffeinated Beverages (12%), coal / lignite (₹400 per tonne),
○ motor vehicles-aircraft-yacht (3-22% depending on type of vehicle).
The cess thus collected is used for compensating States for their revenue losses during the first five
years since inception of GST. i.e. 1st July 2017 to 30th June 2022
Table 4: GST Compensation to States Act 2017 (राज्यों को मुआवजा अधिनियम)
Section-  It contains formula for compensation: State's Projected Revenue = 14% annual
7 compound growth rate than its 2015's VAT collection (base year). If current year
SGST collection is less than Projected Revenue → Union to pay compensation
 (राज्य का " अनुमानित राजस्व" उसके 2015 के वेट अनुपात की 14% वार्षिक वृद्धि के साथ की गिना गया। यदि
राज्य को एसजीएसटी मे उससे कम आमदनी हुई तो उस राज्य को, पहले 5 वर्षों के लिए, कें द्र मुआवजा देगा- जनता
पर जीएसटी क्षतिपूर्ति उपकर लागू करके । )
Section-  GST Council can recommend extending GST compensation cess beyond the
8 period of five years. (5 साल से के पश्चात भी उपकर जारी रखने की सिफारिश कर सकता है. )
✓ Compensation available only for SGST. It is not given to The Union Territory Without
Legislature (because they've UTGST e.g. Ladakh)
✓ State Liquor Taxes are outside GST, so Bihar / Gujarat / Nagaland / Lakshadweep / Parts of
Manipur can’t ask more ₹ for compensation from GST for having liquor prohibition (मद्य-निषेध).
Year → 2018- 2019- 2020-21 2021-22 2022-23 2023-24
19 20
GST 95k cr 98k cr 1.10 Lakh Cr 1.05 Lakh 1.30 lakh cr 1.45 Lakh cr
Compensation expected but in cr.

(Batch:PCB10-Prelims) Mrunal’s Economy Pillar#2A2: Budget → Revenue Part → Indirect Taxes & GST → Page 366
 Cess प्रतिपूर्ति reality hardly
उपकर 85,000cr earned
😰Controversy?
 Before Corona: since 2019-August onwards payment pending. Also known as “GST Arrears
problems” (मुआवजे की रकम बकाया है) . 2019-Dec: only partial compensation released. FM Nirmala. S
says, “Sales are ⬇, so we have not collected enough cess money ₹₹ to release the compensation.”
 Non-BJP states first complained to GST council, but it did not help much. So some State Govts
even threatened of going to Supreme Court, which hints cooperative federalism facing problems.
However, later on Union government released the money to the States.

22.19 🤧😷:🧔 → 🤑(👩‍🦲👳‍♀️) GST C OMPENSATION & BACK2BACK LOANS

 2020: Due to Corona lockdown, State government and very little amount in SGST.
 So, States started demanding ₹2.35 lakh crore in GST compensation from Union.
 Union govt's initial reaction was, "Under the GST compensation Act, we are not legally obliged
to pay this large amount (₹2.35lcr) because of unexpected circumstances / 'Act of God' / 'Force
Majure' like Corona. We can only pay the originally estimated amount (₹97kcr)."
 However the Attorney General opined that GST Compensation Act does not provide such
exceptions; Union ought to pay the entire loss amount ₹2.35lcr. (अटॉर्नी-जनरल का मानना है कि कें द्र ने पूरी
रकम देनी चाहिए क्योंकि जीएसटी मुआवजे के कानून में कोरोनावायरस जेसी आपातकालीन चीजों मे कें द्र कोई माफी /अपवाद नहीं)
⏬
 But, corona → sales → GST compensation cess collection . So, the union offered two ⏬
options to borrow money for the compensation (क्योंकि जीएसटी में आमदनी वैसे भी कम है, इसलिए कें द्र ने
राज्यों को पैसा उधार लेकर मुआवजा चुकाने के विकल्प दिए….. )
 We will NOT study the difference between those TWO options because it is technical/outdated.
Just memorize that States accepted ‘modified’ version of Option#1 and they got Rs.1.10 lakh
crore. (उन दो विकल्पों मैं क्या मुद्दे/भिन्नताए थे वो हम पढ़ने नहीं बैठेंगे। बस रट्टा मार लो कि राज्यों ने मुआवज़े के लिए विकल्प#1
का एक सं शोधित स्वरूप पसं द किया था। )

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22.19.1 🤧😷🔪[🧔 → 🔪(👩‍🦲👳‍♀️Back to Back loans: Beneficiary States
Who? List of States and UT with Legislature
😿Will not get Some North Eastern State don’t have any SGST-shortfall → So they will not
get any compensation / back to back loans as per Section-7 formula.
🤑Will get Remaining States & 3 UT (with legislature) =they will get the money e.g.
Andhra, Assam, Bihar, Goa, Gujarat, Haryana, Kerala etc and Union territories
of Delhi, Jammu and Kashmir, Puducherry

22.19.2 🤧😷🔪 ⚖️
: GST Compensation Cess Extended till 2026
GST Compensation Cess Originally 😷
After Corona crisis & Back2Back loan matter
Expiry date → 30/June/2022 31/March/2026 तक सरकार लेती रहेगी ये उपकर/सेस।

22.20 🍋🛒🕵️‍♂️GST R ELATED ORGANIZATIONS (सं स्थाए)

We already learnt about the GST council in the previous pages of handout. Apart from that…
🕵️ 👩🦲👳
22.20.1 ‍♂️ ‍ ‍♀️Group of Ministers (GoM: मंत्रियों का समूह)
These committees are set up by GST Council to look into specific issues from time to time. Example
Some examples of GoM headed by _ _ Objective ↡ (for example)
2021: Conrad Sangma, Meghalaya CM Sangma to examine GST rates of Covid vaccine, drugs
and related items.
22.20.2 ⚖️🕵️‍♂️🍕 National Anti-Profiteering Authority (NAA/NAPA)
राष्ट्रीय मुनाफाखोरी निरोधक प्राधिकरण
 GST provides input credit for most of the indirect taxes of the Union and State Govt. So,
entrepreneur’s cost of production should ⬇, then he should also ⬇ prices for consumers, yet
many companies had not reduced their prices e.g. Dominos Pizza, Nestle, Hindustan Unilever
toothpaste & detergents etc. [टैक्स क्रे डिट मिलने पर उत्पादन की लागत कम होती है तो वस्तु सस्ती होनी चाहिए. हालाँकि
कु छ मुनाफ़ाख़ोर कं पनियां चीज़ों के दाम सस्ते नहीं कर रही थी तो फिर उन्हें सबक़ सिखाने के लिए ये सं स्था बनायी गई]
 So, Union govt set up NAA under Central Goods & Services Tax Act, 2017 to penalize them.
 This Authority shall cease to exist after 2 years from birth (2017+2= 2019), unless GST council
renews it.(हालाँकि जन्म के दो साल में ही इस सं स्था को अपने आप बं द हो जाना था, सिवाय कि GST परिषद आयु बढ़ा दें)
 GST council extended it till 2022-Nov (कार्यकाल बढ़ाया)
 2022-Dec: NAA stops working. Now matters related to GST anti-profiteering will be looked after
by the Competition Commission of India. CCI is a statutory body under Ministry of corporate
Affairs, setup under Competition Act, 2002 (Ref: Pillar#1C) (भारतीय प्रतिस्पर्धा आयोग)

🕵️ 🍼
22.20.3 ‍♂️ Authority for Advance Ruling (AAR-अग्रिम फै सलों के लिए प्राधिकरण)
 Diabetic foods supplements are subjected to 12% GST whereas pasteurized milk is subject to 0%
GST. If Amul plans to launch ‘Amul Camel Milk' with bottle label: "Camel milk is easy to digest,
high in an insulin-like protein, hence beneficial for diabetic person."

(Batch:PCB10-Prelims) Mrunal’s Economy Pillar#2A2: Budget → Revenue Part → Indirect Taxes & GST → Page 368
 So, whether Amul’s product be subjected to 0% GST or 12% GST? An entrepreneur would like
to such have clarification from Tax authorities before starting the production, lest he gets
tangled in raids and litigations afterwards. (छापेमारी और मुकदमेबाजी द्वारा उत्पीड़न किया जाना)
 So, CGST Act, 2017 provides for a statutory body called Authority for Advance Ruling (AAR),
where entrepreneur can seek such advance clarification.
 Higher appeal? Appellate Authority for Advance Ruling (AAAR: अग्रिम फै सलों के लिए अपील प्राधिकरण).
🤩Benefit? Reduces scope/opportunity for litigation/harassment/bribe demand → Ease of doing
business (व्यापार करने में आसानी) → helps attract Foreign Direct Investment (FDI: प्रत्यक्ष विदेशी निवेश).

🕵️ 🕵️ 🕵️
22.20.4 ‍♂️ ‍♂️ ‍♂️GST tribunal (GSTAT) (2023)
GST related cases are heard in the following sequence:
LEVEL DESCRIPTION
1. Adjudicating Authority Additional/Joint/Deputy/Assistant Commissioner/
Superintendent- (Depending on the case/amount)
2. First Appellate Authority Joint Commissioner/ Additional Commissioner / Commission -
(Depending on the case/amount)
3. Goods and Services Tax  Setup based on report of Dushyant Chautala committee. By
Appellate Tribunals amending the CGST Act. So, it’s a statutory/Quasi-Judicial
(GSTATs-2023) body. (वैधानिक/अर्द्ध-न्यायिक सं स्था है)
Composition  GSTAT- HQ @Delhi & benches in different States/cities.
1) 👨🏻⚖️
‍ ️President of  Will hear cases related to CGST Act, UTGST Act, SGST Act,
GSTAT** (Judge of iGST Act. Thus, it is the common forum of dispute resolution
SC/HC) dealing with Centre and States’ GST laws.
2) 1 Judicial member  This will help reducing the case pendency at HC/SC.
3) 1 Technical member
(from Union side)
4) 1 Technical member
(from States’ side)
4) HC and 5) SC Self-explanatory. (स्वयं स्पष्ट है)
👨🏻⚖️
**Note: Don’t confuse this post “ ‍ ️President of GSTAT” with “President of India” (Droupadi
Murmu). They are separate posts/people. (इधर हमारे देश के राष्ट्रपति की बात नहीं हो रही है. यह अलग नौकरी/व्यक्ति है)

🕵️
22.20.5 ‍♂️GST Fitment Committee (जीएसटी फिटमेंट समिति)
 Fitment committee contains revenue officials from both Union and states.
 They examine the demands / proposals related to changing GST on particular item. (किसी वस्तु या
सेवा पर जीएसटी दरों में बदलाव के प्रस्ताव पर समीक्षा करते हैं)
 They submit the report to GST Council and then GST Council will take final decision. (फिर ये अपनी
राय जीएसटी परिषद को देते हैं। और जीएसटी परिषद अंतिम निर्णय लेगी)
 e.g. (2023) Tobacco industry demand reduction in GST. → fitment committee suggested “don’t
reduce.” → GST council didn’t reduce.

(Batch:PCB10-Prelims) Mrunal’s Economy Pillar#2A2: Budget → Revenue Part → Indirect Taxes & GST → Page 369
 However, the recommendations of this committee are not always on the GST Council. (इनकी
सिफारिशें जीएसटी परिषद पर बाध्य नहीं है. वह तो जीएसटी परिषद खुद के विवेक/मर्ज़ी से तय करेगा.)

🕵️ 💻
22.20.6 ‍♂️ GSTN Network (Not for Profit Company- मुनाफ़ा रहित कं पनी )
2013: Goods and Services Tax Network (GSTN) “Not for Profit” Private ltd. company set up under
the Companies Act.
Ownership→ 2013-18 Ownership from 2018
Union govt 24.5% 50%
All states of India (incl. Delhi & Puducherry) 24.5% 50%
Non-Government Financial Institutions such as 51% 0%
HDFC Bank (20%), ICICI Bank (10%), NSE (10%),
LIC Housing Finance (10%)
 This company runs the GSTN online portal, where the suppliers register themselves, pay their
GST, claim input tax credits, generate e-way bills etc. [Infosys ltd. helped develop this
webportal.]
 GSTN Network ltd. also provides the IT infrastructure and software services to GST officials for
monitoring the tax compliance, issuing notices, data mining etc.
 In future, such data could also be shared with the RBI’s Public Credit Registry (PCR: ऋण की
सार्वजनिक रजिस्ट्री) so the lenders can have a complete picture of the borrower’s business.
 GST Suvidha Providers (GSPs): These are selected private IT/Fintech companies that develop
apps / software to help the taxpayers interact with GSTN portal. E.g. Zoho Accounting Software.
22.20.7 📲💻 Project Saksham: Digital integration (2016)
CBEC/CBIC launched, “Project Saksham” for data-coordination among following 3 portals
Name of Tax Excise Duty Customs duty GST
Associated Web portal ACES SWIFT GSTN
- Separately, 2018: Indian Railways also launched Project Saksham but with different objective of
employees’ training and skill-upgradation for doing railway related work.
- CBIC has Antarang portal for internal communication among CBIC officers.
- CBIC also launched portals such as i) ECTS (Electronic Cargo Tracking System), ii) Risk
Management System (RMS), iii) Indian Customs Compliance Information Portal (CIP) etc.
What is their objective? how do they work? Ans. not important.
22.20.8 🔢🔠 HSN and SAC Codes
- Service Accounting Code (SAC) are used for classifying services for GST rates. e.g. coaching
services = SAC Code 999293 = 18% GST.
- Harmonized System of Nomenclature (HSN) developed by the World Customs Organization
(WCO) is used for classifying goods for GST rates. e.g. Jarda scented tobacco = HAC code
24039930 = 28% GST.

(Batch:PCB10-Prelims) Mrunal’s Economy Pillar#2A2: Budget → Revenue Part → Indirect Taxes & GST → Page 370
- 🤩Benefit? HSN-SAC coding helps in computerised accounting, billing, digitization, surveillance
& big data analytics by Tax authorities.

22.21 🔢💳🔠 PAN VS GSTIN VS AADHAR

Table 5: ✋don't lose too much sleep over it unless preparing for State Tax Dept Exams
Difference PAN: स्थायी लेखा सं ख्याक GSTIN: वस्तु एवं सेवा कर पहचान सं ख्याक
Permanent Account Number Goods and Services Tax Identification Number
Full form issued by the Income Tax issued by the Central Board of Indirect Taxes &
Department Customs (CBIC)
Suzlon Energy ltd: Suzlon Energy ltd:
example
AADCS0472N 24AADCS0472N1Z8
10 digit alphanumeric number 2 digit state code+ 10 digits PAN number + 3
Format (=containing both alphabets and characters = total 15 characters (=containing
numbers) both alphabets and numbers)
- IF Individuals / firms registered under the
Pre-GST law (i.e., Excise, VAT, Service Tax
etc.) OR
Every income tax assessee-
Who has to - IF your biz. turnover is above a threshold
individual, HUF, firm, company,
get it? limit of “x” lakhs for ordinary states or “y”
trust (internal different not imp.)
lakhs in Sp.cat. States. OR
- Merchants who sell through e-commerce
aggregators like Amazon.
Do all Every PAN card holder is not Every GSTIN holder is required to have PAN
taxpayers REQUIRED to have GSTIN. (e.g. a card number. (Because its format is like that,
have it? salaried employee) observe “format” row above).
- If firm operates from more than one state,
- Only 1 PAN number allowed then a separate GST registration is required
How many per individual. for each state.
numbers / - Only 1 PAN number allowed - If a firm has multiple subsidiaries, they have
cards can per company. to get GST number for each e.g. “Faith
one have? - Subsidiary firms will have to Hospitality Chain ltd→ Sam’s Pizza
get separate PAN numbers. restaurant, Sankalp Dosa restaurant, Saffron
Punjabi restaurant”
Prevent evasion of GST, and help the
Objective Prevent evasion of direct taxes.
entrepreneurs claim their input credits.

(Batch:PCB10-Prelims) Mrunal’s Economy Pillar#2A2: Budget → Revenue Part → Indirect Taxes & GST → Page 371
- PAN number is required for various activities like opening of bank account, opening of demat
accounts (for trading in securities), obtaining registration for GST, VAT-Excise registration (for
Petrol-Liquor dealers) etc.
- So, PAN is slowly becoming a Common Business Identification Number (CBIN) or simply
Business Identification Number (BIN: सामान्य व्यवसाय पहचान सं ख्याक)- because if a Department
knows your PAN number they can dig all information about you, know whether you’re eligible
to fill up a particular tender or contract or a scheme application form or not?
22.21.1 🔢💳🔠 PAN/GSTIN vs UID (=Aadhar Card)
Table 6: ✋don't lose too much sleep over it unless preparing for State Tax Dept Exams
🔢🔠 PAN and GSTIN 🔢 UID (=Aadhar Card)
Issued by a Statutory body- Unique Identification
Issued by the direct and indirect tax authorities that Authority of India (UIDAI:भारतीय विशिष्ट पहचान
function under Ministry of Finance. प्राधिकरण ) under Ministry of Electronics and
Information Technology (MeitY).
These Tax authorities derive powers from: Aadhaar Targeted Delivery of Financial and Other
- Income Tax Act 1961 Subsidies, Benefits and Services) Act, 2016 (“आधार
- Goods & Service Tax Acts in 2017. एक्ट 2016”)
Primary objective is to eliminate bogus
beneficiaries in government schemes & reduce
Primary objective of these id-numbers is to reduce
subsidy leakage. Auxiliary benefits: Identifying
tax evasion by tracking the transactions.
dead bodies, tracking criminals, mobile number
ownership, tax evasion etc.

🔢🔠format contains both numbers + alphabets. 🔢is aUnique Identification number (UID) or Aadhaar
12 digit number. No alphabets.
Only for living resident HUMANS of India. Not
given for companies. Resident is defined as person
who lived in India for 182 days/> in last 12 months.
Issued for individual humans, 💼Full-Budget-2019: we’ll consider giving
HUF/firms/companies/trusts**. immediate Aadhar card to NRIs with Indian
Passport so they don’t have to wait till ~180 days.
It’ll help them get through KYC bank/share market
transaction.
One HUMAN → one PAN number only. No age
same (एक इंसान का सिर्फ़ एक आधार कार्ड निकल सकता है)
limit. Minors can also join.
- ~₹110 Fees to get PAN card.
No fees to get Aadhar. मुफ्त में मिलता है.
- No fees to get GSTIN
Compulsory to enroll (अनिवार्य है), if your income or Voluntary to enroll. आधार कार्ड बनवाना स्वैच्छिक है. अनिवार्य
turnover is beyond “x” rupees**. / बाध्यकर नहीं है.**

(Batch:PCB10-Prelims) Mrunal’s Economy Pillar#2A2: Budget → Revenue Part → Indirect Taxes & GST → Page 372
 🔢🔠 PAN and GSTIN 🔢 UID (=Aadhar Card)
Demographic info:
They contain
- Name, Date of Birth, Gender, Address.
- Name
- Mobile & Email (optional)
- Photograph & Date of Birth (in case of
Biometric info:
“Human”)
 Ten Fingerprints, Two Iris Scans, and Facial
- Address.
Photograph.
 Compulsory to link Aadhar card with PAN by 31/3/2023. (later deadline shifted to 30/Jun/2023)
**there are more terms-conditions to it but he'll not do PhD.
22.22 🍋🛒🥰 GST: B ENEFITS (लाभ)
✓ GST covers both goods and services, with standard rates, minimal number of cess/surcharges.
(सामान्य दर, बहुत कम चीजों पर उपकर/अधिभार लगता है। )
✓ GST online portal and e-way bill system reduces the interface between tax-officials and the
assesses, thereby reducing the scope of harassment, bribery and Inspector Raj. (=Ease of doing
business) (उत्पीड़न, रिश्वतखोरी में कमी → व्यापार में सुगमता बढ़ी).
✓ GST provides input credits to suppliers thereby incentivize them to sell with invoice at every
stage. Thus, GST will expand our tax collection, and deter tax evasion. (इनपुट क्रे डिट के लिए बिल बनाना
जरूरी, इसलिए करचोरी मुश्किल)
✓ GST Input credit system ⬇ the cascading effect of taxes, ↓ cost of manufacturing & selling, while
its anti profiteering authority ensures that such benefits are passed on to the customers in the
form of reduced MRP. (मुनाफाखोरी पर लगाम)
✓ Federal nations such as Canada and Australia shifted from VAT to GST regime. It helped
boosting their revenue, GDP and exports. (कर राजस्व, जीडीपी, निर्यात में बढ़ोतरी)
✓ GST rates are uniform across the States so it reduces the scope for ‘rate arbitrage’ (दर अपवंचन) i.e.
buying from another state for profiteering, even if same item available in home state. (HOW?
Watch Video)
✓ GST’s ITC helps Ancillarisation, Subcontracting and Outsourcing. This helps in more job
creation (How? Watch Video) (अनुषंगीकरण, उपठेका और आउटसोर्सिंग)
✓ Both CGST and SGST are computed on the same base (₹10,000), therefore tax burden on final
consumer is less in GST regime, than in Excise-VAT regime. (How? Watch Video) (एक आधार पर
कें द्र और राज्य के जीएसटी की गिनती से उपभोक्ता पर बोज कम होता है)
✓ Thus, GST will help to create a unified common national market for India, & catalyse “Make in
India”, and Assemble in India(More in 📑Pillar#4B)
22.22.1 🍋🛒🥰 ⚓️
: GST Benefit: Zero Rated Exports (शून्य रेटेड निर्यात )
- When company buys raw material or intermediate goods it will have to pay GST but if final
product is exported outside India, it'll be subjected to 0% IGST.

(Batch:PCB10-Prelims) Mrunal’s Economy Pillar#2A2: Budget → Revenue Part → Indirect Taxes & GST → Page 373
- So, whatever GST the company had paid on the inputs, all of that will become its “Input Tax
Credit” (and company can use this ITC to pay for the taxes on the purchase of raw material and
intermediate goods in the next time), thus reducing its cost of production. (उत्पाद खर्च में कमी)
- This will improve price competitiveness of Indian products in foreign markets. (विदेशी बाजार में भारत
का सामान किफायती बनता है)
- Australia and other GST countries also follow similar “zero rated export” regime.
🔠❓MCQ. Most likely advantages of implementing GST? (Asked in UPSC-Pre-2017)
1. It will replace multiple taxes collected by multiple authorities thus create a single market in India.
2. It will drastically reduce ‘Current Account Deficit’ of India and will enable it to increase its
foreign exchange reserves.
3. It will enormously increase the growth and size of Indian economy of India & will enable it to
overtake China in the near future.
Codes: (a) 1 only (b) 2 and 3 only (c) 1 and 3 only (d) 1, 2 and 3

22.23 🚨👮🏻‍♀️GST: E ASE OF DOING BIZ (EOD): DECRIMINALISATION

Note: following decisions were taken in the GST Council meeting in 2022 December. Then in 2023
budget, FM announced “we’ve done this for giving ease of doing business to the traders”. (व्यापार में
सुगमता के लिए हमने कु छ अपराधों को फ़ौजदारी कार्यवाही की श्रेणी से बाहर किया है)

22.23.1 🚨👮🏻‍♀️GST-EoD: criminal prosecution threshold

MINIMUM AMOUNT OF TAX EVADED 😰BEFORE 😄AFTER
Sr1] Generating fake invoices to claim ITC Rs.1 crore tax evasion Rs.1 crore tax evasion
Sr2] offences other than Sr.1 Rs.1 crore tax evasion Rs.2 crore tax evasion
If the tax evasion amount is less than above limits → no criminal prosecution / jail. Simply penalty
only. (करचोरी उक्त मात्रा से कम है, तो आपराधिक मुकदमा नहीं चलेगा। जेल नहीं होगी। सिर्फ जुर्माना लगेगा।)

22.23.2 🚨👮🏻‍♀️GST-EoD: obstructing officers

😰BEFORE 😄AFTER
obstructing or preventing any officer in discharge of his duties, it is decriminalized = No jail.
tempering evidence and failure to supply information Only penalty.
= criminal offense.
(जीएसटी के अफसरों के कार्य में बाधा डालना, सबूतों से छेड़छाड़ करना, जानकारी ना देना इत्यादि मामलों में जेल नहीं। मात्र जुर्माना)
22.24 🍋🛒😢 GST: C HALLENGES FOR MAINS (चुनौतियां)
shifted to Mains handout.
✅
Handout: [2A) Direct & Indirect Taxes [2B) Black Money, 15th Finance Commission
[2C) Subsidies to Disinvestment [2D) Fiscal Deficit, FRBM, Budgeting & scheme types

(Batch:PCB10-Prelims) Mrunal’s Economy Pillar#2A2: Budget → Revenue Part → Indirect Taxes & GST → Page 374
 2B: Finance Commission, Black Money & 2C: s ubsidies, revenue expendi ture
Table of Contents

23 🍋 (🧔⚖️👨‍🦲👳🏻‍♀️👳🏻) Taxation → Finance Commission..................................................................377

23.1 Introduction to Finance Commission (वित्त आयोग)...................................................................................377

23.2 🕵️‍♂️(🍋 🧔⚖️👨‍🦲) Fifteenth FC Composition (setup in 2017-Nov).........................................................378

23.2.1 📑 15th FC Terms of Reference (TOR: विचारार्थ विषय)?...............................................................................................378

23.3 🍋 [🧔⚖️(👨‍🦲👳🏻‍♀️👳🏻)] FC: Vertical Tax Devolution from Union to States.............................................379

23.4 🍋 [👨‍🦲⚖️👳🏻‍♀️⚖️👳🏻] Horizontal Tax Devolution among States..............................................................379
23.4.1 🍋 [👨‍🦲⚖️👳🏻‍♀️⚖️👳🏻]15th FC: Horizontal devolution: States’ share.......................................................................380
23.4.2 🍋 14th Finance Commission- Horizontal formula.............................................................................................381
23.4.3 🧕Finance Commissions & the fate of UTs of J&K & Ladakh............................................................................381
23.4.4 🧔 → 💸🤲🏼 (👨‍🦲👳🏻‍♀️) Grants from Union to States : 14 FC.................................................................................381
th

23.4.5 🧔 → 💸🤲🏼 (👨‍🦲👳🏻‍♀️) Grants from Union to States : 15 FC..................................................................................382

th

23.4.6 💸🤲🏼🤦🏼‍♂️Post-Devolution Revenue Deficit Grants ( - )..........................................................383

अंतरण पश्च राजस्व घाटा अनुदान
23.4.7 💸🤲🏼🙋🏿15th FC: Special Grants: ( )..........................................................................................................384
विशेष अनुदान
23.4.8 💸🤲🏼🏕15th FC: Local Bodies Grants ( )........................................................................................384
स्थानीय निकाय अनुदान
23.4.9 💸🤲🏼🌬🌪15th FC: Disaster Management Grants ( :)...................................................................385
आपदा प्रबं धन अनुदान
23.4.10 💸🤲🏼🍽15th FC: Sector Specific Grants ( - )-Malnutrition..............................................................385
क्षेत्र विशिष्ट अनुदान
23.4.11 💸🤲🏼🍽15th FC: Sector Specific Grants ( - )-Health.........................................................................385
क्षेत्र विशिष्ट अनुदान
23.4.12 💸🤲🏼🍽15th FC: Sector Specific Grants ( - )- Others( )................................................................386
क्षेत्र विशिष्ट अनुदान अन्य
23.4.13 💸💣🧨Defence and Internal Security Fund for Union.....................................................................................386
23.5 🕵️‍♂️(🍋🧔⚖️👨‍🦲)⏰ FC: Giving Permanent Status (स्थायी दर्जा देना)...............................................................387
23.6 🕵🏻 FC vs PC vs NITI: What’s the Difference?.......................................................................................387

23.7 🍋(🧔⚖️🤷‍♂️🙏) Special Category States? विशेष श्रेणी के राज्य?........................................................................388

24 🍋👺🕵🏻 Taxation → Black Money & Allied Issues......................................................................389

🍋👺)🕵🏻Black Money → Notable Organisations...............................................................................391
24.1 (

24.2 🍋👺 Tax Evasion (Hiding Income / Transaction) (कर चोरी)..................................................................392

24.2.1 🍋👺⚖️ Prevention of Money Laundering Act (PMLA-2002)..........................................................................392
24.2.2 🔎🌸🌐 PMLA Reporting Norms to apply on Crypto-exchanges (2023).........................................................392
24.3 🫵Burden of Proof & PMLA..................................................................................................................392
24.3.1 🍫 PMLA Amendments via Finance Bill = Money Bill?......................................................................................393
24.3.2 🍋👺⚖️ Undisclosed Foreign Income & Assets Act (UFIA-2015)....................................................................394
24.3.3 🍋👺⚖️ Benami Transactions Prohibition Act (BTPA- 1988, 2016).................................................................394
24.4 ( 🍋👺)💼 Tax Evasion → Govt Announcements.................................................................................395
24.4.1 🍋👺🙌 Tax (Evasion) “Surrender” schemes........................................................................................................395
24.4.2 🍋👺🙌 💼
Vivad se Vishwas Scheme for Direct Taxes ( Budget-2020).............................................................395
24.4.3 🍋👺🙌 💼
Dispute Resolution Committee (DRC) in Budget-2021...................................................................396
24.4.4 TDS on influencers / influencer tax........................................................................................................................396
24.4.5 🍋👺 Tax Evasion → Other Initiatives from older days (अन्य कदम).......................................................................396

(Batch:PCB10-Prelims) Mrunal’s Economy Pillar#2B: Budget → Revenue → 15th FC, Black Money, Subsidies→ Page 375
24.5 ( 🍋👋🤵)Tax avoidance (कर परिहार / कर टालना)............................................................................................397
24.5.1 🍋👋🤵Double Taxation Avoidance Agreement (DTAA) & Round Tripping................................................397
24.5.2 🌐👩🏻‍⚖️
International Law: Monism and Dualism & application of DTAA...........................................................398
24.5.3 🍋👋🤵Tax Avoidance through Non-Resident Status........................................................................................399
24.5.4 🍋👋🤵Place of Effective Management (POEM: पीओईएम)....................................................................................399
24.5.5 🍋👋🤵Base Erosion and Profit Shifting (BEPS: बीईपीएस).....................................................................................400
⚓️
24.5.6 Safe Harbour Rules (सुरक्षित बं दरगाह नियम)..................................................................................................................400
24.5.7 🍋👋🤵Transfer Pricing & Authority for Advance Rulings (AAR) ( हस्तांतरण मूल्य)...............................................401
24.5.8 ( 🍋👋🤵 🕵🏻
) General Anti-Avoidance Rules (GAAR).......................................................................................401

24.6 ( 🍋👋🤵:⌛️) 🕵🏻 Retrospective Tax: Vodafone......................................................................................401

24.6.1 ( 🍋👋🤵:⌛️) 🕵🏻 Retrospective Tax: Cairn Energy...............................................................................................403
24.7 🍋👋🌐:🤵 Global Minimum Tax (वैश्विक न्यूनतम कर)...................................................................................404
24.7.1 🍋👋🌐:🤵 Global Minimum Tax: G7 Framework..............................................................................................404
24.7.2 🍋👋🌐:🤵 G7-OECD “Two” Pillar Solution for Global Minimum Tax...........................................................404
24.8 🍋🍋🍋🕵🏻: 🙇🏻 Reforms to reduce Tax Terrorism / Harassment.........................................................405
24.8.1 🍋🍋🍋🕵🏻:🧾 Pre-filled online forms for Tax Payers..........................................................................................405
24.8.2 🍋🍋🍋🕵🏻:🧾Updated Return Form to correct errors- in 👜🥻Budget-2022:.................................................405
24.8.3 🍋🍋🍋🕵🏻:🧾 Faceless interaction between Tax payers and Tax official...........................................................406
24.8.4 🍋🍋🍋🕵🏻:🧾⏰ Time limit on opening of past cases .........................................................................................406
24.8.5 🍋🍋🍋🕵🏻:🧾 Document Identification Number (DIN: ).........................................................406
दस्तावेज़ पहचान सं ख्याक

24.9 📯🍋📜 Taxpayers’ Charter in 💼 Budget-2020 (करदाताओ का अधिकारपत्र)....................................................407

24.9.1 📯🍋📜 (Indian) Tax Payers' Charter released in 2020-Aug...............................................................................407
24.10 🍋🙇🏻: 🧜‍♂️🦸‍♂️ Tax Ombudsman in 📔📔 Economic Survey 2021.........................................................408
24.10.1 🍋🙇🏻: 🧜‍♂️🦸‍♂️Tax ombudsman: Indian experience ..............................................................................................408
24.10.2 🍋🙇🏻: Reducing Tax Terrorism / Harassment: online portals/Apps................................................................408
24.10.3 🔖 ITR / income tax return form – highest ever.................................................................................................409
24.10.4 🔍 Income Tax : E-Governance Initiatives in Modi-Raj....................................................................................409
24.11 🍋🌐🤝Taxation → Global Treaties, Agreements & Indexes............................................................409
24.11.1 🍋🌐🤝 Tax Information Exchange Agreement (TIEA: )....................................................409
कर सूचना विनिमय समझौता
24.11.2 🍋🌐🤝 USA’s Foreign Account Tax Compliance Act (FATCA-2010)..........................................................410
24.11.3 🌐 Intl.Coop: Tax Inspectors Without Borders (TIWB)...................................................................................410
24.11.4 🍋🌐📊 Global Financial Secrecy Index ( ).......................................................................410
वैश्विक वित्तीय गोपनीयता सूचकांक

24.12 →Black Money → Demonetisation (विमुद्रीकरण).....................................................................................410

24.12.1 💸Why Demonetise ₹ 500 & 1000?......................................................................................................................411
24.12.2 👩🏻‍⚖️ Demonetisation SC Verdict.............................................................................................................................411
24.12.3 🍋🥛 Tax: GDP – why low in India ( : ?)...................................................................412
भारत का कर जीडीपी अनुपात खराब क्यों है
24.12.4 🍋🥛 Tax: GDP 📘📘 ES19: “Use Behavioural Economics to improve Tax Compliance”...........................413
24.13🍋🍃Revenue Shortfall.........................................................................................................................414
24.14 🍋Taxation: Misc. Terms.....................................................................................................................414
24.14.1 ⚽️Tax buoyancy ( ):................................................................................................................................415
कर उत्प्लावकता
24.14.2 🍋 Net Tax Revenue of the Govt ( ).......................................................................................................415
शुद्ध कर राजस्व

24.15 → Budget → Revenue Part → Receipts → Non-Tax Receipts.................................................416

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25 📤⏰ Budget → Revenue Expenditure ( राजस्व खर्च/ व्यय)....................................................................416

25.1 ( →) Revenue Expenditure → Subsidies.................................................................................417

25.1.1 📤⏰(🌽⛽️) Types of subsidies with selected examples......................................................................................418
25.1.2 👍🏻 👎🏻 Impact of Subsidies ( : )....................................................................................418
सब्सिडी का प्रभाव सकारात्मक एवं नकारात्मक
25.1.3 📘📘 Past Economic Surveys on subsidy delivery JAM/DBT ( )...............................................419
आर्थिक सर्वेक्षणों के उपाय
25.1.4 🏃🏻‍♀️✍🏻🕵️‍♂️National Recruitment Agency (NRA: )..................................................................................419
राष्ट्रीय भर्ती एजेंसी

25.2 📤⏰🥳 Revenue xpdr → Salaries→ 7th Pay Commission (वेतन आयोग).................................................419
25.2.1 🥳 Pay Commission: Dearness Allowance (DA: )...................................................................................419
महंगाई भत्ता
25.2.2 🥳 Bonus to govt employees ...................................................................................................................................420
25.2.3 🥳 Pay Commission: Misc. terms...........................................................................................................................420
25.3 👻📤⏰👨‍💼🥳 SALARY Reforms in Atmanirbharat 2.0 (Oct 2020).....................................................420
25.3.1 👻⏰👨‍💼🥳 Atma-Nirbhar 2.0: Festival Advance Scheme ( )........................................................420
त्योहारों में एडवांस रकम
25.3.2 👻⏰👨‍💼🥳 Atma-Nirbhar 2.0: LTC Cash Voucher Scheme................................................................................420
📥 📤)⏰⚠️ Revenue Deficit & Effective revenue deficit...................................................................420
25.4 ( <

23 🍋 (🧔⚖️️👨‍🦲👳🏻‍♀️👳🏻) T AXATION → FINANCE COMMISSION

23.1 INTRODUCTION TO FINANCE COMMISSION (वित्त आयोग)

- Fiscal Federalism refers to the division of responsibilities of i) taxation and ii) expenditure
between the different levels of the government. (राजकोषीय सं घवाद: कें द्र और राज्यों के बीच कराधान और खर्च की
जिम्मेदारियों का आवंटन/बटवारा/विभाजन)
- While the 7th schedule assigns many responsibilities to the States but their taxation power is
relatively lower than Union’s. So, Finance Commission plays a key role in transferring union’s
revenue resources to the state.. (राज्य की कराधान शक्तियां कम है इसलिए वित्त आयोग कें द्र के करो से हिस्सा दिलाता है)
- Article 280: President of India forms a Finance Commission (a quasi-judicial body) every 5th
Year or earlier, with 1 chairman and 4 members. Eligible for re-appointment. Recommendations
are not binding on the government but usually not rejected.
📔Further self-study & HINDI TERMS@ M.Laxmikanth’s Indian Polity ch.45. or Unacademy Notes.
14th FC: YV Reddy Recommendation Period: 1st April, 2015 to 31st March, 2020

15th FC: NK Singh Originally, it was meant to cover: 1st April, 2020 to 31st March, 2025
But later, Modi Govt ordered it to submit two reports:
1) Report#1: for 1/Apr/2020 to 31/March/2021 → submitted to President
in 2019-Nov, and accepted in 2020-Jan
2) Report#2: for 1/Apr/2021 to 31/March/2026. Title of report is "“Finance
Commission in Covid Times”. Published in 2021-February.

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 16th FC: <update when setup>

23.2 🕵️‍♂️(🍋 🧔⚖️️👨‍🦲) F IFTEENTH FC COMPOSITION (SETUP IN 2017-NOV)

23.2.1 📑 15th FC Terms of Reference (TOR: विचारार्थ विषय)?

President of India has ordered them to study and recommend following:

1. Union Taxes’ vertical devolution to the states, and its horizontal distribution among the states.
(except cess, surcharge and IGST).
2. Union’s grant-in-aids to the states. (कें द्र द्वारा राज्यों को अनुदान)
3. How to augment State Govts’ Consolidated funds to help their PRI/ULBs
4. Any other matters referred by the President of India such as:
5. Use Census-2011 for your calculation. (जनगणना) – 😰however, Southern States were
apprehensive that they’d get less ₹ compared to Northern States because Southern states
controlled their population.
6. While allotting money, FC should keep in mind Union’s responsibilities for New India 2022
vision e.g. Swatchh Bharat, Digital India, PM-Jan Arogya etc. so FC should give more money for
that purpose. 😰Non-BJP states didn’t like this.
7. Recommend measures for Fiscal Discipline/Consolidation for the Union and State governments.
(राजकोषीय अनुशासन/समेकन) e.g. asking State governments to stop populist schemes like Free
TV/Mixer Grinder etc.
8. Shd union continue to provide revenue deficit grants to States? (राजस्व घाटे की भरपाई के लिए अनुदान)
9. How to finance the disaster management initiatives? (आपदा प्रबं धन)
10. Performance based incentives to the state governments. (प्रदर्शन आधारित प्रोत्साहन) e.g. reducing
population, stopping electricity theft, stopping populist schemes like free mixer-grinders etc.
11. (2019-Jul) suggest ways for allocation of non-lapsable funds for defence and internal security.
(रक्षा और आंतरिक सुरक्षा बिनव्यपगत निधि)
12. (2019-Oct) Award for the UT of J&K. (This terms of reference required under Jammu and
Kashmir Reorganisation Act, 2019. जम्मू कश्मीर पुनर्गठन अधिनियम)

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23.3 🍋 [🧔⚖️️(👨‍🦲👳🏻‍♀️👳🏻)] FC: V ERTICAL TAX DEVOLUTION FROM UNION TO STATES

Finance Commission recommends the vertical devolution (ऊर्ध्वाधर कर अंतरण) from the ‘divisible pool’
of union taxes. (Here IGST, Cess, Surcharge not counted.)
FC → वित्त आयोग 12th (2005-10) 13th (2010-15) 14th (2015-20) 15th (2020-21) & 21-26
Chairman? (अध्यक्ष) C.Rangarajan Vijay Kelkar VY Reddy NK Singh
States Share 30.5% 32% 42% 41%*
- *15th FC’s justification: Compared to 14th FC, 1% extra Union should keep for UTs of J&K &
Ladakh’s security & other needs.
- Sometimes finance minister says “States, along with Ladakh, J&K be given 42% share from Union
tax for 2021-2025” Although UT of J&K & Ladakh= to get 1%, so in reality other states getting
42-1=41%.”
23.4 🍋 [👨‍🦲⚖️️👳🏻‍♀️⚖️️👳🏻] H ORIZONTAL TAX DEVOLUTION AMONG STATES

राज्यों के बीच समस्तरीय/क्षैतिज करअंतरण

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 15th FC horizontal distribution formula components (घटक) → (भारांक%)
Weight%
(both in Report#1 and Report#2)
Income Distance (आय में अंतर):
 State GSDP divided by its Population = per capita GSDP.
45%
 For most states, Haryana’s per capita GSDP is taken as benchmark. How poorer is
your state compared to Haryana= more ₹₹ you’ll get.**
📏 Area (क्षेत्रफल) More area = more ₹₹ 15%

👪 Population (as per Census-2011: आबादी): More population = more ₹₹ 15%

Demographic Performance (जनसांख्यिकीय निष्पादन): States that have ⬇ Total Fertility
12.5%
Rate (TFR: कु ल प्रजनन दर), will get ⬆₹₹. More in Pill#6
🌳 Forest and Ecology (वन एवं पारिस्थिकी): More forest= more ₹₹ 10%
🍋 Tax Effort (कर प्रयास) : States who’ve improved their per capita (State) tax collection 2.5%
in the last 3 years = get more ₹₹
Total (कु ल) 100%

** Note: computing income distance: the Highest per capita GSDP: 1) Goa 2) Sikkim 3) Haryana 4) Himachal.
But since Goa, Sikkim are very small states with a unique economic situation, so it’ll distort statistical formula. So, there are some
internal fine tunings done in formula. Long story cut short: Haryana taken as benchmark for most states. If you’ve more intellectual
curiosity about how above indicators are calculated in real life, you may spend waste time in PHD-reading of the original report@
https://fincomindia.nic.in/

🔠 MCQ. For the horizontal tax devolution, the Fifteenth Finance Commission used how many
of the above as criteria other than population area and income distance? (Prelims-2023)
1. Demographic performance 2. Forest and ecology 3. Governance reforms
4. Stable government 5. Tax and fiscal efforts
Codes: (a) Only two (b) Only three (c) Only four (d) All five

23.4.1 🍋 [👨‍🦲⚖️👳🏻‍♀️⚖️👳🏻]15th FC: Horizontal devolution: States’ share

Table 1: Try to remember 3-5 names in top & bottom each, & your home state for UPSC Interview.
1) Uttar Pradesh (17.931%) 11) Chhattisgarh (3.418%) 21) Himachal (0.799%)
2) Bihar (10.061%) 12) Gujarat (3.398%) 22) Meghalaya (0.765%)
3) MP (7.886%) 13) Jharkhand (3.313%) 23) Manipur (0.718%)
4) W. Bengal (7.519%) 14) Assam (3.131%) 24) Tripura (0.709%)
5) Maharashtra (6.135%) 15) Telangana (2.133%) 25) Nagaland (0.573%)
6) Rajasthan (5.979%) 16) Kerala (1.943%) 26) Mizoram (0.506%)
7) Odisha (4.629%) 17) Punjab (1.788%) 27) Sikkim (0.388%)
8) Tamil Nadu (4.189%) 18) Arunachal (1.76%) 28) Goa (0.386%)
9) Andhra (4.111%) 19) Uttarakhand (1.104%) ANY type of UT = 0% here
10) Karnataka (3.646%) 20) Haryana (1.082%)

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23.4.2 🍋 14th Finance Commission- Horizontal formula
Finance Commission also gives formula for How to distribute that share horizontally with
individual States (Guj | Bihar | MH | TN...). 14th FC (YV Reddy)’s formula was…
14th FC horizontal distribution formula components Weight %
👪 आबादी Population: as per Census 1971 17%

👪 जनसांख्यिकीय बदलाव
Demographic Change as per Census 2011 (To consider the
migration angle.)
10%

👜 आय-दूरी
Income-Distance: Based on per capita income of a state (GSDP ÷
its population). Accordingly, poorer states get more weight
50%

📏 क्षेत्र Area: more area more weight 15%

Forest-Cover: more forest cover more weight because of
🌳 वन-आवरण Opportunity cost (State can’t allow industries there, else it could 8%
have obtained some taxes)
Based on above formula, Highest to Lowest was: Uttar Pradesh > Bihar > MP > WB > MH > Raj>
….. > Mizoram > Goa > Sikkim.

23.4.3 🧕 Finance Commissions & the fate of UTs of J&K & Ladakh
Until 10 Finance Commission, the FC would also prescribe the revenue sharing formula between
th

the Union Government and Union Territories.

 But this practice stopped since 11th finance commission i.e. Finance ministry itself decides how
much revenue will be shared with Union Territories based on its own discretion (कें द्रशासित प्रदेशों को
कितने पैसा देना है= कें द्र सरकार अपने विवेक से तय करता है. वित्त आयोग इस में बोल नहीं सकता).
 Finance Commission no longer prescribed formula in this regard. But,
 31st October 2019: The state of Jammu Kashmir was officially split into the union territories of
Jammu Kashmir and union territory of Ladakh.
 Jammu and Kashmir Reorganization Act, 2019 mandates that:
o Whatever amount the former state of J&K was supposed to receive between 31/10/2019
to 31/3/2020 (as per 14th FC formula) …It will be distributed between these two new
union territories on the basis of population ratio and other parameters.
o President of India shall require 15th FC to make award for UT of J&K.
o But, 15th FC report, no separate share is given in verticle / horizontal tax devolutions.
Simply 1% extra kept with Union to look after J&K & Ladakh, compared to 14 th FC.

23.4.4 🧔 💸🤲🏼 👨🦲👳🏻

→ ( ‍ ‍♀️) Grants from Union to States : 14th FC
Apart from the tax devolution, FC would also suggest Union to give grant to the states (grant= NOT
loan, so need not return with interest). (अनुदान= मतलब राज्य सरकार ने वो पैसा कें द्र को वापस नहीं करना)
14th FC suggested following types of grants→
1. For All States: Grants for Panchayati Raj Institutions (PRI) and Urban Local Bodies (ULB) are
subdivided into two parts (पंचायती राज व शहरी स्थानीय निकायों के लिए अनुदान दो हिस्सों में विभाजित)

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 a. basic grant (प्राथमिक) and
b. (10-20%) performance based grants.(प्रदर्शन आधारित)
2. For All States: Disaster Management Grants. (आपदा प्रबं धन अनुदान)
3. For 14 States: Post-Devolution Revenue Deficit Grants. (अंतरण-पश्च राजस्व घाटा अनुदान)

23.4.5 🧔 → 💸🤲🏼 (👨‍🦲👳🏻‍♀️) Grants from Union to States : 15 th

FC
15th FC suggested following types of grants → Numbers NOT GREATLY IMPORTANT

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 Type Report#2 (2021-26)
1 💸🤲🏼🏕Local Bodies Grants (स्थानीय निकाय अनुदान A)2.##Lcr Rural
B)1.##Lcr Urban
=total 4.36Lcr
2 💸🤲🏼🤦🏼‍♂‍Post-Devolution Revenue Deficit Grants 2.94 Lcr
3 💸🤲🏼🌬🌪Disaster Management Grants (आपदा प्रबं धन A) 68 kcr in Union ke Disaster
अनुदान) funds
B) 1.22 Lcr in State ke Disaster
funds
4 💸🤲🏼🍽Sector Specific Grants: (क्षेत्र-विशिष्ट अनुदान) with >1 lakh crore for (Sectoral grants
💸🤲🏼💪🏿 Performance-based incentives (निष्पादन-आधारित Health, Education, agricultural
प्रोत्साहन) reforms, rural roads, Judiciary,
Statistics, Aspirational districts)
6 💸🤲🏼🏰State specific grants for tourism, historical 49599 cr.
monuments, infrastructure, water etc.
7 💸🤲🏼🙋🏿Special Grants: (विशेष अनुदान) N/A
8 Union Govt ke liye Defense and Internal Security Fund 2.38 Lcr
Total >10 lakh Cr
23.4.6 💸🤲🏼🤦🏼‍♂️Post-Devolution Revenue Deficit Grants (अंतरण-पश्च राजस्व घाटा अनुदान)

Figure 1: हमको और पैसा दो, हमारे राजस्व घाटे की भरपाई के लिए!

Suppose (amt in ₹cr) 2020-21
Andhra’s own State Budget: (-) 41 kcr
Revenue Expenditure -minus Revenue Income = Revenue Deficit (राजस्व घाटा)
Andhra’s share from Union’s taxes based on horizontal devolution (+) 35 kcr
Andhra’s Post-Devolution Revenue Deficit = 41-35=6 kcr.
So 15th FC will give Andhra extra 6 kcr as Post-Devolution Revenue Deficit Grant (अंतरण-पश्च राजस्व
घाटा अनुदान). Only 14 states eligible: Assam, Himachal Pradesh, Manipur, Meghalaya, etc eligible.
(Full list of all 14 States Not important)

🚩👶🏻FAQ: Give me full list of all 14 States? Ans. I’d not loose sleep over it. Satisfy your PHD
curiosity with Page 297 here in this official report

🚩👶🏻FAQ: On above logic/formula, wouldn’t a careless state govt spend truckload of money by
borrowing from market? Ans. REF: Pillar2D: FRBM Act.

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23.4.7 💸🤲🏼🙋🏿15th FC: Special Grants: (विशेष अनुदान)
Report#1 (2020-21)

 If a state receives less ₹₹ in (15th FC’s devolution + post revenue deficit grants) in 2020-21
compared to 2019-20 (when 14th FC Rangarajan’s formula was in effect),
 Then such State will get Special Grants just to prevent any ‘feeling of injustice / bias’ (अगर 14वें वित्त
आयोग की अपेक्षा 15में कम मिल रहा हो तो अन्याय / पक्षपात के आरोप से बचने के लिए उन राज्यों को विशेष अनुदान)
 Only 3 states eligible: Karnataka, Telangana and Mizoram. Total ₹6,764 cr for 2020-21
Report#2 (2021-26)

- No such grant announced. (ऐसा कोई विशेष अनुदान नहीं दिया गया)
23.4.8 💸🤲🏼🏕15th FC: Local Bodies Grants (स्थानीय निकाय अनुदान)

Figure 2: img source: Lagaan Movie starring Amir Khan

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23.4.9 💸🤲🏼🌬🌪15th FC: Disaster Management Grants (आपदा प्रबंधन अनुदान:)
Disaster Management Act, 2005 → Ministry of Home Affairs (गृह मं त्रालय) looks after the subject.
15th FC: recommend 🧔
National Disaster Risk Management Fund 👨‍🦲State Disaster
सिफ़ारिशे (NDRMF: एनडीआरएमएफ/राष्ट्रीय आपदा जोखिम प्रबं धन कोष) Risk Management
Fund (SDRMF)
Internal distribution  80% amt for National Disaster Response Fund Same pattern, change
आंतरिक वितरण (NDRF:एनडीआरएफ/राष्ट्रीय आपदा सहायता कोष) word from National
 20% amt for National Disaster Mitigation to ‘State’
Funds (NDMF:एनडीएमएफ/राष्ट्रीय आपदा प्रशमन कोष)
**Notes on SDRMF:
1) How much will an individual state get? Ans= depends on its past disasters, risk exposure (area &
population wise) etc. आपके राज्य में आपदा का जोखिम कितना है उस हिसाब से कम / ज्यादा पैसा मिले
2) Respective State Govt is also required to contribute some money in SDRMF.

23.4.10 💸🤲🏼🍽15th FC: Sector Specific Grants (क्षेत्र-विशिष्ट अनुदान)-Malnutrition

- Report#1 (2020-21): 15th FC only recommended health → Nutrition grant (₹7700+ cr पोषण
अनुदान) to combat malnutrition (कु पोषण). Ministry of Women and Child Development (MoWCD:
महिला बाल विकास मंत्रालय) will oversee its utilization.
- Report#2 (2020-21): no special mention of Malnutrition grants. But, related to health are given
below in the following table:
23.4.11 💸🤲🏼🍽15th FC: Sector Specific Grants (क्षेत्र-विशिष्ट अनुदान)-Health
Type Report#2: (2021-26) Amount
Sectoral Grant → Healthcare @Local (Rural and urban) Local Bodies given ₹₹ to 70kcr
Bodies convert Primary Health centres (PHC) into
पं चायती राज/नगरपालिकाओं को प्राथमिक स्वास्थ्य health and wellness centres (HWCs)
कें द्र को स्वास्थ्य और कल्याण कें द्र में परिवर्तित
करने के लिए ट्रक भर के पैसा
Sectoral Grant → Health Critical Care hospitals i.e. facilities with 15kcr
नाजुक देखभाल के अस्पतालों को बनाने के लिए Intensive Care Unit (ICU) ventilator, kidney
पैसा dialysis etc.
Sectoral Grant → Health Training of Allied Healthcare workforce (lab 13kcr
चिकित्सा सं लग्न मानव बल की तालीम के लिए पैसे technicians, radiographers, dieticians,
Physiotherapist, ASHA Worker etc)
Sectoral Grant → Health State government to run Doctor training 2kcr
जिले के अस्पतालों में डॉक्टरी तालीम के कोर्स courses in district hospital
करवाने के लिए पैसा
कु ल मिलाकर Total: 70kcr to local bodies + 30kcr as Sectoral 1.06
Grants = 1.06 Lakh cr. Lcr.

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 ** Healthcare sector Grants are unconditional i.e. not based on performance of a State Govt.

Additional Recommendations by 15th FC on Healthcare

 Union and State Government together should spend 2.5% of GDP on Healthcare sector by 2025.
(कें द्र और राज्य सरकार ने मिलकर स्वास्थ्य क्षेत्र में सार्वजनिक खर्च को बढ़ाकर जीडीपी के ढाई प्रतिशत तक करना चाहिए)
 All-India Services Act, 1951: (presently we've IAS,IPS,Indian Forest Service) → make 4th All
India service: "All India Medical and Health Service" → UPSC to conduct recruitment. This will
help addressing the shortage of doctor in backward states. आईएएस/आईपीएस की तर्ज पर एक और अखिल
भारतीय सेवा बनाई जाए "अखिल भारतीय चिकित्सा एवं स्वास्थ्य सेवा" ताकि पिछड़े राज्यों में डॉक्टरों की कमी को पूरा किया जा सके
 Most of the medical colleges and super-speciality hospitals (e.g. Cancer) are concentrated in the
Western and Southern parts of India. Union and State government should make efforts to
address this.(पश्चिमी/दक्षिणी राज्यों के अलावा वाले विस्तार में भी अच्छी मेडिकल कॉलेज/अस्पताल बनाने पर जोर दिया जाए)

23.4.12 💸🤲🏼🍽15th FC: Sector Specific Grants (क्षेत्र-विशिष्ट अनुदान)- Others(अन्य)

Report#2: (2021-26) Amount
कृ षि क्षेत्र में सुधारों के लिए -नीति आयोग द्वारा Implementation of agricultural reforms e.g.
प्रस्तावित कानूनों को पारित करना, भूजल Passing the agricultural formula suggested by
सं वर्धन, तिलहन दाल लकड़ी उत्पादों को Niti Aayog, Groundwater conservation, 45kcr
प्रोत्साहन, कृ षि निर्यात को बढ़ोतरी Improving Oilseed pulses wood products,
📑
agricultural export, ( Ref: HDT-Pillar#4A)
ग्रामीण सड़कों की मरम्मत Maintenance of PMGSY roads (Pradhanmantri 27 kcr
📑
Gram Sadak Yojana) ( Ref: HDT-Pillar#5-
Transport Infrastructure)
न्यायिक सुधार -अतिरिक्त न्यायालय और Judiciary: ₹₹ for Setting of extra courts and
जजों की नियुक्ति के लिए पैसा- जिसे 5 साल judges to finish the the property cases which are 10 kcr
या उससे अधिक विलंबित सं पत्तियों के मामलों pending for 5 years or older, Civil cases of
का निपटारा, बच्चों के यौन शोषण,गंभीर marginalized people, POSCO cases (child sex
अपराध के मामलों का जल्दी निपटारा abuse) & heinous crimes
उच्च शिक्षा में ऑनलाइन पढ़ाई की व्यवस्था Higher Education-For 1) developing online 6 kcr
तथा चिकित्सा और इंजीनियरिंग के कोर्स को learning 2) translating medical engineering
प्रादेशिक भाषा में अनुवादित करने के लिए courses in regional languages
स्कू ली शिक्षा School Education 4.8 kcr
सांख्यिकी/डेटा सं ग्रह Statistics/Data collection >1000 cr
These grants also include internal quota for performance based incentives i.e. Better performing
States will be given additional money. (इन सभी अनुदान में कु छ अंदरूनी/आंतरिक कोटा होता है, जिसमें अधिक अच्छा
प्रदर्शन करने वाले राज्यों को अधिक रकम मिल सके )

23.4.13 💸💣🧨Defence and Internal Security Fund for Union

For whom? Union Government (कें द्र सरकार के लिए)

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 Where? Public Account of India → Modernisation Fund for Defence and Internal Security
(MFDIS: लोक लेखा निधि के अंतर्गत रक्षा तथा आंतरिक सुरक्षा के नवीनीकरण/आधुनिकीकरण के लिए कोष या
निधि).
Type Non-lapsable Fund (The money in such fund will not lapse on 31st March, so it can
be used in future without getting another approval from parliament.) बिनव्यपगत निधी
Amount ₹ 2.38 Lcr (total for 2021-26)
🔠 MCQ. Find correct about 15th Finance Commission is/are correct? (EPFO-2023)
1. Basic (untied) grants can be used by rural local bodies for location- specific felt needs under the 29
subjects enshrined in the Eleventh Schedule of the Constitution of India except for salaries and other
establishment costs.
2. Tied grants can be used for basic services of sanitation and maintenance of ODF status,
management and treatment of household waste and human excreta.
3. It recommended 'Health Grants' to create diagnostic infrastructure in primary health care
facilities. Ans. Codes: (a) 1 only (b) 2 and 3 only (c) 1 and 3 only (d) 1, 2 and 3

23.5 🕵️‍♂️(🍋🧔⚖️️👨‍🦲)⏰ FC: G IVING PERMANENT STATUS (स्थायी दर्जा देना)

Shifted to Mains Handout.

23.6 🕵🏻 FC VS PC VS NITI: WHAT’S THE DIFFERENCE?

🕵🏻 🍋⚖️️Finance 🕵🏻🤴 Planning Commission (PC) 🕵🏻🧔 NITI Aayog

Commission (FC) योजना आयोग National Institution
for Transforming India
Constitutional body Created by executive resolution, so neither constitutional non
statutory. Both headed by Prime Minister as the chairman.
1951: 1st FC setup under KC -1951: PC set up and over the years -2015: Formed.
Neogy designed 12 Five Year plans -Three Year Action Agenda
(12th FYP: 2012-2017) (2017-20).
-2014: Dissolved by Modi -Seven Year Strategy Document.
Government. -Fifteen Year Vision
Document(2017-32).
- Taxes’ Vertical 1. How much money should It is not in its scope of work to
Devolution and union give to each state for decide how much money
horizontal distribution implementation of Union’s should be given to each state.
among states. centrally sponsored schemes That component is decided by
- + any other matters (CSS)? the Finance Ministry.
referred by the President 2. How much money should - NITI’s primary objective is

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 🕵🏻 🍋⚖️️Finance 🕵🏻🤴 Planning Commission (PC) 🕵🏻🧔 NITI Aayog
Commission (FC) योजना आयोग National Institution
for Transforming India
in TOR union government give to the to serve as the think tank of
- Each Finance five year plans of the state the Government of India,
Commission arrived at governments? - Helps in policy design.
its own methodology. To answer these Qs, PC would use - Helps in monitoring
E.g. 14th FC: 42% Gadgil Mukherjee formula schemes’ through its
vertical, and 5 factor (designed in 8TH FYP)- based on dashboard e.g. ‘School
formula for horizontal population, per capita income, Education Quality Index’,
distribution. special problems etc. of a state. ‘SDG India Index’, ‘Digital
Transformation Index’
< More about Planning Commission and NITI Aayog in 📑Pillar#4>
🔠❓ MCQ. In India, which of the following review(s) the independent regulators in sectors like
telecommunications, insurance, electricity etc. ? (UPSC Prelims-2019)
1. Ad Hoc Committees set up by the Parliament.
2. Parliamentary Department Related Standing Committees
3. Finance Commission (4) Financial Sector Legislative Reforms Commission (5) NITI Aayog
Answer Codes: (a) 1 and 2 (b) 1 , 3 and 4 (c) 3, 4 and 5 (d) 2 and 5
23.7 🍋(🧔⚖️️🤷‍♂️🙏) S PECIAL CATEGORY STATES? विशेष श्रेणी के राज्य?

Figure 3: हमारा राज्य गरीब है, इसलिए हमे विकास के लिए कें द्र सरकार ने अलग से ढेर सारा पैसा देना चाहिए.
- 1952: The National Development Council (NDC: राष्ट्रीय विकास परिषद) was set up, with PM, CMs and
other representatives to approve FYP prepared by the Planning Commission.
- Although NDC became obsolete with establishment of NITI Aayog.(फू टा हुआ कारतूस बन चुका है)
- 1969: 5th FC recommended giving extra ₹₹+ tax-relief to certain disadvantaged states. Over the
years, NDC added more states into the Special Category List based on
✓ (i) hilly and difficult terrain (पहाड़ी और कठिन भूभाग)
✓ (ii) low population density and / or sizeable share of tribal population (कम जनसं ख्या
घनत्व और / या जनजातीय जनसं ख्या का बड़ा हिस्सा)
✓ (iii) strategic location along borders with neighbouring countries (पड़ोसी देशों के साथ
सीमाओं के साथ रणनीतिक स्थान)
✓ (iv) economic/infrastructural backwardness (आर्थिक/अवसं रचनात्मक पिछड़ेपन)
✓ (v) non-viable nature of state finances. (राज्य वित्त की गैर-निहित प्रकृ ति।)
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- Examples: 8 North Eastern states and 3 Himalayan States (JK, Uttarakhand, HP). Although,
Post-370 removal, J&K is no longer in this list.
- 🤩🤩Benefits of Sp.Cat. States? (विशेष श्रेणी के राज्यों को क्या रियायते / लाभ मिलते है?)
✓ Industrialists will be given benefits in Union-taxes for setting up factories in these states.
(उद्योगपति को फै क्ट्री लगाने पर कर में छू ट/ रियायत- ताकि वह पिछड़े राज्य में जाने के लिए आकर्षित हो )
✓ Union bears higher burden in Centrally Sponsored Schemes (CSS) e.g 90:10 ratio: (कें द्र
प्रायोजित योजनाएं में कें द्र सरकार अपनी जेब से ज्यादा अनुपात में पैसा देता)
✓ FC & PC would assign more weightage in their formulas to give them more funds.
- 14th FC: Previous FC assigned extra weightage & funds to Sp.Cat states, but 14th FC stopped
- But, whenever elections are near, W.Bengal, Bihar and Andhra CMs would demand Sp.Cat.
status & blame Union for ‘injustice’. (चुनाव करीब हो- उस वक़्त कु छ राज्य नाइंसाफी की बात करते हैं)
- 15th FC: Some States have requested special category status. But it’s not part of our
mandate/Terms of Reference. (वित् आयोग के विचारार्थ विषयो मे ये है ही नही!)
- So, at present, Sp.Cat states don’t get additional revenue/grants in FC’s formula. Although,
Union upon its own discretion continues to give them certain benefits in CSS. (वर्तमान वित्त आयोग,
इन राज्यों को अलग से कोई पैसा नहीं देते। किं तु कें द्र सरकार स्वयं के विवेक से योजनाओं में ज्यादा पैसा दे सकती है।)

24 🍋👺🕵🏻 T AXATION → BLACK MONEY & ALLIED ISSUES

Tax Planning / Tax When person invests money in LIC/PPF/Pension funds etc.in such manner
Mitigation that he can claim various deductions legally available in the Income Tax Act.
(कर-नियोजन) It’s neither illegal nor unethical. (न ही अवैध और न ही अनैतिक)
Black Money It is an income or transaction that is taxable yet NOT reported to the tax
(काला धन) authorities concealed from the tax authority.
कालाधन ऐसी आय/लेनदेन है जो की कर-पात्र है, किन्तु कर-अधिकारियों से छिपाई गई.
Parallel Economy The economy that runs on black money. (समानांतर अर्थव्यवस्था जो काले धन पर चलती है)

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 👺Tax Evasion When person hides income or transaction from tax authorities, and thereby
(कर अपवंचन evades paying taxes. It’s illegal. (कराधान योग्य आय या लेन देन को सरकार से छिपाना)
कर-चोरी)
🤵🍸Tax Avoidance When person discloses his income and transactions to tax authorities but uses
(कर परिहार legal loopholes to avoid paying taxes. E.g. Bollywood stars who register digital
कर-टालना) media companies in Tax Havens. It may not be illegal in every case, but still
unethical. (कराधान योग्य आमदनी या लेनदेन को सरकार से छिपाना नहि, लेकिन क़ानून मे छिद्रों के
इस्तेमाल द्वारा कर को टालना जाना। )
🍸Tax Haven Is a country that demands little taxes from foreigners and offers legal
(कर स्वर्ग) loopholes for Tax Avoidance & opportunities for Tax Evasion. E.g.
एसा देश जहां कर टालने / Liechtenstein, Mauritius, Marshall Islands, Cayman Islands, Panama, Nauru,
Vanuatu etc. These countries are geographically small, & without viable
छिपाने के लिए बहुत अवसर
economy. So they offer such mechanism to attract foreign investors and
मिलते हैं
foreign tourists.
👺→🤵Money  When drug trafficking, ransom, corruption and other criminal activity
laundering generates substantial profits, the criminal tries to spend / invest / hide the
(गैरकानूनी तरीके से प्राप्त money without attracting attention.
धन को वैध बनाना)  Money laundering (धनशोधन) is the process of disguising the source of
money, as if it came from a legitimate activity, & then channelize it into
banks, share market and other financial intermediaries.
Hawala  Hawala is an illegal money transfer / remittance system. Money is paid to
गैर कानूनी रूप से एक जगह an agent who instructs an associate in the relevant country or area to pay
से दूसरी जगह पैसा भेजना the final recipient.
Although used by Indian workers in middle east because lower commission
than post-office/bank transfers, + better network in remote villages
Shell firms, They do not have any active business operations. Created with sole objective
Post-box/ of money laundering/tax evasion/avoidance E.g. Mishail Packers and Printers
Letter-box Pvt Ltd. allegedly setup by Misa Bharti Yadav to launder ₹1.2 crores (as per
companies Enforcement Directorate). मात्र कर चोरी के लिए बनाई गई कं पनियां
Panama Papers International Consortium of Investigative Journalists is a USA based
(2016) nonprofit organization: released these incriminating documents from certain
Paradise Papers law firms in tax havens & showed how big politicians, businessmen,
(2017) sportsmen, filmstars have setup shell companies for tax evasion/avoidance
Mauritius papers across the world.
(2018) Putin, Sachin, Ambani, Amitabh Bachchan & Aishwarya Rai also named in
Pandora Papers these papers. (पत्रकारों का एक वैश्विक सं गठन जिन्होंने अलग अलग दस्तावेज़ जारी कर साबित किया-
(2021) कै से दुनिया के रसूखदार लोग फ़र्ज़ी कं पनियां बनाकर कर चोरी करते हैं)
Tax Terrorism - Happens when tax authorities put undue pressure on an honest taxpayer
(कर आतंकवाद) to pay more taxes. (ईमानदार करदाता पर टैक्स अधिकारी अनावश्यक दबाव / उत्पीड़न करे)
🍋🍋🍋🕵🏻: 🙇🏻 - Critiques have used this word in context of Vodafone & Cairn cases.
TDS/TCS Tax Deduction at Source (TDS) स्त्रोत पर कर कटौती
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 Tax Collection at Source (TCS) स्त्रोत पर कर सं ग्रह
📑
These are the mechanism to discourage tax evasion. Ref:2A: IT Handout
PAN Card 10 letters alphanumeric numbered assigned to all taxpayers in India by
स्थाई खाता सं ख्याक Income Tax Dept. 📑Ref: 2A: GST Handout for more.
24.1 ( 🍋👺)🕵🏻B LACK MONEY → NOTABLE ORGANISATIONS

FinMin → Department of Revenue → ED is a Specialized financial

Enforcement investigation agency to enforce following laws
Directorate (ED: प्रवर्तन 1. Foreign Exchange Management Act,1999 (FEMA)
निदेशालय ) founded in ’56, 2. Prevention of Money Laundering Act, 2002 (PMLA)
HQ: Delhi. 3. Conservation of Foreign Exchange and Prevention of Smuggling
Activities Act, 1974 (COFE- POSA) to fight against smugglers.
FinMin → Department of Revenue → CBIC → DRI is an agency to
Directorate of Revenue
investigate Customs/Narcotics/Wildlife/Arms related smuggling & illegal
Intelligence
activities. (DRI: राजस्व आसूचना निदेशालय)
Dept of Revenue → CBIC → CBN (HQ: Gwalior). Also called National
Central Bureau of Opium Agency. (1) It supervises opium/poppy cultivation in Madhya
Narcotics (CBN) Pradesh, Uttar Pradesh and Rajasthan. (2) It fights against drug trafficking
using powers of Narcotic Drugs and Psychotropic Substances Act, 1985
Financial Intelligence It analyses the suspected financial transactions in domestic and
unit (FIU-2004: वित्तीय crossborder levels & reports directly to the Economic Intelligence Council
आसूचना एकक) (EIC: आर्थिक आसूचना परिषद) headed by the FM
Deals with appeals in Union’s indirect taxes other than GST. (For GST,
Customs, Excise and there is separate tribunal, refer to previous handout)
Service Tax Appellate - Stage1: Junior Officers | Stage2: Commissioner
Tribunal (CESTAT) - Stage3: Customs, Excise and Service Tax Appellate Tribunal
(CESTAT) | Stage4: HC → SC.
Financial Action Task - is a brainchild of G7, Combating Money laundering and terror
Force (FATF-1989: finance. India became member in 2010. HQ@Paris
HQ@Paris - Greylist: nations that safe haven for terror financing and money
वित्तीय कार्रवाई कार्यदल: ऐसे laundering. E.g. Syria, Yemen, etc are on the grey list. (Update 2022:
बदमाश ग़ैर ज़िम्मेदार देशों की Mauratius & Pakistan REMOVED from this list)
सूची बनाता है जहाँ धनशोधन
- Blacklist: nations that are not cooperating in the global fight against
और आतंकी वित्तपोषण के
money laundering, terrorist financing. Iran and N.Korea
ख़िलाफ़ सख़्ती नहीं है)

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 OECD (1961:  Organisation for Economic Co-operation and Development
HQ@Paris.  Works for International cooperation in the matters of economy and
आर्थिक सहयोग तथा विकास taxation. Known for Base erosion and profit shifting (BEPS) Norms.
सं गठन)  India is not a member of OECD, yet. HQ@Paris.
24.2 🍋👺 T AX EVASION (HIDING INCOME / TRANSACTION) (कर चोरी)
24.2.1 🍋👺⚖️️Prevention of Money Laundering Act (PMLA-2002)

धनशोधन निवारण अधिनियम

➢ 1998: UN General Assembly (UNGA) declaration on Money Laundering → 2002: India enacts
this law to combat money laundering with search-seizure-arrest-penalty. Main agency?
Enforcement Directorate. (सं युक्त राष्ट्र सामान्य परिषद की घोषणा के बाद भारत ने क़ानून बनाया था)
➢ Cases heard @ PMLA Adjudicating Authority (न्यायनिर्णयन प्राधिकारी) → PMLA Appellate Tribunal
(अपीलीय प्राधिकरण) → High Court → Supreme Court.
➢ RBI, SEBI, IRDAI and other regulators to make norms for Banks/NBFCs.
➢ E.g. RBI’s Know Your Customer (KYC) norms and Anti-Money Laundering (AML) standards.
2013: Online Magazine Cobrapost’s sting operation proved ICICI, HDFC and Axis Bank were
flouting norms so RBI imposed a heavy penalties.

24.2.2 🔎🌸🌐 PMLA Reporting Norms to apply on Crypto-exchanges (2023)

➢ crypto-exchange is a platform where buying and selling of bitcoin and other crypto currency,
NFTs takes place. e.g. Unocoin, Coinswitch etc.
➢ 2023: cryptoexchanges will have to perform the know your customer (KYC) guidelines i.e.
collect ID proof, PAN/Aadhar, verified the residential address etc. (अपने ग्राहक को पहचानो नियमावली का
पालन करना होगा)
➢ crypto-exchanges will have to notify any suspicious transactions to authorities. (सं दिग्ध लेनदेन के बारे
में सरकार को सूचित करना होगा)
➢ Govt issued these directives using Prevention of Money Laundering Act (PMLA-2002)

24.3 🫵B URDEN OF PROOF & PMLA

Burden of proof = responsibility of substantiating statements with evidence. (सुबूत पेश करके आरोप को
साबित/सिद्ध करना।)

Burden of Proof (सबूत का बोझ) Reverse Burden of Proof (सबूत का उल्टा-बोझ)

On Police/Prosecution. They’ve to prove accused On Accused Person. He has to prove he
person committed crime. (पुलिस/सरकारी वक़ील ने साबित didn’t commit crime. (आरोपी पर बोझ होगा कि वह
करना होगा कि आरोपी ने वो जुर्म/अपराध/गुनाह किया है) स्वयं साबित करे उसने गुनाह नहीं किया।)

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 Burden of Proof (सबूत का बोझ) Reverse Burden of Proof (सबूत का उल्टा-बोझ)
e.g. Present Indian penal code (IPC) / future - e.g. Terrorist and Disruptive Activities
Bharatiya Nay Sanhita (Prevention) Act (Sanjay Dutt case)
- Narcotic Drugs and Psychotropic
Substances Act, 1985 (SRK-son Aryan)
- Prevention Of Money Laundering Act,
2002 (Rahul - National Herald Case)

24.3.1 🍫 PMLA Amendments via Finance Bill = Money Bill?

- Between 2015-19: Govt amended the PMLA Act

- To increase the powers ED to summons, arrest, and raids. (प्रवर्तन निदेशालय की शक्तिओं में बढ़ोतरी)
- Imposed ‘reverse’ burden of proof on accused. So automatically it became near impossible to get
bail. (ज़मानत लगभग असं भव क्योंकि सबूत का उल्टा-बोझ आरोपी पर ही डाला गया)
- These changes were made by amending PMLA via Finance bill (instead of directly amending the

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 PMLA Act- to avoid Rajya Sabha scrutiny) (धनशोधन क़ानून में सीधा सं शोधन नहीं किया वर्ना राज्य सभा की अनुमति
लेनी पड़ती है, और राज्यसभा में उस वक्त बीजेपी की बहुमति नहीं थी। इसलिए परोक्ष रूप से वित् बिल में छिपाकर किया।)
- So, case filed in Supreme court against this for violation of fundamental rights of the accused
person (through reverse burden of proof).
- 2022: SC held Govt is right in doing this & Opposition parties/PIL-Walla are wrong.
- 2023: Chief Justice of India (CJI) D.Y. Chandrachud said he will constitute a seven-judge
Constitution Bench to revisit this matter. (इस मामले को फिर से देखेगी सुप्रीम कोर्ट की सं वेधनिक खं डपीठ )

24.3.2 🍋👺⚖️️Undisclosed Foreign Income & Assets Act (UFIA-2015)

अज्ञात विदेशी आय तथा परिसं पत्ति अधिनियम

➢ It requires Indian residents to disclose their foreign assets (e.g. bungalow in Dubai, Bank account
in Switzerland), and income coming from foreign sources (e.g. shell company in Cayman Island)
in their income tax forms. (विदेशी आमदनी और विदेशी निवेश की जानकारी अपने आयकर फॉर्म में देनी होगी)
➢ Such foreign income will be subjected to 30% income tax. No deduction, exemption or rebate
➢ Violation = Penalty + upto 10 years jail time.
➢ If a company is found violating the Act, then every person responsible to the company shall also
be liable for punishment unless he proves that it was done without his knowledge.
➢ Empowers Union to enter into agreements with other countries for the tax info exchange.

24.3.3 🍋👺⚖️️Benami Transactions Prohibition Act (BTPA- 1988, 2016)

 1988’s original act did not achieve much results → amended in 2016. Main Agency? Income
Tax Department. (बेनामी लेनदेन (निषेध) अधिनियम:)
 Benami refers to properties that buyer registers in the name of his relative, personal staff (Driver,
Gardner) or a non-existent/ fictitious persons (काल्पनिक व्यक्ति) to avoid tax authorities’ attention.
 E.g. 2018: Misa Bharti Yadav (allegedly) bought farmhouse in the name of her brother-in-law
Nilesh Kumar.
 Cases heard @ PMLA-walli bodies. Violation = Confiscation of property + penalty + Jail

🔠❓MCQ. ‘Prohibition of Benami Transactions Act’: find correct statement(s):( Pre-2017)

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1. A property transaction is not treated as a benami transaction if the owner of the property is not
aware of the transaction. (यदि सं पत्ति का मालिक कहें कि “मुजे लेनदेन के बारे में नहीं पता था” तो उसकी सं पत्ति को बेनामी
नहीं माना जाएगा)
2. Properties held benami are liable for confiscation by the Govt. (बेनामी सं पत्ति को सरकार जप्त/क़ब्ज़े मे लेगी)
3. The Act provides for 3 authorities for investigations but does not provide for any appellate
mechanism. Answer Codes: (a) 1only (b) 2 only (c) 1 and 3 only (d) 2 and 3 only
24.4 ( 🍋👺)💼 T AX EVASION → GOVT ANNOUNCEMENTS
24.4.1 🍋👺🙌 Tax (Evasion) “Surrender” schemes
गुनाह कबूल करो / आत्म-समर्पण करो तो कम जुर्माना भरना होगा / जेल नहीं जाना होगा

Under such schemes, a tax-evader can declare his undisclosed income, pay the taxes and penalty.
Then, Income Tax Department will not pursue case against him. (Although Police may still pursue
case if income is from narcotics, kidnapping, extortion etc.)
Income Declaration Offer? 45% of the undisclosed income shall be taken away by govt as (tax 30%
Scheme (IDS) + surcharge + penalty). ~67,000 cr black money was declared.
from 2016 JuntoSept

Pradhan Mantri - ~50% of the undisclosed income shall be taken away by Govt. as Tax +
Garib Kalyan Penalty + Pradhan Mantri Garib Kalyan Cess.
Yojana (PMGKY) - Further, 25% of the undisclosed income shall be deposited in RBI’s
Launched after
‘Pradhan Mantri Garib Kalyan Deposit Scheme, 2016’. It’ll be a fixed
Demonetization
📅
Validity?
-
deposit for 4 years @ ZERO % Interest rate.
The PM Garib Kalyan cess, and deposit will be used for schemes related to
2016-Dec:
To 2017-April irrigation,housing,toilets,infrastructure, edu, health etc.
- The scheme was not very successful, hardly ~ ₹ 5000 cr. declared.

🍋🛒👺🙌 Sabka - Businessman accepts his fault, Tax officials gives a ‘discount/relief/waiver’
Vishwas L.D.S in the penalty/late-fees, and the matter is settled, instead of litigating in
Scheme 2019 courts for years & years.
In budget-2019 - For pending cases in Service Tax & Excise Duty

24.4.2 🍋👺🙌 Vivad se Vishwas Scheme for Direct Taxes (💼Budget-2020)

Presently, >₹9 lakh cr worth direct tax cases pending before Appellate Forums (अपीलीय मंचों के समक्ष
लंबित मामले) viz. IT Commissioner (Appeals) → Income Tax Appellate Tribunals (ITAT: आयकर अपीलीय
न्यायाधिकरण ) → HC → SC. So, 💼Budget-2020 → “Direct Tax Vivad se Vishwas Bill/Act, 2020”.
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 Scope: Appeal related to Income tax or Corporation Tax, pending before a forum as of
31/Jan/2020. Then,
 Taxpayers can settle with IT dept by paying 50-100% of the disputed tax amount- depending on
the case-matter.
 he'll get a complete waiver/relief from interest+penalty (ब्याज और जुर्माना से माफी).
 Above scheme is valid upto 31/March/2020, then Atma-Nirbhar Bharat extended it further.
 This scheme is not applicable if:
o person is under prosecution for criminal activities. (अपराधिक मामले चल रहे हो)
o If black money is hidden in foreign countries. (विदेश में काला धन छिपाया हो)

24.4.3 🍋👺🙌 Dispute Resolution Committee (DRC) in 💼Budget-2021

 💼Budget-2021 Announced to setup this committee under the Income Tax Act (आयकर कानून के
अंतर्गत विवाद निपटान समिति)
 Anyone with a taxable income up to ₹50 lakh and disputed income up to ₹10 lakh shall be
eligible to approach the Committee. Committee can reduce, waive any penalty or give immunity
from any offence. (गुनाह कबूल कर लो /समझौता करवालो तो कम जुर्माना भरना होगा / जेल नहीं जाना होगा इत्यादि)
 It will help the small taxpayers to settle tax matters without going through legal expenses & time
wastage in the regular appellate process. (i.e. viz. IT Commissioner (Appeals) → Income Tax
Appellate Tribunals (ITAT: आयकर अपीलीय न्यायाधिकरण ) → HC → SC. (छोटे करदाता का कोर्ट कचहरी में
मुकदमें बाजी मैं समय और पैसे बच जाएगा)
 It will be a faceless / online Committee to ensure efficiency, transparency and accountability.

24.4.4 TDS on influencers / influencer tax

24.4.5 🍋👺 Tax Evasion → Other Initiatives from older days (अन्य कदम)
Banking Cash A 0.1% direct tax levied on cash withdrawals from banks. Started by
Transaction Tax Chidambaram but later withdrawn (2005-09). Objective was to encourage
(BCTT: 2005-09) less-cash economy and data mining of transactions.

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 A proposal by a Pune based think-tank to Baba Ramdev that all the direct
and indirect taxes of the Union and states should be abolished and
(Suggested) Banking replaced with 2% tax on banking transactions.
Transaction Tax (BTT) Impracticable because such experiments were tried and failed in Australia
बैंकिं ग लेनदेन पर कर and other countries as people shifted to using barter system, diamonds
and gold for transaction. 2017: Govt clarified they are not considering any
such proposal. So NOTIMP
Chairman: Retd. SC Justice MB Shah, and senior tax officials. They
SC’s special investigation
recommended various measures against Black Money hidden in India, in
team (SIT) on Black
overseas banks, P-Notes etc. SC ordered Govt to implement its
Money 2014
recommendations.
Operation Clean Money 2017: IT Dept. verified large bank deposits made Post-demonetization.
Budget 2017 → Finance Act, 2017 →
1) if anyone accepts ₹ 2 lakh /> CASH in a day / in multiple transactions
related to one ‘event’, then Income Tax Dept penalty = 100% of the cash
received.
Restrictions on Cash
Banks, post office, govt organisations that receive cash = are exempted.
Transactions, 2017
2) normally political party does not have to pay income tax. But if
political party accepts more than ₹2000 CASH as donation → political
party will have to pay income tax on such donation. (This rule made to
encourage the use of cheque/ NEFT/ RTGS/ Electoral bonds in donation.)
Electoral Bonds, 2017 📑Ref: Pillar#1C: SEBI/Sharemarket handout
24.5 ( 🍋👋🤵)T AX AVOIDANCE (कर परिहार / कर टालना)
Here, people will not hide the transaction, they’ll blatantly declare transactions in their official
records, but will use legal loopholes (कानूनी-खामिया) to avoid paying taxes.

24.5.1 🍋👋🤵 Double Taxation Avoidance Agreement (DTAA) & Round Tripping
➢ DTAA: It is a tax treaty signed between two or more countries.
➢ Objective? A taxpayer resides in one country and earns income in another, then he need not pay
(direct) tax twice in two countries for the same income.
➢ e.g. India Mauritius DTAA (1982): If a Mauritius person / company buy shares in India and sells
them at profit, then he need not pay Capital Gains Tax (CGT) in India. Only the Mauritius
government can ask CGT from him. And vice-versa. (दोहरा कराधान परिहार समजौता)
➢ 😰Loophole? India has ~10-20% CGT whereas Mauritius ~0-3% CGT (depending on nature of
asset, how long the buyer kept asset before selling etc). So many Indian Politicians, Businessmen
and Bollywood actors would transfer the money using Hawala to their shell companies in
Mauritius → make those Mauritius Cos to invest back in Indian assets → avoid Indian CGT.
➢ This process is called Round Tripping (राउं ड-ट्रिपिंग) i.e. money that leaves the country through
various channels and makes its way back into the country as foreign investment.

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➢ Similar loophole in India Singapore DTAA. 2016: Modi government amended the treaties = even
Mauritius and Singapore investments in India will be subjected to Indian taxes.

24.5.2 🌐👩🏻‍⚖️️International Law: Monism and Dualism & application of DTAA

Monism- अद्वैतवाद Dualism- द्वैतवाद
A dualist system treats the international and
International law is superior to domestic law.
domestic systems of law as separate and
(अंतर्राष्ट्रीय कानून घरेलू कानून के ऊपर है / सर्वोपरी है।)
independent (दोनों ही अलग और स्वतंत्र है)
If there in any conflict between the two laws,
then international law will prevail over the Not necessary.
domestic law.
International law automatic applies to the International law will be applicable in a nation,
country without changing the local laws. (बिना ONLY after that nation amends its local national
राष्ट्रीय स्तर के कानून में कोई बदलाव किए अंतरराष्ट्रीय कानून के laws. (जब देश के खुद के कानून में सुधार/सं शोधन किया जाएगा
प्रावधान सीधे ही उस देश पर लागू/अमल हो जाएं गे। ) तभी उसे देश में अंतरराष्ट्रीय कानून के प्रावधान लागू हो सकते हैं)
India doesn’t follow this system. India follows this system.
Why in news? 2023: SC ruled DTAA applicable ONLY after Indian government amends/notifies
such DTTA under India’s own income tax act.

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24.5.3 🍋👋🤵 Tax Avoidance through Non-Resident Status

If a person is
🦁Has to pay his IT on 🐼Has to pay IT on global income e.g.
income coming from India? income coming from the USA/China?
Ordinarily
Yes Yes
resident of India
Non-residents Yes No
If India has a double taxation avoidance agreement (DTAA) with other nation, then above things
may differ (e.g. recall erstwhile Mauritius CGT-roundtripping-walla example)

Table 2: 💼Budget-2020 changed these definitions

Definition in Indian Tax laws Before Budget-2020 → 💼Budget-2020
Ordinarily Indian Resident (साधारणतया भारतीय निवासी) 182 days/> in a year 120 days/>
= person who stays in India for →
Non resident (गैर निवासी)= person who stays outside 182 days/> in a year 246 days/>
India for →
 Implications? Person will have to stay out of India for a longer period if he want to be treated as
“Non-Resident” to avoid taxes on his global income.
24.5.4 🍋👋🤵 Place of Effective Management (POEM: पीओईएम)

(विदेश में बनी फर्जी कं पनी के प्रबं धन का वास्तविक स्थान भारत में स्थित है तो भारत सरकार उसके मुनाफे पे टेक्श मांगेगी।)

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24.5.5 🍋👋🤵 Base Erosion and Profit Shifting (BEPS: बीईपीएस)

 When MNCs shift profit from its source country to a tax-haven to avoid / reduce paying taxes, its
known as “BEPS”. (बहुराष्ट्रीय निगम द्वारा मुनाफे को स्थानांतरित करना ताकि भारत में उसे टेक्श कम भरना पड़े )
 India signed the OECD’s joint Multilateral Convention to Implement Tax Treaty Related
Measures to Prevent Base Erosion and Profit Shifting (commonly referred to as MLI) ओईसीडी के
बहुपक्षीय समझौते पर हस्ताक्षर किए हैं

24.5.6 ⚓️ Safe Harbour Rules (सुरक्षित बंदरगाह नियम)

It is a concept related to legal immunity (कानूनी सं रक्षण).

🐥 e.g. for social media 🍋e.g. for calculation of direct taxes

in certain type of transactions involving
if a user released pirated movie on Facebook → transfer pricing and foreign investors →
govt will not take action against Facebook owner Indian tax officers will not take action against
Mark Zuckerberg but government will take action those foreigners.
only against user.
See next section for transfer pricing.

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24.5.7 🍋👋🤵 Transfer Pricing & Authority for Advance Rulings (AAR) (हस्तांतरण मूल्य)

✋Not really important। What above thing means ? = explained in video lecture.
24.5.8 (🍋👋🤵) 🕵🏻 General Anti-Avoidance Rules (GAAR)
Till now we learned how Indians and foreigners avoid tax payment in India through loopholes like
DTAA, POEM, BEPS, Transfer Pricing etc.
 So, UPA/Congress Govt setup economist Parthasarathi Shome panel who suggested General
Anti Avoidance Rules (GAAR: कर परिवर्जन रोधी व्यापक नियम) → they were added Income Tax Act
 GAAR empowers Income Tax officials to send notices to both Indians and foreigners for
suspected Tax Avoidance. (For Tax evasion, we’ve separate laws- PMLA, UFIA, BTPA)
 But critics alleged GAAR will result in tax terrorism, harassment, no ease of doing biz. So
successive Budgets kept delaying the GAAR- implementation. Finally done on 1/4/2017.

24.6 ( 🍋👋🤵:⌛️️) 🕵🏻 R ETROSPECTIVE TAX: VODAFONE

 (Intro: Origin) To avoid paying capital gains tax in India, the foreign companies usually create
shell companies to indirectly transfer Indian assets. (भारत में पूंजीगत लाभ कर से बचने के लिए विदेशी कं पनियों
द्वारा शेल कं पनी बनाकर भारतीय सम्पत्तियों की परोक्ष रूप से ख़रीद बिक्री की जाती है)
 e.g. 2007: Vodafone (Its Netherland subsidiary company) bought shares of CGP company
(Cayman Island based shell company) from HTIL Company (based in Hong Kong). Thus,
Vodafone became (indirect) owner of Hutch (India) because CGP company owned Hutch India.
(वोडाफ़ोन ने इसी तरह से परोक्ष रूप से भारतीय कं पनी ‘हच’ को ख़रीदा था)
 Income tax dept demanded capital gains tax (CGT) → Vodafone went to Supreme Court. [Note:
In CGT: the administrative mechanism is such that IT dept will require buyer to deduct CGT &
Deposit. That's why IT Dept asking Vodafone (buyer) for the CGT tax. For more watch lecture.]
 2012: Vodafone won the case. Indian Supreme Court ruled that presently Indian tax laws do not
allow taxation on non-Indian assets traded outside India. (सर्वोच्च न्यायालय ने पाया कि इन स्थितियों में कर
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 माँगना भारतीय कराधान कानूनों के अधिकार क्षेत्र से बाहर हैं।)
 2012-May: UPA/Congress government amended the Income Tax Act 1961 with retrospective /
Ex post facto effect that “even if non-Indian assets (e.g. Shares of Cayman Company) traded
among Non-Indians (Netherland and Hongkong walli companies), but IF the underlying value is
derived from Indian asset (Hutch) then then we can tax it.” (2012 में सरकार ने क़ानून में सं शोधन किया है
ताकि 2007 की लेनदेन पर पूर्व प्रभावी/भूतलक्षि रूप से कर/टेक्ष माँग सके )

 (Definition) Respective taxation= It is an act of demanding tax on a transaction that occurred in

the past, when such transaction was not taxable. e.g. in 2012- demanding tax on 2007’s event,
even though in 2007 it was not taxable as per law in 2007. (पूर्वप्रभावी/भूतलक्षी कराधान यानी की कोई ऐसी
भूतकाल की लेनदेन पर कर माँगना, जिसपर उस भूतकाल में क़ानून रूपसे कर नहीं लगता था)
 Then Govt issued fresh notices against Vodafone “now any transactions that occurred after 1962
are also taxable. So you pay tax + penalties“
 Separately, India had signed an investment treaty with Netherlands. Such investment treaties
allow the aggrieved investor to complain in the specialised international tribunals at Singapore,

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 Netherland, etc So, Vodafone (its Netherlands subsidiary company) filed case against Indian
Government in Netherlands. (द्विपक्षीय निवेश समझौतों के अंतर्गत यदि विदेशी निवेशक भारत ने नाराज़ है तो वो निवेशक
विदेश में उसके बारे में के स कर सकता है. वोडाफ़ोन कं पनी ने भारत के ख़िलाफ़ नीदरलैंड में के स दायर किया.)
 The then Gujarat chief Minister had Modi called it “Congress/UPA’s Tax Terrorism on
Companies” (उस समय के गुजरात मुख्यमंत्री मोदी ने इसे कांग्रेस सरकार का कर-आतंकवाद बताया था)

24.6.1 ( 🍋👋🤵 ⌛️ 🕵🏻
: ️) Retrospective Tax: Cairn Energy
Cairn Energy Company’s case is also similar to Vodafone Hutch case. Income tax dept was
demanding Capital Gains Tax. Cairn complained to Netherland Arbitration Court under the
provisions of India Britain bilateral investment Treaty. (Such treaties allow the aggrieved investor to
complain in the specialised international tribunals at Singapore, Netherland, etc.)

 2020-21: Netherland Arbitration Court had ordered Indian govt to pay $1.2 billion to Cairn
Energy for tax harassment. (नीदरलैंड की कोर्ट ने भारत सरकार पर एक बिलियन डॉलर से ज़्यादा का जुर्माना डाला)
 To recover this $1.2 billion compensation, Cairn company was trying to seize Indian Govt's
assets in foreign countries e.g. Air India planes parked on USA Airport, Indian Govt’s embassy
office/properties in Paris etc. (कं पनी मुआवज़े की वसूली के लिए भारत सरकार की विदेशों में स्थित सं पत्तियों पर
क़ब्ज़ा/नीलामी चाहती है)
o 2021-Aug: FinMin introduced a Taxation Laws (Amendment) Bill, 2021 to end
retrospective tax rule-( वित् मंत्रालय का कराधान क़ानून सं शोधन अधिनियम २०२१- जिसमें पूर्वप्रभावी/भूतलक्षी
कराधान को रद्द किया)
o “If indirect transfer of Indian assets occurred before May 28, 2012, then Indian
government will not demand taxes on it. (2012 से पहले हुए इस प्रकार के लेन देन पर कोई भूतलक्षी
कराधान नहीं माँगा जाएगा।)
o however it requires that company need to drop the cases against Indian tax authorities,
filed in the Indian and foreign courts. (हालाँकि इस रियायत मैं शर्त ये है, कि कं पनी ने भारतीय सरकार के
ख़िलाफ़ जो जो मुक़दमे भारतीय और विदेशी अदालतों में दायर किए हैं, उन्हें वापस लेना होगा।)
 2021-Sept: Cairn agrees to drop cases filed against India in France, Netherland, USA etc. And
government of India agreed to drop the (retrospective) tax demand against Cairn. Vodafone also
planning to do similar. (उन विदेशी कं पनीयो ने भारत सरकार के ख़िलाफ़ विदेशी अदालतो में दर्ज किए के सों को वापस लिया)

🔠❓Which one of the following situations best reflects “Indirect Transfers” often talked about in
media recently with reference to India ? (Prelims-2022)
(a) An Indian company investing in a foreign enterprise and paying taxes to the foreign country on
the profits arising out of its investment
(b) A foreign company investing in India and paying taxes to the country of its base on the profits
arising out of its investment
(c) An Indian company purchases tangible assets in a foreign country and sells such assets after their
value increases and transfers the proceeds to India
(d) A foreign company transfers shares and such shares derive their substantial value from assets
located in India

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24.7 🍋👋🌐:🤵 G LOBAL MINIMUM TAX (वैश्विक न्यूनतम कर)

 (Introduction: Origin) Tax Haven/Low Tax nations such as Luxembourg (Corporation Tax:
1.39%), British Virgin Island 0.07%, Cayman Islands 0.2 %. These countries are geographically
small, & without a viable economy. So they offer such a mechanism to attract foreign investors
and foreign tourists. (कर स्वर्ग ऐसे देश हैं जहां पर प्रत्यक्ष करों की दर बहुत कम होती है ताकि विदेशी निवेश और विदेशी
पर्यटकों को आकर्षित किया जा सके )
 Multinational corporations register their company here to transfer their profits/avoid paying
taxes to normal countries where they are operating. India is losing annually $100 cr, while USA
is loosing annually $500 cr by this. (बहुराष्ट्रीय कं पनियां ऐसे कर स्वर्ग की मदद से कर-परिहार/करो को टालती है.)
 USA: Former President Donald Trump ⏬decreased corporation tax from 35% to 21%. New
⏫
President Joe Biden aims to taxes for Corona-welfare schemes for Americans. Biden also
urged G20 group of countries to keep minimum level of Corporation taxes. (Given in next topic)

24.7.1 🍋👋🌐 🤵 : Global Minimum Tax: G7 Framework

G7 Summit-2021: The theme is ‘Build Back Better’. Venue: Cornwall, England. Members: US, UK,
France, Germany, Italy, Canada and Japan- with following outcomes:
 Companies need to pay in the countries where they do business.(कं पनी जिस देश में धंधा व्यापार कर रही है
वहां उसने कर देने होंगे)
 G7 framework/agreement for global minimum tax framework of 15%. (बहुराष्ट्रीय कम्पनियों पर न्यूनतम
15 प्रतिशत कर/टेक्स)
 In the past, countries engaged in a tax-reduction race, to attract FDI investments. This needs to
be discouraged. (विदेशी निवेश को आकर्षित करने के चक्कर में अलग अलग देश अपने करो की दरे कम किये जा रहे थे. इस
स्पर्धा को रोकना होगा)
 Later such treaty may be used for imposing sanction / international lawsuits /armtwist tax
havens to increase their taxes. Then it'll become difficult for companies to avoid paying taxes.
(भविष्य में इस प्रकार की सं धि द्वारा छू ट-भैय्ये कर-स्वर्ग देशों पर प्रतिबं ध /दंड/अंतरराष्ट्रीय मुकदमे चलाए जाएं गे। ताकि वे भी अपने
करो की दरें बढ़ा दें. अंतत: बहुराष्ट्रीय कं पनियों के लिए कर-परिहार मुश्किल होगा।)
 2021-Jul: India supported the idea.

24.7.2 🍋👋🌐:🤵 G7-OECD “Two” Pillar Solution for Global Minimum Tax
For implementation of above G7 15% Global Minimum Tax Framework → OECD has given “Two-
Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy.“

Pillar#1 Pillar#2
Applies to? - Applies to ~100 biggest and most Applies to any company with
profitable multinational enterprises over 750 million EURO annual

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 Pillar#1 Pillar#2
(MNEs). revenue
Implications? - They need to re-allocates “X%” of their These companies would be
profit to the countries where they sell subject to an minimum 15%
their goods/services. (So, such govt can tax (on their profit).
count that profit & demand Corporation
Tax on it.) Associated term / keyword:
- All member-nations to remove all Digital qualified domestic minimum
Services Taxes. (e.g. India will have to top-up taxes (QDMTT)
remove equalisation levy/google tax. REF:
Handout Pillar#2A1- Direct Taxes.)
🔠MCQ. Quantified Domestic Minimum Top-up Tax' is a term related to _ _ _ _ . (EPFO-2023)
- (a) Global Anti-Base Erosion Rules - (b) Prevention of Money Laundering
- (c) Regulation of Crypto-currency - (d) Virtual Digital Asset Transactions
24.8 🍋🍋🍋🕵🏻: 🙇🏻 R EFORMS TO REDUCE TAX TERRORISM / HARASSMENT

We learned about the reforms to fight “Tax evasion” → ban on cash transaction of ₹ 2 lakh / >, -
Operation Clean Money etc. So, on one hand, Income Tax Department has to become 😡💪strict /
coercive to fight against Tax evasion. At the same time, IT dept. also needs to become more 🤝🌷
friendly towards honest taxpayers, So, following measures taken→ (कर आतंकवाद उत्पीड़न)

24.8.1 🍋🍋🍋🕵🏻 🧾: Pre-filled online forms for Tax Payers

Income Tax dept extract your financial data from Banks, NBFCs , Stock exchanges, Mutual Funds,
EPFO, Employers’ TDS submissions etc. → provides you with a Pre-filled tax returns containing
your salary income, capital gains from share/bond, bank interests, etc. (पहले से भरा हुआ फॉर्म आपको दे देंगे)
1) 🤩Income tax payers’ time and energy saved. He’ll not have to consult Chartered Accountant for
every small matter on how to fill form.
2) 🤩Accuracy of reporting income and paying taxes.

24.8.2 🍋🍋🍋🕵🏻:🧾Updated Return Form to correct errors- in 👜🥻Budget-2022:

- Sometimes, after filling up the Income tax form, the taxpayers may realize he committed mistakes
in reporting his income. So, 👜🥻 Budget-2022 announced a new ‘Updated Return Form’ to provide
an opportunity to correct such errors, within two years of filling the original details. (कभी कभी करदाता
फ़ॉर्म में अपनी आय लिखने में गलतियां करता है। तो दो साल के भीतर वो उसे सुधार कर सके , एसा नया फ़ार्म जारी किया जाएगा)

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24.8.3 🍋🍋🍋🕵🏻 🧾 : Faceless interaction between Tax payers and Tax official
Personal interaction between the assessee (=tax payer) and Income Tax official = more chances of
harassment / bribery. So, Government launched following reforms:
1) Cases will be allotted in random computerized lottery basis to IT officials without disclosing the
name, designation or location of the Officer.
2) faceless system (see next table)
Table 3: कर अधिकारी और करदाता के रूबरू मुलाकात/सं पर्क बिना आकलन और अपील कार्रवाई

Year Scheme Meaning

2019 Faceless - Example, taxpayer/assessee received a notice about discrepancy in
Assessment his reported income vs TDS submitted by his banker, then at initial
stage assessee need not visit IT-office, simply give clarification in
web-portal. (फे सलेस: बिना प्रत्यक्ष/रूबरू मुलाकात के निर्धारण)
2020 Faceless - So, even in appeal stage, assessee need not physically visit IT
Appeals commissioner / tribunal. It’ll be done online.
Scheme - all Income Tax appeals will be finalised in a faceless manner. Except
those related to serious frauds, major tax evasion, sensitive matters,
International tax etc. के वल बड़े और सं गीन मामलों में ही रूबरू सुनवाई होगी
24.8.4 🍋🍋🍋🕵🏻 🧾⏰ : Time limit on opening of past cases
Outdated for 2023 so deleting.

24.8.5 🍋🍋🍋🕵🏻:🧾 Document Identification Number (DIN: दस्तावेज़ पहचान सं ख्याक)

Whenever Tax official sends letters to taxpayers regarding search authorisation, summons, arrest
memo, inspection notices etc. All such documents will have computer generated ‘Document
Identification Number’ (DIN).
 2019: Both Central Board of Direct Taxes (CBDT) and Central Board of Indirect Taxes and
Custom (CBIC) started this practice.
DIN system benefits?
 It’ll create a digital directory of communication between tax authorities and taxpayers.
Transparency, accountability, efficient and faster clearance of cases, because all the information
available at the click of a mouse. (पारदर्शिता, जवाब देही, कार्य दक्षता, के सों का त्वरित निपटान)
 If a document doesn’t have DIN number, it’ll be treated invalid. Thus, DIN system will prevent
the corrupt tax officials from sending fake notices to harass/blackmail taxpayers for bribes.
Sidenote: Director Identification Number (DIN): Director of every company is required to obtain
this number from the Ministry of Corporate Affairs under the provisions of Companies Act. It helps

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monitoring the company act provisions related to “1 person can’t be director in more than ‘x’ number
of companies” etc.

24.9 📯🍋📜 T AXPAYERS’ CHARTER IN 💼B UDGET-2020 (करदाताओ का अधिकारपत्र)

A citizens’ charter (नागरिक अधिकारपत्र) is a document of commitments made by a government agency

to the citizens in respect of the services being provided to them.
 e.g Dept of Post's citizen charter reads, "we'll deliver speed post anywhere in India by 4-5 days
→ELSE complain online to this website & we'll solve it → if not solved in 90 days then complain
to Postmaster General → then to Chief Postmaster General.”
 Traditionally tax administrations paid limited attention to taxpayer service. पुराने जमाने में/पारंपरिक रूप
से कर-अधिकारी "करदाता को अच्छी सेवा देना" अपनी जिम्मेदारी नहीं समझते थे. घमं ड और बेरुख़ी से काम करते थे
⏫
 However, Modern times → demand for better services to the taxpayers → Govts across the
world, started framing charters and bill of rights for the taxpayers. हालांकि आधुनिक विश्व में इस प्रकार के
अधिकार पत्र और कानून बनाए गए हैं
1986 UK charters for taxpayers (करदाताओं का अधिकार पत्र) → more updated 2009
- 1991: citizen charter system started in UK by PM John Major
1991 - 1997: citizen charter introduced in Indian union ministries/departments.
(नागरिकों का अधिकार पत्र)
1988 USA Taxpayers’ Bill of Rights (करदाताओं के अधिकारों का विधेयक/कानून)
2007 Canadian taxpayers’ Bill of Rights
💼 Indian Budget-2020: CBDT will declare a Taxpayers’ Charter. So, Tax payer
2020 will easily know what services / complaint redressal mechanisms (शिकायत निवारणतंत्र)
are available to him= ⬇taxpayer’s harassment (करदाता का उत्पीड़न)
24.9.1 📯🍋📜 (Indian) Tax Payers' Charter released in 2020-Aug
It promises following things to taxpayers: करदाताओं को वादा करता है
1. You'll be treated in an impartial,courteous, professional manner. निष्पक्ष, विनम्र और पेशेवर तरीके से व्यवहार
2. You'll be treated/ presumed to be honest, unless there is a reason to believe otherwise. आपको
ईमानदार माना जाएगा।
3. We will provide complete and accurate information about rules & complaint mechanism etc a
timely fashion.नियम/शिकायत दर्ज कराने सम्बन्धी जानकारी
4. We will collect only correct amount of tax. (के वल सही राशि ली जाएगी। ज़बरन ज़्यादा राशि नहीं ली जाएगी।)
5. We will respect your privacy and confidentiality निजता व् गोपनीयता का सम्मान
6. We will hold our officers accountable for their wrongful actions. अधिकारिओ को गलत कार्यो की सजा देंगे
7. You can appoint a representative / tax lawyer to file replies/complaints//cases on your behalf.

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 मामले दर्ज करने के लिए एक प्रतिनिधि / कर वकील नियुक्त कर सकते हैं।
8. We'll reduce cost of compliance (e.g. number of forms to be filled, photocopies to be submitted
etc) अनुपालन की लागत कम करेंगे- फ़ालतू में दस्तावेज़ो की दर्जनों कॉपी निकालके फ़ॉर्म के साथ जोड़ने पड़े- एसे तमाशे बं द करेंगे.
9. +many other points but we have sufficient content for 250 words
It expects following things from taxpayers: Be honest, Pay taxes in time, Keep accurate records, be
informed, respond to notices in time when notices are given. (करदाताओं से निम्न अपेक्षा करता है की वे ईमानदार
रहें, समय में करों का भुगतान करें, सटीक रिकॉर्ड रखें, सूचित रहें, समयसर नोटिस का जवाब दें)

24.10 🍋🙇🏻: 🧜‍♂️🦸‍♂️T AX OMBUDSMAN IN 📔📔 E CONOMIC SURVEY 2021

‘Ombud’ is a Swedish term and refers to a person who acts as the representative or spokesman of
another person. 1809: The institution of Ombudsman was first created in Sweden- to look into
citizens grievances (लोकपाल/लोक प्रहरी- नागरिकों की शिकायतों के निवारण के लिए)

✅Homework: READ about Lokpal and Lokayukta in Polity Book

24.10.1 🍋🙇🏻: 🧜‍♂️🦸‍♂️Tax ombudsman: Indian experience
2003 Direct Tax Ombudsman In India Started (प्रत्यक्ष करों के लिए कर-लोकप्रहरी/शिकायत निवारण अधिकारी)
2011 Indirect Tax Ombudsman In India Started (अप्रत्यक्ष करों के लिए)
2019 Above posts were abolished (दोनों पदों को समाप्त कर दिया)
2021 Eco Survey recommends to setup tax ombudsman with statutory powers. More in the
Mains Handout.

24.10.2 🍋🙇🏻: Reducing Tax Terrorism / Harassment: online portals/Apps

Aaykar Setu - 2017: CBDT’s mobile app for Income Tax, TDS refunds etc.
Ease in paying Customs 1. Indian Customs Electronic Gateway (ICEGATE) webportal for e-
Duty services related to the Customs duty.
: 2. ICEDASH webportal: public can view daily data on customs
Portals/Apps by CBIC clearance at seaports and airports. (launched 2019-Nov)
3. ATITHI mobile app: for international travelers to file the customs
declaration in advance (e.g. ‘we are leaving or coming with “x” gms of
gold/diamonds/electronics etc on which y% customs duty is
applicable/exempted’). So, they don’t have to waste time at airport
queues in filing such declarations. (launched 2019-Nov)
Transparent Taxation - 2020-Aug: PM Modi launched this webportal/online platform with
Honouring the Honest following components:
पारदर्शी कराधान- ईमानदार का  Taxpayers’ Charter.
सम्मान करना  Automated Random/lottery allocation of investigation cases.
 Faceless assessment & Faceless appeal. No requirement of physical
interface between taxpayers and the Income Tax department.
Turant Customs  By Central Board of Indirect Taxes and Customs (CBIC)

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  Turant Customs initiatives= Faceless, Paperless, and Contactless
Processes / Application Forms, Assessment, Appeal etc for importers
and exporters
 It is to be implemented phase wise across India by 2021.

24.10.3 🔖 ITR / income tax return form – highest ever

- It is a prescribed form through which person/company needs to disclose income and pay direct
taxes.
- ITR forms have different form numbers such ITR-1 (Sahaj), ITR-4 (Sugam), ITR-2 etc.
depending on the type of taxpayer (salaried-employee, freelance-professional, company etc)
Year 2021-22 2022-23
No. of ITRs filed 5.83 crores 6.77 crores (highest ever) ⏫
24.10.4 🔍 Income Tax : E-Governance Initiatives in Modi-Raj
- This software monitors the TDS/TCS, e-commerce websites (e.g. Amazon
Non- Filers
se iPhone buying) etc. to identify the people who are doing high-value
Monitoring
transactions, but not filing income tax return (ITR) forms.
System (NMS)
- - Then IT Dept issues notice to such people / tax-evaders.
- TDS Reconciliation Analysis and Correction Enabling System (TRACES) -
TDS: TRACES is a web portal of the Income Tax Department.
Portal / Refund - Helps in deposit & refund of TDS/TCS.
Banker SBI - Refund is delivered to tax payer via Refund Banker SBI via
NEFT/RTGT/Cheque.(Ref: Pillar#2A1: TDS and refund)
Income Tax Dept. hired L&T Infotech ltd to develop an integrated platform for
data mining & tracking tax evaders.
Project Insight
(Related) Project Saksham 2016: CBEC/CBIC’s project for digital re-engineering
2017
related to GST. It’s not a ‘drive against black money’ but for ‘Ease of Paying Taxes’.
- (Related) Aaykar Setu: CBDT’s mobile app to pay Income Tax.
- Computer Assisted Scrutiny Selection
CASS
- Income Tax Department uses it to select cases for raid/prosecution.

24.11 🍋🌐🤝T AXATION → GLOBAL TREATIES, AGREEMENTS & INDEXES

24.11.1 🍋🌐🤝 Tax Information Exchange Agreement (TIEA: कर सूचना विनिमय समझौता)

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➢ India has signed such agreements with multiple countries. It enables mutual sharing of
information to detect tax avoidance and tax evasion. Example,
➢ 2019: India has notified a tax information exchange agreement (TIEA) with the Marshall Islands.
➢ From Indian side- CBDT is the the nodal agency for such agreements.

24.11.2 🍋🌐🤝 USA’s Foreign Account Tax Compliance Act (FATCA-2010)

विदेशी खाता कर अनुपालन अधिनियम
➢ USA’s FATCA Act requires foreign financial Institutions (such as Indian Banks, Pakistani
Insurance Companies, Chinese Mutual Funds etc) to report the assets held by Americans.
➢ This helps US Tax authorities to detect tax avoidance / evasion by Americans

24.11.3 🌐 Intl.Coop: Tax Inspectors Without Borders (TIWB)

- Joint initiative by United Nations Development Programme (UNDP) and Organisation for
Economic Co-operation and Development (OECD)
- For training and knowledge sharing of tax inspectors. (कर निरीक्षकों के प्रशिक्षण और ज्ञान के आदान-प्रदान)
- India is a member & we are giving training to tax officers of the African country ‘Eswatini’ (old
name: Swaziland)

24.11.4 🍋🌐📊 Global Financial Secrecy Index (वैश्विक वित्तीय गोपनीयता सूचकांक)
➢ Prepared by London based Think Tank ‘Tax Justice Network (TJN)’.
➢ It uses 20 indicators to measure the countries on their financial secrecy, opportunities for Tax
Avoidance, BEPS etc. 2022 Ranking: 1st rank: USA> Switzerland>Singapore,….then India@36.
➢ Its report says India is losing over $10 billion in taxes each year due to MNC’s tax abuse.

24.12 💸B LACK MONEY → DEMONETISATION (विमुद्रीकरण)

Definition? Demonetization is the wholesale withdrawal of currency notes from circulation. (मुद्रा-
चलन में से कु छ खास किस्म की नोटों को हटा देना)
 RBI Act 1934: Every banknote is a legal tender. However, RBI Central Board can recommend
the Government of India to notify specific currency note(s) should no longer be treated as legal
tenders. Then FinMin → Department of Economic Affairs makes official gazette notification.
 1946: ₹ 500 Notes demonetized; 1978: ₹ 1000, ₹ 5000, ₹10000 Notes demonetized.
 2016-Nov-8th: Public was ordered to deposit the (old) Mahatma Gandhi series currency notes ₹
500 and ₹ 1,000 (henceforth called “Specified Bank Notes: SBN”) into Banks and post-offices

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 latest by 30th December 2016. And all the banks and post offices where ordered to deposit such
SBN into RBI.
 Specified Bank Notes (Cessation of Liabilities) Ordinance:
- From 31st December 2016, RBI Governor not required to honour “I promise to pay…”
or exchange the SBN. Except for NRIs: deadline little bit relaxed, with certain caveats.
- Public prohibited from keeping SBN, except for research or numismatics or museum-
and that too in limited amount. This ordinance became Act in 2017.
 India is not the only country in the world to do demonetisation. Sweden ( 2013), European
Union ( 2016) and even Pakistan (2015) has done it for their currency notes.

24.12.1 💸Why Demonetise ₹ 500 & 1000?

 Demonetization is usually done in the aftermath of hyperinflation, war & regime-change.
 India did it to combat Corruption, Black money, Counterfeiting and Terror finance .
भ्रष्टाचार, काला धन, जाली नॉट,आतंक का वित्तपोषण
 We had 12.04% Cash to GDP ratio, one of the highest in the world. Currency printing &
transportation cost alone was 1.7% of GDP.
 “Soil rate” is the rate at which notes are considered to be too damaged to use and returned to the
RBI. (बिगड़े/फटे हुए नोटों को रिजर्व बेंक में बदलवाना)
 For ₹ 500 & 1000 SBN-notes, soil rate was much lower than the currency notes of ₹ 10 to 100.
(implying that 500-1000 SBN were used for ‘storing black money’, rather than in transactions.)
 So, experts made mathematical comparison of the foreign countries’ economic development,
soil rates of their foreign currency notes etc. and arrived at a figure ₹ 3 lakh crores of Indian black
money is stored in SBN (=2% of GDP).
 So if SBN were demonetised, the black money holders will not return their currency notes into
banks (fearing IT-RAIDS) and thus black money will be destroyed. (काला धन स्वयं तबाह हो जाएगा)
 But in reality, ~99.30% of the SBN were returned back into the banking system, so hardly ₹
10,720 crore of black money was destroyed by the demonetisation of 2016.

24.12.2 👩🏻‍⚖️️Demonetisation SC Verdict

- 2016: Congress Leader P Chidambaram and many others had petitioned in SC.
- 2023: Supreme Court upholds Demonetisation In 4:1 Verdict. (सर्वोच्च न्यायालय ने सरकार के के जजों ने
विमुद्रीकरण के निर्णय को 4–1 की बहुमति से उचित/योग्य/सही ठहराया है)

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24.12.3 🍋🥛 Tax: GDP – why low in India (भारत का कर:जीडीपी अनुपात खराब क्यों है?)
1) Lack of civic sense among people that paying taxes is a basic duty. (देश के प्रति कर्तव्य की भावना नहीं)
2) Presence of informal sector, parallel economy, cash based economy provides ample
opportunities of hiding income. (नगदी आधारित अनौपचारिक अर्थतंत्र)
3) Low per capita income, high level of poverty. Concentration of income in the hands of few
people- who are greedy to engage in tax evasion & avoidance. (देश की ज्यादातर सं पत्ति चुनिंदा लोगों के हाथों
में कें द्रित, जो लालच में कर जमा नहीं करते)
4) Election funding → source of corruption → black money. Politician-Builders-Mafia nexus.

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5) Due to political considerations, state govts and local bodies do not levy all the taxes authorised
by the constitution e.g. tax on agricultural income. So our (direct) tax base is narrow. [Tax base:
कराधार means the total value of all the persons/income/property, etc. on which tax is charged.]
6) Loopholes in the tax laws encourage tax avoidance (कर कानूनों में खामियां)
7) Direct taxes like wealth tax, gift tax and estate duty suffered from loopholes, lax monitoring and
evasion. They didn’t yield much revenue. Hence even referred as ‘paper taxes’, and had to be
abolished ultimately. (कागजी कर जिनसे वास्तव में नाम मात्र की आमदनी होती थी)

24.12.4 🍋🥛 Tax: GDP 📘📘 ES19: “Use Behavioural Economics to improve Tax Compliance”

Shifted to Mains-QEP. (Above img-source: Taarak Mehta Ka Ooltah Chashmah)

🔠❓MCQ. Which of the following effects of creation of black money in India has been the main
cause of worry to the Govt of India? [काला धन भारत सरकार के लिए चिंता का विषय क्यों है] (Prelims-2021)

A. Diversion of resources to the purchase of real estate and investment in luxury housing [सं साधनों को
आलीशान बं गले खरीदने के लिए मोड़ दिया जाता है]
B. Investment in unproductive activities and purchase of precious stones, jewellery, gold, etc.[कीमती
जवाहरात सोने और गैरउत्पादक प्रवृत्तियों में निवेश होता है]
C. Large donations to political parties and growth of regionalism [राजनीतिक पक्षों को बड़ा चंदा दिया जाता है
और प्रांतवाद की वृद्धि होती है]
D. Loss of revenue to the State Exchequer due to tax evasion [कर चोरी के चलते राजस्व आमदनी कम होती है]

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24.13 🍋🍃R EVENUE SHORTFALL

Amt in Crores 2019-20 2020-21 2021-22 2022-23 2023-24

Budget Estimate (BE) 1962761 202092 221705 275782 3360858
6 9 0
Revised Estimate (RE) 1684059 202710 270931 304306 WAIT & Watch
4 5 7
Shortfall, if RE<BE Shortfall of 2.78 Lcr Surplus Surplus Surplus WAIT & Watch

24.14 🍋T AXATION: MISC. TERMS

Laffer Curve - American economist Arthur Laffer: if (direct) tax rates are ⏫ above a certain
(लफ़र वक्र): level, then tax revenue collection will ⏬ because higher tax rates discourage
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 people from working and/or encourage them to evade tax.
- So, tax-cuts could lead to ⏫tax revenue collections.
- 💼Modi Budgets from 2017 onwards: The lowest Income Tax slab was cut
from 10% to 5%; The corporation tax on small sized companies was also
brought down from 30 % to 25% in a phased manner.
- 💼Budget-2020: new optional Income tax slabs.
- 💼USA Budget-2017: Corporation tax cut down from 35 % to 15%
Tax elasticity - If first income tax slab increased from say 5% to 15%, then in absolute terms
(कर लचिलाता): how much more IT-revenue will be generated?

24.14.1 ⚽️️Tax buoyancy (कर उत्प्लावकता):

- Tax buoyancy measures the degree to which tax collections increase or decrease in response to
changes in GDP.
- If GDP grew by x%, then how much % Income tax collection will grow?
- E.g. if income tax collection growth rate is 11% when GDP growth rate is 10%, then Income
Tax’s tax buoyancy is 1.1
BUOYANCY INTERPRETATION EXAMPLE FROM ES23 📙
>1 High buoyancy. Tax collection will increases e.g. GST =1.12
at a faster rate than the growth in GDP.
<1 Low buoyancy. e.g. pre-GST indirect taxes
(VAT, Services Tax etc) =0.99
24.14.2 🍋 Net Tax Revenue of the Govt (शुद्ध कर राजस्व)
Sr. Budget → Revenue Receipts → Tax Receipts 💼Budget 2023
A Gross Tax Revenue = Union’s Direct and indirect 33.60 Lakh Cr
taxes, incl. cess and surcharge
B Union territories without legislature: their direct and 8400 cr
indirect taxes: विधानमंडल रहित सं घ राज्य क्षेत्र
C Gross Tax Revenue (=A+B) सकल कर राजस्व 33.60 Lakh cr
D Minus the Tax devolution to States (कर हस्तांतरण) as (-) 10 Lakh Cr
per the Finance Commission
E Minus Contributions to National Disaster Response (-) 8700 cr
Fund in Home ministry**
C-D-E Net Tax Revenue of Union (शुद्ध कर राजस्व) 23 Lakh Cr
**Public Account → National Disaster Response Fund (राष्ट्रीय आपदा प्रतिक्रिया कोष) is a statutory fund under
Disaster Management Act, 2005. Previously, called National Calamity Contingency Fund (NCCF).

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24.15 📥🚆📮 B UDGET → REVENUE PART → RECEIPTS → NON-TAX RECEIPTS

Notable components are:

 Interest receipts (ब्याज प्राप्तियां received on Union’s loans to states, railways, CPSE, foreign
countries.) is a revenue receipt. [Had those borrowers repaid loan-principal, then that portion is
‘Capital Receipt.]
 Dividends and profits received from CPSE, PSBs, RBI. [Had Union sold its shares to a third party
(disinvestment / privatization) → that’s ‘Capital Receipt’].
 Union’s income from (Dividend & Profits) >> from Interests.
 Income from selling various goods & services such as railways, postal services, selling of India
Yearbook-, Yojana-Kurukshetra magazines, fees that CISF charges for giving protection to
Private Airports, auction of spectrum & mining rights, selling of commemorative coins etc.
 Grant in Aid (अनुदान)/ Donations received by Union.
 [If Union had received ‘loan’, it’ll be ‘Capital Receipt’.]
 Similar Non-tax revenue earned by UT without Legislature

25 📤⏰ B UDGET → REVENUE EXPENDITURE (राजस्व खर्च/ व्यय)

- Expenditures spent on day to day functioning of the organs of the state =
- salaries & pensions, stationery, electricity bill, phone bill etc.
- in Executive, Judiciary, Legislature, Constitutional & Statutory bodies.
- Expenditures that do not create income generating assets or permanent assets or financial assets.

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- Thus, money SPENT on loan-interests, subsidies, scholarships, grants etc. counted here
Notable Revenue Expenditures
Interest to be paid on previous loans is Revenue Expenditure. [Whereas Union repays loan-
principal, its ‘Capital Expenditure’]
- Finance Commission’s Grant-in-Aid (अनुदान) to States & Local Bodies for Disaster
Management, Panchayati Raj Development etc.
- Grant = Amt doesn’t have to be returned with Interest. (Whereas If Govt gave ‘loans’ to
States/CPSE/Foreign Countries then it’s an income generating financial asset = counted under
Capital Expenditure).
🌽
Subsidies: 1) Food subsidies, 2) 🌽👨🏼🔬 ⛽️
‍ Fertilizer (Urea, Others), 3) ️Fuel (LPG, Kerosene)
4) Interest Subsidies on loans: Farmers (highest), MSME, Affordable Housing, LIC Vay Vandana
Yojana etc.: 5) Other (Price stabilization fund, Cotton & Jute etc.):
👴🏼Pension to retired employees (who belong to old pension scheme-walli generation.)
➢ Economic services related revenue expenditure (Agriculture, energy, transport,
communication, Science technology)
➢ Social services’ revenue expenditure ( health, education, social security):
➢ Expenditure on Administrative machinery (Police, Jail, External Affairs etc.), Elections,
Parliament, Judiciary:
➢ 👮🏼Defence revenue expenditure (e.g. soldier salaries, fuel for tanks)
➢ Revenue expenditures of UT without Legislature:
🔠❓ As per the Budget 2019-20, the maximum subsidy expenditure was likely to be on _ _ _ (CDS-
2020-ii) (a) urea subsidy (b) petroleum subsidy (c) food subsidy (d) fertilizer subsidy
25.1 📤⏰(🌽⛽️️) R EVENUE EXPENDITURE → SUBSIDIES

Tax Subsidies
Tax is a compulsory contribution imposed by A subsidy is a benefit given to an individual or
State. Refusal to pay the tax is punishable. firm by the government to reduce some type of
कर= राज्य द्वारा लगाया जाने वाला कर एक अनिवार्य योगदान है। burden. A person may refuse to accept the
करचोरी एक दंडनीय अपराध subsidy, he will not be punished.
Tax doesn’t promise specific and direct A specific benefit is promised e.g. 6000 to
goods/services to the taxpayer. (Mukesh farmers, idli@₹ 1 rupee in Amma Canteen
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 Tax Subsidies
Ambani’s car will still suffer from potholes) (Tamilnadu).

25.1.1 📤⏰ 🌽⛽️
( ️) Types of subsidies with selected examples
1. Given in direct cash (or bank transfer): PM KISSAN 6k for farmers, LPG Pahal ~200 per
cylinder. नगद में.
2. Given in kind: free school bags, uniform and books to the poor children, free medicines in
public hospitals, free insurance. मुफ्त वस्तु या सेवा के रूप में
3. Indirect subsidies (परोक्ष): cheap fees in government colleges, cheap kerosene, cheap urea, cheap
crop insurance premium etc. Here govt. is paying some money to an organization so they may
provide goods/services @cheap rate to the beneficiary.
4. Implicit Subsidies (अंतर्निहित): Govt supresses the supply so to ⏫ the prices to help a sector. E.g.
Indian govt banned import of American chicken/poultry/eggs. So, shortage of chicken helps
local Indian poultry industry to demand high prices from public. Here Indian poultry receiving
‘implicit subsidy’ (from public), even though Govt is not paying them money. (More in 📑
Pillar#3B -> WTO)
5. Cross-Subsidization (क्रॉस सहायिकीकरण): To keep rail travel cheap for the poor people, Railways
keeps the passenger tickets lower than its input cost. To compensate this loss, Railways keeps
freight (goods transport) prices higher. This is called “Cross subsidization” (More in 📑Pillar#5
Infra → Railways)
6. Regulatory (नियामक) subsidies: e.g. if State Electricity Regulatory Commission directs companies-
that electricity to farmers must NOT to be beyond ₹ “x” per unit.
7. Procurement (खरीद) subsidies: e.g. FCI purchasing at food grains from farmers at minimum
support price (MSP). (More in 📑Pillar#4A -> AGRO)
8. Interest (ब्याज) subsidies / subvention: govt pays “x%” interest on agriculture, MSME, affordable
housing loans.
25.1.2 👍🏻 👎🏻 Impact of Subsidies (सब्सिडी का प्रभाव: सकारात्मक एवं नकारात्मक)
- 👍🏻 Merit Goods (लाभदायक वस्तुऐं): Healthcare, education, scientific research, LPG, solar panels,
wind mills etc. Here subsidies can increase the positive externalities. (Cheap LPG → poors don’t
use firewood → more trees & less indoor pollution.)
- 👎🏻 But subsidies on diesel, kerosene =negative externalities (नकारात्मक बाह्यता) on environment.
- 👎🏻 Urea subsidies to industries → cheap urea to farmers → excessive consumption → soil &
water pollution, algae-blooms. (यूरिया उर्वरक का अत्याधिक उपयोग जमीन पानी में प्रदूषण)
- 👎🏻 Subsidy leakage: When ghost beneficiaries (non-existent persons propped up by corrupt
officials), and ineligible (rich) people are receiving subsidy. (सब्सिडी रिसाव, धांधली और गबन)

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25.1.3 📘📘 Past Economic Surveys on subsidy delivery JAM/DBT (आर्थिक सर्वेक्षणों के उपाय)
Shifted to Mains Handout.

25.1.4 🏃🏻‍♀️✍🏻🕵️‍♂️National Recruitment Agency (NRA: राष्ट्रीय भर्ती एजेंसी)

- Present: multiple recruitment exams conducted by multiple agencies at different points of time
throughout the year..
- Future: NRA will conduct Common Eligibility Test for recruitment to Non-Gazetted personnel
in Government and PSBs. → SSC and IBPS will conduct Mains exams for respective posts →
time and cost saved for both candidate and recruiting agencies.
- 💼Budget-2020: we’ll set up NRA & open a (computerized) test centre in every district.
- Self-Study-Topics for GSM2/GSM4: 1) Lateral entry in IAS. 2) Three years tour of duty in
Army. Source? Internet / Current Affairs PDF/Lectures.
25.2 📤⏰🥳 REVENUE XPDR → SALARIES→ 7TH PAY COMMISSION (वेतन आयोग)
Setup by Finmin → Dept of Expenditure. 1st: Srinivasa Varadachariar (1946). 7th: (Retd) Justice
AK Mathur (2014). Its recommendations became effective from 1/1/2016. Major highlights were:
✓ New system of “Pay Matrix” instead of previous system of pay band and grade pay.
✓ Regulatory bodies salaries increased: Chairman ₹ 4.50 lakh / month, members ₹ 4l.
✓ Minimum pay in Central service increased to ₹ 18k / per month (Group-D).
✓ Maximum pay: ₹ 2.25 lakh per month for Apex scale (e.g. Secretary of a Dept.), and ₹ 2.50l (for
Cabinet Secretary)
✓ It adopted Dr. Aykroyd formula to compute wages at periodic interval (formula tracks the
changes prices of the commodities used by a common man).
✓ So, critiques believe there will not be an 8th Pay Commission because salaries will be updated
automatically at regular interval, using this formula.
✓ Various reforms for defence and CAPF services. (सशस्त्र सेना /कें द्रीय पुलिस बल के लिए सुधार)
✓ stronger rules in Modified Assured Career Progression (MACP) system so lazy officials don’t get
promoted. (आलसी और निकम्मे अफसरों की पदोन्नति को रोका जाए)

25.2.1 🥳 Pay Commission: Dearness Allowance (DA: महंगाई भत्ता)

- Dearness Allowance (DA): It is an allowance given by government to (serving/non-Retired)
central government employees to protect them against the inflation. (नौकरीशुदा कर्मीयो को)
- Dearness Relief (DR): It is an allowance given by government to RETIRED central government
employees to protect them against the inflation. (निवृत कर्मीऑ को)
- In 2020- Union govt had frozen DA&DR because Govt was struggling with money for Corona
⏫
relief. 2021-July: Govt resumed paying & DA&DR from 17% to 28%. कोरोना-वर्ष में सरकार ने
सरकारी कर्मचारियों को महँगाई भत्ता नहीं दिया, क्योंकि सरकार को खुद ही पैसों की क़िल्लत थी, लेकिन अब वापस शुरू कर रही है.

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25.2.2 🥳Bonus to govt employees
Bonus is occasional extra money given to employees in addition to normal salary. (वेतन के अतिरिक्त कभी
कभी कु छ और पैसा दिया जाए)
📈 Productivity Linked Bonus (प्रदर्शन आधारित) Non-Productivity Linked (=ad-hoc )
• e.g. how many files did employee clear? e.g. Diwali Bonus. It doesn’t matter if
• how many trees did forest-guard plant? employee worked hard or not for the
• did employee improve the sales in postal entire year.
dept/railways etc?
25.2.3 🥳
Pay Commission: Misc. terms
- House Rent Allowance (HRA: मकान किराया भत्ता): rent allotted by the employer for employee's
accommodation (house).
- Gratuity (ग्रेच्युटी): It’s a lump sum amount “x” given by an employer to the employee for
rendering services continuously for “y” number of years. Usually given at retirement. Norms
governed under Payment of Gratuity Act, 1972
- One Rank One Pension (OROP): 2015- Modi govt. promised equal pension to military
personnel retiring in the same rank with the same length of service, regardless of the date of
retirement. Some, Ex-servicemen unhappy about the base year & calculation formula.

25.3 👻📤⏰👨‍💼🥳 SALARY R EFORMS IN ATMANIRBHARAT 2.0 (OCT 2020)

To ⏫shopping/market demand during the festival season, FinMin launched two schemes:
25.3.1 👻⏰👨‍💼🥳 Atma-Nirbhar 2.0: Festival Advance Scheme (त्योहारों में एडवांस रकम)
- Govt will give ₹10,000 as interest-free advance to govt employees. Employee need to repay it
back in maximum 10 instalments. (किश्तों में रक़म वापस चुकानी होगी हालाँकि ब्याज नहीं लगेगा.)
- Govt will not give this ₹₹ in cash form. but in form of a prepaid SBI Rupay Card known as "SBI
Utsav Card". This card can be used like a debit card, for making purchases e.g. billpayment,
ECommerce websites etc. ( 📑Ref: HDT-Pillar#1A1)
25.3.2 👻⏰👨💼🥳
‍ Atma-Nirbhar 2.0: LTC Cash Voucher Scheme
Outdated technical topic. Removed from handout

25.4 ( 📥<📤)⏰⚠️️ R EVENUE DEFICIT & EFFECTIVE REVENUE DEFICIT

Shifted to Pillar2D: Deficit Handout.

NEXT 📥🗓 BUDGET → CAPITAL → RECEIPTS & Expenditure

2A) ✅ Direct Taxes [✅ 2A2-Indirect Taxes & GST ✅ 2B) Black Money, 15th FC
2C) ✅ Subsidies, Salaries, Revenue Expenditure
2D) Disinvestment, Deficit, FRBM Act, Fiscal Council, Budgeting-Railway budget, plan-non plan
budget, & scheme types etc.

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 Pillar#2D: Disinvestment to Deficit to Budget & Scheme Types
Table of Contents

26 📥🗓 Budget → Capital → Receipts.........................................................................................424

26.1.1 💼🤲🎅 Foreign Borrowing in Foreign Currency................................................................425
26.1.2 💼🤲🎅💼Budget-2023: Foreign Borrowing........................................................................426
26.2 → → Budget → Capital Receipts → Disinvestment: विनिवेश......................................426
26.2.1 🏭 CPSE vs PSU vs PSB..........................................................................................................427
26.2.2 🥉Ratna Companies = freedom to govt companies based on performing ........................427
26.2.3 🧔🗃 ♐️ 🤵 Government policy towards disinvestment before 2021...............................429
26.2.4 🧔🗃 ♐️ 🤵 Disinvestment & Privatization in the Modi Raj (2014-19)............................431
26.2.5 🧔🗃🗃 ♐️ 🤵 Privatization / Strategic Disinvestment in Modi Raj.................................431
26.3 → 👨‍💼 New Public Sector Enterprise (PSE) Policy (2021)........................................431
🚿💸National Monetisation Pipeline (NMP 2021).............................................................432
26.3.1
26.3.2 🚿💸National Land Monetization Corporation (NLMC-2022)........................................432
26.4 🗓📤Budget → Capital Part → Expenditure (पूंजीगत व्यय)......................................................432
26.4.1 👻🧔🔪👨‍🦲🏗State CAPEX Loans..........................................................................................433
26.4.2 🗓📤 Budget → Capital Part → Effective Capital Expenditure.........................................433
26.4.3 🗓📤 Capital expenditure for a Company............................................................................433
27 💼🤲🏻 Types of deficits: घाटे के प्रकार...............................................................................................434
27.1.1 💼🤲🏻 Types of Budget- Surplus, Deficit, Balanced...............................................................434
27.1.2 🐘 Yudhishthir Disclaimer on Deficit Formulas..................................................................434
27.1.3 💼🤲🏻 Budget Deficit (बजट घाटा)...............................................................................................435
27.1.4 💼🤲🏻 Fiscal Deficit - formula Tamilnadu Textbook............................................................436
27.1.5 💼🤲🏻 Fiscal Deficit - formula NCERT Textbook (two formulas).......................................436
27.1.6 💼🤲🏻 Gross Fiscal Deficit (GFD) vs NET fiscal Deficit........................................................437
27.1.7 💼🤲🏻 Primary Deficit (प्राथमिक घाटा)........................................................................................437
27.1.8 💼🤲🏻 Gross Primary Deficit (GPD: सकल प्राथमिक घाटा)...........................................................438
27.2 (📥<📤)⏰⚠️ Revenue Deficit (राजस्व घाटा)..............................................................................438
27.3 (📥<📤)⏰⚠️ Effective Revenue Deficit (प्रभावी राजस्व घाटा)......................................................438
27.3.1 🛬 Fiscal glide.......................................................................................................................... 439
27.4 💼🤲🏻👜🤲🏻 Extra-Budgetary Resources (बजटेतर सं साधन)...........................................................439
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27.5 💼🤲🏻Debt Composition: Amount-wise..................................................................................440
27.5.1 💼🤲🏻Debt Composition: Type-wise......................................................................................442
27.6 💼🤲🏻 Financing the deficit: its negative consequences on economy:....................................442
27.6.1 💼🤲🏻 ⏫:🛒⏬ Financing the Deficit: Ricardian Equivalence.............................................443
27.6.2 💼🤲🏻 ⏫:🛒⏬Ricardian Equivalence invalid for India says 📔📔ES21............................444
27.6.3 💼🤲🏻 Financing the deficit: “Crowding Out” of private borrowers...................................444
27.6.4 💼🤲🏻 Crowding out of private investment? 📔📔ES21 Observations...............................444
27.6.5 💼🤲🏻 Financing the deficit: Printing More Money..............................................................446
27.6.6 💼🤲🏻 Fiscal Deficit ⏫= India sovereign rating ⭐️⭐️⏬.....................................................446
27.7 💼💉💸💸Countercyclical policy (प्रतिचक्रीय राजकोषीय नीति) .......................................................447
27.7.1 💼💉💸💸Countercyclical: IRGD & Debt Sustainability....................................................448
27.7.2 💼💉💸💸 Countercyclical: Domar Condition of Debt Sustainability..............................449
27.8 🔀💸Side Note: Automatic Stabilizers (स्वचालित-स्थिरीकारी).......................................................450
27.8.1 🍋 Tax multiplier is a negative multiplier.............................................................................451
27.8.2 💼🤲🏻 THREE Functions of Govt Budget..............................................................................451
27.8.3 💼🤲🏻 Effects of Budget/Fiscal policy on Demand & Savings..............................................451
27.9 💼🤲🏻 Misc Terms related to Deficit Financing.......................................................................452
27.10 💼📤🤺 Fiscal Consolidation / Prudence: राजकोषीय एकत्रीकरण / विवेक.....................................452
27.11 💼💉 Fiscal stimulus (राजस्व प्रोत्साहन पेके ज)...............................................................................453
27.11.1 💼💉 👳‍♂️ Manmohan’s Fiscal Stimulus (2008-)..................................................................453
27.11.2 👻💼💉 🧔 Modi’s Atma-Nirbhar Bharat Economic Stimulus Package (2020) ............454
27.11.3 ♨️Frontloading of Stimulus and Overheating in Economy..............................................454
27.12 💼🤲🏻🔨 Fiscal Responsibility & Budget Management Act, 2003........................................454
27.13 🙌 FRBM: Trigger Mechanism (to) Escape (Deficit control) Clause..................................455
27.13.1 💼🤲🏻🔨 FRBM: Misc. Concepts...........................................................................................456
27.13.2 💼🤲🏻🔨 🗂 FRBM Act: Documents (दस्तावेज़)......................................................................456
27.14 👻🧔🕉👨‍🦲Fiscal Federalism: Helping the States in ATMANIRBHAR...............................457
27.14.1 🧔🕉👨‍🦲Helping States → Tax devolution and grants.......................................................458
27.14.2 🧔🕉👨‍🦲Helping States → States’ Fiscal deficit limits ⏫..................................................458
27.15 🧔🕉👨‍🦲Fiscal Deficit target for States..................................................................................458
27.16 💼🤲🏻🔨🕵🏻 Fiscal Responsibility: NK Singh FRBM Review Panel.......................................458
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 27.16.1💼🤲🏻🔨🕵🏻 :🎯 Budget marksmanship is Poor, says 15th FC ...........................................459
27.17 💼🤲🏻🔨🕵🏻 Fiscal Responsibility: Freebies / Revdi Culture..................................................460
27.18 💼🤲🏻🔨🕵🏻 Fiscal Responsibility: Misc Bodies......................................................................460
27.18.1 💼🤲🏻🔨 Expenditure Management Commission (2014)..................................................460
27.18.2 💼🤲🏻🔨🕵🏻 Public Debt Management Agency (PDMA): सार्वजनिक ऋण प्रबं धन एजेंसी............460
27.18.3 💼🤲🏻🔨🕵🏻 Fiscal Council (राजकोषीय परिषद)..........................................................................460
27.18.4 ⚰️ 😰 Public finance challenges: Corona ex-gratia Yojana ...............................................460
27.18.5 🥵 💼 Challenges to Fiscal Federalism and Public Finance..............................................461
28 💼 Types of budget: बजट के प्रकार.................................................................................................... 461
28.1 Revenue versus Capital budget: राजस्व बनाम पूंजीगत बजट...........................................................461
28.2 💼🚊General budget versus Railway budget (आम बजट बनाम रेलवे बजट)...................................461
28.3 💼🤴 Plan vs non plan expenditure budget:..........................................................................462
28.4 💼🖋Budgeting (बजट निर्माण की प्रक्रिया/ रणनीति)...........................................................................463
28.5 👜 Gender Budget (लैंगिक बजट).................................................................................................464
28.6 💼🖋📂Tribal sub plan & SCSP.............................................................................................464
28.7 💼🖋📊Output Outcome Framework for Schemes:..............................................................464
28.8 💼🖋Cash vs Accrual Budgeting: नगदी बनाम उपचय बजट.............................................................465
28.9 💼📤🏎Lapsable Funds & March Rush: व्यपगत निधि और मार्च व्यस्तता...........................................465
28.10 💼📤🛴 Non lapsable funds & No Rush: बिनव्यपगत निधी.........................................................465
28.11 📯🧔Types of schemes (योजनाओं के प्रकार)................................................................................466
28.11.1 👜🥻Budget-2022: CSS rationalisation...............................................................................466
28.11.2 📯🧔Ministry-wise Highest Allocation (amt in ₹ lakh crore)..........................................467
28.11.3 💰🔎📊Govt Schemes: Result Based Financing instead of input based financing .........467
28.11.4 ✍️Mains Questions...............................................................................................................467

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26 📥🗓 B UDGET → CAPITAL → RECEIPTS

Table 1: बजट → पूं जी भाग → प्राप्तियां: Sub-classified into two parts

Capital Debt Receipts Capital Non-Debt Receipts:
पूंजीगत ऋण प्राप्तियाँ गैर-ऋण पूंजी प्राप्तियां
💼🤲🐯 Internal Borrowing: आंतरिक ऋण Loan Principal recovered (i.e. Union government

- 🐯From RBI,
would have given loans to state governments,
foreign countries, public sector companies etc.)
- From market (Banks, NBFCs)
so when they return Principal amount back that is
- From small savings (Post-Office Savings
counted here. (मूलधन की बरामदगी)
Accounts, Kisan Vikas Patra, etc),
- From Provident Funds (EPFO, PPF)
💼🤲🎅 External borrowing: from foreign Disinvestment (विनिवेश) i.e. Union selling its
countries & international institutions like IMF shares from Public Sector Undertakings (PSUs) /
World Bank, BRICS bank etc. बाह्य।/ विदेशी ऋण Central Public Sector Enterprises (CPSEs).
Bigger portion of Capital Receipts from this side Smaller portion

🔠❓MCQ. Which of following is not a component of ‘Capital Receipts’? (IEnggS-2018)

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(a) Market borrowings including special bonds
(b) External loans raised by the Central Government from abroad
(c) Receipts from taxes on property and capital transactions
(d) Provident Funds (State Provident Funds and Public Provident Fund)
26.1.1 💼🤲🎅 Foreign Borrowing in Foreign Currency

कें द्र सरकार के विदेशी ऋण को विदेशी मुद्रा में जुटाने का मसला

Introduction (Origin): In the (Full) Budget-2019, FM Nirmala S. announced, "India’s sovereign

external debt to GDP is among the lowest (~5%). The Govt would start raising a part of its borrowing
programme in external markets in external currencies."
🙂Arguments in favor (समर्थन) 😥Against (प्रस्ताव के विरुद्ध)
1. In domestic market, the 'crowding 1. Exchange Rate Risk (विनिमय दर का जोखिम): If rupee
out of private corporate borrowers' weakens against the dollar during the bond’s tenure
will decline. ( 📑more in 2D:Fiscal ($1: ₹ 60 → ₹ 70), the government would have to
Deficit) return more rupees to pay back the same amount of
2. Corporates will be able to mobilize dollars. Then the loan may turn out to be 'more
more funds from local market → expensive' than originally anticipated.
factory expansion, jobs, GDP 2. It's true that presently Indian Govt's external

growth ⏫ borrowing is very low, but once this 'door' is opened,

subsequent govts may get tempted to borrow more
3. In the advanced economies such as
and more from the foreign sources to finance their
USA, EU: the loan interest rates
(populist) welfare schemes, ultimately it can result
are very low, so our Indian govt
into crisis when rupee gets weaker. लोकलुभावन योजनाओं
may be able to get cheaper loans.
के लिए विदेशी ऋण लेने की सरकार को लत लग सकती है
सस्ते ब्याज पर
4. If we borrow a little more from 3. Better to ⏫the foreigners' investment limit in G-Sec
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 🙂Arguments in favor (समर्थन) 😥Against (प्रस्ताव के विरुद्ध)
external sources it won't harm. थोड़ा (in ₹ currency) and attract them to come to India,
सा ऋण अगर विदेशों से विदेशी मुद्रा में ले लिया rather than we going 'abroad' to get their money in $
तो कु छ जोखिम नहीं currency.
Conclusion: whether we should borrow in foreign currency or not?
 👎 (Against) From the aforementioned analysis, it's evident that challenges outweigh the
potential benefits. Noted economists such as Dr. Raghuram Rajan are apprehensive about
sovereign borrowing from external markets in foreign currency. Therefore, this idea, though
well-intended, requires more deliberation. (इस प्रस्ताव में फायदे कम नुकसान ज्यादा दिख रहे हैं इसलिए इरादा नेक
है लेकिन इस पर ज्यादा विमर्श की आवश्यकता है)
 💼🤲🎅=👌👍 (In favor) Considering above points, sovereign borrowing from external
markets in foreign currency may not be a bad idea, provided that it's done in a judicious and
prudential manner. (यह प्रस्ताव बुरा नहीं है, विवेक पूर्ण रूप से लागू करना चाहिए)
26.1.2 💼🤲🎅💼Budget-2023: Foreign Borrowing

 📙ES23: most of our foreign debt denominated in ₹₹ Currency. So need not worry much.
26.2 🧔🗃 ♐️️🤵 B UDGET → CAPITAL RECEIPTS → DISINVESTMENT: विनिवेश
There are THREE types of Commercial or industrial undertaking owned by the govt:
🚝 ✉️Departmental 🐯Statutory Corporations ⛽️Govt. Companies
Undertakings विभागीय उपक्रम वैधानिक निगम सरकारी कं पनिया
Directly part of a ministry e.g. Created by an act of Parliament Registered under the
Postal, Railways, or state legislature. E.g. RBI Act, Companies Act, Govt’s
They can be created easily SBI Act, LIC Act, FCI Act, shareholding is 51% or
because, no laws required, no EPFO Act. etc, SIDBI, more.Coal India ltd, GAIL,
Companies Act registration NABARD, NHB, EXIM etc. SAIL, NTPC, IOCL, BHEL &
required various Public Sector Banks and
NBFCs which are not statutory
corporations.
Risk aversion by officers. 🤘 Middle of both sides More operational flexibility to
👺 High level of ministerial officers. Less interference by
interference (मं त्री की दख़ल ज़्यादा) Ministers
CAG will audit directly [भारत के Some of these Acts provide for Companies Act requires them
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 🚝 ✉️Departmental 🐯Statutory Corporations ⛽️Govt. Companies
Undertakings विभागीय उपक्रम वैधानिक निगम सरकारी कं पनिया
नियं त्रक और महालेखा परीक्षक स्वयं internal audit & exclude CAG to produce audited reports.
विभागीय उपक्रम के हिसाब किताब का लेखा from auditing the Corporation. CAG will empanel the (private)
परीक्षण करेंगे] E.g. RBI, LIC. auditors for them.
Their earning will go directly in Their earning → profit → dividend goes to shareholders.
Public Account / CFI
All three types of org are Answerable under the Right to Information Act, 2005
सूचना अधिकार कानून/ अधिनियम के अंतर्गत इन सभी सं स्थानों ने जानकारी देनी होगी
Their employees are considered Not considered govt employees. Their service / discipline
government employee- conditions are governed by the respective organizations’ internal
subjected to service and manuals. सरकारी कर्मियों वाले सेवा और अनुशासन/शिस्त के नियम इनके कर्मीयो को
discipline rules framed by the लागू नहीं होते.
government.
 Objective: Public interest & welfare through affordable services, Development of infrastructure,
regional balance, prevent concentration of economic power in the hands of Corporates /MNCs.
(उदेश्य: जन हित में सस्ती सेवाएं , बुनियादी ढांचा, विकास में क्षेत्रीय सं तुलन, बहुराष्ट्रीय कं पनियों के हाथों में आर्थिक शक्ति की
के न्द्रीकरण रोकना)
 😭Challenges? Political interference, lack of innovation & consumer responsiveness, employee
unions, loss making business. (राजनीतिक हस्तक्षेप, नवाचार की कमी, उपभोक्ता के प्रति जवाबदेही कम, कर्मचारीओ को
काम से ज्यादा यूनियनों-बाजी और हड़ताल में लिप्त रहेना, घाटे में चलना)

26.2.1 🏭
CPSE vs PSU vs PSB
 PSB: Public Sector Banks = Banks wherein Govt has majority shareholding.
 Central Public Sector Enterprises (CPSEs: कें द्रीय सार्वजनिक क्षेत्र के उपक्रम): Registered in Companies
act & Union Government has 51%/> shareholding. Commonly known as ‘Govt companies’. The
word CPSE is mainly used to denote “govt companies other than Public Sector Banks, Public
Sector Insurance Companies and Public Sector NBFCs”.
 Public sector Undertaking (PSU: सार्वजनिक क्षेत्र के उपक्रम) = collective term for all the govt
companies owned by Union Govt + State Government + Local Bodies.
✋ Note: Some book/internet may differ in this definition. But we need not loose sleep over pedantry.
शब्दभेद में पांडित्य वाली बाल की खाल निकालने की कोई जरूरत नहीं है।

26.2.2 🥉
Ratna Companies = freedom to govt companies based on performing
 Ministry of Heavy Industries & Public Enterprises-> its Department of Public Enterprises (DPE)
decided Ratna Status. 2021: DPE shifted to Finance Ministry (REF: Handout #2A for more).
 ✋This is NOT for private owned companies like Tata, Infosys or Adani.
 “Ratna” status-walli Govt Companies are given for the flexibility in their operations e.g. hiring
more professionals, acquisition of other companies etc. without requiring government approval

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 for every small decision. (अच्छा प्रदर्शन करने वाली सरकारी कं पनियों को अपनी कार्य रीति के लिए स्वतंत्रता देना. हर छोटी
चीज के लिए सरकार से अनुमति लेना जरूरी नहीं)
Category Condition and examples
🥉
Miniratna
✓ made profits in the last 3 years continuously, further subdivision in Category-I &
Category-II depending on how much profit is generated.
Cat-I and ✓ Examples: National Film Development Corporation ltd, Mazagaon Dock ltd,
Cat-II Mishra Dhatu Nigam, NHPC ltd, WAPCOS, ONGC Videsh, Rail Vikas Nigam
🥈 ✓ A Mini Ratna company fulfilling “x” conditions OR
Navratna ✓ Non-Mini Ratna Govt companies fulfilling “y” conditions such as Manpower cost
to total cost of production etc.
✓ Examples: Rashtriya Ispat Nigam ltd, Rural Electrification Corporation ltd,
Shipping Corporation of India ltd, Oil India ltd, National Aluminum Company
ltd, Neyveli Lignite Corporation ltd, Mahanagar Telephone Nigam ltd, Hindustan
Aeronautics ltd, Container Corporation of India ltd, Bharat Electronics ltd,
🥇
Maharatna
✓ Already a Navratna Company+ fulfilling “z” conditions such as min. ₹ 5000 crore
profit per year in last 3 yrs, listed at a Stock exchange, significant global presence
✓ Very few here: 1)Bharat Heavy Electricals, 2)Bharat Petroleum Corporation,
3)Coal India , 4)GAIL (India) , 5)Hindustan Petroleum , 6)Indian Oil
Corporation, 7)NTPC , 8)Oil & Natural Gas Corporation (ONGC), 9)Power Grid
Corporation, 10) Steel Authority of India (SAIL)
✋ Above Ratna examples are taken on 1/1/2020. List may change afterwards. Some companies
get privatized. We need not lose sleep over it too much, unless preparing for their specific
recruitment exam.# 🕰थोड़ा-पढ़ो-आगे-बढ़ो
 🚩👶FAQ. Are Public Sector Banks (PSB) given Ratna Status? Ans. No. While PSBS are a sub-
set of Government companies but Ratna status is for CPSEs who are NOT PSBs.
 🚩👶FAQ. Are Statutory Corporation like LIC, EPFO etc given Ratna Status? Ans. No. It’s for
Central Govt’s companies only. It is not for statutory corporation.
 🚩👶FAQ. Are State Govt’s Govt Companies given Ratna Status? Ans. No. It is for Central Govt
owned companies only. ये सिर्फ कें द्र सरकार की सरकारी कम्पनियो के लिए है
 🚩👶FAQ. Are Private sector Companies like Tata/Reliance given Ratna Status? Ans. No. It is
for Central Govt owned companies only. भाई ये सिर्फ कें द्र सरकार की सरकारी कम्पनियो के लिए है. इतनी आसान
और सीधी सी बात को आप क्यों जटिल कर रहे है!?
🔠❓MCQ. Which among the following is designated with ‘Navratna’ status? (CDS-2021-i)
(a) Indian Oil Corporation Limited (b) Gas Authority of India Limited
(c) Bharat Petroleum Corporation Limited (d) Bharat Electronics Limited

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26.2.3 🧔🗃 ♐️️🤵 Government policy towards disinvestment before 2021

 Disinvestment: ⏬ govt shareholding in a Government company but govt keeps atleast 51%
shareholding with itself.
 Privatization / Divestment / Strategic Disinvestment (निजीकरण/रणनीतिक विनिवेश): When govt sells
upto 50 per cent or more shareholding, along with transfer of management control. (Definition
as per DIPAM Dept)
 ✅Arguments in favour: ⏬govt shareholding → Private investors will enter in the board of
directors → ⏫ efficiency, innovation and autonomy. दक्षता, नवाचार स्वायत्तता
 Disinvestment proceeds can be used for welfare schemes, and ⏬ fiscal deficit.
 ✋ Argument Against: MNC monopolies, exploitation of worker, job loss.

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 Year Nationalization and Disinvestment related developments
1951  First Constitution Amendment Act: While 19(1)(g) gives citizen's right to
practice any profession. But Government can impose reasonable restrictions on
it for interests of general public → this allowed for nationalization of pvt
industries e.g. Bank nationalization in Pillar#1B1 (सरकार जन हित में निजी कं पनीयो का
राष्ट्रीयकरण कर सकती है.)
 ( 🎓NOTE: first amendment act also contain some other provisions for SEBC, 9th
Schedule etc, but we are only focusing on the parts that are related with
nationalization/disinvestment)
1953  1953: Air Corporations Act: Govt nationalised nine airlines—Air India, Air
Services of India, Airways (India), Bharat Airways, Deccan Airways, Himalayan
Aviation, Indian National Airways, Kalinga Airlines, and Air India International
 Above private sector companies were nationalised into two Public sector
Enterprises I) Indian Airlines II) Air India International.
1991 The term 'disinvestment' was used first time in Interim Budget 1991. “We will reduce
shareholding in all Govt Companies”- said PM Narasimha Rao.
1998’s PM - In strategic sector (Railways, Defense, Atomic Energy)- ✋we’ll not do
Vajpayee disinvestment
- ✅
In Non-strategic sector = we’ll do disinvestment in a phased manner (गैर-
रणनीतिक क्षेत्र में चरणबद्ध तरीके से विनिवेश करेंगे ).
1999: PM Vajpayee set up Department of Disinvestment → privatisation of
-
Maruti Udyog, Hindustan Zinc, Bharat Aluminum and Videsh Sanchar Nigam
Limited (VSNL) etc. 12 govt companies.
UPA-1 (2004- Due to pressure from Leftist/Marxist coalition parties = No Disinvestment from any
09) government companies. If a government company is sick, we will try to revive it.

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 वामपंथी / मार्क्सवादी गठबं धन दल के चलते विनिवेश नहीं
UPA-2 (2009-  All Govt Companies can be disinvested upto 49% = Govt will keep 51%
14) minimum and sell remaining shares.
 ₹₹ will goto National Investment Fund (NIF, in Public Account) → used for
Bank recapitalization, metro rail, nuke energy, EXIM-NABARD-RRB etc. राष्ट्रीय
निवेश कोष
 Also launched CPSE-Exchange Traded funds (ETF): 📑Ref Pill#1C:SEBI
26.2.4 🧔🗃 ♐️ 🤵
️ Disinvestment & Privatization in the Modi Raj (2014-19)
✓ Various methods of Disinvestment, depending on the Company
1. Converting Private Limited Company to public limited company and issuing Initial
Public Offers (IPOs) e.g. Indian Railway Catering and Tourism Corporation (IRCTC)
and Rail Vikas Nigam Ltd (RVNL)
2. Exchange Traded Funds (ETFs): CPSE-ETF, Bharat-22-ETF (Ref: Pillar#1C)
3. Institutional placement Programme (IPP): offer shares only to non-retail investors.
4. Offer for sale (OFS): Govt sells its existing shares to both retail and non-retail investors
5. Share Buyback i.e. Govt company itself buys the shares owned by Govt, thereby
decreasing Government's shareholding portion viz a viz private sector's shareholding.
✓ Modi govt shut down many sick Govt companies such as HMT watches, Hindustan Photo Film
etc. (जिसे कोई निजी क्षेत्र का उद्योगपति खरीद कर चलाना नहीं चाहता था उन बीमार सरकारी कं पनियों को बं द कर दिया.)
✓ Budget-2016 renamed FinMin’s Dept of Disinvestment into Dept. of Investment & Public Asset
Management (DIPAM: निवेश और सार्वजनिक सं पत्ति प्रबं धन विभाग).

26.2.5 🧔🗃🗃 ♐️ 🤵️ Privatization / Strategic Disinvestment in Modi Raj

 Strategic Disinvestment (रणनीतिक विनिवेश): it means selling a substantial portion of Government
shareholding in a CPSEs along with transfer of management control to a private party.
 For this action, NITI Aayog prefers to use the term ‘strategic disinvestment’, ‘strategic sale’
instead of ‘privatization’, lest the opposition parties create uproar about it.
 Sometimes, press statement also uses the word “Divestment” for it.
 👜🥻Budget-2022: NINL (Neelanchal Ispat Nigam Limited) will be privatised
 📙ES23: Govt has done privatisation of 10 CPSEs - HPCL, REC, DCIL, HSCC, NPCC. NEEPCO,
THDC, Kamrajar Port, Air India and NINL.

26.3 👻🧔🗃 → 👨‍💼 N EW PUBLIC SECTOR ENTERPRISE (PSE) POLICY (2021)

Strategic sectors (महत्वपूर्ण क्षेत्रो) Non strategic sectors
Example 1) Atomic energy, Space, Defence (परमाणु ऊर्जा, All the other sectors. (बाकी
अवकाश,रक्षा,) तमाम क्षेत्रों= गैर-महत्वपूर्ण क्षेत्रो= में
2) Transport, Telecom (परिवहन, दूरसं चार) जितने भी सरकारी कं पनियां है उन सब

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 Strategic sectors (महत्वपूर्ण क्षेत्रो) Non strategic sectors
3) Power, Petroleum, Coal, other minerals को या तो निजीकरण कर देंगे या बं द कर
(ऊर्जा, पेट्रोलियम, कोयला, खनिज,) देंगे)
4) Banking, Insurance and financial services (
बैंकिं ग बीमा वित्तीय सेवाएं )
Will there be a
Minimum one government company will be No government company will
government kept. Remaining will be merged/ be kept. All the Existing
company privatized/shutdown (महत्वपूर्ण क्षेत्रो में सिर्फ एक government companies will
here? सरकारी कं पनी को रखा जाएगा, बाकी सभी अन्य सरकारी कं पनियों be privatized/shutdown.
को उस में विलीन/निजीकरण/बं द कर दिया जाए)
✓ Disinvestment targets previous budgets:
Budget 2018-19 2019-20 2020-21 2021-22 2022-23 2023-24
Target 80,000 cr 1.05 Lcr 2.10 lcr 1.75 lcr 65,000 cr 51,000/61,000*
Achieved? ✅ 😰65,000cr* 😷37000 Cr 😰14,638 cr 😰60,000 cr We’ll see

 *51,000cr as per News Website like https://economictimes.indiatimes.com, and LiveMint

 *61,000 cr as per Budget Excel file: indiabudget.gov.in/doc/Budget_at_Glance/bag5.xls
 Then which number is right? Ans. I’d tick answer as per the Budget excel file (61,000).

26.3.1 🚿💸 National Monetisation Pipeline (NMP 2021)

 Govt initiative for selling/renting/leasing the land/building/machine/assets of CPSE/National
Highways/Railways to mobilise ₹6 lakh crore by 2025. (राष्ट्रीय मौद्रिकरण पाइपलाइन = इस मुहिम के अंतर्गत
सरकारी कं पनी/हाईवे/रेलवे की सं पत्तियों को बेचना/किराये पर देना- इसकी मदद से ६ लाख करोड़ रुपये बटोरने हैं)
 More a in 📑Pillar#5- along with other associated topics like 1) National Investment and
Infrastructure Fund (NIIF) 2) National Infrastructure Pipeline / GATI Shakti initiative etc.

26.3.2 🚿💸 National Land Monetization Corporation (NLMC-2022)

Refer to Handout Pillar2A1- Departments of Finance Ministry.

🔠❓MCQ. Why is Govt disinvesting its equity in the Central Public Sector Enterprises (Pre’11)
1. The Government intends to use the revenue earned from the disinvestment mainly to pay
back the external debt.
2. The Government no longer intends to retain the management control of the CPSEs.
Ans Codes: (a) 1 only (b) 2 only (c) Both 1 and 2 (d) Neither 1 nor 2

26.4 🗓📤B UDGET → CAPITAL PART → EXPENDITURE (पूं जीगत व्यय)

बजट → पूं जीगत भाग → व्यय: Its notable components in decreasing order are:
1. Capital assets for various schemes, ministries, departments (Building, vehicles..)

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 2. Giving debt/equity finance to PSUs & foreign institutes, giving loans to State Govt & Foreign
Govt.
a. Note: FinMin: Dept of Economic Affairs (DEA)’s Indian Development and
Economic Assistance Scheme (IDEAS) gives such ₹₹ to foreign nations.
3. Union repaying loan principal for Internal Debts (आंतरिक ऋण का मूलधन वापस देना)
4. Union repaying loan principal for External Debts (बाह्यऋण का मूलधन वापस देना)
26.4.1 👻🧔🔪👨🦲🏗 ‍ State CAPEX Loans
 Special Assistance to States for Capital Expenditure’/CAPEX scheme
 2020: Union to loan interest-free 50-year loan to states. Total amount approx. ₹12,000 cr for
capital expenditure like, health, rural development, water supply, irrigation, power, transport,
education, urban development. (स्वास्थ्य, ग्रामीण- शहरी विकास, जल आपूर्ति, सिंचाई, बिजली, परिवहन, शिक्षा के
पूंजीगत ख़र्चो के लिए कें द्र द्वारा राज्य सरकारों को बिना ब्याज के लोन)
 👜🥻Budget-2022:- State govts to get 1 lakh crore CAPEX loans with 50 year tenure, 0% interest.
 👛Budget-2023: we’ll give capex loans & Some of these CAPEX loans will be linked to:
o - Scrapping old government vehicles (पुराने सरकारी वाहनों को स्क्रै प/कबाड़ी में भेजना)
o - Urban planning reforms (शहरी नियोजन सुधार)
o - Financing reforms in urban local bodies reform so they can become financially strong
enough to issue municipal bonds (शहरी स्थानीय निकायों में सुधारर)
o - Housing for policemen (पुलिसकर्मियों के लिए आवास)
o - Constructing Unity Malls- Ref Pillar#3A (एकता मॉल का निर्माण)
o - Children adolescents’ libraries and digital infrastructure (बच्चे किशोरों के पुस्तकालय और
डिजिटल बुनियादी ढांचा/अवसं रचना)

26.4.2 🗓📤 Budget → Capital Part → Effective Capital Expenditure

🙋🏼‍♀️What does above chart mean? Ans. Explained in the video lecture. 👩🏻‍🏫
26.4.3 🗓📤 Capital expenditure for a Company
Capital Expenditures of a company = the amount of money invested by the company in (income
generating) assets such as:

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 🏭Tangible Assets भौतिक सं पत्तियां 💿 Intangible Assets अमूर्त सं पत्तियां
Patents for vaccines, copyright for
Land, Buildings, Vehicles,
books/music/movies/softwares, Brand-logo, Trade secret
Equipment
formulas (e.g. KFC burger, Cocacola),
Raw material and Unsold inventory License fees (e.g Software, mining, telecom etc) (Ref:
(finished goods) Pillar#5- Infra)
Investments made in the
Clients’ database / mailing list
shares/bonds of other companies.
Accounts receivable (Ref#1C) Goodwill (Ref: Pillar#1C - eg Byjus buying Whitehall jr.)
Cash & deposits in bank account Website domain name
We can further sub-divide these assets into current assets, financial assets, fixed assets. More of that
in Pillar7: Microeconomics.

🔠 MCQ. With reference to the expenditure made by an organisation or a company, which of the
following statements is/are correct ? (कं पनी द्वारा किए गए ख़र्च के बारे में सही वाक्य ढूँढो) (Prelims-2022)
1. Acquiring new technology is capital expenditure. (नई प्रौद्योगिकी को ख़रीदना पूंजीगत ख़र्च है)
2. Debt financing is considered capital expenditure, while equity financing is considered revenue
expenditure. (ऋण-द्वारा वित्तपोषण को पूं जीगत ख़र्च माना जाता है जबकि इक्विटी/शेयर वित्तपोषण को राजस्व ख़र्च माना जाता है।)
Codes: (a) 1 only (b) 2 only. (c) Both 1 and 2. (d) Neither 1 nor 2
🔠 MCQ. How many of the above are considered intangible investments? (Prelims-2023)
1. Brand recognition 2. Inventory 3. Intellectual property 4. Mailing list of clients
Codes: (a) Only one (b) Only two (c) Only three (d) All four

27 💼🤲🏻 T YPES OF DEFICITS: घाटे के प्रकार

27.1.1 💼🤲🏻
Types of Budget- Surplus, Deficit, Balanced
- If government’s income >> its expenditure it will have a surplus budget/ अधिशेष बजट
- If government’s expenditure == its income, it will be a balanced budget/ सं तुलित बजट
- If government’s expenditure >> its income, it’ll be a deficit budget/ घाटे का बजट

27.1.2 🐘 Yudhishthir Disclaimer on Deficit Formulas

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27.1.3 💼🤲🏻 Budget Deficit (बजट घाटा)

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27.1.4 💼🤲🏻 Fiscal Deficit - formula Tamilnadu Textbook
Fiscal Deficit = Budget Deficit plus Borrowing. This borrowing includes internal borrowing [such as
through Small Savings Scheme, and the G-Secs subscribed by Banks/NBFCs) + Borrowing from RBI] +
External Borrowing. (as per Tamilnadu TextBook & government’s official calculation method)

27.1.5 💼🤲🏻Fiscal Deficit - formula NCERT Textbook (two formulas)

- 1) FD = Total expenditure – (Revenue receipts +Non-debt creating capital receipts).
- 2) FD = difference between the govt’s total expenditure & its total receipts excluding borrowing

• Fiscal Deficit related famous committee= Sukhmoy Chakravarti Committee (1997-98)

🔠❓MCQ. The excess of total expenditure of Govt over its total receipts, excluding borrowings, is
known as _ _ _ (CDS-2021-i)
(a) Primary deficit (b) Fiscal deficit (c) Current deficit (d) Capital deficit
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27.1.6 💼🤲🏻 Gross Fiscal Deficit (GFD) vs NET fiscal Deficit

➔ Gross Fiscal Deficit = Net borrowing at home + Borrowing from RBI + Borrowing from
abroad (सकल राजकोषीय घाटा)
➔ Net Fiscal Deficit = Gross Fiscal Deficit (GFD) minus the net lending of the central
government. (शुद्ध राजकोषीय घाटा)
🚩👶🏻 FAQ: RBI is also ‘at home in India’ so why show it separately in formula? Ans. NCERT given it
like that. so u’ve to prepare. NCERT didn’t bother to explain “WHY” so I didn’t bother to PHD

27.1.7 💼🤲🏻 Primary Deficit (प्राथमिक घाटा)

➢ PD = Fiscal Deficit minus interest to be paid on previous loans (राजकोषीय घाटे में से पुराने ऋण/कर्ज
पर जो ब्याज चुकाना है उसे हटा दीजिए.)

➢ 1993: Finance Minister Manmohan Singh’s budget speech mentioned it.

➢ If the government continues to borrow year after year, it leads to accumulation of debt and
the government has to pay more and more interest. These interest payments themselves add
more burden to borrow next year. (पुरानी लोन पर जो ब्याज चुकाना है उस रकम को घाटे की गिनती में नहीं लेना
चाहिए)

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 ➢ So, to get a clearer picture of how much is the government borrowing for new programs,
they look at another indicator: (ताकि नए वर्ष में विकास के काम के लिए इतना वास्तविक कर्ज लिया जा रहा है
उसका पता चले)

27.1.8 💼🤲🏻 Gross Primary Deficit (GPD: सकल प्राथमिक घाटा)

Gross primary deficit = Gross fiscal deficit - Net interest liabilities

🚩👶🏻
- FAQ : 1) difference between Primary Deficit vs Gross Primary Deficit. Ans. Read Yudhisthir
disclaimer on deficit formulas.
🚩👶🏻
- FAQ : 2) Formula for net primary deficit? Ans. Same as above.

27.2 ( 📥<📤)⏰⚠️️R EVENUE DEFICIT (राजस्व घाटा)

 When govt spends more than its income in revenue account, it incurs …
 Revenue deficit = Revenue expenditure – Revenue receipts. (व्यय ज्यादा आमदनी कम)
 Since most of revenue expenditure is ‘committed’ (like Interest repayment on previous loans,
staff-salaries & pensions which Govt can’t ‘avoid’), so difficult to ⬇ the revenue deficit.
 So, when revenue deficit ⬆, govt forced to borrow more money or ⏬ expenditure in the capital
part (= less new schools, bridges and hospitals) → ⏬ human dev, and lower economic growth
(less new bridges → ⬇ demand of steel/cements → ⬇ growth in those sectors).
Deficit Formula
Revenue Deficit राजस्व घाटा Revenue expenditure – Revenue receipts जब राजस्व खर्च राजस्व आय से ज्यादा
Effective Revenue Deficit Revenue Deficit minus Grants for creation of capital assets
प्रभावी राजस्व घाटा

📥 📤 ⏰⚠️
27.3 ( < ) ️EFFECTIVE REVENUE DEFICIT (प्रभावी राजस्व घाटा)
- We’ve counted Grant-in-Aid to States / Local Bodies as ‘Revenue Expenditure’, but some portion
of that ₹₹ may have been spent by the States / Local Bodies for building Panchayat-Bhavans,
Disaster Management Training Institutes, Cranes & Bulldozers for Disaster rescue operations
etc. which are actually “Capital Assets”. (पूंजीगत सं पत्तियां)

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- Therefore, Budget 2011 (Chidambaram) introduced a new concept:
- Effective Revenue Deficit = Revenue Deficit MINUS Grants to various bodies which were spent
for creation of Capital Assets

27.3.1 🛬 Fiscal glide

Fiscal glide refers to the gradual adjustment/decrease in fiscal deficit over time to maintain economic
stability. (होल होल घाटे को कम करना, ताकि देश की आर्थिक स्थिरता बनी रहे।)

Year 20–21 21–22 22–23 23–24 24–25 Financial Year (FY) 25–26
Fiscal 9.2 6.7 6.4 5.9 6.4 Target below 4.5 (as per 👛
Deficit (%) Budget-2023)

🔠❓MCQ. Find Correct Statement(s) (Asked in UPSC-Pre-2017)

1. Tax revenue as a percent of GDP of India has steadily increased in the last decade.
2. Fiscal deficit as a percent of GDP of India has steadily increased in the last decade.
Codes: (a) 1 only (b) 2 only (c) Both 1 and 2(d) Neither 1 nor 2

27.4 💼🤲🏻👜🤲🏻 E XTRA-BUDGETARY RESOURCES (बजटेतर सं साधन)

‘Extra Budgetary Resources’ (EBR) or ‘Off-budget resources’ are loans taken by public sector
undertakings and Government organizations. (सरकारी निगम सं स्थानों द्वारा कर्ज लिया जाना)For example,
✔ Govt not releasing food subsidy to Food Corporation of India (FCI) & (thereby forcing) FCI to
borrow money from National Small Savings Fund (NSSF) for its food schemes. [Although 💼
Budget-2021 announced to stop this practice].

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 Here repayment of the entire principal and interest is done from the Central Government Budget
eventually, behind the curtains. (पर्दे के पीछे सरकार देरी से पैसा देगी)
✔ EBR measures are announced after passing of budget so, they may escape the same general level
of media-reporting, parliament debate or audit = bad for financial transparency & accountability.
मीडिया-रिपोर्टिंग, सं सद बहस या ऑडिट से छिपना = वित्तीय पारदर्शिता और जवाबदेही के लिए बुरा।

✔ 15th FC has termed “EBR” as ‘off-budget borrowings through para-statal entities’ and asked
Government to avoid it. (15वें वित्त आयोग ने भी इन हरकतों को बं द करने की सलाह दी है)
✔ 📔📔ES20 also criticised this practice (आर्थिक सर्वेक्षण ने इन हरकतों की आलोचना/निंदा की है)
 These EBRs are not taken into account while calculating the Fiscal Deficit but they’re counted
while calculating Government debt or public debt.
FISCAL YEAR 2020–21 2021–22 2022–23 & 2023–24
EBR (IN CRORES) 148000 121000 0

27.5 💼🤲🏻D EBT COMPOSITION: AMOUNT-WISE

Table 2: Definition & DATA as per 📔📔ES22 Vol1Ch2.

Outstanding Loan (बकाया क़र्ज़ ) 2019-20 2020-21 2021-22
i) Internal Debt (आंतरिक ऋण)- all the pending loans total 80 Lcr 99 Lcr 115 Lcr
A. Marketable debt = Government's dated securities (G-
Sec) and Treasury Bills, issued through auctions.
Investor can be easily resell it in secondary market
B. Non-marketable debt = special types of
securities/bonds issued by Union Govt to EXIM Bank
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 Outstanding Loan (बकाया क़र्ज़ ) 2019-20 2020-21 2021-22
and other All India Financial Institutions (AIFI), State
Govts etc. It's difficult/sometimes not possible to re-sell
such securities/bonds in the secondary market.
Majority of Govt’s internal debt is marketable debt.
ii) External Debt (बाह्य ऋण) 5 Lcr 6.15 Lcr 6.59 Lcr
 Borrowed from other nations and multilateral
institutions such as IMF, World Bank, ADB etc.
 At present Govt of India doesn’t borrow directly
from the International Capital Market.
A) Public Debt (सार्वजनिक ऋण)= (i) + (ii) 85 Lcr 105 Lcr 121 Lcr
B) (Public Accounts): Other Liabilities such as Post Office 13 Lcr 12 Lcr 12 Lcr
Savings, Postal Insurance, Provident Fund etc. small
savings schemes (लघु बचत योजना) (More in 📑Pillar#1D3)
C) Extra Budgetary Resources (बजेटेतर सं साधन) 1.12 Lcr 1.39 Lcr 1.39 Lcr
Total Liability (कु ल देयता) = A+B+C 99 Lcr 117 Lcr 134 Lcr
🔠❓MCQ. Find correct statements (Prelims-2022) :
1. A share of the household financial savings goes towards government borrowings.
2. Dated securities issued at market-rates in auctions form a large component of internal debt.
Codes: (a) 1 only (b) 2 only (c) Both 1 and 2 (d) Neither 1 nor 2

🚩 FAQ: Why are above numbers not matching fiscal deficit numbers!!?? Ans. Fiscal deficit number
only shows loan taken in a single financial year. Above is the cumulative (total) outstanding/unpaid
loans of successive Govt (Vajpayee, Manmohan, Modi…..etc) (ये कु ल बकाया कर्ज दिखा रहा है)

🚩 FAQ: Why are above numbers not matching Extra Budgetary Resources numbers in previous
section !!?? Ans. same as previous FAQ answer.

🚩 FAQ: Is EPFO/NPS amount included in above? Ans. EPFO/NPS invests money in 1) Pvt sector
company Shares, 2) private sector company Bonds and 3) G-Sec (=Loans to Govt). The G-Sec
components is included.

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27.5.1 💼🤲🏻Debt Composition: Type-wise

Out of loans majority (अधिकतर कर्ज़ इस प्रकार के हैं) minority(बहुत ही कम कर्ज़ इस प्रकार के हैं)
Total Public Debt State Govt (70%) Union (30%)
Union Debt → Internal (94%) external/foreign (6%)
(Source)
Repayment Rupee Foreign Currency (जो कर्ज विदेशी मुद्रा में
Currency वापस करने हैं)
Union Debt → 🔨Fixed Interest (निश्चित ब्याज दर) 🎈Hardly 5% of Govt loans are 'floating
(Type of Interest interest rate' (e.g. may be tied with
Rate) LIBOR etc REF#1C). (चलायमान ब्याज दर
वाले लोन बहुत कम है)
Tenure (अवधि के 📆
Long Term (दीर्घ अवधि) ⏰Short Term (लघु अवधि)
हिसाब से)
 Ratio of (External debt: GDP) = <3% (less than three percent)
 India's "debt to GDP" ratio is lowest among following group of countries: 1) G20 2) OECD 3)
BRICS( 📑Ref: HDT-Pillar#3B: International Organisations)
 Moreover, public debt for India has declined since 2003 and has been stable since 2011.

27.6 💼🤲🏻 F INANCING THE DEFICIT: ITS NEGATIVE CONSEQUENCES ON ECONOMY:

घाटे का वित्तपोषण: अर्थव्यवस्था पे उसके नकारात्मक परिणाम
How to fill deficit? 😰Why problematic / impractical? क्या समस्याएं /व्यावहारिक क्यों नहीं है
🍋 🍋1) Demanding  Taxes can’t be ⏫ beyond a point because it may force people to
more taxes जनता पर evade taxes / discourage their motivation to work. (recall Laffer
ज्यादा कर लादे जाएं Curve). करो का स्तर बहुत बड़ा दिया तो लोग करचोरी करेंगे
🤲🏻 🤲🏻 2) Borrowing  Ricardian Equivalence: ⏫ Government borrowing → ⏬public
more money सरकार द्वारा shopping = bad for economy. Although 📔📔ES21 says this will not
ज्यादा पैसा कर्ज में लिया जाए happen in India.

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 How to fill deficit? 😰Why problematic / impractical? क्या समस्याएं /व्यावहारिक क्यों नहीं है
 Crowding out of the private borrowers Although 📔📔ES21 says this
will not happen in India.
 Fall in the sovereign credit rating. Although 📔📔ES21 says this will
not happen in India.
🖨 🖨3) Printing  Although known as Monetising the deficit- it results in
More money hyperinflation (दे दना दन नोट छाप दिया जाए तो महंगाई बहुत बढ़ जाएगी)

27.6.1 💼🤲🏻 ⏫:🛒⏬ Financing the Deficit: Ricardian Equivalence

✔ ⏫ deficit → Government borrows ⏫ money → @Maturity (also called ‘Redemption’) of G-

Sec, Govt will have to return the principal and interest to the lenders.
✔ At that time, Govt may greatly increase taxes on people to arrange that amount.
✔ So, Economist David Ricardo argued that during high deficits, people save more, because they
become precautious about future hike in taxes.
✔ It’s called “Ricardian equivalence: रिकार्डियन तुल्यता” [& if people begin to spend less and save more,
then companies will face unsold inventories = new problems for economy]

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27.6.2 💼🤲🏻 ⏫:🛒⏬Ricardian Equivalence invalid for India says 📔📔ES21
📔📔ES21 cited multiple Research about Indian Economy (1950s-80s) & found REP to be NOT
valid for India Because...

Ricardian Equivalence Proposition (REP) Assumes Why invalid for India? भारत में यह सिद्धांत गलत
that (निम्न धारणाएं आवश्यक है) क्यों साबित हुआ?
Citizens are perfectly rational and perfectly capable Shopping decisions also depend on
to think about Future income, future tax liability, emotional urges and psychological whims
fiscal deficit when making their consumption e.g. Marriage-DJ/iPhone/Foreign vacation.
decisions.डेविड रिकार्डो की तुल्यता सिद्धांत सही साबित होने के लिए ग्राहक सभी निर्णय तर्क सं गत बनकर नहीं लेते. भावनात्मक
सभी नागरिकों का तर्क सं गत और बुद्धिमत्ता से सोच विचार के लिए सक्षम आग्रह और मनोवैज्ञानिक सनक भी आप को खरीदारी के
होना जरूरी- कि भविष्य में उनकी आमदनी, कर-दायित्व, राजकोषीय लिए उत्तेजित करती है
खाध, उपभोक्ता मांग कितनी होगी.
All citizens are paying taxes. डेविड रिकार्डो की तुल्यता सिद्धांत Tax Evasion, Black money, parallel
सही साबित होने के लिए सभी नागरिकों का करदाता होना जरूरी economy. भरपूर मात्रा में कर चोरी, काला धन

27.6.3 💼🤲🏻 Financing the deficit: “Crowding Out” of private borrowers

✔ If govt borrows ⏫ money from households & financial intermediaries (LIC, EPFO, Banks via
SLR), then that much less money will be available for loans to private corporate borrowers. = “
Crowding Out Effect” on the private borrowers= harms factory expansion and job creation.
(कॉरपोरेट उधारकर्ताओ को ऋण बाजार से बाहर धके ल देना)
✔ If Govt forces SBI, LIC, EPFO to buy its G-sec using public deposits → depriving households of
the optimal return (Had the same money been invested in the corporate sector) = “ Financial
Repression of the households.” (घरों/ कु टुम्बों का वित्तीय दमन”.)
✔ Govt (forced) NABARD to buy its ₹ 15,000 crore Swachh Bharat Mission (Gramin) Bonds with
maturity period of 10 years. Govt (forcing) RBI and others to pay higher dividend. →
operational freedom of those organization is affected.

27.6.4 💼🤲🏻 Crowding out of private investment? 📔📔ES21 Observations

📔📔ES21 found some evidence of "crowding out" of private companies in India during 1950s to
1990s. Mainly because (50 से 90 के दशक में निजी क्षेत्र की कं पनियों को रुण-बाजार से बाहर धके ले जाने के सबूत मिले क्योंकि:)
 [1) CRR and SLR were very high therefore PSB banks loanable funds supply was very limited
& due to politicized boards, they may have channeled most of the savings towards the govt.
(डिपॉजिट में से सीआरआर एसएलआर को हटाने के बाद कर्ज में देने योग्य रकम वैसे भी बहुत कम रहती थी)
 [2) Absence of large private sector banks (निजी क्षेत्र के बड़े बैंकों का आगमन अभी बाकी था)
 [3) Publics' earnings and savings were low. (लोगों के पास भी आमदनी और बचत कम ही थी)
 [4) Capital market / share-bond Market was underdeveloped. (पूंजी बाजार, शेयर/बांड बाजार विकसित
नहीं हुआ था → निजी कं पनियों के लिए पूंजी हासिल करना मुश्किल)
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📔📔ES21 find no evidence of crowding out in India from 1990-2019. Because
1. the above factors have gradually faded. (90 के दशक में उक्त बाधाएं कमजोर हो गई थी)
2. if Govt borrows money for Infra-development (Health, Education, Transport, electricity,
Irrigation etc) → jobs & GDP ⏫ → citizens' income ⏫ → savings ⏫ → more ₹₹ in banks,
NBFC, mutual fund, shares/bonds etc. So, "crowding out" may not happen because 'size of dish'
will become larger. (शिक्षा स्वास्थ्य परिवहन बिजली सिंचाई जैसी बुनियादी अवसं रचना के लिए अगर सरकार कर्जा लेती है →
रोजगार और आर्थिक वृद्धि मैं बढ़ोतरी → नागरिक की आमदनी बढ़ेगी → उसकी बचत बढ़ेगी → अपने आप ही बैंक-बचत शेयर
बांड द्वारा कं पनियों को ढेर सारा निवेश मिल जाएगा. अतः रुण बाजार से कं पनियों को बाहर नहीं धके ला जाएगा)
3. 1990-2019: ⏫in the population of youth / working age people ( demographic dividend)→
income & savings & banking habits ⏫ → Loanable funds ⏫ so "Crowding out" chances ⏬
(आबादी में नौजवानों की मात्रा बढ़ी → आमदनी और बचत की भावना भी बढ़ी → कर्ज में देने के लिए रकम भी बढ़ी है)
"Crowding out" assumes that the supply of savings is fixed. But in reality, economic growth ⏫ → the
size/quantity of savings ⏫ (धारणा से विपरीत वास्तविकता में बचत की रकम का जत्था स्थिर नहीं होता. आर्थिक वृद्धि के साथ-
साथ बचत-जत्थे में भी बढ़ोतरी होती है)

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27.6.5 💼🤲🏻 Financing the deficit: Printing More Money

✔ When central bank prints more money to pay for government's loans → called
“Monetizing the Deficit”. (मुद्रीकृ त घाटा: सरकारी कर्ज के लिए रिजर्व बैंक द्वारा दे दना दन नोट छापे जाए)

⏬
✔ It can result in hyperinflation and the purchasing power of currency (if there is not
sufficient increase in the supply of onion, tomatoes & goods in the market. e.g. Germany,
after Treaty of Versailles in 1919. जाने पर महंगाई दर/मुद्रास्फीति को अप्रत्याशित रूप से बढ़ जाएगी)

✔ Therefore, "Monetizing the Deficit" is also called "inflating away of debt".

FRBM Act prevents monetization of deficit- with following provisions: 👇

✔ Normally, RBI must not subscribe to the G-Sec in primary market from 2006-07 onwards.
[Refer Pillar1A2 Monetary policy for more on this matter.]
✔ Normally, Govt shall not borrow from RBI, except for Ways and Means Advances (WMA
Ref: Pillar#1C)

27.6.6 💼🤲🏻 Fiscal Deficit ⏫= India sovereign rating ⭐️️⭐️️⏬

Table 3: classification not important, sufficient to know AAA=best.
Rating → Moody's sovereign rating (सरकारी प्रतिभूतियों का रेटिंग/श्रेणीकरण )
Prime अग्रिम/उच्चतम दर्जे Aaa (e.g. US Treasury Bonds)
High grade / उच्च Aa1 to 3
investment grade: Upper A1
medium / मध्यम
investment grade: Lower medium Baa1 to Baa3. 2020-June: India rating reduced to Baa3.
because of weak fiscal position, rising fiscal deficit
Non investment grade (junk / रद्दी) BA1 to lower ranks like “C”.
⏬
So, now if India’s sovereign rating any step further= junk status= Implications? 😰
 Next time when issuing fresh G-Sec, Govt will have to offer more interest to investors to lure
them.
 Flight of Foreign Capital from India (भारत से विदेशी पूंजी का उड्डयन/निर्गम):
 Foreign investors may fear Indian govt will default in payment of previous G-Sec
 So they’ll dump it to other investors and run away from India.
 =Flight of capital from India = $ strengthen, rupee weakens. (Why? Ref: pillar3)
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 However, 📔📔ES21 suggested we need not worry about it. मत डरो इनसे और दे दना दन कर्जा ले लो

27.7 💼💉💸💸C OUNTERCYCLICAL POLICY (प्रतिचक्रीय राजकोषीय नीति)

(Introduction: Origin) Indian Kings used to build palaces, temples, mosques etc during famines to
provide employment. Thus, during an economic slowdown, the Govt must spend more ₹₹ to achieve
a similar objective. (अकाल के दिनों में राजा महाराजा महल मंदिर और मस्जिद बनवाते, ताकि लोगों को रोजगार मिले. आर्थिक मंदी
के समय में सरकार ने भी कु छ ऐसा ही करना चाहिए)

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 Counter  During economic slowdown → ⏫ Increase Fiscal expenditure to boost
cyclical Fiscal employment & GDP.
policy
प्रतिचक्रीय
 It helps in “Crowding-in” i.e. When govt spending ⏫ increased → private
राजकोषीय नीति investment ⏫ e.g. Govt building highway in Arunachal → Private
entrepreneurs building petrol pumps & hotels → jobs GDP. आर्थिक मंदी के दौरान
सरकारी खर्च को बढ़ाया जाए-ताकि निजी क्षेत्र निवेश रोजगार आर्थिक वृद्धि में मदद.
 During economic boost: ⏬Decrease govt spending (So as to build reserves
for future emergency/future slowdown) आर्थिक तेजी में सरकारी खर्च को कम किया जाए
ताकि सरकार भविष्य की मंदी के दौरान इस्तेमाल करने योग्य रकम को आरक्षित रख सके /जमा कर सकें .
 USA, UK, Chile have done this in the past, but India has not done it. 📔📔
ES21 Suggested India to pursue this.
Pro-Cyclical  During economic Boom, ⏫Fiscal expenditure
 चक्रीय-समर्थक राजकोषीय नीति ⏫ आर्थिक तेजी के दौरान सरकार ज्यादा पैसा खर्च करें
fiscal policy

🔠❓MCQ. The increase in private investment spending induced by the increase in Government
spending is known as (CDS-2021-i)
(a) Crowding in (b) Deficit financing (c) Crowding out (d) Pumping out

27.7.1 💼💉💸💸 Countercyclical: IRGD & Debt Sustainability

 Interest Rate Growth Rate Differential (IRGD: रूण-ब्याज-दर वृद्धि-दर के बीच अंतर): It is the difference
between (loan) interest rate (paid by Govt to investors) and GDP growth rate in an economy.
 so if loan interest 6% - minus growth rate 9% = (-3)% negative IRGD figure basically hints that if
GDP Growth rate is higher than the loan interest rate paid by the govt, then Govt need not worry
much, because GDP ⏫ → Tax collection ⏫ → Enough ₹₹ to repay those loans. यदि सरकार ने जिस
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 ब्याज दर पर कर्जा लिया है उसे आर्थिक वृद्धि दर ज्यादा हो तब तक सरकार ने चिंता करने की जरूरत नहीं क्योंकि आर्थिक वृद्धि के
चलते कर-आमदनी में बढ़ोतरी होगी → कर्जा चुकाने के लिए सरकार के पास रकम आती रहेगी.

Title Formula Comment

Interest Rate Growth Rate Loan interest minus GDP Negative number is good for
Differential growth: 6-9= Minus 2 economy.
Growth Rate Interest Rate GDP growth minus Loan Positive number is good for
Differential Interest: 9-6 = Plus 2 economy.

 📙ES23: our growth-interest rate differential positive. Our government debt to GDP is
sustainable.

27.7.2 💼💉💸💸 Countercyclical: Domar Condition of Debt Sustainability

 Economist Evsey Domar (1944) stated that, “Public debt of a country will be sustainable, IF GDP
growth is greater than the public debt growth rate.

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 Otherwise government may default on loan-repayment.” (यदि देश का आर्थिक वृद्धिदर, उस देश के सार्वजनिक
कर्ज़ वृद्धिदर से ज़्यादा होगा तो सार्वजनिक क़र्ज़ वहनीय हो पाएगा, वरना तो सरकार दिवालियापन दिखा देगी/ कर्ज़ नहीं चुका पाएगी।)

More on GDP Growth = 📑Ref: HDT-Pillar#4C: GDP

27.8 🔀💸S IDE NOTE: AUTOMATIC STABILIZERS (स्वचालित-स्थिरीकारी)

 Automatic stabilizers are mechanisms built into govt budget to address economic slowdown
automatically- by automatically increasing govt’s spending and/or decrease public’s tax liability.
[“स्वचालित-स्थिरीकारी’ - आर्थिक मंदी के दौरान अपने आप सरकारी ख़र्च को बढ़ाता है या जनता की कर-देयता को कम करता है]
 Automatic stabilizer does not require any change in the existing tax law or voting in the
Parliament- because it starts working automatically during slowdown. [उन्हें क्रियान्वित करने के लिए
अलग से नया क़ानून/ सं सद की अनुमति लेने की ज़रूरत नहीं होती. वो अपने आप ही क्रियान्वित हो जाता है]
 Examples of Automatic Stabilisers: Income tax, Corporation tax, unemployment allowance,
food subsidy and other Government schemes that are meant only for poor /lower middle class
people. [आयकर, निगम कर, गरीब के लिए लक्षित खाद्य सब्सिडी और दूसरी कल्याणकारी योजनाएं - “स्वचालित-स्थिरीकारी’ है]
Note: Countercyclical fiscal policy / fiscal stimulus = it requires the government to pass a new
budget / new law / permission of Parliament for some new initiatives. So, they are not automatic
stabilisers. They are discretionary stabilisers. [प्रति चक्रीय राजकोषीय नीति तथा राजकोषीय प्रोत्साहन पैके ज के लिए
सरकार ने अलग से विशेष रूप से नए बजट में ज़िक्र करना होगा कोई क़ानून पास करवाना होगा इसलिए वे विवेकाधीन स्थिरीकारी है।]

🔠❓MCQ. Which one of the following functions as an automatic stabilizer in the context of fiscal
and monetary policies of an economy? (UPSC-CAPF-2021)
(a) Personal income tax (b) Reverse repo rate of bank (c) Open market operation (d) Bond price.
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27.8.1 🍋 Tax multiplier is a negative multiplier

27.8.2 💼🤲🏻 THREE Functions of Govt Budget

Function Example / Meaning

Government provides certain goods and services which cannot be provided by the
Allocation market e.g. national defence, police, roads, railways etc. These are called public
goods.
Redistribution Collect more taxes from the rich and use it for welfare of the poor.
During the economic slowdown, govt should spend more money to stabilise the
Stabilisation
economy. Read the “counter-cyclic fiscal policy” section for more.

27.8.3 💼🤲🏻 Effects of Budget/Fiscal policy on Demand & Savings

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27.9 💼🤲🏻 M ISC TERMS RELATED TO DEFICIT FINANCING
Table 4: ✋need not do PHD on it unless Optional Subject=Public Administration
Methods for repaying debt (ऋण चुकाने के अलग अलग तरीके )
Redemption Repay the loan principal and interest at regular interval. Also known as
(भुगतान) Terminal Annuity. अनुशासन पूर्वक मूलधन और ब्याज धीरे-धीरे वापस चुकाना
Govt creates a special fund & keeps depositing money in it regularly. So at the
Sinking Fund
time of G-sec maturity, it has enough ‘buffer’ money to honor the loan
(निक्षेप निधि)
repayment. First introduced in England.
पुनर्गठन : Converting old loan into new loan with modifications in interest /
Conversion / tenure. (पुरानी लोन के ब्याज दर या अवधि में बदलाव करना)
restructuring 2020-Nov: Zambia became Africa’s 1st nation to default on its Euro loans due
to Corona. Experts believe some restructuring may be done.
Evergreening Taking new loan to repay the old loan (पुरानी लोन चुकाने नया कर्ज लेना)
Repudiation Govt does not recognize its obligation to repay the loan. E.g. After Russian
(परित्याग / बहिष्कार) Revolution (1917) Lenin’s Government refused to pay the loans taken by the
कर्ज चुकाने से previous Czar regime from Britain & France. Although, in modern times not a
मना कर देना sound strategy because next time, no one will give you loans.

27.10 💼📤🤺 F ISCAL CONSOLIDATION / PRUDENCE: राजकोषीय एकत्रीकरण / विवेक

It involves reduction in government expenditure to control its Fiscal Deficit. Such as

1. ⏬ the leakages (रिसाव) by targeted delivery of schemes and subsidies through direct benefit
transfer (DBT) through JanDhan- Aadhar- Mobile (JAM) trinity.
2. ⏬ the quantum (मात्रा) of subsidies: e.g.
a. Deregulation of Petrol prices (2010), Diesel (2013) (दामो को नियंत्रण मुक्त)
b. 2016: Oil Ministry began to block LPG-Pahal subsidies to persons with annual taxable
income of ₹ 10 lakh />
c. 2017: Oil Ministry asked oil companies to keep raising prices of subsidised kerosene by
25 paise every fortnight until the subsidy is eliminated.
3. Shutting down loss making PSU. E.g. Hindustan Photo Films, HMT Bearings, HMT Chinar
Watches, Tungbhadra Steel, Hindustan Cable & HMT Watches (2014).
4. Privatization of loss making Govt companies (निजीकरण) e.g. IDBI, Air India.
5. 2014-16: Government setup an Expenditure Management Commission (व्यय प्रबंधन आयोग) under
Bimal Jalan to suggest ways to reduce its Expenditure.

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6. Austerity Measures (मितव्ययिता के उपाय) e.g.
a. 2018- W.Bengal govt issued directives to its departments banning flower bouquets and
mementoes in public functions, banning officials meetings at private hotels, frequent
installation of AC, car purchases, office renovations etc. & restricting the no. of foreign
tours by Ministers / IAS etc., More use of video-conferencing instead of physical travel.
b. 2019: PM’s Cabinet Committee on Investment and Growth (CCIG: निवेश और विकास की
कै बिनेट समिति) ordered all Union ministries to reduce wasteful expenditure on travel, food
and conferences by 20% (यात्रा, भोजन और सम्मेलन की फिजूल खर्ची मे कटौती करो).
c. 2021: Parliament canteen subsidy ended e.g. Masala Dosa will no longer be sold at ₹6 etc.
This will help saving ₹8cr

🔠❓MCQ. There has been a persistent deficit budget year after year. What can be done by by the
government to reduce the deficit? (Asked in UPSC-Pre-2015)
1) Reducing revenue expenditure 2) Introducing new welfare schemes
3) Rationalizing subsidies 4) Expanding industries
Answer Codes: (a) 1 and 3 only (b) 2 and 3 only (c) 1 only (d) 1, 2, 3 and 4
🔠❓MCQ. In India, the price of petroleum products has been deregulated to _ _. (CDS-2013-II)
(a) reduce the burden of subsidies given to the oil companies
(b) discourage the exploration of oil reserves in the country
(c) discourage the demand for private vehicles
(d) curb the use of black money in the economy

27.11 💼💉 F ISCAL STIMULUS (राजस्व प्रोत्साहन पेके ज)

When govt ⏬taxes and/or ⏫ public procurement (सरकारी खरीद) to ⏫ demand & growth in economy,
it’s called “Fiscal Stimulus” (राजस्व प्रोत्साहन पेके ज).
27.11.1 💼💉 👳‍♂️Manmohan’s Fiscal Stimulus (2008-)
 Post-subprime crisis in USA, PM Manmohan announced Fiscal Stimulus (2008) such as
- (1) ⏬ in the Excise duty & Custom Duty on exports
- (2) Businessman were given additional benefits in Income Tax & Corporation Tax, if
they purchased new commercial vehicles.
- (3) Hiked the Minimum Support Prices (MSP) for farmers. 📑More in Pillar#4A
 However, the economic surveys observed that such Fiscal Stimulus create new set of problems by
⏫ fiscal deficit in the subsequent years.
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27.11.2 👻💼💉 🧔 Modi’s Atma-Nirbhar Bharat Economic Stimulus Package (2020)
 (Origin) 2020-March: Government of India initiated nationwide lockdown to prevent the spread
of Corona/COVID-19 pandemic. (कोरोना महामारी के चलते देशव्यापी तालाबं दी)
 This lockdown affected the income and livelihood of everyone from corporate companies to
common citizens of India. (सबकी आजीविका को हानी हुई)
 Therefore, to revive the economy, Prime Minister of India launched Atma Nirbhar Bharat
stimulus package in 2020-May to revive the Indian economy. (अर्थव्यवस्था को पुनजीवन / प्रोस्ताहन का
आर्थिक पेके ज)
 It’s centred on five pillars of – Economy, Infrastructure, System, Demand and Vibrant
Demography (स्फू र्तिली जनसांख्यिकी).
Table 5: (DATA) 👻Atma Nirbhar Bharat consists of
DATE 👻 Components of Atma Nirbhar Bharat Amt in lakh cr As per 📔📔
(Originally) ES21
2020-Mar to May 1) RBI’s monetary policies → (Ref#1A2) ₹8 lakh cr ₹13 Lcr
2) PM GARIB KALYAN (PMGKY): Covid Relief ₹17 Lcr
2020-Mar ₹1.70-1.90 lcr
Package →
3) FM Nirmala.S made new announcements made like
2020-May ⏬
Credit guarantee for MSME, TDS rates, PM Matsya ₹11 lakh cr
Samda Yojana, Agri infra fund etc.
= ₹20 lcr approx. ₹30 Lcr = 15%
ATMANI = 1+2+3=Total कु ल मिलाकर जोड़ी गयी रकम
(10% of GDP) of GDP
Note: Salient features of Atma-Nirbhar is spread across 6 pillars of Handout. Its criticism, how useful
in reviving economy & GDP growth, Nehru vs Modi’s ideas of self-reliance etc. = Ref: 📑Pillar#4C
♨️
27.11.3 ️Frontloading of Stimulus and Overheating in Economy
Refer to Pillar 4D: GDP

🔠❓MCQ. Which one of the following describes the “fiscal stimulus”? (UPSC-Pre-2011)
1) It is a massive investment by the Government in manufacturing sector to ensure the supply of
goods to meet the demand surge caused by rapid economic growth
2) It is an intense affirmative action of the Government to boost economic activity in the country
3) It is Government’s intensive action on financial institutions to ensure disbursement of loans to
agriculture and allied sectors to promote greater food production and contain food inflation
4) It is an extreme affirmative action by the Government to pursue its policy of financial inclusion

27.12 💼🤲🏻🔨 F ISCAL RESPONSIBILITY & BUDGET MANAGEMENT ACT, 2003

FRBM Act: राजकोषीय उत्तरदायित्व और बजट प्रबं धन अधिनियम, 2003

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Originally it required Union and States to control their deficits with following targets:
- By 2008: ⏬ Fiscal Deficit
- 🧔 For Union: 3% of GDP (GROSS DOMESTIC PRODUCT: सकल घरेलू उत्पाद)
- 👨🦲‍ For States: 3% of GSDP (GROSS STATE DOMESTIC PRODUCT)
- By 2008: Eliminate Revenue deficit (=make it 0%) of their respective GDP or GSDP.

While some of the state govts achieved them, but successive union govts struggled to meet these
targets so they kept amending the act to extend the deadlines and targets. (लक्ष्यों की समयसीमा को पीछे
धके लते रहे). E.g. Amendment 2012: No need to have 0% Revenue deficit. Instead it required 0%
Effective Revenue Deficit by 2015. These deadlines extended even further in subsequent years.

27.13 🙌 FRBM: T RIGGER MECHANISM (TO) ESCAPE (DEFICIT CONTROL) CLAUSE

FRBM Act Section 4(2): provides for a trigger mechanism to escape the deficit control related clauses
in the act i.e. Government can overcross the targets in following situations (चुनिन्दा 'ट्रिगर' परिस्थितियों मे,
घाटे-नियं त्रण सं बं धी धाराओं से बच सकते हैं)
1. ⚔️National Security / Act of War (राष्ट्रीय सुरक्षा / युद्ध)
2. 🌬🌪 National Calamity (राष्ट्रीय आपदा)
3. 🌽 If agriculture output and farm incomes collapse (कृ षि उत्पादन, आय मे पतन)
4. 📉 Fall in real output/ GDP growth rate beyond x% (विकास दर में अत्याधिक गिरावट)
5. 🍋 Structural reforms in the economy with unanticipated fiscal implications (अर्थव्यवस्था में सं रचनात्मक
सुधारों की राजकोष पे अप्रत्याशित असर हो.)

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 🔫 🙌 During above ‘trigger conditions’ (उक्त 'ट्रिगर' परिस्थितियों मे)
 FRBM Act Section 4(2): Govt may overcross/deviate the fiscal deficit target by upto 0.5% of
GDP, as recommended by NK Singh’s FRBM review Committee. (घाटे की मर्यादा/लक्षयांक को लांघ देना).
 Individual State Governments may also do similar (e.g. overcross by 0.5% of GSDP), but they’ve
to amend their state FRBM Act accordingly with this provision.
 💼Budget-2020: FM cited trigger#5 (structural reforms…..) to escape the FRBM targets for 2019-
20 and 2020-21.
Table 6: यानि की घाटा मे कटौती हमसे ना हो पाएगी'
Original target
Fiscal deficit → Overcrossed After Trigger Mechanism
(मूलत:)
2019-20 3.3% 3.8%⏫
2020-21 3% 3.5%⏫
- Primary deficit target 0% (2020-21): shifted to 2022-23.
- Revenue Deficit and ERD also over crossed but anyways FRBM Act has abandoned targeting
them since 2018’s amendment.
- 2020-Corona crisis: Govt’s income ⏬ and expenses ⏫ so deficit rose to unprecedented level. 💼
Budget-2021: FRBM amended to provide fiscal deficit 6.8% (2021-22) and 4.5% (2025-26)-
because 4.5% target is recommended by 15th FC.
27.13.1 💼🤲🏻🔨 FRBM: Misc. Concepts
1) 🛬 in 2018, instead of immediately reducing the Fiscal deficit to 3.0% FM Jaitley promised to
reduce it to 3% in 2020-21 like a glider gradually descending on its landing target. Hence
subsequent Finance Ministers keep reiterating that we’ll continue on that ‘Fiscal Glide’ (राजकोषीय
सरकाव) path. Although 💼Budget-2020 FM Nirmala.S used FRBM-trigger to escape it,
temporarily.
2) Fiscal Profligacy (अंधाधुंध राजकोषीय खर्च/आवारगी/ऐयाशी): This phrase is used to denote reckless
extravagance/wasteful expenditure of public money.
3) 🛵 If government has targeted to keep the fiscal deficit within 3.3% percent of GDP, but if it
crosses that limit, it’s called ‘Fiscal Slippage’ (राजकोषीय फिसलन).

27.13.2 💼🤲🏻🔨 🗂 FRBM Act: Documents (दस्तावेज़)

FRBM Act requires the Union Govt to present following documents along with the budget:
1) Macroeconomic Framework Statement (व्यापक आर्थिक ढाँचा विवरण): to show economic data - GDP,
growth rate, import-exports, and government’s receipts,expenditure etc.
2) Medium Term Fiscal Policy Statement (मध्यम अवधि की राजकोषीय नीति विवरण)

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3) Fiscal Policy Strategy Statement (राजकोषीय नीति कार्यनीति विवरण): To explain how Govt. is controlling
the deficits, and whether there is going to be any deviation from the target. Note: In real life,
Doc#2 and Doc#3 are published together as "Medium Term Fiscal Policy cum Fiscal Policy
Strategy Statement." (दूसरा और तीसरा दस्तावेज वास्तव में एक साथ, एक ही फाइल में दे देते हैं)
4) Medium-term Expenditure Framework (मध्यम अवधि व्यय ढाँचा विवरण) → 💼Budget-2021, 2022, 2023
Government not presented this document in Parliament, due to Corona. 😰

💼 💼
Note: above DATA Table from Budget-2020. Later in Budget-2021 and Budget 2022, govt 💼
not given such table because Nirmala.S said “fiscal projections for the years 2022-23 and 2023-24 will
NOT be presented. We will amend the FRBM Act to allow this exemption.”

🔠❓MCQ. According FRBM Act, the Govt is under obligation to present three statements before the
parliament along with the Annual Budget. Which one of the following is not one of them? [CDS-2008-I]
(a) Macroeconomic Framework Statement (b) Fiscal Policy Strategy Statement
(c) Medium-term Fiscal Policy Statement (d) Statement showing Short term Fiscal Policy
🔠❓MCQ. Along with the Budget, the Finance Minister also places ‘The Macro Economic Framework
Statement’. The aforesaid document is presented because this is mandated by (UPSC-Prelims-2020)
[a) Long standing parliamentary convention
[b) Article 112 and Article 110(1) of the Constitution of India
[c) Article 113 of the Constitution of India
[d) Provisions of the Fiscal Responsibility and Budget Management Act, 2003

27.14 👻🧔🕉👨‍🦲F ISCAL FEDERALISM: HELPING THE STATES IN ATMANIRBHAR

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27.14.1🧔🕉👨‍🦲Helping States → Tax devolution and grants
Corona = Union’s tax income ⏬⏬ but still Union has given the Tax Devolution and grants (कर
अंतरण व अनुदान) to the states, as per the figures announced in the Budget and Finance Commission
report.

27.14.2 🧔🕉👨🦲‍ Helping States → States’ Fiscal deficit limits ⏫

 Constitution Article 239: States require union govt permission before borrowing money.
 Before: Union had kept states net borrowing ceiling @3% of Gross State Domestic Product
(GSDP) (राज्यों के सकल घरेलू उत्पाद के 3% से ज्यादा कर्ज राज्य सरकार नहीं ले सकती)
 👻After ATMANI: 3% → ⏫to 5% for 2020-21. राज्य सरकार की राजकोषीय घाटे की मर्यादा को बढ़ाया गया।
State can borrow extra ₹₹
Sr if State Government does following reform
upto _ _ % of GSDP
1 No conditions /un-tied (बिना शर्तों के ) 0.50%

2
a) One Nation One Ration Card System( 📑Ref: HDT- 0.25%
Pillar#)
3 📑
b) Ease of doing business reform; ( Ref: HDT-Pillar#) 0.25%
c) Urban Local body/ utility reforms; (शहरी स्थानीय निकायों गटर 0.25%
4
पानी व्यवस्था इत्यादि में सुधार)
5 📑
d) Power Sector reforms( Ref: HDT-Pillar#5) 0.25%
6 if any 3 of the above (a-b-c-d) reforms done *** 0.50%
Total extra borrowing limit (sum of above six rows) 2% of GSDP. Total for all
States=₹4.27 Lcr
*** However, States who opt for GST compensation Option#1 Back2Backloans, will get
unconditional relaxation. (गैर शर्ती छू ट) (Ref: More in 📑Pillar#2A: GST compensation)
27.15 🧔🕉👨‍🦲F ISCAL DEFICIT TARGET FOR STATES
State Govt 2020-21 2021-22 2022-23 2023-24
Fiscal 3% (increased
4% + extra 0.5% 3.5% + extra 0.5% 3% + extra 0.5%
Deficit as to 5% as given
depending on some for power sector for power sector
% GSDP above) conditions (=total reforms. (=total reforms. (=total
4.5%) 4%) 3.5%)
 GSDP = Gross State Domestic product.
 What are power sector reforms? Ref: Pillar:5- Energy infrastructure.

27.16 💼🤲🏻🔨🕵🏻 F ISCAL RESPONSIBILITY: NK SINGH FRBM REVIEW PANEL

 Budget-2016: Finance Minister Jaitley felt FRBM Act targets were too rigid and did not allow any
room for the government to address any crisis. (लक्ष्य बहुत ही सख्त थे, उन्हें लचीला बनाने की जरूरत)

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 e.g. farm loan waivers during drought period or unemployment allowance during global
financial crisis are not possible if government strictly wants to control fiscal deficit at 3% of GDP.
(अकाल में किसानों को ऋण-माफी, या नौजवानों को बेरोजगारी भत्ता देना असं भव)
 So, FinMin constituted a panel under NK Singh to review the FRBM act.
 I’ve deleted its recommendations / numbers because too outdated / NOT followed after corona.
 While UPSC asked some PYQ from NK Singh Report but WE’ll NOT solve it. For same reason.

27.16.1 💼🤲🏻🔨🕵🏻 :🎯 Budget marksmanship is Poor, says 15th FC

 marksman = gunman who is skilled in shooting targets. (निशानेबाज)

 budget marksmanship = ability to keep income & expense within the budget targets/estimates.
however in reality...
2019-20 Budget estimate revised estimate Actual (finalized
(presented on (presented on after 31/3/2020)
1/2/2019) 1/2/2020)
Receipt → Taxes 16 Lcr 15 Lcr 13 Lcr 😰
Expenditure → Revenue (subsidies, 24.47 Lcr 23.49 Lcr 23.50 Lcr 😰
loan interest repayment etc)
 Thus the union government is poor in budget marksmanship. (बजट निशानेबाजी में कमजोर). Why?
 Because generally the income is overestimated in budget presentation to show a rosy picture
(मीडिया और विपक्ष के सामने गुलाबी चित्र प्रस्तुत करने के लिए आमदनी के आंकड़ों को वास्तविक परिस्थितियों की अपेक्षा ज्यादा बढ़ा
चढ़ा कर दिखाया जाता है)
 but, when the tax collection target is missed → it results in:
😰problem#1) Tax authorities engaging in tax terrorism / litigation (कर आतंकवाद और मुकदमे बाजी)
Year 2012 2020
Direct Tax dispute amount less than 3 lakh cr nearly 10lakh cr
😰problem#2) prediction error leads to ad-hoc expenditure management → A) excessive Reliance
on extra budgetary resources B) randomly cutting the scheme expenditure → not paying the
contactors on time → substandard quality of construction. (अनुमान में ऐसी गलतियों के चलते व्यय प्रबं धन

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 तदर्थ/अस्थाई रूप से किया जाता है, परिणाम स्वरूप योजनाओं के खर्च में कटौती कर दी जाती है, ठेके दारों को पैसा वक्त पर नहीं
चुकाया जाता → वे कमजोर गुणवत्ता की सड़क मकानों का निर्माण करते हैं इत्यादि)

27.17 💼🤲🏻🔨🕵🏻 F ISCAL RESPONSIBILITY: FREEBIES / REVDI CULTURE

 ‘Revdi Culture’ is a term used by PM Modi to denote the bad habit of political parties to
announce freebies to win elections even if they are not financially sustainable.
 Supreme Court also criticised this & asked the union govt to take action.
 Topic is still developing, we will revisit in Mains Course separately.

27.18 💼🤲🏻🔨🕵🏻 F ISCAL RESPONSIBILITY: MISC BODIES

27.18.1 💼🤲🏻🔨Expenditure Management Commission (2014)

 FinMin setup under Dr. Bimal Jalan. (व्यय प्रबं धन आयोग)
 Gave suggestions on how to ⏬ fiscal deficit, how to ⏬ subsidy bill etc.
27.18.2 💼🤲🏻🔨🕵🏻 Public Debt Management Agency (PDMA): सार्वजनिक ऋण प्रबंधन एजेंसी
Shifted to Mains handout. Experts had suggested to set up this organisation, but it is not yet set up.

27.18.3 💼🤲🏻🔨🕵🏻 Fiscal Council (राजकोषीय परिषद)

Shifted to Mains handout. Experts had suggested to set up this organisation, but it is not yet set up.

😰
27.18.4 ⚰️ Public finance challenges: Corona ex-gratia Yojana
 Disaster Management Act 2005’s Section 12: requires National Disaster Management Authority
(a statutory body headed by PM) to recommend minimum standards of relief to person affected
in a disaster. (आपदा प्रबं धन क़ानून की धारा 12 में ये लिखा है कि राष्ट्रीय आपदा प्रबं धन प्राधिकरण ने आपदा से प्रभावित लोगों
के लिए न्यूनतम सहायता घोषित करनी होगी।)
 Home Ministry has notified Corona as a disaster. So, PIL in SC asking Govt to pay compensation
to the family of every dead person. (गृह -मंत्रालय पहले ही कोरोना महामारी को आपदा घोषित कर चुका है, तो कु छ
लोगों ने सुप्रीम कोर्ट में जनहित याचिका दायर की कि कोरोना में मरे सभी लोगों के परिजनों को मुआवज़ा दिया जाए)
 2021-Oct: SC ordered Rs.50,000 for family of every person who died in Corona. This is posing
challenges to Govt’s fiscal capacity.

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27.18.5 🥵💼 Challenges to Fiscal Federalism and Public Finance
Shifted to Mains Course.

28 💼T YPES OF BUDGET: बजट के प्रकार

28.1 REVENUE VERSUS CAPITAL BUDGET: राजस्व बनाम पूं जीगत बजट
👜 Revenue budget: राजस्व बजट 👛 Capital Budget पूंजीगत बजट
associated with the income and expenditure that
It is associated with the income and expenditure
are of long term nature and/or results into
that are of temporary in nature (1 year or less),
creation of permanent / capital /financial assets,
and/or do not result into creation of permanent /
such as land, buildings, machinery, equipment,
capital / physical / financial assets.
shares, bonds, G-sec.
Taxation, revenue from selling goods and
services, interest payment on previous loans, Borrowings, disinvestment, and expenditure on
salaries, pension, subsidies and other non- assets creation.
developmental expenditure
🔠❓MCQ. Which is/are included in the capital budget of India? (UPSC-Pre-2016)
1. Expenditure on acquisition of assets like roads, buildings, machinery, etc,
2. Loans received from foreign governments
3. Loans and advances granted to the States and Union Territories
Ans Codes: (a) 1 only (b) 2 and 3 only (c) 1 and 3 only (d) 1, 2 and 3

28.2 💼🚊G ENERAL BUDGET VERSUS RAILWAY BUDGET (आम बजट बनाम रेलवे बजट)

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- 1920-21: Acworth Committee recommends separate Railway Budget. This practice continued
even after Independence, first the railway minister would present the Railway budget in
parliament, and after a few days finance minister will present General Budget.
- NITI Aayog’s Bibek Debroy committee recommends its abolition because
- 1) No constitutional requirement (सं वैधानिक रूप से यह अनिवार्य नहीं है)
- 2) During Coalition Governments, Rail budget was used for populism, cheap fares which eroded
the profitability of Railways. (गठबं धन सरकारों में लोकलुभावन, भारी घाटा)
- 3) during the British time, railway revenue used to be quite large compared to other sources of
revenue, but after independence, Railway revenue is quite small compared to overall General
budget- So it does not deserve a special presentation.
Therefore, Modi govt merged Railway budget with General budget from 2017 (विलीनीकरण).

28.3 💼🤴 P LAN VS NON PLAN EXPENDITURE BUDGET:

योजना बनाम गैर योजना व्यय बजट: is a method of classifying the expenditure side

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 Plan (expenditure) budget: योजना Non-Plan (Expenditure) Budget: गैर योजना
 Central Plans (the Five-Year Plans) - Expenditure related to general, economic and
 Central assistance for State Five Year Plans. social services of the government; Interest
 It is further subdivided into payments, defence services, subsidies, salaries
1) revenue expenditure (e.g. teachers and pensions.
salary under Sarva Shiksha Abhiyan) - It is also further subdivided into revenue
2) capital expenditure (e.g. new school expenditure (e.g. soldier salaries) and capital
buildings to be constructed under expenditure (e.g. Building new aircraft
Sarva Shiksha Abhiyan) carrier).

Since Budget-2017, Modi govt stopped the practice of displaying the plan and non plan expenditure
separately because (1) No such constitutional requirement (2) Government had dissolved the
planning commission in 2014-15 (3) 12th Five Year Plan (FYP:2012-17) was ending in 2017 anyways.
(More about PC & FYP in 📑Pillar#4C)

28.4 💼🖋B UDGETING (बजट निर्माण की प्रक्रिया/ रणनीति)

It is the process / strategy with which the budget is created.
🖋Traditional / पारंपरिक / लाइन-आइटम बजट: Simply calculating the income and expenditure without
Line-item measuring the underlying benefit or performance
- Allot ₹ 10,000/- to buy a new bed in government hospital
Budgeting

⏱Performance
- Allot ₹ 50,000 to buy a new computer in government department
calculating income and expenditure tied with underlying benefit or performance
budgeting प्रदर्शन - Allot ₹ 50,000 to buy a new computer with target that it should result in 30%
the faster clearance of RTI-applications compared to pen and paper
बजट
- Such budgeting helps measuring cost:benefit and efficiency.

⭕️Zero based - In a traditional budgeting, the approach is “automatic and incremental e.g.
budgeting “Last year we allotted ₹ 50,000 crore to educational schemes, so this year we
should allot 55,000 crores, lest the opposition parties create controversy.”
शून्य आधारित बजट
- Whereas in Zero Based Budgeting the budget is viewed as a fresh exercise
from zero base. So, each department has to justify its budget demands to
finance ministry. E.g. if last year ₹ 50,000 crores given to education schemes
but still 60% of class 5 kids cannot read class 2 books, then we’ll delete / modify
that scheme.
🌞 Sunset - In a traditional budgeting, once a scheme is launched it runs perpetually, even
Budgeting after regime change e.g. MNREGA, Mid-day Meal.
- In a Zero Based Budgeting, schemes are reviewed every year and then they
सूर्यास्त/ समयसीमा का
may get discontinued or continued (with or without modifications).
बजट
- In Sunset Budgeting, scheme are announced with deadline. e.g. “X” subsidy for
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 a period of two years starting from 1/1/2018. Thus, this scheme will self-
destruct after deadline just like the sun will set after the sunset.
28.5 👜G ENDER BUDGET (लैंगिक बजट)
Not required in Constitution / any law. But within general budget, this data presented since 2005.

28.6 💼🖋📂T RIBAL SUB PLAN & SCSP

From 70s, Govt required individual ministries to earmark funds for SC/ST within their overall funds:
A. “Scheduled Castes Sub-Plan (SCSP: अनुसूचित जाति उप-योजना)” → Social Justice Ministry monitors
via e-utthaan.gov.in
B. “Tribal Sub plan (TSP: आदिवासी उप योजना)” → Tribal Affairs Ministry monitors via stcmis.gov.in
which is not a fancy name so we need not memorize unlike e-utthaan.
Sidenote: Although not required by the Constitution, but Government also tables separate
documents showing 1) allocation for children 2) allocation for NORTH EASTERN AREAs.

28.7 💼🖋📊O UTPUT OUTCOME FRAMEWORK FOR SCHEMES:

योजनाओं के लिए उत्पादन परिणाम ढाँचा

Started from Budget-2017 onwards, the FinMin uploads a document showing outlay output and
outcomes for each ministry and department. These are monitored by NITI Aayog. For example,

(Batch:PCB10-Prelims) Mrunal’s Economy Pillar#2D: Budget → Disinvestment & Deficits → Page 464
 Ministry & Scheme Outlay Output (Deliverables) Outcome
MEITY → Pradhan ₹ 400 Give computer training to Increased number of
Mantri Gramin Digital crores 5 crore persons in rural digitally literate persons in
Saksharta Abhiyan area rural areas
(PMGDISHA)
28.8 💼🖋C ASH VS ACCRUAL BUDGETING: नगदी बनाम उपचय बजट
Outdated/Faded technical topic. I am deleting it from latest handout.

28.9 💼📤🏎L APSABLE FUNDS & MARCH RUSH: व्यपगत निधि और मार्च व्यस्तता
Appropriation act allows the government to spend funds from consolidated fund of India for a
period of one year (ending in 31st March).
- If any allotted funds remain unutilised, then by the ‘ rule of lapse ’, they must be returned (&
govt will have to again seek Parliament approval for the next financial year using next
appropriation bill). So, in March, there is a rush among the Govt orgs to spend money (in a
haphazard / reckless manner) lest they’ve to return it back.
- 2017-18: Finance ministry issued directive that in “In the fourth quarter (Jan to March) and in
the March-Month, Govt organizations shall not spend more than “x%” & “y%” of funds”. This
helps controlling the March Rush.

28.10 💼📤🛴 N ON LAPSABLE FUNDS & NO RUSH: बिनव्यपगत निधी

The money in such fund will not lapse on 31st March, so it can be used in future without getting
another approval from parliament. e.g. Dept of Economic Affairs → Nirbhaya fund → women
safety related projects.
- 😰Criticism? Since fund is non lapsable, Departments become very lax in utilising it. Budget
2013 started Nirbhaya fund in the aftermath of Dec-2012 Gangrape @Delhi. The successive
budgets kept adding ₹ into it. By 2018: ~3000 crore but not even 50% utilized
- 2018: Defence ministry demands “ non lapsable defence modernization fund”, but Finance
ministry rejected for similar same reason. (money will remain unspent.)
- Although later 15th FC has recommended Modernisation Fund for Defence and Internal Security
(MFDIS) ₹ 2.38 Lcr (total for 2021-26). (More in 📑Pillar#2B: 15 th
FC)

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28.11 📯🧔T YPES OF SCHEMES (योजनाओं के प्रकार)

 For any Union Territory without Legislature: 100% funding by Union for any scheme in any
category. ✋We will look at the schemes’ features in the respective pillars.
 To disburse scheme ₹ & monitor it effectively, FinMin →Dept of Expenditure Controller
General of Accounts (CGA) → Public Financial Management System (PFMS) webportal.

28.11.1 👜🥻Budget-2022: CSS rationalisation

Govt has reduced the number of CSS from 130 → ⏬ 65. (योजनाओं की सं ख्या में कटौती)
 Some schemes are Stopped e.g. Dairying Through Cooperatives, National Dairy Plan-II and
National Dairy Plan. (बं द कर दिया)
 some schemes are merged: e.g. (एकीकरण)
 I] previously Woman Child development Ministry was running 19 scheme is now they are
compressed into just 3 viz A) Mission Shakti B) Mission Vatsalya C) Saksham Anganwadi and
POSHAN 2.0. (More in 📑Pillar#6)
 ii] Ministry of Agriculture running 20 CSSs have been rationalised into three schemes: A)
Krishionati Yojana B) Integrated Scheme on Agricultural Cooperative C) Rashtriya Krishi
Vikash Yojana. (More in 📑Pillar#4A)
😍effective monitoring, duplication of efforts⏬ → subsidy bill & deficit ⏬ (प्रभावी रूप से निगरानी,
योजनाओं में प्रयत्नों का व्यर्थ दोहराव न हों, ताकि सब्सिडी और सरकारी घाटे का बोझ कम हो जाए.)

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28.11.2 📯🧔Ministry-wise Highest Allocation (amt in ₹ lakh crore)

28.11.3 💰🔎📊Govt Schemes: Result Based Financing instead of input based financing
INPUT-BASED FINANCING RESULT-BASED FINANCING
 Government will pay money for  Govt will define results e.g. daily 15km
purchase of inputs. road constructed, minimum 80% of skill
 Then officials/contractor will trainees must get job placement etc.
built road/college, provide skill  if result not achieved then govt may not
training etc. pay full amount / cut penalty.
👛Budget-2023: for selected government schemes, we’ll shift from ‘input-based financing’ to ‘result-
based financing’. (कु छ चुनिंदा सरकारी योजनाओं के लिए, हम ‘इनपुट-आधारित वित्तपोषण’ की जगह, ‘परिणाम-आधारित
वित्तपोषण’ का अमल करेंगे. यानि की सरकार द्वारा तय परिणाम/सूचकांकों को ठेके दार/अफसर हांसिल नहीं कर पाया तो पैसा नहीं
मिलेगा/काट दिया )

✍️
28.11.4 ️Mains Questions
Mostly centred around the – Challenges in public finance, how to curb black money, features of GST,
problems in GST, significance of disinvestment, how to reduce subsidy burden, how to control fiscal
deficit, how to increase the impact of government schemes etc. Covered separately in Mains Course.

Next Handout: Pillar3A: Balance of Payment

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 PILLAR#3A : Balance of Payment , International Trade, Currency Exchange
Table of Contents
30 ⛽️🎖Pillar#3A: Balance of Payment (भुगतान संतुलन)....................................................................471
30.1 👩‍🎓 Academic Disclaimer.........................................................................................................471
30.2 🔁 Types of Economies............................................................................................................472
30.3 🚢 🔁 Intl. Trade & Circular flow of income- impact of import / export .............................472
30.3.1 🚢😄 Benefits of international trade......................................................................................472
30.4 🤔Entry into international business - various modes/types..................................................473
30.5 📝 Documents related to Import/export................................................................................474
30.5.1 📝 Docx related to Loans - Bill of Exchange.........................................................................475
30.5.2 📝 Docx related to Loans - others..........................................................................................475
30.6 🛟 BoP- meaning / definition..................................................................................................476
30.7 🐯 RBI’s (Actual/real) method of classifying BoP..................................................................476
30.1.1 📊Notes about the Data Tables in this Handout Pillar#3A.................................................477
30.1.2 📊Where is 2023’s Data BoP?................................................................................................477
30.8 ⛽️🎖 Balance of payment → Current Account →................................................................477
30.9 ⛽️🎖 Balance of Trade (BoT व्यापार का संतुलन)......................................................................478
30.1.3 ⛽️🎖 Net Terms of Trade (NTT) or Commodity terms of trade.......................................478
30.1.4 ⛽️🎖 Gross (Barter) Terms of Trade (GTT, सिर्फ प्रिलिम के लिए, अत: हिं दी अनावश्यक)....479
30.1.5 ⛽️🎖 Income terms of trade (ITT)........................................................................................479
30.2 ⛽️🎖 Top Import and Exports of GOODS for India:............................................................479
30.2.1 Notable Import / Export Goods as per 📙ES23....................................................................479
30.2.2 📤⛽️🎖 Goods Export Before Corona: Notable items........................................................479
30.2.3 📤🍊 India’s TOP Agriculture Exports.................................................................................480
30.2.4 📤⛽️🎖 SERVICES Import Export Before Corona.............................................................480
30.2.5 🛒🤝India’s trade partners: Import / Export as per 📙ES23 ...............................................480
30.2.6 India’s trade partners: Trade Surplus / Deficit With Notable Countries...........................481
30.3 💌📊 Reports / Indices related to Export & Remittance........................................................482
💌📊Export Preparedness Index by NITI ( निर्यात तैयारी सूचकांक)................................................482
30.3.1 💌📊Global Survey on Digital and Sustainable Trade Facilitation by UNESCAP ...........482
30.3.2 💌📊Report: Goods Trade Barometer Index........................................................................482
💌📊 Remittance: World Bank’s Remittance Report (विश्व बैंक की धनप्रेषण रिपोर्ट)......................482
30.3.3 Indian migrants’ key destinations - 📙ES23.........................................................................482

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 30.3.4💌📊Report: Misc....................................................................................................................483
30.9.1 💌 Remittance /Migrant workers → Pravasi Bharatiya Diwas (PBD) ...............................483
30.10 ⛽️Balance of payment → Current Account → Import of Oil............................................483
30.3.5 ⛽️🕵🏻 Domestic Oil Exploration Policies?.............................................................................484
30.3.6 ⛽️🕵🏻: 🤷🏻‍♂‍NELP’s primary limitations were →.....................................................................484
30.10.1 ⛽️📯🧔HELP Policy (हाइड्रोकार्बन अन्वेषण और अनुज्ञप्ति/लाइसेंसिं ग नीति).........................484
30.10.2 ⛽️India’s Strategic Oil Reserves (भारत के सामरिक तेल भण्डार)...........................................484
30.10.3 ⛽️📈📉 Crude Oil prices & OPEC (कच्चा तेल)..................................................................485
30.3.7 ⛽️📈📉 Crude Oil: Russia-Ukraine War (2022)..................................................................486
30.3.8 ⛽️📈📉 Crude Oil: Theory / GK ?.........................................................................................486
30.3.9 ⛽️💰BoP: Current → Fall of Crude oil prices in negative figure .......................................486
30.3.10 ⛽️💰 Price cap Russian oil (2022).......................................................................................487
30.3.11 ⛽️💰 Petrol & Diesel Prices & Taxes in India ...................................................................487
30.3.12 ⛽️ Electric Vehicles, Ethanol Blending etc.........................................................................487
30.11 🎖Balance of payment → Current Account → Import of Gold.........................................487
30.11.1 🎖🐯RBI’s 80:20 Scheme (2013-14)....................................................................................488
30.11.2 🎖🗃🐯 Sovereign Gold Bond Scheme (2015: स्वर्ण बांड योजना).......................................488
30.3.13 🎖🗃🐯 Gold Monetization Scheme (2015: स्वर्ण मुद्रीकरण योजना)..................................488
30.11.3 🎖🎖🦁 Indian (Sovereign) Gold Coins (2015: भारतीय स्वर्ण सिक्के )................................489
30.3.14 🎖😷: Gold price in Corona (कोरोना महामारी के दौरान स्वर्ण क़ीमतें)....................................489
30.3.15 🏅Gold import: ⬆️ customs duty (2022)............................................................................489
30.12 🏅Gold related GK Data..........................................................................................................490
30.13 💎Lab Grown Diamonds (LGD: प्रयोगशाला में बनाए गए हीरे)................................................490
30.13.1 BoP → Current → Export → GI Tag...........................................................................490
30.13.2 ☕️🔖 GI Logo.........................................................................................................................491
30.3.16 🏬🛒 Unity Malls for selling GI, Handicraft etc. in 👛Budget-2023 ...............................491
30.4 →BoP → Current → Exports → SEZ...............................................................................492
🍋🚫🕵️‍♂️Baba Kalyani report on SEZ.................................................................................................492
30.4.1 🍋🚫🕵️‍♂️SEZ → DESH Hubs...................................................................................................493
30.4.2 👜🥻Budget-2022 Announcements to ⏬CAD...................................................................493
30.14 💎📞📯 BoP ➡️ Current ➡️ Foreign Trade Policy...............................................................493
30.15 📞📯4 pillars of FTP-2023.....................................................................................................494

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 30.15.1 📞📯FTP-2023 Pillar#1: Incentive to Remission (टेक्श माफ़ी ).........................................494
30.15.2 📞📯 FTP-2023 Pillar#2: Ease of Doing Biz (व्यापार में सुगमता)........................................495
30.15.3 📞📯 EoD: Bol Bachchan/ चिकनी चुपड़ी बाते.......................................................................495
30.15.4 📞📯 FTP-2023 Pillar3: Emerging Areas (उभरते क्षेत्र)........................................................496
30.15.5 📞📯 SCOMET & Dual use Export.....................................................................................496
30.15.6 📞📯 E-Commerce Exports.................................................................................................496
30.15.7 E-Governance initiatives......................................................................................................496
30.15.8📞📯 Merchanting trade @Gift City (वाणिज्यिक व्यापार)..................................................496
30.15.9 📞📯 FTP-2023 Pillar4: Collaboration of Stakeholders ( हितधारकों का सहयोग)..............497
30.15.10 📞📯 ✍️Conclusion (Summarise - yes FTP-2023 greatly help).....................................498
30.16 🚢📈 Export Improvement -Misc. Schemes.........................................................................498
30.4.3 🔪 Interest Equalisation Scheme for Exporters (2015)........................................................498
30.4.4 🍋🤑Tax Credit for Exporters: MEIS/SEIS...........................................................................498
30.4.5 🍋🤑Tax Credit for Exporters: RoDTEP?.............................................................................498
30.4.6 ⚓️Port Logistics: Authorised Economic Operator (AEO)..................................................499
30.4.7 ✈️ Krishi Udan Scheme v 2.0 (Civil Aviation Ministry, 2020)...........................................499
30.4.8 📙ES23 observation on Export Improvement......................................................................499
30.4.9 📲📯🧔 “Assemble in India” | Production Linked Incentive Scheme (PLI) .....................499
30.17 ⛽️🎖: 🗃🤲 BoP → Capital Account→ Investment→ FDI / FPI.......................................500
30.17.1 🗃🎅 Foreign Portfolio Investors (FPI: विदेशी पोर्टफोलियो निवेशक)................................500
30.17.2 🗃🗃🎅🤝 FDI: Inward vs Outward Direct Investment (ODI)........................................500
30.17.3 🗃🗃🎅🤝 Foreign Direct Investment (FDI: प्रत्यक्ष विदेशी निवेश)....................................501
30.4.10 🗃🗃🎅🤝 FDI in India → Source Nation and sector-wise as per 📙ES23 ....................502
30.17.4 🗃🗃🎅🤝 Foreign Investment → 100% Automatic permitted in...................................502
30.17.5 🗃🗃🎅🤝 Foreign Investment → Limits in Others sectors............................................503
30.17.6 🗃🗃🎅🤝:🖱🛒 India’s FDI rules for E-Commerce........................................................503
30.4.11 🗃🗃🎅🤝: 🔥💸 Hotmoney Effect by FPIs.......................................................................504
30.18 🗃🗃🎅🤝Investment: Misc Terms & Reports....................................................................505
30.18.1 🤲🏻✈️ Golden Visa (स्वर्ण वीज़ा).............................................................................................505
30.18.2 📊UNCTAD's World Investment Report (विश्व निवेश रिपोर्ट)............................................505
30.5 🕵🏻 Yearbook: Ministry of Commerce and Industry (वाणिज्य और उद्योग मंत्रालय):.................505

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 🔎 Commerce Ministry: Export Inspection Council (EIC)..............................................506
30.18.3
30.5.1 💼 Budget-2020 : Medieval dictionary GK about Foreign Trade.......................................507
30.18.4 🕵️‍♂️ (2019) DIPP becomes DPIIT (विभाग का नाम बदला गया).............................................507
30.18.5 🕵🏻 (2017) FIPB Abolished (विदेशी निवेश अनुमति की संस्था को हटाया गया)........................507
30.5.2 🗃🈶💰 BoP: Capital → Chinese FDI need Govt approval................................................508
30.18.6 🕵🏻 Related Topic: Cabinet Committees..............................................................................508
30.19 🐯🎅🏽🦁 International Financial Services Centre (IFSC) / GIFT CitY................................509
30.19.1 🐯🎅🏽🦁: 🕵🏽 IFSC Authority Act, 2019................................................................................510
30.5.3 👛Budget-2023 on IFSCA Authority.....................................................................................510
30.19.2 🏫 Foreign University @ Gift City.......................................................................................511
30.19.3 Data Embassy @Gift city in 👛Budget-2023.......................................................................511
30.5.4 🐯🎅🏽🦁: 🕵🏽 Variable Capital Companies (VCC)@Gift city................................................511
30.20 🤲🏻 🔪 BoP → Capital → Debt (Loans & Non Resident Bank deposits).............................511
30.5.5 🤲🏻 🔪 External Debt : Composition Govt vs Pvt. As per ES23...........................................512
30.5.6 🤲🏻 🔪External Debt : currency wise as per 📙ES23.............................................................512
30.20.1 🤲🏻 🔪 BoP → Capital Account → Misc. Concept: NIIP..................................................512
30.5.7 🤲🏻 🔪 Asset liability ratio........................................................................................................513
30.5.8 🤲🏻 🔪 BoP → Capital Account → Misc.: VOSTRO, NOSTRO, FCNR, NRE, NRO .......513
30.5.9 🤲🏻 🔪 BoP: External Debt overhang Problem (ऋण की अधिकता)......................................513
30.6 📝 Next Handouts in Pillar3:..................................................................................................513

30 ⛽️🎖P ILLAR#3A: BALANCE OF PAYMENT (भुगतान सं तुलन)

Economy: 6 PillarsTM
Prelims P1 (GS 100 🔠❓MCQs)
2017 2018 2019 2020 2021 2022 2023
3_Intl_Trade, BoP 4 4 7 7 2 4 3 MCQ

30.1 👩‍🎓 A CADEMIC DISCLAIMER

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30.2 🔁T YPES OF ECONOMIES

30.3 🚢🔁I NTL. TRADE & CIRCULAR FLOW OF INCOME- IMPACT OF IMPORT / EXPORT

30.3.1 🚢😄 Benefits of international trade

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 Stakeholder Benefits
Earning of forex, jobs, GDP, efficient use of resources (men, material),
To Govt
increase income → improved standard of living
To (exporting) more customers, more profit, increased capacity utilisation, way out (escape)
Companies from intense competition within domestic market.
To Customers improved choices - in terms of quality and price.
🙋🏼‍♀️What does above table mean? Ans. Explained in the video lecture. 👩🏻‍🏫
30.4 🤔E NTRY INTO INTERNATIONAL BUSINESS - VARIOUS MODES/TYPES

Type Meaning / Example Challenges

cost/risk of packaging-transport, Taxes,
simplest form of entry into
import export protectionism, exchange rate, geopolitical
intl. business
problems (Taiwan, Ukraine, Palestine)
e.g. Tata making iPhones
Contract Quality control. Contract manufacturer (Tata)
for Apple
manufacturing / will not make as much % profit as the original
Godrej making Dettol soaps
outsourcing company (Apple)
for Reckitt and Colman.
1) Quality control.
Dominos Pizza (USA) → 2) Royalty fees/payment.
Franchising
JUBILANT FOODWORKS 3) Danger to the original brand that later on
(services)
(India). Franchisee may pirate/misuse the trade-
secrets/receipts to launch a similar product.
Licensing
Pepsi → Varun Beverages Similar to Franchising
(goods mfg)
Hero Honda = Hero Group
- Leak of trade secrets
of India and Honda of
Joint venture - Clash of egos/ideas of the two companies’
Japan. (later on venture was
top bosses.
terminated around 2010)
- Issues related to taxation, transfer pricing etc.
Standard Chartered Bank - Business stability depends on
Wholly Owned (India) is 100% owned by political/diplomatic relation between the two
Subsidiaries Standard Chartered Bank countries e.g. Canada/USA arrested Huawei top
(UK Parent). official then China started taking action against
American companies in China (2019–21).
🚩👶🏻
• FAQ1: what is the difference between contract manufacturing and licensing and joint
venture? Ans. Academic disclaimer on top of HDT3A. थोड़ा-पढ़ो-आगे-बढ़ो.

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🚩👶🏻
• ✅
FAQ2: you mentioned the challenges, but what are the benefits? Ans. Apply common sense
around how such partnerships or deals cud help in the capital/investment, risk-taking, innovation &
Idea exchange etc.

30.5 📝D OCUMENTS RELATED TO IMPORT/EXPORT

Document Meaning / example

quotation / proforma
I (Exporter) can supply you (importer) tea at X price on Y date.
invoice
indent / Receipt of I (importer) agree with your (Exporter’s) quotation & I want buy _ _ _ kg
order tea at the price quoted by you.
Indian importer/ exporters have to get this number / license/registration
Importer-Exporter
number from Directorate General Foreign Trade (DGFT, under
Code
Commerce Ministry)
Indian exporter may have to get this from Export Inspection Council of
Certificate of
India (EIC, under Commerce Ministry)- depending on the type of
Inspection
product.
1) Suppose USA banned Chinese seafood. Then Indian exporter need to
produce certificate to USA-officials ke “my product is from India (and not
from China)”.
Certificate of origin 2) Suppose India signed free trade agreement (FTA) with Sri Lanka ke 0%
import tax (customs duty) on Srilankan Ink→ Srilankan seller need to
show certificate to Indian officials ke “my product is made in Sri Lanka
(and not in China)
e.g. If USA sells fighter jets to Pak Airforce (PAF), then PAF has to certify
to France that we (=PAF/buyer) are the final recipient of the materials,
End-user certificate
and we are not planning on selling/transferring the jets to another party
(EUC)
e.g. Hamas/Taliban. EUCs are required by many governments to
restrict the flow of the materials to undesired destinations/organizations.
Shipping/Courier e.g. carting order, cart ticket, mate’s receipt, bill of lading, airway bill:
related docx what do they mean? How do they work? not important.
Mundra Port owner (=Adani) will demand penalty fees from the
Demurrages importer/exporter/shipping company IF they cause delays in
loading/unloading cargo in the port.

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30.5.1 📝 Docx related to Loans - Bill of Exchange

30.5.2 📝 Docx related to Loans - others

Document Meaning / example
Export Credit Guarantee / NIRVIC Scheme: e.g. ECGC’s letter to SBI:-
Export Credit Insurance Dear@SBI please approve the loan to Indian Exporter. If he
(Ref: Pillar#1D) doesn’t repay loan, we’ll cover _ _ _ % losses.

Letter of Credit / Letter of PNB (Mumbai Branch)’s letter to HSBC (HongKong):

Undertaking for importer Dear@HSBC Bank (HongKong) plz give foreign currency loan to
(Ref: Pillar#1B2-NPA) our client (Indian importer) Nirav Modi for import of diamonds.
If he doesn’t pay, we (PNB) will pay.

🚩👶🏻 FAQ: How are above two terms (export credit guarantee versus letter of credit) similar to
different? Can’t we say X is a sub-topic of Y? Ans. If you are intelligent enough, then you will find out
that one of the product is primarily targeting importer and other is meant for exporter. But anyways
that’s Not imp4exam. थोड़ा-पढ़ो-आगे-बढ़ो. 🐎✅🐂✋

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30.6 🛟 B P-O MEANING / DEFINITION

- BoP is a systematic record of all economic transactions made between the residents and non-
residents of a country for a specific time period, usually a year. किसी देश के निवासियों और गैर-निवासियों के
बीच किए गए सभी आर्थिक लेनदेन का एक रिकॉर्ड है।
- Central Banks of each country prepare BoP records as per the format given in IMF’s BPM-6
manual, all the figures are expressed in Dollar$.
- Since any country’s debit (outgoing money) is a credit (incoming money) for another country →
World’s NET Balance of Payment is ZERO.
- BoP is further sub classified into two parts → Current Account (चालू खाता) and Capital Account
(पूंजी खाता), based on the nature of transactions.

30.7 🐯 RBI’ (A S CTUAL/REAL) METHOD OF CLASSIFYING BOP

⛽️🎖💎 Current Account 🗃 🤲 Capital & Financial Account
Goods and services 1. Direct Investment (FDI)
Primary Income: wages, dividend, interest 2. Portfolio Investment (FPI)
Secondary income: remittance, gift, donation 3. Loans / External Commercial Borrowing
(ECB)
4. Non-resident’s investment in Bank,
Insurance, Pension schemes.
5. RBI’s foreign exchange reserve
However, for the purpose of learning, we’ll continue with the traditional classification given in the
textbooks (and in below image)

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30.1.1 📊
Notes about the Data Tables in this Handout Pillar#3A
- In most of the tables, I’ve used data of a stable/normal year 2018-19 to explain theory basics.
Because subsequent years’ data trends have some abnormal trends due to economy slowdown
(in 2019), Corona (in 2020 & 21).

30.1.2 📊
Where is 2023’s Data BoP?
 Financial Year will end on 31/3/2023 Then RBI will publish BOP in 2023-June, after fixing
errors/omissions. So, Economic Survey 2023 (published on 31/Jan/23) only published partial
BoP data from April to Sept/Dec-2022, which is not very useful for PYQ/MCQs. So we will focus
on the general trend but not EXACT numbers.
 Then wait for Free Win24 series for latest figures in 2023-Feb.
- Note: if I have not mentioned the data in a particular segment= means latest economic survey
2023 has not bothered to talk about it loudly, so I’ve not bothered to do self-google search. अगर
किसी भाग में मैंने लेटेस्ट डाटा नहीं दिया तो मतलब कि इकनोमिक सर्वे ने उसे बताने की जहमत नहीं की.

30.8 ⛽️🎖 B ALANCE OF PAYMENT → CURRENT ACCOUNT →

Component NET Amount in billion dollars 2018-19 2019-20 2020-21
Visible दर्शनीय Trade in Goods -180 -157 -102
Invisible अदृश्य Trade in Services +82 +85 +88
Primary Income: Wages, Profit, -28 -27 -36
Interest, Dividend.
Secondary Income/Transfer: +70 +75 +73
Remittance, Gift, Grants, Donations.
Net Current Account Balance (if negative: “Deficit”) 😰-57 Bn 😰-24 Bn 🤩+24 Bn
(Deficit) (Deficit) (+0.9% GDP)
1) From 2001-04: We had Current Account Surplus (चालू खाता अधिशेष) because, it was a time before
the USA’s subprime crisis when global economy boom had ⏫ our exports). But then we started

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 to have deficit. India’s current account deficit averaged -2.2% GDP in the last 10 years.
2) 2020-21: Corona- imports ⏬ compared to export (and we managed to export decently in the
Pharmaceutical and IT sector). So, India witnessed a Current Account surplus for the first time
(2020-21) after last 17 years! कोरोना महामारी व तालाबं दी के चलते आयात में भारी गिरावट के चलते पिछले 17 सालों में
पहली बार चालू खाता घाटा नहीं, चालू खाता अधिशेष हुआ!
Year 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020-21 2021-22 2022-23
CAD as - - - - - - - - - +0.9% CAD CAD
% of 4.3% 4.8% 1.7% 1.3% 1.1% 0.6% 1.8% 2.1% 0.9% (Reality) DEFICIT DEFICIT
GDP possible. possible.
1.2% #
3._%#
Final data yet to release, but these are projection (2021-22 & 2022-23) from BizStd Newspaper.
#

30.9 ⛽️🎖 B ALANCE OF TRADE (BOT व्यापार का सं तुलन)

(Definition) Balance of Trade is the difference between the value of import and export of _ _ _ .
- ✅Of Goods (as per NCERT.)
- ✅Of Goods and Services (as per IMF balance of payment manual)
🚩👶🏻FAQ: So what to tick in MCQ? Ans. well depends on the context of the MCQ.
Balance of Trade Amount in Billion $ for Year 2018-19
Export Goods +330
Import Goods -510
Export Services +208
Import Services -126

Balance of Trade (ONLY Goods) +330-510 = (-180) 😰TRADE DEFICIT in GOODS

Balance of Trade (ONLY Services) +208-126 = (+) 82 🤩TRADE SURPLUS in Services
Balance of Trade (Goods & +330 Goods + 208 Services-510 Goods – 126 Services= (-
Services Combined) 98) = 😰TRADE DEFICIT
30.1.3 ⛽️🎖 Net Terms of Trade (NTT) or Commodity terms of trade
Value of export 💸
💸
'
NTT = ∗100=for India i t s<100(usually)
Value of import
Meaning ($ or value) wise we are importing more and exporting less.

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30.1.4 ⛽️🎖 Gross (Barter) Terms of Trade (GTT, सिर्फ प्रिलिम के लिए, अत: हिंदी अनावश्यक)
quantity vol of import
GTT = ∗100=for India its <100 (Usually ).
quantity vol of export
So, in physical quantity (kg, litres) we are exporting more than importing. This is possible because
exported Indian rice’s quantity (kg) could be large even though its value ($) will not be very large.

30.1.5 ⛽️🎖 Income terms of trade (ITT)

Value of export 💸
ITT = ( Value of import 💸 )
∗( Quantum index of exportsQIE )= ( Net terms of trade )∗( QIE )

✋Formula not important. What is quantum index of export = not important.

For India and other developing countries, ITT is much relevant indicator for analysing their foreign
trade compared to previous 2 indicators. Why? Ans. not important.

30.2 ⛽️🎖 T OP IMPORT AND EXPORTS OF GOODS FOR INDIA:

30.2.1 Notable Import / Export Goods as per ES23 📙

NOTABLE EXPORTS NOTABLE IMPORTS
Goods Petroleum products e.g. Naphtha Crude oil, electronic goods; coal,
Bitumen,Lubricants,Wax, etc), gems & machinery, gold, chemicals
jewellery, organic & inorganic chemicals,
drugs & pharmaceuticals
Services Telecommunications, computer and Business services, transport, travel,
information services, transport, travel, fees paid for using intellectual
financial services, financial services property (e.g. drug patents)
🚩👶🏻FAQ: Why not given Top-10, why gave only important names? Ans. Feel free to sort data from
Statistical Appendix of Eco Survey: https://www.indiabudget.gov.in/economicsurvey/doc/Statistical-
Appendix-in-English.pdf poor cost benefit making top-10 list, apply logic/guesswork/skip.

30.2.2 📤⛽️🎖Goods Export Before Corona: Notable items

EXPORTs Before Corona (i.e. 2018, 2019) Import Before Corona (i.e. 2018, 2019)
1) 💅Petroleum Products (e.g. paint, polish, 1. 🛢Crude oil
asphalt) 2. Gold

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 EXPORTs Before Corona (i.e. 2018, 2019) Import Before Corona (i.e. 2018, 2019)
2) Pearl & Precious Stones 3. 💅Petroleum Products
3) 💊Drug & Biologicals 4. Pearl & Precious Stones
4) 💍Gold Silver jewellery 5. Coal
5) Iron and Steel Metal 6. Electronics Components
6) Electric Machinery 7. Organic Chemicals
7) Chemicals 8. Plastic Raw Materials
8) Products of Iron and Steel 9. 🍟Vegetable Oils
9) 🐠Marine Products 10. 💻Computer Hardware, Peripherals
10) Aluminum

30.2.3 📤🍊 India’s TOP Agriculture Exports

🐠 (1)Marine Products, (2) NON-Basmati Rice (3) Spices, (4) Sugar, (5) Buffalo Meat, (6) Basmati-
Rice, (7) Cotton, (8) Wheat, (9) Castor Oil, (10) Misc. Processed Food

30.2.4 📤⛽️🎖 SERVICES Import Export Before Corona

Services Export Before Corona (i.e. 2018, 2019) Import Before Corona (i.e. 2018, 2019)
 📡Telecom, computer, and information  business services -research development,
services consultancy services etc.)
 business services -research development,  🏖Travel of persons (Indians going to
consultancy services etc.) foreign trip using foreign airline)
 🏖Travel of persons  🚛Transport of goods (e.g. Indian using
 🚛Transport of goods American Cargo Shipping company’s
 Financial services service to deliver goods)
 Construction Services  intellectual property (Patent, Trademark)
 📡Telecom, computer, information
services, Financial services

30.2.5 🛒🤝 India’s trade partners: Import / Export as per ES23 📙

Top Destination of Indian Exports Top Sources of Indian Import
(भारत के कु ल निर्यात में ज़्यादातर हिस्सा) (भारत के कु ल आयात का ज़्यादातर हिस्सा)
1. USA 1. China
2. UAE 2. UAE (Gold, Crude Oil)
3. Netherland 3. USA
Other notable partners: Bangladesh, Hong Other notable partners: Saudi, Iraq,
Kong, Singapore, Netherlands, Britain, Switzerland, Hong Kong (Diamonds) ,
Belgium, Germany Indonesia (due to Palm Oil) , Singapore , South
Korea

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30.2.6 India’s trade partners: Trade Surplus / Deficit With Notable Countries
Trade Deficit (i.e. India imports more but exports Trade Surplus (i.e. India imports LESS but
less to these nations) exports MORE to these nations)
We’ve large Trade Deficit: व्यापार घाटा with We’ve Trade Surplus: व्यापार अधिशेष with
 China (cheap electronics, toys etc.) over 50 - USA (Chemicals, textile, services etc.),
billion$ - Britain, Netherlands, Turkey (Tea,
 Middle Eastern nations (Oil import esp Iraq, Spices, textile etc.),
Saudi, Qatar). - Bangladesh, Nepal (Food, medicine,
 Switzerland (Gold, Luxury items), vehicles etc)
 S. Korea (mobile, TV, electronics)
- India’s top five trading partners are USA, China, UAE, Saudi Arabia and Hong Kong (with
whom we’ve largest value of import & export relations)

🔠❓MCQ. The balance of payments of a country is a systematic record of (Pre-2013)

(a) All import & export transactions of a country during a given period of time, normally a year.
(b) Goods exported from a country during a year.
(c) Economic transaction between the government of one country to another.
(d) Capital movements from one country to another.
🔠❓MCQ. Which of the following does not form part of current account of BoP? [UPSC-CDS-2014-II]
(a) Export and import of goods (b) Export and import of services
(c) Income receipts and payments (d) Capital receipts and payments
🔠❓MCQ. With reference to Balance of Payments, which of the following constitutes/ constitute the
Current Account? (Asked in UPSC-Pre-2014)
1. Balance of trade. 2. Foreign assets. 3. Balance of invisibles. 4. Special Drawing Rights.
Answer codes: (a) 1 only (b) 2 and 3 (c) 1 and 3 (d) 1, 2 and 4
🔠❓MCQ. Among the following, which one of the following is the largest exporter of rice in the world in
the last five years? (Pre-2019) (a) China (b) India (c) Myanmar (d) Vietnam
🔠❓MCQ. Among the agricultural commodities imported by India, which one of the following accounts
for the highest imports in terms of value in the last five years? (Pre-2019)
(a) Spices (b) Fresh fruits (c) Pulses (d) Vegetable oils
🔠❓MCQ. Since 2014-15, India has consistently run trade surplus with which one among the following
countries? (UPSC-CDS-2020-ii) (a) China (b) Saudi Arabia (c) USA (d) Germany
🔠❓MCQ. Find correct statement(s) about international trade of India at present? (Prelims-2020)
1. India’s merchandise exports are less than its merchandise imports.
2. India’s imports of iron steel, chemicals, fertilisers and machinery have decreased in recent years.
3. India’s exports of services are more than its imports of services.
4. India suffers from an overall trade/current account deficit.
Ans Codes: [a) 1 and 2 only [b) 2 and 4 only [c) 3 only [d) 1, 3 and 4 only
🔠❓MCQ. Consider the following statements: (Prelims-2020)
1. The value of Indo-Sri Lanka trade has consistently increased in the last decade.

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2. “Textile and textile articles” constitute an important item of the trade between India and
Bangladesh.
3. In the last five years, Nepal has been the largest trading partner of India in South Asia.
Codes: [a) 1 and 2 only [b) 2 only [c) 3 only [d) 1, 2 and 3

30.3 💌📊 R EPORTS / INDICES RELATED TO EXPORT & REMITTANCE

💌📊Export Preparedness Index by NITI ( निर्यात तैयारी सूचकांक)
 It ranks the Indian states based on State govt policies, infrastructure, transport connectivity, ease
of doing business etc. (राज्य सरकार की नीतियां, बुनियादी अवसं रचना, परिवहन, व्यापार में सुगमता)
 Overall, most of the Coastal States are the best performers. (तटीय राज्य सर्वश्रेष्ठ प्रदर्शन)
 Further sub-rankings for categories -‘Coastal’, ‘Landlocked’, ‘Himalayan’, and ‘UTs/City-States’).
But poor cost benefit preparing the whole list for exam.

30.3.1 💌📊
Global Survey on Digital and Sustainable Trade Facilitation by UNESCAP
 By United Nations Economic and Social Commission for Asia Pacific’s (UNESCAP).
 It gives % score based on Govt’s efforts for Transparency, ⏬Formalities, Institutional
Cooperation, Cross-Border Paperless Trade. But Ranking NOTIMP.

💌📊Report: Goods Trade Barometer Index

30.3.2
 by World Trade Organization (More in 📑Pillar#3B: International Orgs.)
 This index signals changes in world goods trade growth.
 If Index value > 100: 😍. But less than 100 = 😥. Current value is 96.1% (as of 2022-Dec)
💌📊 Remittance: World Bank’s Remittance Report (विश्व बैंक की धनप्रेषण रिपोर्ट)
- Since 2008: largest amount of remittance received by 1) India 2) China 3) Mexico.
- World Bank also noted: remittances have a direct impact in poverty removal for many
households, (धन प्रेषण से गरीबी उन्मूलन में मदद मिलती है)

30.3.3 Indian migrants’ key destinations - ES23 📙

BEFORE (पहेले इधर ज़्यादा NOWADAYS (आजकल प्रवासी मज़दूर इन देशों में
जाते थे) ज़्यादा जाते है)
Destination Gulf nations USA,UK, East Asia,Singapore, Japan,
Australia, New Zealand
Type of low-skilled, informally high-skilled jobs in high-income
jobs employment countries

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30.3.4 💌📊Report: Misc.
Report Organization
Migration and Development Brief World Bank
Global Migration Report International Organization for Migration (IOM, HQ:
Geneva, Switzerland) - a related organization of UN

30.9.1 💌Remittance /Migrant workers → Pravasi Bharatiya Diwas (PBD)

1915 9th January: Gandhi-ji returned from S.Africa to Bombay (India).
2003 NDA-I (PM Vajpayee) decides to celebrate Pravasi Bharatiya divas (PBD) annually every
9th January. First summit @New Delhi. Presently organized by Ministry of External Affairs
2015  NDA-II (PM Modi) converts PBD into “biennial” event i.e. grand festival every second
year (भव्य उत्सव/रंगारंग कार्यक्र्म हर दूसरे साल)
 every other year, only a small event in India, & regional PBD event in a foreign country
2020 @New Delhi. But just a small scale video conference type of event.
भव्य रंगारंग कार्यक्रम नही किया, क्योकि वो तो हर दूसरे साल करते है।
2021 Theme: "Contributing to Aatmanirbhar Bharat”. It was held virtually due to Corona
Chief Guest: Mr. Chandrikapersad Santokhi, President of Suriname.

2022 just a small scale video conference type of event.

भव्य रंगारंग कार्यक्रम नही किया, क्योकि वो तो हर दूसरे साल करते है।
2023 @Indore, MP. Theme is "Diaspora: Reliable partners for India's progress in Amrit Kaal”.
🎓Self Study? Indian Polity: Citizenship → difference OCI vs PIO
30.10 ⛽️B ALANCE OF PAYMENT → CURRENT ACCOUNT → IMPORT OF OIL

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➢ Govt’s target of ⏬oil import by 10% by 2022 (compared to 2015).
➢ Therefore, boosting domestic oil exploration & production is necessary. So, …..
30.3.5 ⛽️🕵🏻
Domestic Oil Exploration Policies?
 Nodal? Directorate General of Hydrocarbons: हाइड्रोकार्बन महानिदेशक (DGH) Ministry of Petroleum
& Natural Gas.पेट्रोलियम और प्राकृ तिक गैस मंत्रालय
 Before the 1991’s LPG reforms, only ONGC and other Public sector companies were allowed to
explore the oil, gas and hydrocarbon reserves in India. But under 1991’s Liberalization norms,
this sector was opened for the private sector players as well. (पहले के वल सरकारी कम्पनियां कर सकती थी.
हालाँकि बाद में निजी क्षेत्र की कम्पनियों को भी उदारीकरण नीति के अंतर्गत अनुमति दी गई है)
 1997: New Exploration Licensing Policy (NELP: नयी अन्वेषण अनुज्ञप्ति नीति) to award contract to
public and private sector companies using bidding / auction system.
30.3.6 ⛽️🕵🏻 🤷🏻
: ‍♂‍NELP’s primary limitations were →
Separate license required for each type of hydrocarbon.
NELP worked on production sharing contract (PSC: उत्पादन साझाकरण अनुबं ध), wherein the Oil Explorer
will pay a share to Govt from the profits from production. However,
 Indian producers allegedly exaggerated their production costs to show less profit. → Govt
earned less, and will do more ‘inspector raj’ to check account books → No ease of doing Biz.
(उप्ताद खर्च को बढ़ा चढ़ा के दिखाया जाता ताकि मुनाफा कम दिखे)

30.10.1 ⛽️📯🧔 HELP Policy (हाइड्रोकार्बन अन्वेषण और अनुज्ञप्ति/लाइसेंसिंग नीति)

In 2016, NELP was replaced with Hydrocarbon Exploration and Licensing Policy (HELP).
 Single uniform license sufficient to explore and produce all type of hydrocarbons from the given
area. (oil, gas, coal bed methane, shale gas, tight gas and gas hydrates etc)
 Govt to receive a share from gross revenue from sale of oil / gas etc, irrespective of company’s
profit. (बिक्री से हिस्सा देना होगा, सरकार को आपके मुनाफे से कोई लेनादेना नही)
 Government not to interfere in the marketing and pricing of the oil and gas.
 Relaxed norms for exploration in offshore areas, because they have higher risk and higher cost
of production. (समुद्र में तट से दूर क्षेत्रों में खोज के लिए सुगम मानदंड)
 Open Acreage Licensing Policy (OLAP) → company can pick and choose the blocks from the
designated area, even if no specific bids are invited by Govt before. Then Govt will invite other
companies for auction.
 2019-July: Govt finished auctioning process of HELP-OLAP round 2 and 3.

⛽️
30.10.2 India’s Strategic Oil Reserves (भारत के सामरिक तेल भण्डार)
Objective? (When crude prices are low) India should buy and store crude oil for strategic-cum-
buffer stock → use during war & other emergency. दाम सस्ते चल रहे हो तब, खरीद के भं डारण कर लेना चाहिए

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- Ministry of Petroleum & Natural Gas → Govt petro companies → places such Visakhapatnam
(Andhra), Chandikhol (Odisha), Padur & Mangalore (Karnataka) etc.
- They’re stored in underground rock cavern facilities = more secure / safe during airstrikes, more
economical and environmental friendly than conventional ‘Above Ground Storage Tanks’

30.10.3 ⛽️📈📉
Crude Oil prices & OPEC (कच्चा तेल)
 1961: Organization of the Petroleum Exporting Countries (OPEC: पेट्रोलियम निर्यातक देशों का सं गठन) is
a group of oil producing countries Saudi, UAE, Venezuela, Iran, Iraq etc.… total 14 members.
HQ: Vienna city of Austria.
 Qatar withdrew from 1/1/19. Russia is NOT a member. (रशिया/ रूस इसका सदस्य नहीं है)
Depending on following factors of supply versus demand, there have been ups and downs in the oil
price movement in the last 3 years: आपूर्ति और मांग के कारकों के चलते कच्चे तेल के दाम कम/ज्यादा होते हैं
Crude Oil Supply Side Factors (आपूर्ति) Demand Side (मांग)
Price up ⏫ When Supply Decreases ⏬ When Demand Increases ⏫
तेल कब महंगा  Whenever OPEC + Russia agreed to  When economic growth ⏫ in USA,
हो जाता है reduce their oil production
 2019: Houthi (a Shia rebel group of
China, EU → ⏫demand for
petroleum, plastic industry
Yemen with Irani support) Drone-
 Post-Corona unlockdown →
attacked oil field of Saudi Arabia
→ Oil production down.
travel ⏫ → Oil demand⏫
Price When Supply Increases ⏫ When Demand Decreases ⏬
down ⏬  When OPEC+Russia can't agree for  When economic slowdown →
कब सस्ता production cuts demand for petroleum ⏬
हो जाता है
 When Saudi Arabia ⏫supply to  Corona: Travel Ban
reduce global prices to harm Iranian  Chinese imposing more Taxes on
Oil export business. imported American/Japanese cars →
 When USA pressurizes Nigeria, Iraq ⏬ car sales → ⏬ oil demand in
etc to produce more oil China
 When USA also increases its own
domestic oil and Shale Gas
Production
 2021-Feb: India's biggest oil suppliers: 1) Iraq 2) USA 3) Saudi. Saudi Arabia ranked shifted from
#2 to #3 because Saudi has been ⏬cutting down its production to raise prices.
 2021-Saudi minister (rudely) tells India, “if you do not like our expensive oil, then use oil from
your own strategic reserves.” Indian Petroleum Minister calls it an ‘undiplomatic’ comment.
 2021-Mar: Indian Oil Companies decided to ⏬ import from Saudi Arabia -to teach Saudi a

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 lesson (सऊदी अरब का घमंड तोड़ने के लिए वहाँ से हमने कच्चा तेल आयात करना थोड़ा कम किया है).
 2021-April onwards: OPEC+ decided to gradually ⏫the production. Thus daily news keeps
going on....If any MCQs asked, solve through 50:50 from above Table. # ⏳📚थोड़ा-पढ़ो-आगे-बढ़ो

Figure 1: Oil Barrel Prices in U$D

30.3.7 ⛽️📈📉 Crude Oil: Russia-Ukraine War (2022)

 Oil prices has skyrocketed in February 2022 due to Russia Ukraine were but 2022-March: OPEC
producers UAE and Iraq ⏫ the oil production → oil prices fell by 17% (UAE तथा इराक़ ने कहा कि हम
अपने अपने कच्चे तेल की उत्पादन/आपूर्ति को बढ़ाएं गे इसके बाद कच्चे तेल की क़ीमतों में गिरावट)
 India’s STATE-OWNED OIL marketing companies (OMCs) are set to procure crude oil from
Russia at a discount, to the Russia-Ukraine conflict, Russia wants money urgently. (भारतीय सरकारी
तेल कं पनियों को रूस से सस्ते में कच्चा तेल मिलेगा।)

30.3.8 ⛽️📈📉 Crude Oil: Theory / GK ?

Cartel is an association of manufacturers who collude to keep prices high, and keep
📑
the competitors away. (More in Pillar#4Z-Microeconomics)
Sweet Crude Oil Low Sulphur content. Sour crude = High Sulphur content.
BRENT Index is an index to measures crude oil price, mainly in North West Europe.
1 barrel Contains approx. 159 liters of oil

30.3.9 ⛽️💰
BoP: Current → Fall of Crude oil prices in negative figure
 USA’s crude oil prices are monitored through West Texas Intermediate (WTI) contracts.
 Long story cut short: Oil demand ⏬ due to Corona lockdown on vehicle/aviation traffic. But,
American oil drilling companies can’t stop production because it’s more expensive to ‘restart’ the
production after shutting it. खुदाई को पूर्ण रूप से स्थगित किया तो वापस शुरू करने में बहुत लागत खर्च आता है
 And merchants/intermediaries can’t hold stock because their storage capacity is limited.
 2020-April: sellers were (temporarily) paying $$ to buyer to take the stock of oil barrels. Hence
negative minus $40 per barrel price. (अमरीकी विक्रे ताओ के पास तेल रखने की जगह उपलब्ध नही, इसलिए ग्राहक को
सामने से पैसा देकर माल उठवा रहे है।)
 India did not benefit much, since we mostly imported from the middle-east and not the USA.

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🔠❓MCQ. Term ‘West Texas Intermediate’, sometimes found in news, refers to a grade of_ _
(Prelims-2020) [a) Crude oil [b) Bullion [c) Rare earth elements [d) Uranium

30.3.10 ⛽️💰 Price cap Russian oil (2022)

 2022-G7 group of nations (Canada, France, Germany, Italy, Japan, United Kingdom, United
States) agreed to cap the price of Russian oil to reduce Russia's ability to finance its war on
Ukraine. (रूसी कच्चे तेल की महत्तम खरीद कीमत पर सीमाएं लगाई।)
 India rejected this proposal. 2023: however, India managed to save only $2 per barrel even after
Russia’s ‘deep discounts’, due to cost of transportation and cargo-insurance. ( हालांकि वास्तव में बहुत सस्ता
मिला नहीं है- परिवहन और बीमा खर्च के चलते.)

30.3.11 ⛽️💰 Petrol & Diesel Prices & Taxes in India

(Covered in 📑Pillar#2A: Indirect Taxes Handout)
30.3.12 ⛽️ Electric Vehicles, Ethanol Blending etc.
(Covered in 📑Pillar#5A: Energy Infrastructure)

30.11 🎖B ALANCE OF PAYMENT → CURRENT ACCOUNT → IMPORT OF GOLD

From 2010 onwards, Indian economy was suffering from high level of inflation (8-12%)
 So households earned ‘Negative Real Interest Rate: नकारात्मक वास्तविक ब्याज दर’ on their bank
deposits → started investing in gold. (More in 📑Pillar#1C: inflation Indexed Bonds)
 But, ⏫ gold consumption → ⏫ trade deficit, current account deficit → Indian rupee gets
weaker. Gold transactions also help in the storage of black money and tax evasion. India is the
second largest consumer of Gold after China. (सोने में ज्यादा निवेश से रुपया कमजोर. कर चोरी व काला धन)
Therefore, RBI and Indian government launched following schemes to reduce gold consumption:

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30.11.1 🎖🐯
RBI’s 80:20 Scheme (2013-14)
- RBI mandated that minimum 20% of the imported gold must be exported back. Until then the
Jeweller/ bullion dealers will not get permission to (convert their rupees into dollars / foreign
currency) to import next consignment of gold.
- RBI gets this power under Foreign Exchange Management Act (FEMA: विदेशी मुद्रा प्रबं धन अधिनियम).
Although, 2014: Scheme was stopped as the gold craze had declined.

30.11.2 🎖🗃🐯 Sovereign Gold Bond Scheme (2015: स्वर्ण बांड योजना)
(Covered in 📑Pillar#1C: Share Market)
30.3.13 🎖🗃🐯 Gold Monetization Scheme (2015: स्वर्ण मुद्रीकरण योजना)

- Under this scheme, RBI allows commercial banks accept customers’ idle gold / jewellery for 1
year to 15 years tenure. (2019- RBI also allowed Charitable Institutions and Central Govt to
deposit their gold in the commercial banks)
- Commercial Banks pay the depositor ~2% interest.
- Min. 30gm to maximum any amount of gold can be deposited.
- Gold goes to → Metals and Minerals Trading Corporation of India →
- Gold sold to jewellers, electronic circuits companies and
- Some of the gold used for Minting “Indian Gold Coin.”
- Upon maturity you can redeem deposit in the form of gold coin/bars or cash equivalent. The
profit exempted from Capital Gains Tax. (इस सम्पत्ति निवेश के मुनाफ़े पर व्यक्ति पर पूंजीगत लाभ कर नहीं लगता)

🔠❓MCQ. Main objectives of Gold Monetization Scheme is _ _ _. (IEnggS-2018)

1. To monetize gold holdings in the country 2. To increase export of gold from the country
3. To reduce India’s import bill 4. To meet the targets of reduction in fiscal deficit
Answer Codes: (a) 1 and 4 only (b) 2 and 4 only (c) 2 and 3 only (d) 1 and 3 only
🔠❓MCQ. What is/are the purpose/purposes of Government's 'Sovereign Gold Bond Scheme' and
'Gold Monetization Scheme’? (Asked in UPSC-Pre-2016)

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1.To bring the idle gold lying with Indian households into the economy.
2. To promote FDI in the gold and jewellery sector.
3. To reduce India's dependence on gold imports.
Answer codes: (a) 1 only (b) 2 and 3 (c) 1 and 3 (d) 1, 2 and 3

30.11.3 🎖🎖🦁 Indian (Sovereign) Gold Coins (2015: भारतीय स्वर्ण सिक्के )
Issued by a Govt company “Metals and Minerals Trading Corporation of India”.
- Available in denominations of 5, 10, 20 grams.
- These gold coins are not fiat money because not issued under the powers of Coinage act, they
don’t bear any markings indicating rupee denominations. Their markings only indicate gold
grams. And since they’re not ‘fiat money’ → so, not ‘legal tenders’. (More in 📑Pillar#1a1)
- Benefit? Trusted Purity → Easily resold → Easy liquidity, and Profit (if) gold price⏫.

30.3.14 🎖😷 : Gold price in Corona (कोरोना महामारी के दौरान स्वर्ण क़ीमतें)

As such, Govt’s economic surveys don’t talk much about daily ups/downs of gold price movement.
UPSC also never asked anything like that. So, we need not PHD. ⚾️
 Indian banks ⏬ fixed deposit interest rates. People shifting towards gold investment for a better
"positive real" interest rate. (Recall Pillar1)
 Mutual funds = not good profit after ILFS crisis (Ref: Pill1B2) → some investors prefer gold
 Geopolitical tensions like Iran-US, China-US, India-China, Russia – Ukraine have negative
impact on sharemarket → some investors prefer gold
 2020 Corona-Crisis: Shares and bonds have become risky due to heavy losses faced by
⏫demand of gold → ⏫prices.
companies. Investors prefer a 'safe assets' =
 Corona→ workers @gold mines / refineries ⏬ → gold production ⏬ → price⏫
 However, vaccination = investors expect business revival so they’ll sell gold to invest in shares so
again gold prices fallen from ₹56000 per 10gm in (2020-Aug) to ₹45000 (2021-March) =
₹11,000 ⏬. … ✋+ other 500 angles on Dollar currency exchange rate, Bond yields, some investors
shifting to Bitcoin etc=poor cost-benefit. Apply logic/50:50.# 🕰थोड़ा-पढ़ो-आगे-बढ़ो
🏅 ⬆️
30.3.15 Gold import: customs duty (2022)
Customs duty on gold hiked (increased) from 7.5% → 12.5% to discourage imports.
 🚩👶🏻FAQ: but u told that more taxes on gold= smuggling. Then isn’t this customs duty hike
contradictory/counter-productive?
 Ans. Govt will increase surveillance to prevent smuggling. Just because there is danger of
smuggling so government should not increase the taxes = then it is difficult to run the country/
arrange money for poverty welfare schemes/ manage CAD.

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30.12 🏅Gold related GK Data
Domain Leading names (source: wikipedia/internet)
Nevada Gold Mines (U.S.A), Muruntau (Uzbekistan), Grasberg
Mines
(Indonesia), Olimpiada (Russia), Pueblo Viejo (Dominican Republic) ]
Producers China, Australia, Russia, Canada, United States
Exporters Switzerland, United Kingdom, USA, South Africa, Australia
Gold as in Central
USA, Germany, Italy, France, Russia
Bank reserve
🔠 MCQ. Consider the following statements:[Pre23-SET-A-Q086]
Statement-I: Switzerland is one of the leading exporters of gold in terms of value.
Statement-II: Switzerland has the second largest gold reserves in the world.
Which one of the following is correct in respect of the above statements?
(a) Both Statement-I and -II are correct and Statement-II is the correct explanation for Statement-I
(b) Both Statement-I and -II are correct and -II is not the correct explanation for Statement-I
(c) Statement-I is correct but II is incorrect. (d) Statement-I is incorrect but Statement-II is correct

30.13 💎L AB GROWN DIAMONDS (LGD: प्रयोगशाला में बनाए गए हीरे)

💎🍀NATURAL DIAMONDS (प्राकृ तिक 💎👩‍🔬LAB GROWN
/कु दरती) DIAMONDS (LGD)
Formation Formed in the Earth’s mantle with high Grown in a laboratory using
temperature and pressure. advanced technology
Production Time billions of years Weeks
Chemical & Physical Pure carbon in a crystalline form, very Same as natural diamonds
Properties hard, very high refractive index
Cost Very Expensive Less expensive than Natural
Ethics and Deforestation, child labour in African More ethical and sustainable
environment mines (खनन के लिए वृक्ष छेदन, बाल मजदूरी ) (नैतिक और टिकाऊ।)
👛Budget-2023: (1) we’ll promote LGD, its seeds, its machinery- via tax cuts and subsidies. (2) we’ll
give grant to an IIT for LGD research and development.

30.13.1 ☕️B P → C
O URRENT → EXPORT → GI TAG

 A Geographical Indication (GI: भौगोलिक सं के तक) is a sign used on products with specific
geographical origin and unique qualities due to that origin. E.g. Darjeeling tea from W.Bengal- It
was the first to obtain GI tag from India.

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 🤩Benefit? GI tag adds premium-ness to a product, helps fetching higher prices in the
international market → better income for farmers and artisans. विदेशी ग्राहक उसे उम्दा किस्म की समझ के
और ज्यादा पैसा देने के लिए राजी हो सकता है

GIs are governed under:

 WTO’s Trade Related Intellectual Property Rights Agreement (TRIPS: more in Pill#3B) and
 India’s Geographical Indication of Goods Act, 1999. Once a product gets GI tag, it’s valid for 10
years (and can be renewed further.) GI name cannot be used for products that are manufactured
outside of the designated region, else party can be punished under the law
 International Nodal? UN’s specialized agency World Intellectual Property Organization
(WIPO; विश्व बौद्धिक सं पदा सं गठन), HQ @Geneva,Switzerland
 Indian Nodal? Commerce ministry → Controller General of Patents, Designs and Trademarks
→ Geographical Indications Registry in Chennai.
🎓Self Study? For UPSC interview, your state’s GIs from ipindia.nic.in/registered-gls.htm
🔠❓MCQ. ‘Kandhamal Haldi’, which received GI tag is indigenous to _ _ _ _. (CAPF-2019)
(a) North Bengal(b) Southern Odisha(c) Sangli, Maharashtra(d) Alleppey, Kerala

30.13.2 ☕️🔖
GI Logo
Commerce Ministry has created a logo for GI products with tag ‘Invaluable Treasures of Incredible
India’ to make them more attractive to foreign buyers. (विदेशी ग्राहकों में चाहत बढ़ाने के लिए)

30.3.16 🏬🛒Unity Malls for selling GI, Handicraft etc. in Budget-2023 👛

 Union to give loans to States to set up a Unity Mall in their state capital / best tourist city /
financial capital. (एकता / यूनिटी मॉल बनाने के लिए कें द्र और राज्य को कर्जा देगा)
 Unity mall be sell State’s ODOPs (one district, one product), GI products, handicraft products.
Even other states’ products will be sold @Unity mall.

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30.4 🍋🚫B P → C O URRENT → EXPORTS → SEZ
टैक्स भरना पड़ता है कि नहीं? 🍋Ordinary area 🍋🚫SEZ area
Mfg pe → Excise / GST N/A (नहीं लगता ये टैक्स)
Import Exports pe → Customs Duty N/A (नहीं लगता ये टैक्स)
Profit pe → Corporation Tax/ Income Tax N/A** (नहीं लगता ये टैक्स)
 Special Economic Zones (SEZ: विशेष आर्थिक क्षेत्र) is a specifically demarcated area of India which is
deemed as foreign territory for the purpose of Tax laws and Trade laws. (भारत के कर कानून वहां भारत
के अन्य प्रदेशों की समान नहीं लागू होते। उन्हें करो में छू ट/रियायत दी जाती है)
 Thus, exempted from aforementioned taxes (OR)/ subjected to lower rate of taxes of Union and
State Govts. This relief is for a specific time-period only, which is called “Tax holiday” (कराधान से
छु ट्टी, एक सीमित समय के लिए ही होती है, अनंत काल के लिए नहीं).
**SEZ Sunset clause in Income Tax Act (आयकर कानून में सूर्यास्त प्रावधान)
 Income Tax Act (Section 10AA) provides for a tax-holiday for SEZ firms for a period of “X”
years only. Corona = Economists suggest this deadline should be extended to attract more
foreign companies in India. ✋Exact norms & deadline? NOTimp#🕰थोड़ा-पढ़ो-आगे-बढ़ो
🤑🤑Benefits given to SEZ
 They get single window clearance for various import / export licenses / permissions
 Government will bear the cost of developing the roads, sewage, affluent treatment, weighing-
packaging-labelling etc infrastructure within the SEZ.
 They are regulated under SEZ policy (2000) and Special Economic Zone Act, 2005. State Govt
forwards the proposal to create SEZ → Union’s Commerce Ministry approves.
 1965: Asia's first SEZ was set up in Kandla, Gujarat (At that time it was called Export Processing
Zone/EPZ). Currently we’ve 220+ SEZ in India.
 🥰Benefit? More exports, employment, economic growth.(निर्यात,रोज़गार और आर्थिक वृद्धि के अवसर)
 😰Challenges? SEZ entrepreneurs use legal loopholes → Tax avoidance, Workers deprived of
EPFO/ESIC/Maternity benefit. When entrepreneurs’ Tax holiday is over in one SEZ, they
shutdown operation and move to another SEZ with new name/registration. Agricultural and
forest lands diverted to build SEZs → future challenges in food security, pollution control and
climate change.(कर परिहार, मज़दूरों का शोषण, कृ षि ज़मीन कम होना भविष्य में खाद्य सुरक्षा, प्रदूषण के जोखिम)
Solution? 2018: Commerce Ministry had setup Baba Kalyani committee to look into SEZ issues.
Baba is the Chairman of Bharat Forge ltd.

🍋🚫🕵️‍♂️Baba Kalyani report on SEZ

Shifted to Mains Handout.

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30.4.1 🍋🚫🕵️‍♂️SEZ → DESH Hubs
👜🥻Budget-2022: Development Enterprise and Services Hub (DESH) Bill, 2022 to replace the
existing SEZ law of 2005 with following features:
 DESH hubs will focus to ⏫mfg & services for both domestic market and export market.
 Single window clearance e.g. pollution, fire-safety etc.
 Easy norms for voluntary liquidation / exit (REF: Pillar1B2)
 Promote research & development, infrastructure facilities, Input tax credit for indirect taxes –
GST, Customs.
🔠❓ Which Asian country established the first Export Processing Zone (EPZ) in 1965? (UPSC-
Geologist-2020) a. China b. India c. South Korea d. Japan

30.4.2 👜🥻Budget-2022 Announcements to ⏬CAD

 ⏫ Customs duties on imported daily use items such as umbrellas, headphones, earphones,
loudspeakers, and imitation jewelry ( आयात होने वाले छतरी हेडफ़ोन लाउडस्पीकर और नक़ली गहनों पर आयात-कर
काफ़ी बढ़ाया गया है।)
 ⏬Tax benefits given to Bizmen for buying imported capital goods machineries e.g. textile
machine, bulldozer, mining equipment etc. (So they'll be forced to buy India-made machines)
 Banned the import of Drone except for defense and research development. (आयातित ड्रोन पे प्रतिबं ध)
 68% Defense purchase will be made from India made products (earlier 58% last year).
 Unblended fuel shall attract an additional differential excise duty of Rs. 2/ litre (To encourage
blending of bio-ethanol.) → 🤩this will help ⏬ import of crude oil.
 Hackers are releasing the data of Indian importers/exporters price details and client details then
Chinese importers and exporters may connect with those foreign clients offering better
deals/prices than Indians. This is harming Indian exporters. So Budget-2022 proposed new
provision in Customs Act for penalising illegal sharing of export-import data (कभी कभी हैकर्स भारतीय
निर्यातकों का डेटा डार्क नेट पे बेच देते हैं जिसकी मदद से चीन के व्यापारी उन विदेशी ग्राहकों का सं पर्क कर उन्हें भी सस्ता बार दिखाकर
अपना माल बेच देते हैं तो यह भारत के हक़ में नहीं है। इसलिए नए बजट में सीमा-शुल्क क़ानून में सं शोधन: अवैध तरीक़े से आयात
निर्यात का डेटा साझा करने पर दंड के प्रावधान।)
 Special Economic Zones Act will be replaced with a new law for ‘Development of Enterprise and
Service Hubs (DESH)’.

30.14 💎📞📯 B P ➡️ C O URRENT ➡️ F OREIGN TRADE POLICY

Nodal? Director General of Foreign Trade (DGFT) under Ministry of Commerce.
Year Policy

2018 Agri export policy. ref Pillar4A for more.

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 Year Policy

Foreign Trade Policy. Now replaced with new policy. India's export in goods and
services in 2013-14 was ~$465 billions. This FTP Policy (विदेश व्यापार नीति) aimed to
2015-20
almost double it to $900 billion by 2020.
2022: Exports India crossed $400-billion exports in goods.
2023
new Foreign Trade Policy. given in next section below
onwards

30.15 📞📯4 PILLARS OF FTP-2023

 Incentive to Remission (e.g. RODTEP, EPCG, Advance Authorisation etc)

 Ease of doing business, reduction in transaction cost and e-initiatives
 Emerging Areas – E-Commerce Developing Districts as Export Hubs and streamlining
SCOMET policy.
 Export promotion through collaboration - Exporters, States, Districts, Indian Embassies abroad

30.15.1 📞📯 FTP-2023 Pillar#1: Incentive to Remission (टेक्श माफ़ी )

We are already running the schemes. We will continue them and make them better.

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 Remission Scheme Description
Remission of Duties and Taxes on Exported Products (RODTEP) to
RODTEP provide refunds to exporters for various taxes paid on inputs. (more
details given in separate section)
- Export Promotion capital Goods Scheme: 0% Customs duty import of
capital goods (machinery) for export production.
EPCG / Duty free - Such machines are also exempted from iGST and GST compensation
import of capital goods cess.
(आयातित मशीनरी पर टैक्स - FTP2023: Will give some extra benefits to Textile factories in PM
माफ़ी ) MITRA Parks, Dairy, Green Hydrogen, Battery Electric Vehicles (BEV),
Vertical Farming equipment, Wastewater Treatment, Rainwater
harvesting system.
0% customs on import of raw materials for manufacturing export items.
Advance Authorisation
e.g. oil, catalyst, etc., required for manufacturing export product.
Scheme (AAS) (आयातित
DGFT has designed a list of such raw material. This list is called Standard
कच्चे माल पर टैक्स माफ़ी )
Input-Output Norms (SION) list.
कु ल मिलाकर उक्त सभी योजनाओं में निर्यातक को अपने कच्चे माल, मशीनरी इत्यादि पर जो टैक्स भरने होते हैं उसमें छू ट दी जाती है
🚩 FAQ: Isn’t RODTEP and AAS overlapping with each other? Ans. They’ve internal technical rules
ki if imported item is raw material then AAS but if imported item is not raw material but required for
production, then RODTEP.

30.15.2 📞📯FTP-2023 Pillar#2: Ease of Doing Biz (व्यापार में सुगमता)

One-time Amnesty Scheme on Default on Export Obligations (निर्यात दायित्वों में चूक पर राजक्षमा)

30.15.3 📞📯 EoD: Bol Bachchan/ चिकनी चुपड़ी बाते

 Our policy is based on principles of ‘trust’ and ‘partnership’ with exporters.
 we’ll take feedback from Industry to update FTP, from time to time.
 Process Re-Engineering and Automation, paperless, online environment, Reduction in fee
structures, eliminating the need for manual interface. (कागज रहित ऑनलाइन प्रणाली, पंजीकरण फ़ीस में
कटौती, उद्योगजगत से सुझाव लेके विश्वास व भागीदारी/सहयोग से काम करेंगे।)

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🚩FAQ: what does about things mean? How does it work?? Ans. NOTIMP. Whatever few fancy key
words, you can remember → write them in Mains.

30.15.4 📞📯 FTP-2023 Pillar3: Emerging Areas (उभरते क्षेत्र)

FTP-2023 will focus on emerging areas such as SCOMET, Dual Use goods, E-Commerce and
Merchanting Trade.

30.15.5 📞📯 SCOMET & Dual use Export

• SCOMET = Special Chemicals, Organisms, Materials, Equipment and Technologies. (विशेष
रसायन, जीव, सामग्री, उपकरण और प्रौद्योगिकियां)
• Dual-use High end goods e.g. night vision/thermal scanner, drones etc. (दोहरे उपयोग के सामान)
• FTP-2023: we’ll promote their export.

30.15.6 📞📯 E-Commerce Exports

• Integration of Courier and Postal exporters with ICEGATE portal of CBIC. (ICEGATE
portal is for import-export related documents/clearance/taxes)
• outreach and training activities for rural artisans, weavers, garment manufacturers, gems-
jewellery designers to help them export via E-Commerce platforms (ग्रामीण बुनकरों, कारीगरों,
ज़ोहरीओ को ऑनलाइन-व्यापार प्लेटफ़ार्म/कम्पनियो के साथ जोड़ेंगे, ताकि वे भी अपना माल देश-दुनिया को बेच सके । )

30.15.7 E-Governance initiatives

App/Portal Developer/Function
CBIC → Single Window Interface for Facilitating Trade (SWIFT) for
SWIFT importers and exporters through icegate.gov.in. Within that, e-
governance modules like E-Sanchit, Turant etc for approval etc.
India Trade webportal by Commerce Ministry & FIEO (Federation of Indian Export
and Niryat Mitra App. Organisations)

30.15.8 📞📯 Merchanting trade @Gift City (वाणिज्यिक व्यापार)

(Definition) when a company buys goods from one country and then sells them to a buyer in another
country without bringing the goods into their own country.
It’s essentially acting as a middleman in the international trade of goods. e.g. Companies Dubai,
Singapore and Hong Kong. FTP-2023 will promote this in GIFT city IFSC.

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30.15.9 📞📯 FTP-2023 Pillar4: Collaboration of Stakeholders (हितधारकों का सहयोग)

Stakeholder How to use them for export promotion?

Commerce ministry WAS running two initiatives
 1) Districts as Export Hubs (DEH)
 2) One District One Product Initiative (ODOP)
 Now, both 1+2 merged together and called ODOP.
District
 It seeks to select, brand, and promote products/services from
(हर ज़िले से एक उत्पाद का निर्यात)
each district for exports
- District Export Promotion Committees (DEPCs) have been setup
in 739 districts to focus on agriculture, GI-products, Toys,
handicrafts etc. (ज़िला निर्यात प्रोत्साहन समितियाँ)
- Four new towns, namely Faridabad, Mirzapur, Moradabad, and
Town Varanasi, designated as Towns of Export Excellence (TEE), in
(शहरों में निर्यात के लिए बुनियादी addition to the existing 39 towns.
अवसं रचना का निर्माण) - Govt will give them funding for export infrastructure e.g.
warehouses, transportation, packaging facilities etc.
Indian mission/embassy
we’ll give them funding under Market Access Initiative (MAI) to
abroad (विदेशी ग्राहकों की
do research/survey of Country specific customer
पसं द/नापसं द का सर्वेक्षण दूतावासो द्वारा
likes/dislikes/product preferences.
करवायेंगे)
👴:👶🏻 Exporters - Exporters will be given Star rating/Status based on export
(पुराने/अनुभवी निर्यातक नौसिखियों को performance. 2Star/higher exporters will give training/mentoring
तालीम देंगे) to new/fresh exporters.
- Niryat Bandhu Scheme (2013): Govt mentors the new and

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 Stakeholder How to use them for export promotion?
potential exporters and mentor them through training, counselling,
orientation programmes with help of IIFT & other orgs.

30.15.10 📞📯 ✍️Conclusion (Summarise - yes FTP-2023 greatly help)

Thus, with tax relief, ease of doing business, collaboration with stakeholders and focus on the new
emerging areas such as e-commerce and SCOMAT - the FTP-2023 will greatly help in export
promotion, job creation and GDP improvement for India during the AMRIT KAAL. (इस प्रकार, कर
राहत, व्यापार करने में आसानी, हितधारकों के साथ सहयोग और ई-कॉमर्स और स्कॉमेट जैसे नए उभरते क्षेत्रों पर ज़ोर देकर एफ़टीपी-
२०२३ नीति भारत के अमृत काल में रोज़गार सृजन, निर्यात वृद्धि व आर्थिक वृद्धि में काफ़ी मदद करेगी।)

30.16 🚢📈 E XPORT IMPROVEMENT -MISC. SCHEMES

30.4.3 🔪Interest Equalisation Scheme for Exporters (2015)

LOAN INTEREST SUBSIDY Beneficiary?
5% for MSME manufacturing exporters
3% For other (non-MSME) exporters
Started from 2015. Valid upto 31/March/2024 on Bank loans.

30.4.4 🍋🤑Tax Credit for Exporters: MEIS/SEIS

Boss? Commerce Ministry WAS running two tax-incentive schemes to boost exports
 Services Exports from India Scheme (SEIS: भारत से सेवाएं निर्यात योजना).
 Merchandise Exports from India Scheme (MEIS: भारत से व्यापारिक माल निर्यात योजना)
These schemes provide tax credit to exporters, which they can use for paying Union’s Customs Duty.
AFTER RODTEP is notified fully, the MEIS scheme will be STOPPED.

30.4.5 🍋🤑 Tax Credit for Exporters: RoDTEP?

2020-21: govt announced Remission of Duties and Taxes on Exported Products (RoDTEP: निर्यात
उत्पादों पर शुल्क और कर की छू ट). Boss? Commerce Ministry
MEIS RoDTEP
Exporter gets Customs Duty ITC given for following taxes Exporter paid:
Input Tax Credit 1. Customs Duty
(ITC) for 2. Transport fuel (petrol diesel) Excise and VAT
3. Agriculture raw material pe State Mandi tax (it’s
not a ‘tax’ but rather a FEES charged by APMC
Mandi.)
4. Stamp duty on Commodity trade (Ref:2A)
5. Electricity pe electricity duty (Ref: 2A)
WTO allowed it? No, so WTO ordered Yes (or atleast PM Modi claims so.)

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 MEIS RoDTEP
to stop it. RoDTEP will replace MEIS scheme.
30.4.6 ⚓️
Port Logistics: Authorised Economic Operator (AEO)
 अधिकृ त आर्थिक सं चालक: An importer/exporter/cargo company can apply to the Central Board of
Indirect Taxes and Customs (CBIC) to get this ‘status’.
 Subject to conditions like 1) minimum 3 years experience 2) never filed bankruptcy 3) never
caught in fraud / smuggling etc.
 🥰 Benefits? Faster clearance times, fewer physical examinations on cargo etc.
 At International level, World Customs Organization (WCO, HQ: Brussels, Belgium)’s “SAFE
Framework” guides this program.

30.4.7 ✈️Krishi Udan Scheme v 2.0 (Civil Aviation Ministry, 2020)

To help farmers to transport/export perishable food products within India and Abroad
2021: version 2.0 launched to focus on hilly areas, North- Eastern states, and tribal areas e.g.
King Chillies, Burmese Grapes & Assamese Lemon Gauwahati
Jackfruit Tripura
Litchi Darbhanga

30.4.8 📙ES23 observation on Export Improvement

Reforms to improve India's Exports as per ES23 📙
 Reduce the time/cost of logistics/transport (परिवहन का समय/ खर्च कम करो।)
 Sign more Free Trade Agreements (FTA: More in pillar3C-WTO) ( मुक्त व्यापार समझौते करो।)
 Diversify the export destination. Focus towards the consumers in Africa, S.America, Central Asia
etc. (निर्यात लक्ष्य स्थानों में विविधता लाएं ।)
Competitors to India’s exports- as per ES23: 📙
 Bangladesh & Vietnam giving tough competition to Indian Textile
 Vietnam: machinery and equipment; computers, electronic products, certain agriculture
products etc. giving tough competition to Indian exporters.
 However, India will win eventually in the race due to 1) Younger workers 2) Large scale
production with big geography and big worker base. (भारतीय निर्यात को बांग्लादेश और वियतनाम टक्कर / कड़ी
स्पर्धा दे रहे हैं। हालाँकि दीर्घावधि में भारत ने ही जीतना है, क्योंकि हमारे पास ज़्यादा नौजवान मज़दूर हैं और बड़े पैमाने पर उत्पादन)
करते हैं।

30.4.9 📲📯🧔 “Assemble in India” | Production Linked Incentive Scheme (PLI)

Ref in 📑Pillar#4B: Sectors of Economy → Mfg

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30.17 ⛽️🎖: 🗃🤲 B P → C O APITAL ACCOUNT→ INVESTMENT→ FDI / FPI

30.17.1 🗃🎅 Foreign Portfolio Investors (FPI: विदेशी पोर्टफोलियो निवेशक)

 It is a foreign entity registered @SEBI, and who buys upto 10% in equity / shares of an Indian
Company. [For Corporate Bonds and G-Sec these % are different.]
 Originally, these were called Foreign Institutional Investor (FII: विदेशी सं स्थागत निवेशक) and
Qualified Foreign Investors (QFIs), but in 2013 SEBI merged them all into a single category- FPI,
based on the recommendations of K.M. Chandrasekhar committee.
 FPI’s primary objective is make money from buying and selling of shares through the capital
market / share market. They even help the SEBI-non-registered foreign investors by issuing them
📑
Participatory notes (P-Notes) [ Ref: 1C: SEBI handout].
 FPIs are not involved in the actual operations / production / management / business policy
making of a company (unlike Walmart is for Flipkart). कं पनी का स्वयं सं चालन में रुचि नहीं
 If FPI investor is hopeful to get better returns in the other countries’ share/bond market, he may
quickly sell his Indian securities and run away. The flight of such money is called ‘hot money
(चलायमान मुद्रा)', It results into weakening of Indian Rupee and falling of Sensex.

30.17.2 🗃🗃🎅🤝 FDI: Inward vs Outward Direct Investment (ODI)

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30.17.3 🗃🗃🎅🤝 Foreign Direct Investment (FDI: प्रत्यक्ष विदेशी निवेश)
 FDI is the (more than 10% equity / share) investment made by a foreign entity into an Indian
company, with the objective to get involved in the management / production of that Indian
company. भारतीय कं पनी के सं चालन/ उत्पादन में शामिल होने के उद्देश्य से 10% या उससे ज्यादा शेयर खरीदना
 (e.g. 2018: Walmart-USA bought 77% stakes in Flipkart @$16 billion.)
 ✋Foreign Investment is prohibited in atomic energy, railway operations (except Metro & infra
dev.); Tobacco Products, Real Estate Business, Farm Houses, Chit Funds, Nidhi Companies,
Betting Gambling Casino & Lottery.
 For the remaining sectors, Foreign Investment is permitted either through:
A. 💁‍♂️Automatic Route: स्वचालित मार्ग i.e. Foreign entity doesn’t require Indian Govt’s
approval.
B. 🧔 Government Route: सरकारी मार्ग i.e. prior to investment, they’ve to get approval from
the Govt of India’s respective Administrative Ministry/ Department (+ Commerce
Ministry).

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30.4.10 🗃🗃🎅🤝 FDI in India → Source Nation and sector-wise as per 📙ES23
Sector wise Nation Wise
1. 💿Computer Software & Hardware 1. Singapore
2. Services Sector 2. Mauritius
3. Trading 3. UAE
4. USA (WAIT For latest data in Win24)

30.17.4 🗃🗃🎅🤝 F OREIGN INVESTMENT → 100% AUTOMATIC PERMITTED IN

✓ Agriculture, Animal Husbandry, Plantation Sector, Food Processing companies
✓ Asset Reconstruction Companies (ARC), Credit Information Companies, Core Investment
Company, White Label ATM Operation and Other Financial Services
✓ Pharma & Biotechnology(Greenfield), Healthcare (Greenfield), Medical Devices
✓ Broadcast of non-NEWS TV Channels, Printing of scientific and technical magazines; Wholesale
Trading, Single Brand Retail, E-Commerce (market-place)
✓ IT and Business process management (BPM); Township Construction, Housing, Infrastructure;
Gems & Jewellery, Duty Free Shops, Tourism & Hospitality
✓ Leather, Textiles & Garments, Manufacturing, Capital Goods, Industrial Parks

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✓ Mining and Exploration of metal and non-metal,
✓ Petroleum & Natural Gas, Chemicals, Coal & Lignite, Thermal & Renewable Energy
✓ Civil Aviation (**Selected services), Airports (Greenfield & Brownfield)
✓ Ports and Shipping, Railway Infrastructure, Roads & Highways
✓ 📡 Direct to Home (DTH) TV/Cable services e.g. Tatasky, DishTV
✓ 2019: Insurance intermediaries (e.g. agents, brokers, surveyors, 3 rd party admin etc)
✓ 2019: Coal mining, coal sale & associated activities; Contract manufacturing.
✓ 2021: ⛽️ Public Sector Oil Gas Refineries e.g. Bharat Petroleum Corporation Ltd (BPCL). This is
done to facilitate disinvestment/privatization via foreign companies participation. (Ref Pillar:2D)
✓ 2022: State owned/public sector Life insurance corporation i.e. LIC: 20% FDI allowed.

30.17.5 🗃🗃🎅🤝 F OREIGN INVESTMENT → LIMITS IN OTHERS SECTORS

Sector → Foreign Investment limits
कु छ किस्सों में स्वचालित मार्ग से. कु छ किस्सों में कें द्र सरकार की अनुमति लेनी जरूरी
Automatic
upto?
🧔✋With Govt
approval?
Banking - Public Sector N/A 20%
State owned/public sector Life insurance corporation i.e. LIC 20% Not Required.
 Printing / Publishing newspaper, current affairs magazines; N/A 26%
 News/Current Affairs through Digital Media
Broadcasting of News TV-channels, FM-Radio N/A 49%
Multi Brand Retail Trading N/A 51%
REITs / InvITs Infrastructure Companies N/A 49%
Banking (Private Sector) Upto 49% >49 upto 74%
Telecom Services, Private Security Agencies, Upto 49% ABOVE 49%
Air Transport Services
Insurance Company (earlier 49% then Budget-2021 to → )💼 ⏫ Upto 74% Not Required.
[Pension sector % = Insurance sector so it shd be 74% as well]
Note: this limit is not applicable on LIC.
⏫
1) Defense (2020-Sept: FDI in Defense limit from 49% to 74%) Upto 74% ABOVE 74%
2) Brownfield projects in Pharma, Biotech, Healthcare
Satellite operation N/A 100%
For future updates, refer to https://www.investindia.gov.in/foreign-direct-investment

30.17.6 🗃🗃🎅🤝:🖱🛒 I NDIA’S FDI RULES FOR E-COMMERCE

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Definition? E-commerce means buying and selling of goods and services over digital & electronic
network. Two subtypes
1. Inventory based (इन्वेंटरी आधारित) model of e-commerce: Company sells the inventory of goods
and services, which is owned by them to consumers directly. E.g. primeabgb.com (A computer
hardware site). FDI is not permitted here.
2. Marketplace based (बाजार आधारित) model of e-commerce: Company merely provides a
webportal/app to act as a facilitator between buyer and sellers. E.g. Amazon, Flipkart. 100% FDI
allowed here.
FAQ: What are E-Commerce Rules by Govt ? Ans. More in 📑Pillar#4B: Services Sector
30.4.11 🗃🗃🎅🤝: 🔥💸 H OTMONEY EFFECT BY FPIS

2018-19 (Bn. USD) (+) Inflow (Credit) (-) Outflow (Debit) NET inflow
FPI + 256.9 - 257.5 -0.6 (=outflow)
FDI + 64 - 34 + 30
Foreign investment in India: भारत में विदेशी निवेश → + 30 (approx.)
 From the above table you can see large amount of money comes via Foreign Portfolio Investors
but because it is speculative and volatile in nature (HOT MONEY), so it does not stay for long in
Indian market so in “NET” terms its lower than FDI. (विदेशी पोर्टफोलियो निवेशक सट्टेबाज उद्देश्य से स्थिर रूप से
पैसा भारतीय बाजार में निवेश करते हैं और निकाल कर ले जाते हैं इसलिए ऐसा पैसा लंबी अवधि के लिए भारत में टिकता नहीं उसे हम
हॉट मनी/ गरम मुद्रा कहते है)
 2018-19: there was net ‘outflow’ of FPIs (i.e. more FPI money left India than the amount of FPI
money that came into India) which shows the Hot Money effect.
 2020 onwards: FPI situation given in chart. ES23 also repeated same problem

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30.18 🗃🗃🎅🤝I NVESTMENT: MISC TERMS & REPORTS

30.18.1 🤲🏻✈️ Golden Visa (स्वर्ण वीज़ा)

 It is a special type of visa given for a investor/ property-buyer/celebrity / sportsman / scientist /
very bright student. System prevalent in Spain, UAE (Sanjay Dutt-2021) etc.
 🤩Benefit? Helps the nation to attract investors and talented persons.
30.18.2 📊UNCTAD's World Investment Report (विश्व निवेश रिपोर्ट)
 United Nations Conference on Trade and Development (UNCTAD, HQ- Geneva Switzerland,
1964) → report: World Investment Report
 Global FDI flows will ⏬by 40% in 2020 because of the Corona.
 India was the 9th largest recipient of FDI in 2019-20 in the world.
 2021: it published a report but nothing noteworthy from exam point of view.

🔠❓MCQ. Both Foreign Direct Investment (FDI) and Foreign Institutional Investor (FII) are related to
investment in a country. Which one of the following statements best represents an important difference
between the two?(Asked in UPSC-Pre-2011)
A. FII helps bring better management skills and technology, while FDI only brings in capital.
B. FII helps in increasing capital availability in general, while FDI only targets specific sectors.
C. FDI flows only into the secondary market, while FII targets primary market.
D. FII is considered to be more stable than FDI

🔠❓MCQ. Find correct major characteristics with reference to FDI in India (Prelims-2020)
[a) It is the investment through capital instruments essentially in a listed company.
[b) It is largely non-debt creating capital flow.
[c) It is the investment which involves debt-servicing.
[d) It is the investment made by foreign institutional investors in the Government securities.

🔠❓ Which of the following can be included in Foreign Direct Investments in India [Pre-2021]
1) Foreign Currency Convertible Bonds 2) Foreign Institutional investment with certain conditions
3) Global depository receipts (GDR) 4) Non-resident external deposits
Codes: a) 1, 2 and 3 b) 3 Only c) 2 and 4 d) 1 and 4
🔠❓ MCQ. An Indian buys shares in a British car company. This will be reflected in: (CAPF-2023)
(a) Balance of Trade, but not in Balance of Payments. (b) Balance of Payments, but not in Balance of Trade.
(c) both Balance of Payments and Balance of Trade. (d) neither Balance of Payments nor Balance of Trade.

30.5 🕵🏻 Y EARBOOK: MINISTRY OF COMMERCE AND INDUSTRY (वाणिज्य और उद्योग मं त्रालय):

This ministry looks after Internal and External Trade, WTO, Dumping, SEZ, FDI & Intellectual
property rights (IPR) related issues.
<List not exhaustive- मंत्रालय में और भी सं स्थाएं हो सकती है लेकिन सभी की सूची मैंने नहीं दी >

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 Dept. • Department for Promotion of Industry and Internal Trade (DPIIT)
Attached • Directorate General of Foreign Trade (DGFT: विदेश व्यापार महानिदेशालय) for promotion
offices of foreign trade. → he issues Importer Exporter Code (IEC) unique-id number to
सं लग्न bizmen engaged in foreign trade. HQ- Delhi. Implement WTO agreements in India,
कार्यालय
decides 'rules of origin', 'anti-dumping issues'.
• Directorate General of Trade Remedies (DGTR) to impose anti-dumping duty on
foreign products - as per the policy/rules made by DGFT.
• Directorate General of Commercial Intelligence and Statistics
• Economic Adviser to DPIIT- responsible for publishing Wholesale Price Index
(WPI)- more in Pillar4C: Inflation. थोक महँगाई सूचकांक
Govt  Export Credit Guarantee Corporation of India (ECGC: NIRVIC scheme-walle)
Companie  MMTC ltd. (Gold-coin-walle). Although 2020-Jan approved for Strategic
s disinvestment [भविष्य में इसका निजीकरण हो जाना है]
 National Investment Promotion and Facilitation Agency of India. Commonly known
as “Invest India”: A ‘not for profit’ company by commerce ministry + FICCI +
NASSCOM + other in 2009. Note: FICCI and NASSCOM are not-for-profit
associations made by businessmen, mainly to lobby/highlight their demands to
Government.
Statuto. 1. Agricultural and Processed Food Products Export Development Authority (APEDA:
bodies कृ षि और सं साधित खाद्य उत्पाद निर्यात विकास प्राधिकरण), under its statutory act. APEDA helping
स्वायत्त Kashmir valley start-ups to export high-value Kashmir Saffron (GI-tag) to Middle
निकाय/
East, EU, and North America.
सं स्थाए
2. Marine Products Exports Development Authority (MPEDA)
3. Statutory Commodity Boards → Tea Board, Spices Board, Tobacco Board, Coffee
Board, Rubber Board. Controversy? Some newspapers suggesting these boards may
be closed / merged. So farmers are opposing.
4. Export Inspection Council (EIC): details given in separate section. scroll down.
Autonom Indian Institute of Foreign Trade (IIFT, Delhi)- a “Deemed University” that offers MBA,
ous PHD & other programs.
Other Export Promotion Council:
- These Councils are registered as non-profit organizations under the Companies Act/
Societies Registration Act.
- Total 14 such councils looking after sectors such as Chemicals, Plastics,
Pharmaceuticals, Cosmetics, Leather, Sports Goods, Gem and Jewellery Exports,
Cashew, Oil Seeds etc.

🔎
30.18.3 Commerce Ministry: Export Inspection Council (EIC)
➢Boss? Commerce ministry
➢Type? Statutory body under Export (Quality Control and Inspection) Act, 1963

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➢HQ in Delhi. Its field offices of Export Inspection Agencies (EIAs) @Mumbai, Kolkata, Kochi,
Delhi and Chennai
➢Function? ensures quality and safety of products exported from India.

EIC certificates description / examples

Compulsory for fish, dairy, honey, egg products, meat, Gelatine, crushed bones, Ossein
(अनिवार्य है) (collagen of bones)
Voluntary for
(1) food items not mentioned in above list. (2) non-food items
(स्वैच्छिक है)

🚩👶🏻FAQ: What is attached office / autonomous body? Ans. Self-Study through

https://unacademy.com/lesson/mrunals-yearbook-ministries-and-departments-forms-of-
government-organisations-in-hindi/7KCEZHT4/
🔠❓MCQ. Find correct about “Tea Board” in India:
1. The Tea Board is a statutory body.
2. It is a regulatory body attached to the Ministry of Agriculture and Farmers Welfare.
3. The Tea Board’s Head Office is situated in Bengaluru.
4. The Board has overseas offices at Dubai and Moscow.
Codes: (a) 1 and 3 (b) 2 and 4 (c) 3 and 4 (d) 1 and 4

30.5.1 💼 Budget-2020 : Medieval dictionary GK about Foreign Trade

In Indus script- “Takara Kolimi=Tin smithery”, “ Sreni “= Guild ,” Sethi”= wholesale merchant,
“Poddar”= Assayer of metal into treasury. ( 🎓Medieval dictionary GK sometimes asked in MCQ so
memorize.)

30.18.4 🕵️‍♂️(2019) DIPP becomes DPIIT (विभाग का नाम बदला गया)

 💼Interim-Budget- 2019: Govt renamed Commerce Ministry’s Department of Industrial Policy
and Promotion (DIPP: औद्योगिक नीति और सं वर्धन विभाग) → Department for Promotion of Industry
and Internal Trade (DPIIT: उद्योग और आंतरिक व्यापार को बढ़ावा देने के लिए विभाग ).
 It’ll function under Ministry of Commerce and Industry
 DPIIT’s Objectives? Promotion of internal trade, including retail trade; welfare of traders and
their employees; matters relating to ease of doing business; and startups.

30.18.5 🕵🏻 (2017) FIPB Abolished (विदेशी निवेश अनुमति की सं स्था को हटाया गया)
- Foreign Investment Promotion Board (FIPB: विदेशी निवेश सं वर्धन बोर्ड) was a non-statutory body in
the Department of Economic Affairs in the finance ministry.
- FIPB processed the FDI applications where government approval was required. If investment
amount exceeded ₹ 5,000 crore → application forwarded to Cabinet Committee on Economic
Affairs (CCEA: आर्थिक मामलों की मंत्रिमंडलीय समिति).

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- 2017: Govt announced FIPB’s abolition. Now, individual ministries/departments are empowered
to clear FDI proposals in consultation with Commerce Ministry. e.g. FDI in Pendrive factory →
MEITY + Commerce Ministry. (if proposal above ₹5kcr →CCEA)
- FIPB’s webportal was renamed into “Foreign Investment Facilitation Portal” and transferred to
Commerce ministry.
However, Only Home Ministry will clear FDI proposals coming from Pakistan and Bangladesh; and
FDI proposals related to private security agencies, small arms manufacturing.

30.5.2 🗃🈶💰 BoP: Capital → Chinese FDI need Govt approval

Before From 2020-April
If any FDI proposal coming from Pakistan and  If any FDI proposal from any country that
Bangladesh, it required approval from shares border with India → Indian Govt
Government of India. approval required
 Means, Pakistan, Afghanistan, China,
Nepal, Bhutan, Bangladesh and Myanmar
 Govt decided this because: Corona-led slowdown = Indian companies suffering from losses.
China may mis-use this opportunity to takeover such Indian companies @very low share price
→ will harm our strategic & economic interests. (चीन, हमारी भारतीय कं पनियो का अधिग्रहण कर लेगा तो हमारे
रणनीतिक और आर्थिक हितों को नुकसान हो सकता है)
 😰Criticism? China says this is violation of WTO norms related to foreign investment. Although
Australia and Germany also announced similar restrictions on China for similar reasons (More
on WTO in 📑Pillar#3B)
30.18.6 🕵🏻 Related Topic: Cabinet Committees
Table 1: For more PHD you may refer- https://cabsec.gov.in/writereaddata/cabinetcommittees/english/1_Upload_3017.pdf

Cabinet Committee on Boss* Notes

1) Appointments नियुक्ति विषयक 🧔 PM finalizes the name for top level appointments like

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 Cabinet Committee on Boss* Notes
के बिनेट समिति Cabinet Secretary, Indian ambassadors to each
nation etc. This Committee has only 2 persons-
Modi & Shah.
2) Accommodation आवास HM Giving house allocation to politicians, top officials
3) Economic Affairs 🧔 PM FDI approval, Agri-MSP approval (Pillar#4A),
आर्थिक मामले Bank merger,disinvestment etc grand things
4) Parliamentary Affairs Defense Defense Minister Rajnath Singh made boss for his
सं सदीय कार्य Minister acumen in parliamentary matters

5) Political Affairs, 6) Security 🧔 PM Self-explanatory. If PM is in a cabinet Committee,

5) राजनीतिक मामले, 6) सुरक्षा he automatically becomes its chairman
7) Investment and Growth 🧔 PM These two are new committee formed after 2019's
8) Employment and Skill General Election. 7) निवेश और विकास
Development 8) रोजगार और कौशल विकास

30.19 🐯🎅🏽🦁 INTERNATIONAL FINANCIAL SERVICES CENTRE (IFSC) / GIFT CITY

 International Financial Services Centre (IFSC) is a place having high concentration of financial
institutions such as Banks, Stock Markets, Insurance firms, Fund Managers, FinTech firms, etc.,
 A nation will not apply its local taxation and investment norms in its IFSCs (अंतर्राष्ट्रीय वित्तीय सेवा
कें द्र:) E.g. UAE → Dubai’s IFSC centre: 100% FDI allowed in any sector. 100% Capital Account
Convertibility (i.e.Invest & pullout money as & when you please in any currency of your

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 choice!), 0% income tax for 50 years. DTAA with most countries. Independent judiciary not
bound with local laws. Quick Visa etc. (करो में भारी छू ट, स्थानिक कानूनों से मुक्ति)
 🤩Result? Such place becomes a hub / base of operation for international financial companies
and investment bankers. It also creates trickle down benefits for local people e.g. Chartered
Accountants, Hoteliers, Golf club owners, Taxi operators etc.
 London, New York, Hong Kong and Singapore to have also grown by setting up such centres.
Taking their example, India too has set up Gujarat International Finance Tec (GIFT) city
international financial services centre (IFSC) near Ahmedabad. (2015)
 Although GIFT city not yet attracted good number of international financial companies because
the tax benefits are not as great as Singapore, Hong Kong etc.
 This ‘greenfield’ GIFT city was developed by 50:50 Joint venture of (the infamous) IL&FS +
Gujarat Urban Development Company Limited (GUDCL). Together they were responsible for
the construction, electricity, water, sanitation and other responsibilities of running this city. But
post IL&FS crisis, Govt of Gujarat has bought IL&FS’s 50% shareholding.
 💼Budget-2019: Companies operating from GIFT-city-IFSC given 100% exemption from
Corporation Tax for 10 years

30.19.1 🐯🎅🏽🦁: 🕵🏽 IFSC Authority Act, 2019

 IFSC (such as GIFT city) are setup under the SEZ Act.
 IFSC get relief / exemption in the Indian tax laws. Further, RBI, SEBI, IRDAI and other
regulators’ norms also apply in relaxed manner. E.g. Bank branches in GIFT-city-IFSC are
exempted from RBI’s CRR-SLR-PSL etc. norms.
 2019’s Act aim to setup a statutory International Financial Services Centres Authority (अंतर्राष्ट्रीय
वित्तीय सेवा कें द्र प्राधिकरण), with
- One Chairperson+ One member each nominated from RBI,SEBI, IRDAI, PFRDA
- + few other members from Finance ministry etc
- Tenure? 3 years. Re-appointment? Yes, possible.
 The IFSC Authority will regulate all financial services, products, institutions in International
Financial Services Centres of India.
 2020-April: Government announced its headquarter will be at Gandhinagar, Gujarat. (Since
Gandhinagar is the only place with an IFSC at present, i.e. GIFT City)
 😥Controversy? Maharashtra political outfits demanding HQ should be in Mumbai.
30.5.3 👛Budget-2023 on IFSCA Authority
 We’ll give more powers to IFSCA Authority. This will help reducing problem of dual regulation
between IFSCA Authority vs other (State/Union) Authorities under SEZ Act. (नियंत्रण के व्यर्थ दोहराव

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 को रोकने के लिए आईएफएससी सं स्था की शक्तियों में बढ़ोतरी करेंगे)
 We’ll setup a single window IT portal for Banks’/NBFCs’ registration to IFSCA, SEZ authorities,
GSTN, RBI, SEBI and IRDAI. (पंजीकरण के लिए एकल आईटी खिड़की का निर्माण)

30.19.2 🏫 Foreign University @ Gift City

 2023: Deakin University (Australia) has become the 1st foreign university to to set up an
International Branch Campus (IBC) in GIFT City, Gujarat.
 Such foreign Uni in GIFT city will not be regulated by India’s University Grants Commission
(UGC). They’ll be regulted by IFSC Authority.

👛
30.19.3 Data Embassy @Gift city in Budget-2023
 A data embassy is a place where a country stores its important data in a secure location in
another country
 Benefit? To protect sensitive data from disasters or cyber-attacks.
 It's like having a backup of your important info in a safe place outside your home or office.
 👛Budget-2023: we’ll encourage setting up Data Embassy @Gift city.
30.5.4 🐯🎅🏽🦁: 🕵🏽 Variable Capital Companies (VCC)@Gift city
 VCC is a special type of company dealing with several collective investment schemes e.g.
investing in shares/bonds/real estate/startups, Acting as FPI in other nations etc
 VCC has greater operational flexibility than traditional Mutual Fund, Hedge Funds, REITS,
Limited Liability Partnerships (LLPs), Private limited companies etc (REF Pillar1C).
 VCCs are prevalent in Singapore, UK, Luxembourg and other global financial centres.
 2021: International Financial Services Centres Authority had constituted a Committee under
K.P. Krishnan to see the feasibility of allowing VCCs in IFSC. Krishnan Committee
recommended allowing them in India.
✋Beyond this, VCC pe PHD NOT REQUIRED, irrespective of how many Faaltu-MCQs set by
inexperienced private quizmasters.#🕰थोड़ा-पढ़ो-आगे-बढ़ो
🔠❓MCQ. Who among the following was the Head of the Expert Committee on Variable Capital
Company in India which has submitted its report recently? (UPSC CAPF-2021)
(a) K. P. Krishnan (b) Ketan Dalal (c) J. Ranganayakulu (d) Bobby Parikh

30.20 🤲🏻 🔪 B P → C
O APITAL → DEBT (LOANS & NON RESIDENT BANK DEPOSITS)
NET inflow in (Bn. USD) →निवल आमद 2018-19
Foreign Investment (FPI & FDI) +30
 External borrowing: Pvt. Sector borrowing >Govt. +16
 Further, majority of India’s external debt is in U$D currency >
Indian Rupee > IMF’s SDR > (Yen, Euro, Pound Sterling, etc)

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 NET inflow in (Bn. USD) →निवल आमद 2018-19
Non-Residents’ Deposits in Indian Banks [Foreign Currency Non- +7
Resident FCNR accounts] & other misc. components of Capital
Account
NET balance in Capital Account (approx.) + 54

30.5.5 🤲🏻 🔪External Debt : Composition Govt vs Pvt. As per ES23

TYPE OF EXTERNAL DEBT AMOUNT (IN BILLIONS OF % OUT OF
US DOLLARS) TOTAL
A) Public/Govt Sovereign External Debt $124.5 20.4%
B) Private sector Non-Sovereign External $486.0 79.6%
Debt (or external commercial borrowing)
Total External Debt (A+B) $610.5 100%

30.5.6 🤲🏻 🔪External Debt : currency wise as per 📙ES23

EXTERNAL DEBT REPAYMENT DENOMINATED IN (%)
Loans taken by Indian Govt and Private sector combined
US Dollar 55.5%
Indian Rupee 30.2%
Other Currencies 14.3%
Total 100%

🚩👶🏻 FAQ: In pillar 2D according to ES most of our foreign debt is in rupee currency but in pillar 3
we studied majority of India’s external debt is in U$D currency. how can this happen?
Ans. Bhai dhyaan se padho!! Pillar2D Talked about only govt loans. Here pill3 talking about loans
taken Both by (A) government plus (B) private sector (Adani/Ambani etc). And since pvt parties
borrowed more foreign money than Indian govt so data will change.

30.20.1 🤲🏻 🔪 BoP → Capital Account → Misc. Concept: NIIP

 Net International Investment Position (NIIP)= value of overseas assets owned by a nation minus
the value of domestic assets owned by foreigners.
 🧐 Positive NIIP value = creditor nation (लेनदार राष्ट्र)
 😭 Negative value = debtor nation (कर्जदार देश). USA highest, India at 8th place (in 2018)
CATEGORY BILLION $ AS PER 📙ES23
Sr1. Indian residents’ overseas financial assets (+) 847.5
Sr2. Foreigners’ investment in India (minus) 1,237.1
Net claims of non-residents on India = Sr1- (minus) 389.6
Sr2
Note that the result is negative, indicating that non-residents have a net claim on India.

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30.5.7 🤲🏻 🔪Asset liability ratio
 In above table divide sr1/sr2 = 69% = It is less than <100%. Means India has lesser foreign assets
(847) compared to liability of India towards foreigners (1237).

30.5.8 🤲🏻 🔪 BoP → Capital Account → Misc.: VOSTRO, NOSTRO, FCNR, NRE, NRO
Refer to Pillar3B: Currency Exchange, internationalization of Rupee Topic.

30.5.9 🤲🏻 🔪 BoP: External Debt overhang Problem (ऋण की अधिकता)

📔📔ES21: There is a “Laffer Curve” like relationship between foreign debt and GDP growth:
 Up to a certain level, more External borrowing → ⏫economic growth (Because that foreign
money can be used for expanding the local factories, jobs, production).
 But beyond a certain level it will become unsustainable. (Just like in Original Laffer Curve:
⏫direct tax% → ⏫tax collection but then it'll reduce tax collection Because high level of direct
taxes will encourage laziness and tax evasion/blackmoney. Recall Pillar#2B) (एक हद तक विदेशी कर्जे से
भारतीय का अर्थतंत्र में वृद्धि की जा सकती है लेकिन एक हद के बाद वह अस्थिरता पैदा करता है)
 Because too much debt = then all of your new (monthly/yearly) income will be gone in repaying
the previous loan installments. This phenomena is known as debt overhang. (यदि आपकी सारी कमाई
लोन की किस्त चुकाने में चली जाए तो काम करने का उत्साह भी चला जाता है)
o Debt overhang destroys enthusiasm and motivation to work harder.
o Debt overhang increases the chances of loan default e.g. Argentina, Ecuador, Belize,
Lebanon, Suriname and Zambia – have defaulted on their sovereign debt in Corona.
 📔📔ES21 and 📙📙ES22 observed that Presently India's external debt to GDP is at the optimal
level. (In other words we should not let this ratio increase anymore.)
🔠❓MCQ. Find correct statement(s): (UPSC Pre-2019)
1. Most of India’s external debt is owed by government entities.
2. All of India’s external debt is denominated in US dollars.
Codes: (a) 1 only (b) 2 only (c) Both 1 and 2(d) Neither 1 nor 2
🔠❓MCQ. Which of the following constitute Capital Account? (UPSC-Pre-2013)
1. Foreign Loans. 2. Foreign Direct Investment. 3. Private Remittances. 4. Portfolio Investment.
Answer codes: (a) 1, 2 and 3 (b) 1, 2 and 4 (c) 2, 3 and 4 (d) 1, 3 and 4

30.6 📝N EXT HANDOUTS IN PILLAR3:

 3B- BoP, Currency Exchange, SDR, Forex, NEER, REER
 3C- WTO & other intl. org & Agreements.

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 Pillar3B: BoP, Currency Exchange, Forex, SDR, NEER, REER, PPP
Table of Contents
31 BoP, Currency Exchange, Forex, SDR, NEER, REER, PPP..........................................................515
31.1 ⛽️🎖: 🗃🤲 BoP → summing up................................................................................................516
31.1.1 💱🐯🗃 Sterilization ( )?................................................................................................................................517
स्थिरीकरण
31.1.2 💱🐯🗃: 🧅 🧅 Mundell-Fleming Trilemma ( - )..............................................................518
मं डल फ्लेमिंग की त्रि आयामी दूविधा

31.2 ( ⛽️🎖>🗃🤲)⚠️ India’s Balance of Payment crisis (1991).......................................................519

31.2.1 ( ⛽️🎖>🗃🤲)⚠️ Disequilibrium in BoP: Factors responsible ( असं तुलन के कारण).....................................................520

31.3 🐯🪣 RBI’s Forex Reserve: विदेशी मुद्रा रिजर्व.......................................................................................521

31.3.1 🐯🪣 📈 📉Forex Reserve: goes up or down: when / how?.................................................................................521
31.3.2 🪣🤩 Significance of Foreign Exchange Reserves ( ).......................................................................................522
महत्व
31.3.3 🪣📐Indicators to find forex adequacy- as per IMF.............................................................................................522
31.3.4 🪣😰 Negative implications of Large Forex Reverse ( ).....................................................................523
नकारात्मक आयाम
31.3.5 😰 Weak Currency = Non-Tradable sector neglected.........................................................................................523
32 💱 Currency Exchange Rate: मुद्रा विनिमय दर........................................................................................524
32.1 💱 Exchange Rate Regime: Theory.............................................................................................525
32.1.1 💱🐯 😰 Fixed / Pegged System → Challenges: Study of SriLanka (2022).......................................................525
32.1.2 💱🐯 😰Managed Float System→ Challenges ?...................................................................................................526
32.1.3 💱⚔️ Currency War 2018 ( )............................................................................................................................526
मुद्रा युद्ध
32.1.4 💱⚔️Reverse Currency war?...................................................................................................................................526
32.2 💪 Soft vs Hard Currency............................................................................................................527
32.2.1 💪 Soft currency - factors affecting.........................................................................................................................527
32.2.2 ⚾️🎾 Soft Dollars vs Hard Dollars..........................................................................................................................528
32.3 🤮 Bad Money drives out good money.......................................................................................528
32.3.1 🤮 Bad Money vs good money - Modern world examples..................................................................................529
32.4 💱👴🏼 Exchange Rate Regime: Historic.......................................................................................529
32.4.1 💱🔨👴🏼 Fixed exchange rate system → Gold Standard; / (1870-1914).....................................529
सोने के मानक स्वर्णमान
32.4.2 💱 🔨👴🏼 Fixed exchange rate system → Bretton Woods System (1946-1971).................................................530
32.4.3 💱🐯Currency Exchange in India...........................................................................................................................531
32.5 💱👵🏽IMF Special Drawing Rights (SDR: विशेष आहरण अधिकार).........................................................532
32.5.1 💱👵🏽IMF SDR Formula weightage reforms 2022.................................................................................................533
32.5.2 💱👵🏽IMF Quota Reform..........................................................................................................................................534
32.5.3 💱👵🏽IMF Governors................................................................................................................................................534
32.6 💱⛽️🤲 Currency Convertibility (मुद्रा परिवर्तनीयता)..........................................................................534
32.7 💱✋🐯RBI restriction on convertibility of rupee: रुपये की परिवर्तनीयता.............................................534
32.7.1 💱🤲 Full convertibility of Rupee : ?............................................................................................536
रुपये की पूर्ण परिवर्तनीयता
32.7.2 💱🤲 ₹ 🕵️‍♂️ Convertibility → S.S. Tarapore Committee (1997)...........................................................................537
32.7.3 💱🤲 🐯 ₹ Convertibility → RBI reforms (2004-2019).......................................................................................537
32.7.4 💱🤲 🐯 FEMA Rules for Indian resident’s overseas investment (2022-Aug)..................................................538
32.7.5 💳 (Prepaid) Forex Card?........................................................................................................................................538

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32.8 🍋🗽🗼🛍LRS: TCS on Foreign: trip / shopping / investment (2023-Oct)...............................538
32.8.1 🍋 TCS Rates from 1/October/2023.......................................................................................................................539
32.8.2 🍋 TCS on LRS: Objectives......................................................................................................................................539
32.8.3 🍋🚩👶🏻 TCS FAQ by Zhande-walle Babushone: .................................................................................................539
32.9 ⚖️ FCRA Act................................................................................................................................ 540
32.9.1 FCRA on donations..................................................................................................................................................540
32.9.2 FCRA on remittance.................................................................................................................................................541

32.10 💱⚔️Currency War →Fall of Indian ₹ & RBI’s Response........................................................541

32.11 🐯 RBI's Currency Swaps (मुद्रा स्वैप/अदलाबदली समझौता)......................................................................541
🐯
32.11.1 RBI’s Currency Swap Agreement with Japan ( मुद्रा स्वैप/अदलाबदली समझौता)............................................................541
🐯
32.11.2 RBI Currency Swap with Indian Bankers.......................................................................................................542
32.11.3 Challenges to India’s BOP by ES22 and ES23.....................................................................................................543
32.11.4 →Currency Exchange Rate → Attracting Dollars: VRR and FAR..............................................................544
32.11.5 🐯🦁RBI-Govt’s measures to prevent fall of Rupee (2022-Jul-Aug)................................................................544

32.12 🤝💰Rupee Rouble Agreement.................................................................................................545

32.12.1 💸 Nostro Vostro Accounts- settlements with Russia and SriLanka...............................................................545
32.12.2 💸Internationalisation of Indian rupee ( )........................................................................546
भारतीय रुपये का अंतरराष्ट्रीयकरण
32.12.3 💱⚔️🐼💪🏻 Yuan as global currency?....................................................................................................................547
32.12.4 💱💪🏻 Dollar- the Global Currency & ”DE-Dollarization”? ( - - )....................................................547
वैश्विक आरक्षित मुद्रा

32.13 💱⚔️ Misc. Concepts: Quantitative Easing and Federal Tapering..........................................548

32.13.1 🔪🔪🥵 Strong dollars squeezes global credit.....................................................................................................549
32.13.2 💱⚔️ Misc. Concepts: Helicopter Money & Zero interest rate regimes...........................................................550
32.14 💱 Exchange Rate → Miscellaneous Terminologies................................................................551
32.14.1 💱 NEER and REER? (Hindi not imp because only prelim relevant)..............................................................551
32.14.2 🧨Afghan Currency is the Best Performing Currency in the world? (2023)...................................................554
32.14.3 💱 Purchasing Power Parity: (PPP)....................................................................................................554
क्रय शक्ति समता
32.14.4 ✍🏻🎺 Mock Questions for Mains:.........................................................................................................................555
31 BOP, CURRENCY EXCHANGE, FOREX, SDR, NEER, REER, PPP

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31.1 ⛽️🎖: 🗃🤲 B P → O SUMMING UP

Sr Approx Bn. USD 2018-19 😷2020-21 2022: Apr-Dec

1Current Account Deficit: चालू खाता घाटा - 57 +24 -67
2Capital Account Surplus: पूंजी खाता + 54 +64 (+) 53
अधिशेष
3 Errors & Omissions: त्रुटियां और चूक -0.486 -0.3 -0.1
4 Overall Balance: समग्र सं तुलन/ शेष (-) 3 bn +87 (+) 14
5 Official Reserve Transactions or (+) 3 bn (-)87 [Meaning (-) 14
Monetary Movements in RBI's [Meaning RBI bought this
Foreign Exchange Reserves** RBI sold $$ much $$ from
(रिज़र्व बैंक फॉरेक्स बाजार से डॉलर की खरीदी या from its market]
बिक्री करेगी ताकि विनिमय दर में स्थिरता रहे) reserves]
NET Balance of Payment for India 0 (ZERO) 0 (ZERO) 0 (ZERO)
- Sr. no 1 to 4 are called Autonomous transactions because they occur independently on their own
without RBI’s involvement. (यह लेनदेन स्वायत्त रूप से, अपने आप ही हो जाती है, रिज़र्व बैंक के कहने पर नहीं होती)
- Sr. no 5 is called Accommodating transaction, bcoz RBI will do it based on whether we are
having surplus or deficit due to previous 4 items (so that RBI can accommodate NET BoP to
ZERO). (यह अपने आप नहीं हो जाता, रिज़र्व बैंक ने अपना दिमाग लगाकर इसको करना पड़ता है)
- Column for 2018-19: (+) sign indicates RBI supplied/sold that many $$ from its forex reserve,
**

else $ becomes stronger= ₹ becomes weaker bad for importers. Here (+) Sign indicates ⏬in
RBI’s forex reserve (since RBI sold dollars) [रिज़र्व बैंक की तिजोरी में इतने डॉलर की मात्रा कम हुई]
- ##
Column for 2020: (-) sign indicates RBI purchased $$ from market, else ₹ rupee becomes
stronger= bad for exporters. (-) Sign in sr.5 row indicates ⏫in RBI’s forex reserve (since RBI
bought dollars) [रिज़र्व बैंक की तिजोरी में इतने डॉलर की मात्रा बढ़ जाएगी].

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31.1.1 💱🐯🗃 Sterilization (स्थिरीकरण)?

 If there is a BoP situation, wherein RBI has to sell ₹ to buy $ to get the NET answer ZERO then…
⏫
Such RBI action would result in supply of rupee currency in the Indian market → it can cause
inflation if there is not sufficient supply of goods for purchase.
 So, RBI must ‘absorb’ that excess rupee currency back. RBI will do it through Open Market
Operation (OMO: REF-1A2) → sell govt securities to buyback Indian rupees. This process is

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 called Sterilization. रिजर्व बैंक ने यदि डॉलर खरीदने के लिए बाजार में रुपए दिए तो उन्हीं रुपयों को वापस से भी चूस लेना
चाहिए, वरना महंगाई हो सकती है → इसलिए रिजर्व बैंक, सरकारी प्रतिभूतियां भेजकर बाजार ₹ चूस लेता है इसे स्थिरीकरण कहते हैं

🔠 MCQ. Which one of these activities of the RBI is considered to be part of 'sterilisation? (Pre’23)
(a) Conducting Open Market Operations (b) Oversight of settlement and payment systems
(c) Debt and cash management for the Central and State Governments
(d) Regulating the functions of Non-banking Financial Institutions

31.1.2 💱🐯🗃 🧅 🧅
: Mundell-Fleming Trilemma (मंडल फ्लेमिंग की त्रि-आयामी दूविधा)
Theory by economists Robert Mundell and Marcus Fleming (1960s). It argues that three things can't
be accomplished together: रिजर्व बैंक तीन चीजें एक साथ नहीं कर सकते

Trilemma (त्रि-आयामी दूविधा) Example situation in Corona

1) Keep capital account open / relax Corona:- large foreign FPI,FDI inflow towards India’s
capital account convertibility to boost pharma-IT/Tech sectors. कोरोना के दौरान भारत के औषधि तथा
economy. पूंजी खाते में छू ट: भारत में विदेशी रुपया सूचना प्रौद्योगिकी क्षेत्र में ढेर सारी विदेशी पूंजी आई
लाने- ले जाने पर बहुत ज्यादा पाबं दी ना हो, ताकि
अर्थतंत्र को बढ़ोतरी मिल सके
2) Keep exchange rate stable विदेशी मुद्रा FPI,FDI ⏫ → so, inflow of Dollar$⏫⏫ → then rupee
विनिमय दर को स्थिर रखा जाए
will become stronger → exchange rate will not remain
stable & exporters will suffer due to stronger rupee.
विदेशी मुद्रा के भारत में अधिक मात्रा में आने से रुपया मजबूत होता है जो
निर्यातकों के लिए अच्छी बात नहीं
3) Keep monetary policy independent  Stronger rupee will be bad for exporters → RBI
(from what is happening elsewhere in
the world / solely focusing on Inflation
should purchase dollars & sell rupees → ⏫Rupees
supply → Inflation if there are not sufficient goods
- target) मौद्रिक नीती स्वतंत्र रूप से चलाई जा
in the market. रिज़र्व बैंक रुपया बेचकर डॉलर खरीदना शुरू करें तो
सके -बिना परवाह किए कि विनिमय दर में विदेशी
ताकतों/कारको के चलते क्या अस्थिरताएँ हो रही है. बाजार में रुपये की मात्रा बढ़ जाएगी जो महंगाई उत्पन्न कर सकती है
 So if RBI try to control the exchange rate volatility,
then RBI will end up creating inflation! यानी की विनिमय
दर की अस्थिरता रोकने के चक्कर में महंगाई उत्पन्न हो गई
 Corona-2020: amount of $$ inflow so high,
sterilization game (Ref: previous section) was
difficult. So, inflation inevitable. स्थिरीकरण वाला खेला
बहुत मुश्किल क्योंकि डॉलर/रूपये मात्रा बहुत ज्यादा थी.

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 In this trilemma, What did RBI do?

Way Forward: Description did RBI implement this solution?

Control the exchange RBI should buy dollars & ✅ YES. हाँ यहीं किया गया
rate volatility, prevent sell rupees. रिज़र्व बैंक ने डॉलर
Rupee from becoming खरीद और रुपया बेचना चाहिए
stronger →रुपया को
मजबूत होने से रोको
Control the inflation Then RBI should not buy ✋ No. Because RBI felt that inflation will
→ मं हगाई को काबू में रखो the dollars and sell the
rupees. तो डॉलर मत खरीदों,
⏫
increase irrespectively, because of the
Corona lockdown related supply-demand
रुपया मत बेचो, ताकि बाजार में रुपए
mismatch. लॉकडाउन में महंगाई तो वैसे भी होनी थी
का जत्था ना बढ़े, महंगाई न बढ़े
वस्तुओं की आपूर्ति में गिरावट के चलते. इसलिए रिज़र्व बैंक
ने रुपये की विनिमय दर को स्थिर रखना ज्यादा जरूरी समझा.

31.2 ( ⛽️🎖>🗃🤲)⚠️ I NDIA’S BALANCE OF PAYMENT CRISIS (1991)

Nowadays India usually has “DEFICIT” in current account (due to crude oil imports), but there is
usually sufficient “SURPLUS” in capital account (thanks to FDI & FPI) to counter/offset that Current
Account DEFICIT. (सामान्य रूप से चालू खाते में घाटा, और पूं जी खाते में अधिशेष होता है)

- But in the pre-1991’s Nehruvian Socialist Economy, many sectors were nationalised (banking
insurance) and / or reserved for the public sector companies only = mismanaged & inefficiency.

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 Private sector industrialists were allowed only in selected sectors, and were subjected to Licence-
Quota-Inspector Raj → ⏬competition,⏬ innovation = low exports.(Ref: 📑Pillar#4B)
- And our policy makers restricted foreign investments (FDI /FPI) fearing that
- It’ll bring USA-CIA’s invisible hand in Indian Affairs,
- Our Swadeshi industries & our ‘Non-Alignment Movement (NAM)’ will be harmed.
- 😰 End result? High level of “DEFICIT” in Current Account and not enough surplus in Capital
account to counter/offset that DEFICIT. The situation could be like this:
1991 → imaginary figures for illustration only (सिर्फ़ उदाहरण के लिए काल्पनिक आंकड़े) (Bn. USD)
Current Account (Deficit) [चालू खाते में बोहोत बड़ा घाटा] - 100
Capital Account (Surplus, but it’s insufficient surplus) [पूंजी खाते में अपर्याप्त अधिशेष] + 50
Errors & Omissions 0
Overall Balance - 50
Monetary Movements in RBI's Foreign Exchange Reserves** + 50
NET Balance of Payment for India 0
**Here plus (+) indicates RBI must sell dollars from its forex reserve to keep India’s BoP at ZERO
level. If they can’t do it then shortage of dollars in Indian market to pay for our import bills →
results in heavy weakening of Indian rupee (e.g. $1 =₹ 60 → $1= ₹ 6000) then it becomes even more
expensive to import oil. रुपया बहुत कमजोर हुआ तो कच्चा तेल आयात करना और महंगा होगा

- In 1991, RBI didn’t have enough forex reserves to get India’s BoP zero → we had to pledge our
gold to IMF to borrow dollars. सोना गिरवी रखकर डॉलर के लोन लिए
- IMF also imposed certain conditions which required India to open up its economy through LPG
reforms (Liberalisation, Privatisation, Globalisation: उदारीकरण, निजीकरण, वैश्वीकरण). 🎓Self-study
from (new) NCERT Class11:Indian economic development → Ch3.
- 2022: SriLanka facing similar problems but we’re not preparing for SrilankiPSC so boycott-PHD.

31.2.1 ( ⛽️🎖 🗃🤲 ⚠️
> ) Disequilibrium in BoP: Factors responsible (असं तुलन के कारण)
When Credit (Receipt, income money) = Debit (Payment, outgoing money) then BoP will be ZERO.
If, not then BoP is in disequilibrium. This can happen because of:

 Development disequilibrium (विकास का असं तुलन): poor nations have to import more grains,
medicines etc. = adverse BoP.
 Secular or Long-term Disequilibrium (दीर्घ अवधि तक रहने वाला): newborn nation is usually poor &
backward so imports >> Export. E.g. Nehru’s India until it matured in the 90s.
 Consumerism and Demonstration Effect: Rich Indians try to copy westernized lifestyles. So,
⬆import of Switzerland wristwatches + Sports Cars = adverse BoP. (उपभोक्तावाद, दिखावा करने की चाह

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 → ज्यादा आयात के चलते भुगतान सं तुलन खराब होता है)
 Structural Disequilibrium =if transport, electricity infrastructure is poor or Technological
Backwardness = exports can’t improve. (सं रचनात्मक और तकनीकी)
 Cyclical Disequilibrium (चक्रीय असं तुलन): When two countries may be passing through different
phases of business cycle (Boom, slowdown...तेजी और मं दी का चक्र) , so there will be mismatch in
imports, exports, FDI etc.

31.3 🐯🪣 RBI’ F S OREX RESERVE: विदेशी मुद्रा रिजर्व

The Forex Reserve component(s) are =

1) Foreign Currency Assets (includes foreign currencies & G-Sec/bonds of foreign Govts)
2) Gold (स्वर्ण)
3) Reserve Tranche Position (RTP) in the IMF. Also called Gold Tranche (What is it? = NOT IMP.)
4) Special Drawing Right (SDR) of International Monetary Fund (IMF)

Largest forex: 1) China ($3 Trillion) 2) Japan 3) Swiz >> 6) India (As of 2022-Nov as per 📙ES23)
USA is not in the top-10 list, it barely keeps ~$250 billions in reserve. Because USA has floating
exchange rate so USA central bank doesn’t worry about currency exchange.

🔠❓MCQ. Which is included in India's foreign-exchange reserves? (UPSC-Pre-2013)

A. Foreign-currency assets, Special Drawing Rights (SDRs) and loans from foreign countries.
B. Foreign-currency assets, gold holdings of the RBI and SDRs.
C. Foreign-currency assets, loans from the World Bank and SDRs.
D. Foreign-currency assets, gold holdings of the RBI and loans from the World Bank.

🔠❓MCQ. “Gold Tranche” (Reserve Tranche) refers to _ _ (UPSC-Pre-2020)

[a) A loan system of the World bank [b) One of the operations of a central bank
[c) A credit system granted by WTO to its members [d) A credit system by IMF to its members

31.3.1 🐯🪣 📈 📉Forex Reserve: goes up or down: when / how?

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 Factor / Variable ⬆️ Forex Reserve goes up when ⬇️ Forex goes down when
When RBI has to sell dollars to
in situation when RBI has to buy dollars
BoP accommodating get net BoP=0. e.g. when
to get net BoP =0. e.g. when Both current
transaction Current account deficit number
account and capital account are surplus.
is very high.
RBI interventions when RBI has to buy dollars to keep when RBI has to SELL dollars to
रिजर्व बैंक की दखल rupee stable. keep rupee stable.
when the market value of the forex assets reverse. Refer to the chart for
Valuation Effect
increases (जब रिजर्व बैंक की फॉरेक्स सं पत्तियों का fall in value of gold and Euro
(सं पत्तियों के मूल्य की असर)
बाजार मूल्य बढ़ जाए) during 2023-Oct-Week1.

31.3.2 🪣🤩 Significance of Foreign Exchange Reserves (महत्व)

 To maintain the exchange rate stability (मुद्रा दर में स्थिरता के लिए विदेशी मुद्रा भं डार ज़रूरी।)
 To absorb external-shocks (बाह्य वैश्विक झटकों से भारतीय अर्थतंत्र को सं भालना)
 To help economy in situations where foreign loans are very expensive/unavailable e.g. in
situations similar to Pakistan/SriLanka. (जब विदेशी स्रोतों से कर्ज़ न मिल रहा हो।)

31.3.3 🪣📐Indicators to find forex adequacy- as per IMF

📐 Indicators Description / examples
(न्यूनतम कितना विदेशी मुद्रा भं डार रिज़र्व बैंक ने रखना चाहिए?)
📐 Ratio of forex-reserve - RBI’s S.S.Tarapore committee- Shd be Large enough to pay for 6
to imports months’ imports (छः महीने के आयात का ख़र्चा उठा सके उतना फ़ोरेक्ष भं डार होना चाहिए)
📐 Ratio of forex-reserve - IMF’s Guidotti–Greenspan rule: Shd be Large enough to cover
to external debt short-term external debt of upto 1 year tenure (लघु अवधि के विदेशी ऋण चुका
सके उतना फ़ोरेक्ष भं डार होना चाहिए)
📐 Ratio of forex-reserve - e.g. Forex / M3. (What is M3 = refer Pillar1A2)

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 to monetary aggregates - what's the ideal number? Ans. Eco Survey didn't mention, so, I
didn't google.

MCQ. Adequacy of foreign exchange reserves of a country is captured by which indicators? (CAPF-
2023) 1. Reserves to import ratio 2. Reserves to external debt ratio
3. Reserves to GDP ratio 4. Reserves to monetary aggregates
Codes: (a) 1 and 3 only (b) 1, 2, 3 and 4 (c) 2, 3 and 4 only (d) 1, 2 and 4 only

31.3.4 🪣😰 Negative implications of Large Forex Reverse (नकारात्मक आयाम)

 if large forex reserve is built through exchange rate manipulation / deliberate weakening of local
currency e.g. China = then weak currency → imported inflation in crude oil etc. (फोरेक्स भं डार को
बढ़ाने के लिए यदि कें द्रीय बैंक जानबूझकर स्थानीय मुद्रा को कृ त्रिम रूप से कमज़ोर रखती है → आयात महँगी हो जाते हैं।)
 The excess money thus locked into forex reserve → not available for other activities e.g. health,
education, poverty removal, infrastructure. (और ऊपर से, वो सारा पैसा फ़ोरेक्ष भं डार में फँ स जाता है → वह पैसा
शिक्षा, स्वास्थ्य, ग़रीबी निवारण बुनियादी अवसं रचना आदि के लिए उपलब्ध नहीं रहता।)

31.3.5 😰 Weak Currency = Non-Tradable sector neglected

NON-TRADABLE SECTOR TRADABLE
👇
(व्यापार / निर्यात अयोग्य क्षेत्र) (EASILY EXPORTABLE) 👇
Healthcare, Education, Construction Manufacturing, IT, Food Processing
 If a country excessively focuses on exports → central bank will try to keep local currency weak
and the government will focus more on giving tax cuts, subsidies and cheap loans to ‘tradable’
sectors e.g. Manufacturing, IT, Food Processing
 But consequently, the non-tradable sectors (health, education) receive less funding/attention →
possible loss of social /human development. (निर्यात को बढ़ाने के लिए यदि सरकार अंधाधुंध क़िस्म से के वल निर्यात
योग्य क्षेत्रों पर ही टैक्स की कटौती/ सब्सिडी देगी → तो अंत में ग़ैर-निर्यात योग्य क्षेत्र जैसे शिक्षा, स्वास्थ्य, मकान-निर्माण आदि पर
सरकार कम पैसा ख़र्च करती है → जिससे मानव विकास को हानि होती है।)

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32 💱C URRENCY EXCHANGE RATE: मुद्रा विनिमय दर

Currency Exchange Rate Indian Exporter of Tea Indian Importer of Dell Laptops
Weaker ₹ = Stronger $  (assuming no  . मेरे को आयात करते वकत ज़्यादा
($1=60 → 80) change in inflation) जत्थे में पैसा देना होगा!
Stronger ₹ = Weaker $  मेरे को निर्यात करते वक्त 
($1=60 → 40) कम जत्थे में पैसा मिलेगा।
(Definition) The price of one currency in terms of the other currency is called exchange rate. E.g. $1
= ₹ 70. Meaning, it costs ₹ 70 to buy one dollar (or $0.014 to buy ₹ 1).

- This is also called Nominal Exchange Rate because it does not take into consideration inflation
or purchasing power in the respective countries. (औपचारिक विनिमय दर, महंगाई को नजरअंदाज किया)
- The place where currencies are exchanged is called Foreign Exchange Market (विदेश विनिमय बाज़ार).
Their dealers are called Authorized (Forex) Dealers (AD). They can be banks or non-banks. They
have to get registered with RBI under the Foreign Exchange Management Act (FEMA: विदेशी मुद्रा
प्रबं धन अधिनियम के अंतर्गत विदेशी मुद्रा के दलालों को रिजर्व बैंक से अनुमति लेनी होती है).
- These dealers keep separate prices for buying and selling, to make profit in between e.g. ICICI:
$1 Dollar buying price ₹ 67.95 and $1 selling price is ₹ 72.76. (इन दलालों का डॉलर खरीदने का दाम अलग
और बेचने का दाम अलग होता है ताकि बीच में उनका मुनाफा रहे)
- Such currency transaction service is also subjected to GST, however the tax depends on the
amount of currency exchanged. (e.g. upto ₹ 10 lakh exchanged in foreign currency then only ~₹

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 3000 of that 10 lakh will be taxable in GST → 18% of 3000 → ₹ 540 GST Tax. GST will not be
levied on the entire 10 lakh rupees)

32.1 💱E XCHANGE RATE REGIME: THEORY

It is the set of rules governing the exchange of domestic currency with foreign currencies.

🔠❓MCQ. Under flexible exchange rate system, the exchange rate is determined by [CDS-2015-II]
(a) predominantly by market mechanism (b) by the Central Bank
(c) as a weighted index of a group of currencies (d) by the World Trade Organization

32.1.1 💱🐯 😰 Fixed / Pegged System → Challenges: Study of SriLanka (2022)

FAQ: Why doesn’t Srilankan Central bank supply dollars from its Forex Reserve? Ans. Bhai They
don’t have enough forex. They're begging to IMF. More in Mains HDT- Debt Trap Diplomacy.

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32.1.2 💱🐯 😰Managed Float System→ Challenges ?
1. Currency speculation and interest rates (e.g USA Fed Tapering – refer to Pillar: 1A2.)
2. Currency Manipulation/ मुद्रा जोड़-तोड़: usually occurs when a central bank keeps buying dollars to
create artificial scarcity of $ in the forex markets → dollar becomes expensive → local currency
becomes weak → boost to exports.
US Department of the Treasury publishes a semi-annual report to track such nations. China,
S.Korea, India etc have been kept in (‘Watch list’) citing the (alleged) lack of transparency and
consistency in their respective Central banks operations. (इन देशों की कें द्रीय बैंक, मुद्रा विनिमय दर को नियंत्रित रखने
के लिए जो क्रियाएं करती है, उस में पारदर्शिता नहीं, इसलिए अमेरिका उन पर मुद्रा जोड़-तोड़ का इल्जाम लगाता है)

32.1.3 💱⚔️Currency War 2018 (मुद्रा युद्ध)

2005: Chinese authorities announced they don’t manipulate/control Yuan exchange rate. They only
intervene if Yuan’s exchange rate varies more than +/- 4% from previous day.

- 2018: USA alleges that China is deliberately keeping Yuan weak to make Chinese product more
cheaper in global trade. Trump accused Russia and Japan of playing similar ‘Currency War’
against him.(चीन पर अपनी मुद्रा जानबूझकर कमज़ोर रखने का आरोप)

32.1.4 💱⚔️ Reverse Currency war?

I don’t find it important for exam, until future Economic Surveys talks about it however you can
satisfy your intellectual curiosity by watching my lecture on YouTube: https://youtu.be/OFj-oz-DeQI

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32.2 💪S OFT VS HARD CURRENCY

Type 💪Hard currency Soft currency

Volatility in currency high volatility
low volatility (=more stability)
exchange rate (=less stability)
Dollar, Pound, Euro etc currencies of currencies of the poor
Examples
the developed nations countries in Africa & Asia

32.2.1 💪 Soft currency - factors affecting

1) Income of customers 2) Demand vs Supply of Forex
3) Interest Rate Arbitrage 4) Speculation.

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32.2.2 ⚾️🎾 Soft Dollars vs Hard Dollars
This is a technical concept associated with American Sharemarket mutual fund commission. Not
🧛‍♀️
very imp for our exam. But some Babushonas will come to drink my blood (after they out-of-
trend mock-MCQs from inexperienced quizmasters) - so here is the answer:

in above chart, Who is the paying purple box commission to the broker?
➡️
 - if Mutual fund is paying from his own profit / own pocket called Hard Dollars
➡️
 - if Investor is paying it (via hidden charges imposed by Mutual Fund) called Soft Dollars.
 Note: This concept is from American Sharemarket, and not Indian Sharemarket. I've used Indian
brand photos/logos for easier visualization. now plz don't come to ask me IF there is similar
concept of "Hard Rupee vs Soft Rupee" in India's Mutual fund = waste your time in ChatGPT.

32.3 🤮B AD MONEY DRIVES OUT GOOD MONEY

 - “Bad money drives out good money.” Thomas Gresham’s law (Britain)
 - “Good money drives out bad money” Adolphe Thiers’s law (France)

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 - People stop using currencies that they consider to be of poor quality and adopt currencies that
are found to be of better quality. AND/OR
 - People hoard/store the currency that they find to be of better quality.

🚩👶🏻 FAQ: aren’t these two laws contradictory- one says good money drive bad money whereas
other statement says bad money drives out good money? Ans. Depends on the context/MCQ
Statement.

32.3.1 🤮 Bad Money vs good money - Modern world examples

 2008: Zimbabwe ki local public prefers to use American dollars over their local currency due to
heavy inflation. Once the price of a loaf of bread = 10 million Zimbabwe dollar currency units.
So, it was more convenient to carry American dollars in pocket (=good money), than Zimbabwe
currency in a truck/cart (=bad money). → “Good money drives out bad money” Adolphe
Thiers’s law (France)
 2022: Zimbabwe launched Gold coin currency called ‘Mosi-oa-Tunya’ (priced at 1 coin =
$1,800) because their public doesn't trust the local paper currency due to hyper-inflation.
 2022: Foreigners DONOT ACCEPT the FIXED exchange rate of Srilankan Rupee Because Sri-
Lankan Rupee at fixed exchange rate (Dollar=200) is BAD MONEY for them.

🚩👶🏻 FAQ: I've 500 jaat ke counter argument / doubts ke why X didn't happen in Y? and why "A"
should be called "B"? or can we say "C" also is example of "D" ? Ans. NOTIMP4exam / waste ur time
in chatGPT & mere ko maaf karo. I'm finished from exam point of view.

32.4 💱👴🏼 E XCHANGE RATE REGIME: HISTORIC

32.4.1 💱🔨👴🏼 Fixed exchange rate system → Gold Standard; सोने के मानक/ स्वर्णमान (1870-1914)

- USA would issue $1 note, if only it has 14 grams of gold in reserve, whereas England would issue
one pound note if only it has 73 grams of gold in its reserve. Accordingly, their exchange rate will
be 1 Pound =73/14 = ~5 USD.
- And, each Central Bank Governor has promised to convert their currency into gold at a fixed
amount. So, a person could walk with paper currency & demand gold coins/biscuits in return.
- When the gold mining production declined, nations gradually shifted to ‘bimetallism’ e.g. $1
promised with 14 gm gold or 210 gm of silver whichever available with their Central Bank.
This system collapsed during the First World War (WW1) because the nation’s currency printing
capacity was limited by their gold reserve, but their governments where more eager to print more
money to finance the war (soldiers’ salaries, rifles’ ammunition etc.)

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32.4.2 💱 🔨👴🏼 Fixed exchange rate system → Bretton Woods System (1946-1971)

Here, USA agreed to fix price of its $1 = (1/35) ounces of gold. [1 ounce = 28 grams]. USA allowed
free convertibility of Dollar to Gold. So if a person walked into the US Federal Reserve with $35, their
chairman (Governor) will give him one ounce of gold.

 Then IMF fixed the exchange rate of every country's currency against USA. e.g.₹ 1= $0.30 =
~0.24 grams of Gold. So, that implied India can’t issue more currency If Indian RBI does not
have proportionately sufficient gold reserve of its own. Still if RBI issues more ₹ currency,
International Monetary Fund (IMF: अंतरराष्ट्रीय मुद्रा कोष) will order India to devalue its rupee
exchange rate against dollar.
 American Economist Robert Triffin claimed this system will collapse eventually because gold is
a finite commodity and its price will continue to rise (from 1 ounce of gold = $35 to $40). So
there is always danger of people converting the local currency into dollars and then converting
dollars into gold @$35, then selling it in open market @profit, then US Feds Chairman can’t
continue honouring his promise. It was called “Triffin Dilemma: त्रिफ़िन दुविधा”. He therefore
suggested an alternative SDR (Paper gold) system for IMF. (स्वर्ण का जत्था अमर्यादित नहीं है इसलिए यह
व्यवस्था एक दिन तबाह हो जाएगी)
 1971: USA President Robert Nixon pulled out of Bretton Woods gold convertibility system,
mainly because he wanted freedom to print more dollars to finance the Cold War (शीत युद्ध) and

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 arms race against the USSR. You may read more about the Cold War in NCERT PolSci-I
Class12ch1: http://ncert.nic.in/ncerts/l/leps101.pdf
 Thus, USA shifted to “Floating Exchange System”. Eventually most of the nations also shifted in
that either floating / managed-floating system. (अमेरिका ने डॉलर का विनिमय दर बाजार पर छोड़ दिया है)
 2000: Ecuador adopted Dollarization i.e. it abandoned the domestic currency and adopted the
US dollar as their official currency. (कु छ देशोने अमेरिकी डॉलर को ही अपनी वैधानिक मुद्रा मान ली है)

32.4.3 💱🐯 Currency Exchange in India

We need not waste time looking at what was the system in India before 1995. But for reference of
non-UPSC Exams:

Towards Fixed Exchange Rate: निश्चित विनिमय दर की ओर →

➢ 1860 onwards: Fixed Fiduciary System. i.e. British Indian Govt can issue Rs.10 crore notes on
fiduciary (“trust”) backed by G-Sec. Beyond that every note must be backed by gold / silver.
British govt fixed exchange rate between Rupee currency with Pound.
➢ 1923: Dr. Bhimrao Ambedkar's doctoral thesis "The Problem of the Rupee" analyzed the
economic consequences of the British colonial government's policies on the Indian currency. He
argued that the exchange rate between the Indian rupee and the British pound was unfavorable
to India
➢ 1935 onwards: Proportional Reserve. RBI must keep ~40% gold to the value of currency issued.
➢ 1946 onwards: Bretton Woods / IMF system of fixed exchange rate. Wherein ₹ price was fixed
(pegged) against dollar, and dollar price was fixed (pegged) against gold.
➢ 1956 onwards: While RBI could issue any amount of Indian currency but that has to be balanced
by the Assets of the issue department (Recall M0). Of course, if RBI printed too much currency
backed by only Indian G-sec but (without adequate Gold / Forex Reserve, then IMF may force ₹
devaluation against Dollar). So, we adopted “Minimum Reserve System” i.e. RBI must keep ₹
400 crore of foreign currency/security + ₹ ‘x’ crore worth gold.
Towards Managed Floating Exchange Rate →

✓ 1995 onwards: “Minimum Reserve System; न्यूनतम आरक्षित प्रणाली” is continued but RBI is required
to only keep ₹ ’x’ crores of gold. No compulsion for RBI to keep additional 400 crore worth
foreign currency or foreign securities. RBI can print as much currency it wants as long as its
balanced by the Assets of Issue Dept. (such as Indian G-sec, Foreign Securities, Gold etc.)
System Minimum Reserve system Managed Float system
How much money [M0] can RBI
Objective? How will currency exchange rate decided?
generate?

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 System Minimum Reserve system Managed Float system
RBI कितना पेसा छाप सकती है, उससे जुड़ा हुआ मुद्रा विनिमय दर कै से तय होता है? उससे जुड़ा हुआ concept
concept है। है।

32.5 💱👵🏽IMF SPECIAL DRAWING RIGHTS (SDR: विशेष आहरण अधिकार)

After the collapse of Bretton Woods Exchange Rate System, IMF was converted into a type of
‘deposit bank’, where the members would deposit currencies in the proportion of quotas allotted to
them (depending on size of their economy, openness etc).

- IMF will pay them a small interest rate for their deposits. And IMF would lend this money to a
member facing balance of payment crisis. To operationalize this mechanism, IMF would allot an
artificial currency / accounting unit called SDR to the members based on their deposits. (सभ्य देश
द्वारा जमा की गयी राशि के सामने उसे एक कृ त्रिम मुद्रा / लेखा इकाई दी जाती है, जिसे एसडीआर कहते है)

- Initially the price of SDR was fixed against the amount of gold but present mechanism:
Currency Basket Weight Exchange rate against $?
U.S. Dollar 43.38% $1=$1
Euro 29.31% 1.13
Chinese Yuan (Renminbi *added in 2015) 12.28% 6.7
Japanese Yen 7.59% And so on
Pound Sterling 8.09 And so on
- By applying a formula involving (weight * exchange rate), IMF will obtain value of 1 SDR = how
many dollars? Presently, 1 SDR = $1.40 = ₹ 98 (assuming $1 is trading @₹ 70).

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- SDR is called ‘Paper Gold’ because it’s merely an accounting entry or artificial currency, without
any gold involved. (इसकी पीछे कोई स्वर्ण नहीं है , के वल एक हिसाब किताब की एक प्रक्रिया है)
- SDR can be traded among the members, it can be converted into members’ currencies as per
above method & be used to settle their Balance of Payment Transactions / Crisis.
- If the BoP crisis is so big, that a country’s entire SDR quota exhausts, then member country may
borrow more SDR from IMF (and then convert it into dollar etc to pay off the import bill), but
eventually member will have to repay this loan to IMF with interest.
- Individual nations’ central Banks keep some of the SDR as Reserve Tranche Position (RTP):
What that means and how does that work is not important. # 🕰थोड़ा-पढ़ो-आगे-बढ़ो

😤 FAQ/MORAL Outrage: Why Indian Rupee currency is not in SDR formula?

ANS. IMF reviews the SDR formula’s currencies every five years -with two conditions
[A) Country must be among the Top exporter Nations.
[B) Country’s currency need to be “freely usable” (= capital account convertibility rules shd be
easy/liberal.).

32.5.1 💱👵🏽IMF SDR Formula weightage reforms 2022

🌷Latest weighting 🥀Previous weighting
U.S. Dollar 43.38%⬆️ 41.73%
Euro 29.31% 30.93%
Chinese Yuan (Renminbi *added in 2015) 12.28% ⬆️ 10.92%
Japanese Yen 7.59% 8.33%
Pound Sterling 7.44% 8.09%
Total 100% 100%

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Reason for reform: IMF directors felt this reform was needed based on international trade and
financial market developments from 2017 to 2021.

32.5.2 💱👵🏽
IMF Quota Reform
- 2016: The total SDR increased, and India’s quota was increased from 2.44% to 2.76%
- India is 8th largest quota holder after USA (~18%), Japan (~7%), China (~6%)... India (2.76%)
- 2021: IMF members approved adding extra $650 billion dollars worth of SDR to IMF. India’s
likely to get 2.76% of 650 billion = Approx. 17to18 billion dollars worth of SDR.

32.5.3 💱👵🏽
IMF Governors
- In IMF, a member’s voting power depends on his SDR quota.
- For India, this voting power is exercised by India’s Finance Minister – who acts as the ex-officio
Governor in IMF’s Board of Governors. (वित्त मंत्री होते है आईएमएफ के पदेन / पद के हिसाब से गवर्नर)
- If Finance Minister absent, then RBI Governor can vote as the Alternate Governor during the
IMF’s meetings. (वित्त मंत्री की गैरहाजरी मे वैकल्पिक गवर्नर के रूप में रिज़र्व बैंक के गवर्नर वोट देने जा सकते हैं)

🔠❓MCQ. Recently, which one of the following currencies has been proposed to be added to the basket of
IMF's SDR? (UPSC-Pre-2016) (A) Russian Rouble (B) South African Rand (C) Rupee(D) Renminbi

32.6 💱⛽️🤲 C URRENCY CONVERTIBILITY (मुद्रा परिवर्तनीयता)

Presently, India has managed floating exchange rate system wherein, currency exchange rate is
determined by the market forces of supply and demand, however, during high level of volatility RBI
will intervene to buy / sell ₹ or $ to stabilize the exchange rate.

- But if people are allowed to convert the local and foreign currency in an unrestricted manner →
so much volatility that RBI will not be able to manage. (अमर्यादित रूप से लोगों को मुद्रा परिवर्तित करने दी तो
विनिमय दर में इतनी भारी अस्थिरता होगी जिसे रिजर्व बैंक काबू नहीं कर पाएगा 😰)
- So, RBI puts certain restrictions on the convertibility of Indian rupee to foreign currency using
the powers conferred under
- Foreign Exchange Regulation Act, 1973 (FERA: विदेशी मुद्रा विनियमन अधिनियम)
- FERA was later replaced by Foreign Exchange Management Act, 1999 (FEMA: पुराने कानून
में मज़ा नहीं आ रहा था तो सरकार ने नया कानून बनाया- विदेशी मुद्रा प्रबं धन अधिनियम)

32.7 💱✋🐯RBI RESTRICTION ON CONVERTIBILITY OF RUPEE: रुपये की परिवर्तनीयता

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 💱🤲 Convertibility on Capital Account Transactions: पूं जी खाता लेनदेन पर
💱🤲 BoP → Capital Account → Borrowing → External commercial borrowing (ECB)
- बाहरी वाणिज्यिक उधार: RBI’s ECB ceiling is up to $1.50 billion (or equivalent other currency) per year
for Indian Companies. [भारतीय कं पनियां प्रतिवर्ष इस मात्रा से ज्यादा कर्ज विदेशों से नहीं ला सकती]
- That means even if Bank of America was willing to lend $3 billion to Reliance ltd, Mukesh
Ambani can’t bring all those dollars (or its converted rupee equivalent) in India.
- If he tries through illegal methods like Hawala, then Enforcement Directorate (ED प्रवर्तन निर्देशालय )
will take action for FEMA violation.

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 💱🤲 BoP → Capital Account → Investment → FPI
- An FPI can’t invest in more than 5% of available G-sec in the Indian market and more than 20%
of the available corporate bonds in the Indian market.
- So, even if Morgan Stanley or Franklin Templeton investment fund has billions of dollars they
can’t bring them all to India because of above restrictions.
- Similar restrictions on FDI as well. Govt decides FDI policy → RBI mandates the forex dealers
accordingly to convert or not convert foreign currency into Indian currency. E.g. Las Vegas’s
Flamingo Casino company can’t convert $ into ₹ to invest in Goa’s Casino (Because FDI
prohibited in Casino). If they manage to ‘smuggle’ rupees through Hawala / Mafia-don-walla
boats then again ED will take action for FEMA violation.
Thus, Indian rupee is not fully convertible on capital account transactions.

💱⛽️ 🎖 Convertibility on Current account transactions: चालू खाता लेनदेन पर

BoP → Current account → Trade → import (of Gold)

 During 2013 to 2014, RBI’s 80:20 norms mandated min.20% of the imported gold must be
exported back.
 Until then Jeweller/bullion dealers will not get permission to (convert their rupees into
dollars/foreign currency) to import next consignment of gold.
 However, if we disregard such few rare examples/restriction, Indian rupee is considered fully
convertible on current account transactions (i.e. Import and export, remittance, income transfer
gift and donations) since 1994. चालू खाता लेनदेन पर रुपये की परिवर्तनीयता सम्पूर्ण है।

32.7.1 💱🤲 Full convertibility of Rupee :रुपये की पूर्ण परिवर्तनीयता?

Meaning? India should permit unrestricted conversion of Indian ₹ to foreign currency for both
current account and capital account transactions. → more FDI investment in India → NPA
problem solved, new factories, jobs, GDP growth, rivers of honey and milk will flow.

😡Anti-Arguments:
 Before 1997, East Asian “Tiger” economies: (South Korea, Indonesia, Malaysia, Thailand,
Vietnam Philippines etc.) allowed full capital account convertibility to attract FDI.
 But 1997: Their automobile & steel companies filed bankruptcy → The foreign investors
panicked, sold their shares and bonds → got local currency → converted into $ and ran away.
The flight of this ‘HOT MONEY’ resulted into extreme depreciation of local currency $1 = 2000
Indonesian Rupiah → $1= 18,000 Indonesian Rupiah → heavy inflation in petrol diesel →

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 social unrest, riots and political instability. None of their central banks had enough forex reserve
to combat this crisis. (यदि भारत में इसकी अनुमति दी तो दक्षिण कोरिया और इंडोनेशिया जैसी समस्या हो सकती है)
 So, in 1998, their GDP growth rates fell in negative territory e.g. Indonesia (-13.7%) Because of
their mistake of allowing full currency convertibility. Whereas India and China grew at 6-8%
because we had not allowed it.

32.7.2 💱🤲 🕵️ ₹ ‍♂️Convertibility → S.S. Tarapore Committee (1997)

He suggested India to allow full Capital Account Convertibility (CAC) only when the fundamentals
of our economy become strong enough, such as: ( तारापुर समिति के हिसाब से यदि भारतीय अर्थतंत्र की बुनियाद
एकदम मजबूत हो जाए तो पूर्ण परिवर्तनीयता अनुमति की देनी चाहिए)

 RBI must have enough forex to sustain 6 months’ import

 Fiscal deficit must not be more than 3.5% of GDP
 Inflation must not be more than 3-5%
 Banks’ NPA must not be more than 5% of their total assets. And so forth. So, time is not yet ripe
for allowing full CAC.

🔠❓MCQ. Convertibility of rupee implies:(Asked in UPSC-Pre-2015)

(a) being able to convert rupee notes into gold.
(b) allowing the value of rupee to be fixed by market forces.
(c) freely permitting the conversion of rupee to other currencies and vice versa.
(d) developing an international market for currencies in India.

32.7.3 💱🤲 🐯 ₹ Convertibility → RBI reforms (2004-2019)

While RBI has not permitted full convertibility of Indian rupee (on Capital Account), but over the
years it has liberalised the norms, such as (पूर्ण रूप से छू ट तो नहीं दी, लेकिन उदारीकरण सरलीकरण किया है)

 2004 → Liberalised Remittance Scheme (LRS: उदारीकृ त विप्रेषण योजना) for each financial year, An
Indian resident (incl. minor) is allowed to take out upto $2,50,000 (or its equivalents in other
currencies) from India.
 He may use it for either current account or capital account transaction as per his wish. (e.g.
paying for college fees abroad, buying shares, bonds, properties, bank accounts abroad.)
 😰Controversy? Panama papers allege certain Bollywood celebrities used LRS window to shift
money from India in their shell companies in tax havens → later used those shell companies for
tax avoidance. [Ref: Black Money Handout for more]
 2016 onwards: RBI began relaxing the norms for External Commercial Borrowing (ECB),

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 Before-2016 2016 onwards 2022 onwards
ECB limit → more strict relaxed to $750 million per $1.50 billion per
company per year. company per year.
( ✋Although ECB is prohibited in certain categories e.g. purchase of farm house, tobacco, betting,
gambling, lottery etc. कु छ क्षेत्रो में विदेशी कर्ज लेने की मनाई)

32.7.4 💱🤲 🐯
FEMA Rules for Indian resident’s overseas investment (2022-Aug)
 No Indian resident can invest in foreign companies who are doing gambling biz or real estate biz.
 Wilful defaulters need to get a No Objection Certificate (NOC) from Indian authorities (RBI, ED
etc) before making any ‘financial commitment’ abroad (e.g. taking new loan from USA)
 plus many other technical things but not very IMP for Exam.

32.7.5 💳
(Prepaid) Forex Card?
e.g. HDFC Hajj Umrah Card (Saudi Riyal Currency)

• pay Rs.2.65 lakh to HDFC to get Prepaid Forex card worth 12000 Saudi Riyal balance.
• need not carry physical foreign currency to Saudi. Swipe the card for shopping in Saudi.

32.8 🍋🗽🗼🛍LRS: TCS ON FOREIGN: TRIP / SHOPPING / INVESTMENT (2023-OCT)

 Under the RBI’s LRS scheme, an individual can remit up to USD 2.5 lakh annually overseas
without approval of the RBI. (2.50 lakh Dollars= 2.07 crore Rupees; when 1Dollar=83Rs)
 Remittances beyond the USD 2.5 lakh or its equivalent in foreign currency require approval from
the RBI.
 If Indian resident spending money abroad, his banker/NBFC/Forex supplier in India is required
to collect TCS in following rates:
Foreign Payment Debit Card/ Forex Card/
Credit Card
Method Bank-transfer
No. Money spent via credit card is not Yes. Rates given below in next
TCS applicable
counted under LRS quota table: 👇

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32.8.1 🍋 TCS Rates from 1/October/2023
Type of transaction upto ₹7 lakh beyond ₹7 L
Foreign tour package, foreign shopping 5% 20%
overseas investments in foreign companies’ shares, bonds,
0% 20%
real estate etc.
Education / medical treatment 0% 5%
Any other purpose e.g. donation, pilgrimage, gifting etc. 0% 20%
Note: there are many terms-conditions here e.g. medical trip ke liye separate rules, education loans
ke liye separate TCS rules but we’re not for Chartered Accountant exam, basic is enough.

32.8.2 🍋 TCS on LRS: Objectives

 Discourage Indians from too much shopping abroad (because more foreign shopping = higher
CAD= not good for BoP/ exchange rate stability).
 Data surveillance on Tax evaders.
 Note: TCS is not additional tax. - it is adjusted against the income tax liability- just like TDS.
(Ref: Pillar#2A1 for more)

32.8.3 🍋🚩👶🏻 TCS FAQ by Zhande-walle Babushone:

I am putting FAQ here So even the other newcomers can train their brain ke how to not think like
Zhande-walle Babushone when studying economy– IF u really want to finish syllabus in time
🚩👶🏻 FAQ Ans.
bhai dhyaan se handout padho na.
TDS = when banker 'pays' you interest on your
in Pillar2A1 u said bankers cut TDS but here
deposits.
you're saying banker cut TCS!!!!!!???? WHY
TCS = when banker is 'selling' you foreign
currency / selling currency conversion services.
If I swipe debit card to pay seller 10 lakh rupees
abroad, how much money will be charged?
TDS gets 'cut' from payment.
Option: 8 lakh to seller + 2 lakh TCS = 10 lakh
TCS gets 'added' to the payment.
OR
So ans is Option-B, but not imp4exam.
OptionB: 10 lakh to seller + 2 lakh TCS = 12
lakh.
If tour package is 8 lakh then whole 8 lakh pe
show me one PYQ where UPSC asked such
20% or 7 lakh tak 5% and then remainder 1
faaltu-ki-real life / practical dilemmas.
lakh pe 20%?

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🚩👶🏻 FAQ Ans.
Notimp4Exam because govt did not explicitly
give official reason. My guess is
1. There was heavy social media outrage credit
Why foreign spending using Credit cards card users against TCS on credit card so perhaps
exempted from TCS? govt did not want to lose the voters among upper
middle class / elite people.
2. For CBDT, it is easy to trace credit card data,
EVEN without cutting TCS.
You’re making khichdi of concepts. Don’t mix
up photo frames pillar2A1 with Pillar 3. We are
here talking only about foreign spending. nd we
if I buy luxury car using credit card within
are not for Chartered Accountant exam. If
India, then TCS applicable?
something not explicitly mentioned in Press
statement or newspaper articles, I don’t search
for its answers.
I am finished with this topic. Mere ko maaf karo.
other 500 jaat ke doubts/FAQs on this matter?
थोड़ा-पढ़ो-आगे-बढ़ो. 🙏
32.9 ⚖️ FCRA A CT
Sr No. MATTER RULES/LAWS APPLICABLE→
1 is Indian sending money abroad for current Yes→FEMA Act→ LRS
account or capital account transactions? (liberalized remittance scheme)
2 is foreign money coming to India for Indian Yes→ FEMA Act
export earning payment, FDI/FPI etc financial
investment, ECB loans etc ?
3 is foreign money coming to India for matters Yes→ FCRA Act
other than cell#2. e.g. inward-donation, inward-
remittance to India etc.

32.9.1 FCRA on donations

1) Foreign Contribution Regulation Act 2010 (FCRA -विदेशी अंशदान विनियमन अधिनियम).
2) if NGO (Non-Governmental Organization) / Universities were allowed to accept foreign
donations in an unrestricted manner, they may become puppets of ISI / Pakistan / China / CIA.
3) So, Ministry of Home Affairs (MHA) requires them to ‘register’ and furnish annual reports.
4) Organizations who fail to comply with it, are prohibited from accepting foreign donations.
(भारत में काम कर रहे समाजसेवी सं स्थान/ यूनिवर्सिटी इत्यादि अगर विदेशों से चंदा लेते हैं तो उन्होंने गृह मंत्रालय से पंजीकरण करवाना
होता है और सालाना रिपोर्ट जमा करने होते हैं.)

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32.9.2 FCRA on remittance
BEFORE After 2022-reform
How much money can Indian receive from his relatives ₹1 lakh ₹10 lakhs
abroad without informing the authorities.
🤩Benefit? Ease of receiving foreign money without legal-paper-work → more $ to India→ prevents
more fall of rupee. (बिना सरकार को सूचित किए सालाना 10 लाख रुपये तक की रक़म विदेश में रहते अपने रिश्तेदारों से आप मँगवा
सकते हैं.)

32.10 💱⚔️C URRENCY WAR → FALL OF INDIAN ₹ & RBI’S RESPONSE

What does this mean? How does it work? Ans. Watch Video Lecture.

32.11 🐯 RBI'S CURRENCY SWAPS (मुद्रा स्वैप/अदलाबदली समझौता)

32.11.1 🐯 RBI’s Currency Swap Agreement with Japan (मुद्रा स्वैप/अदलाबदली समझौता)

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(img source: Taarak Mehta Ka Ooltah Chashmah)

e.g. Central banks of India and Japan signed Currency Swap Agreement of $75 billions i.e. either
party can use that much dollar currency from other party’s forex reserve during the crisis.

32.11.2 🐯 RBI Currency Swap with Indian Bankers

2022-March: RBI done $5 bn dollar-swap with Indian Bank/NBFCs to ⏫dollar supply in Indian
market, to prevent weakening of Rupee.

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FAQ: will this change in money supply - not cause XYZ problem- in inflation, loan interest rate
etc? Ans. look at one photo frame at a time. Do not make Birbal Khichdi unnecessarily.

32.11.3 Challenges to India’s BOP by ES22 and ES23

 📙📙ES22 has identified following challenges: 1) Fed Tapering: risks of global liquidity
tightening 2) Inflation in global commodity prices 3) high freight costs 4) Geo-political crisis in
Ukraine 5)
 Challenges to India’s BoP as per 📙ES23
 USA Fed Tapering impact on India→ 1) tightening of dollar supply 2) share market volatility 3)
outflow of FPI money (अमेरिकी फे ड टेपरिंग के चलते भारत में डॉलर आपूर्ति में तंगी/कटौती, एफपीआई का निकल भागना,
शेयर बाजार में गिरावट)
 Local Currency depreciation (स्थानीय मुद्रा का कमजोर होना)
 Slowdown in global growth and trade ( वैश्विक वृद्धि और व्यापार में मंदी)
 Inflation in global commodity prices and food prices ( वस्तु और खाद्य चीजों के वैश्विक दामों में महंगाई)
 Russia-Ukraine conflict and other geopolitical crisis. (भू-राजनीतिक सं कट)
 COVID-19 new variants.

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32.11.4 💸💰 Currency Exchange Rate → Attracting Dollars: VRR and FAR
Voluntary Retention Route (VRR: : स्वैच्छिक अवधारण मार्ग) and Fully Accessible Route (FAR: सम्पूर्णत: सुगम्य
मार्ग) are technical rules / systems of RBI to encourage foreigners to buy Indian companies’ Bonds and
Indian Govt’s G-Sec. how exactly they work? Ans. Technical stuff, NOT IMP for Exam. Just accept
and move to next topic.

🤩Benefit? Investors will convert $ & other foreign currency into ₹ to buy Bonds and G-Sec= more $
$ coming towards India = helps keeping BoP and currency exchange rate stable during crisis.

⏫⏬
Note: RBI frequently / in FPI investment quota/limits in G-sec, depending on how RBI wants
to shape bond-yield, flow of dollars & available quota of G-sec for local investors to play its repo &
OMO games. But that ball by ball chase is NOTIMP. वो सब पं चात हमारे काम की नहीं.

32.11.5 🐯🦁RBI-Govt’s measures to prevent fall of Rupee (2022-Jul-Aug)

 🐯RBI Exempts Foreigners’ deposits in Indian bank from CRR and SLR. This will encourage
bankers to offer attractive deposit interest rates to such clients → ⏫dollar flow → stable rupee /
prevent weakening of rupee (in the aftermath of US Fed Tapering). How? Ref this Video for
more: https://youtu.be/KoiXkAreWoA (विदेशीयो के द्बचत खातों पे भारतीय बेंको ने सीआरआर व एसएलआर नहि
निभाना होगा। ताकि उन खातों पर भारतीय बेंकर विदेशी व्यक्ति को ज़्यादा ब्याज-दर दे सके और विदेशी लोग आकर्षित होकर ढेर
सारा विदेशी धन भारत में लेकर आए।)
 🐯 (2) RBI increased with the limit of external commercial borrowings (ECB) from present 750
million dollars to to $1.5 billion per financial year.
 🐯 (3) RBI relax to the guidelines related to FPI investment in G-Sec and Bonds.
 🦁Govt: Foreign Contribution (Regulation) Act, 2010’s donation limits amended allowing
Indians to receive upto 10 lakh a year from their relatives abroad without informing the
authorities. (The previous limit was 1 lakh) (बिना सरकार को सूचित किए सालाना 10 लाख रुपये तक की रक़म विदेश
में रहते अपने रिश्तेदारों से आप मँगवा सकते हैं)
 🦁Govt: Customs duty on gold hiked to 12.5 per cent from 7.5 per cent to discourage imports.
(विदेशों से आयात होने वाले सोने पर लगने वाली सीमा शुल्क में बढ़ोतरी की गई है।)

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32.12 🤝💰R UPEE ROUBLE AGREEMENT

 2018-Dec: India signed pact with Iran to pay crude oil bill in rupee currency. National Iranian
Oil Co (NIOC) will open a bank account in India’s UCO Bank (a PSB). Indian oil companies will
make payments there in ₹ currency. Then Iran used this ₹ income to pay for Indian Tea & Rice
purchase → helps ⏬ the demand of dollars. (😰However later, due to American pressure, govt
of India stopped this arrangement).
 2022: Russian banks banned from the SWIFT messaging system that enables international
financial transactions. (Ref: Pillar1B2)
 So, Russia proposed “Rupee-rouble trade agreement”. (‘Rouble’ sometimes also spelled as
‘Ruble’. 1 Ruble = 100 kopeks. Just like ₹1= 100 paisa)
 In such agreement, India pays for Russian imports in rupee currency and then Russian
companies will use that money to import goods from India.
(भारत रूस से कच्चा तेल आयात करेगा तब भुगतान रुपया मुद्रा में करें → उन रुपयों से रूसी सरकारी कम्पनियां- भारत से अनाज-
दवाइयां इत्यादि ख़रीदे. रूस पर स्विफ़्ट वित्तीय सं देश प्रणाली की पाबं दियों के चलते वो एसा समझौता करने को बेताब है। एक ज़माने में
भारत ने ईरान के साथ भी कु छ ऐसा ही समझौता किया था।)

32.12.1 💸 Nostro Vostro Accounts- settlements with Russia and SriLanka

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 Picture is worth 1000 words. What it means? Explained in video.
 India has begun utilising such accounts for doing import from Russia, SriLanka, Malaysia etc.

32.12.2 💸Internationalisation of Indian rupee (भारतीय रुपये का अंतरराष्ट्रीयकरण )

CURRENCY SHARE IN GLOBAL FOREX RESERVES AS PER 📙ES23
US dollar (USD) 88%
Indian rupee (INR) 1.6%
Minimum % required to be 📙
4% (as per ES23) (अलग-अलग देशों के कें द्रीय बैंक के फॉरेक्स आपूर्ति
called ‘international currency’ भं डारों में, जब न्यूनतम/कम से कम 4% जत्था भारतीय रुपए का होगा- तब भारतीय
मुद्रा का अंतरराष्ट्रीय करण हो चुका है ऐसा माना जाएगा।)
Internationalization means increasing the use of Rupee for current & capital transactions, and in
forex reserve of other nations. (चालू खाते पूंजी खाते, व् अन्य देशों के फोरेक्स भं डारों में रुपए का चलन बढ़ाना)

😍 Benefit (फ़ायदे) 😰 Challenges (चुनौतियां)

reduces the dependence of dollars India does not have enough export products that attract
& currency exchange rate Russians. So, once Ukraine war is over, Russians will not do
volatility (डॉलर पर निर्भरता तथा विनिमय such deals. India need to increase Quality and variety of its
दर की अस्थिरता कम करेगा) exports.
[रूसियों को पसं द है ऐसी बहुत सारी चीज़ें भारत बनाता नहीं इसलिए यूक्रे न युद्ध ख़त्म
होने के बाद हो सकता है रूसी हमारे साथ ऐसा समझौता रद्द कर दे]
reduces the danger of “imported if Russian Exporter uses his rupee payment to invest in

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 😍 Benefit (फ़ायदे) 😰 Challenges (चुनौतियां)
inflation” that happened with Indian share market….but when/IF he suddenly quits by
expensive dollar → expensive panic-selling those shares, it’ll crash Indian sharemarket. [रूसी
petrol. (डॉलर महँगा होने पर भारत में पेट्रोल निर्यातक जिसे भारतीय रुपये में पैसा मिला है वह उन्हें रुपयों को भारतीय शेयर बाज़ार
महँगा हो जाता है उस आयातित महँगाई के में निवेश करेगा। लेकिन जब एक दिन वो अचानक से उन शेयर्स को पानी के भाव बैच
ख़तरे को कम करेगा) के भाग जाएगा, तब भारतीय शेयर बाज़ार गिर सकता है]
reduces India’s vulnerability to Increases India’s vulnerability to how Russian/Sri Lankan,
global-shocks like US Fed Non-Indian exporters/investors react to such global
Tapering/ Taper Tantrum (अमेरिकी situations. (विदेशी निर्यातक जिन्हें भारतीय रुपया में पैसा मिला है वह वैश्विक
फे ड टैपरिंग जैसी वैश्विक घटनाओं में भारत की घटनाओं पर कै से वर्तन करते हैं उस पर भारत की भैद्यता बढ़ेगी)
भैद्यता को कम करेगा)
😄Some more benefits?
 😄makes it easier for India to trade with countries that are banned by USA and western powers /
SWIFT messaging system e.g. Russia, Iran. [अमेरिकी और पश्चिमी महासत्ताओं ने रूस ईरान जैसे देशों पर जो पाबं दियां
लगायी है उसके बावजूद भी भारत उन बहिष्कृ त देशों के साथ व्यापार आसानी से कर पाएगा।]
 😄reduces the cost of doing business because Indian businessmen does not have to pay
fees/commission to forex agent for converting rupee currency into dollars. [विदेशी मुद्रा परिवर्तित करने
वाले एजेंट को फ़ीस नहीं देनी होगी, इसलिए धंधा करने की लागत ख़र्च कम होगी]
✍️Conclusion: There are risks but they are unavoidable if India wants to be an ‘Atma-Nirbhar’
economic superpower.

32.12.3 💱⚔️🐼💪🏻 Yuan as global currency?

 2015: Yuan added in SDR basket of currency. → It ⏫acceptance of Yuan in global economy.
 China is also loaning Yuan to other nations for infra. development in One Belt One Road
Initiative (OBOR: एक क्षेत्र एक मार्ग पहल), via AIIB and BRICS bank, and even via Panda Bonds.
 In future, China may have to be less dependent on dollar$ while importing oil, missiles, metal
and food commodities- as other nations begin to happily accept Yuan.
 Such Yuan dominance may pose strategic challenges to USA and India.

32.12.4 💱💪🏻
Dollar- the Global Currency & ”DE-Dollarization”? (वैश्विक-आरक्षित-मुद्रा)
 Foreign exchange reserves of 150 nations- internal composition is: 55% US dollars, 30% euros,
2% Yuan (Renminbi, Chinese currency) and 13% Misc. other currencies. That shows majority of
the nations keep large % of their forex reserve in US dollar. विश्व के ज़्यादातर देशों के विदेशी आरक्षित निधि
कोष मैं बहुतायत रूप से डॉलर मुद्रा में इन पैसों को रखा जाता है।
 Thus US dollar is presently the “Global Reserve Currency”. (डॉलर को वैश्विक-आरक्षित-मुद्रा माना जाता है।)
 “de-dollarisation” = Attempts to ⏬ the domination of $ in forex reserve and in international
transactions. e.g. 2021: Russian Central Bank reduced dollar-denominated assets to 16% in its

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 forex reserve. (विदेशी मुद्रा भं डार में तथा अंतर्राष्ट्रीय लेनदेन में अमरीकी डॉलर का प्रभुत्व कम करना)
 Can Indian rupee become global reserve currency? Ans. In a very long future yes if, India adopts
full capital account convertibility, keeps inflation, fiscal deficit, currency exchange rates under
control and becomes a sizeable exporter and global economic superpower. (रुपया-मुद्रा ऐसा दर्जा हासिल
करेंगी जब यदि पूँजी-खाते में सं पूर्ण रूप से परिवर्तनीयता दी जाए, महँगाई क़ाबू में रहे, राजकोषीय घाटा क़ाबू में रहे, मुद्रा विनिमय दर
क़ाबू में रहे, और भारत एक बड़ा निर्यातक और आर्थिक महासत्ता बनकर दिखाए- तो फिर एसा हो सकता हे।)

32.13 💱⚔️ M ISC. CONCEPTS: QUANTITATIVE EASING AND FEDERAL TAPERING

 2007-08: Subprime crisis in USA → Borrowers unable to repay home loans → American Banks
NBFCs’ bad loans / NPA / toxic assets increased → to help them, US Federal Reserve printed
new dollars & used $ to buy those toxic assets/bonds (also known as mortgage-backed securities
(MBS) → ⏫ dollar supply in the system. Known as “Quantitative Easing (मात्रात्मक आसानी)”.
 2013: American Central Bank (US Federal Reserve) gradually cut down its toxic asset
purchasing program → less quantity of dollars issued → called “Fed Tapering (सं घीय टेपिंग)”.

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 Result?= (perceived) shortage of dollars in USA → Loans% become more expensive in USA→
American investors began selling shares/bonds in other countries, and took their dollars back to
USA (to lend to local businessmen). This phenomenon was called “Taper Tantrum”. It resulted
into weakening of other currencies against USD. [गैर अमेरिकी देशों की मुद्राएं बहुत कमजोर हो गई थी]

 2020: During Corona, American Central Bank again started purchase of Bonds to increase
money supply in market. (कोरोना में अर्थतंत्र को पुनर्जीवित करने के लिए वापस ये तमाशा शुरू किया था)
 Then what happened? Is explained in above chart, also in Pillar1A2 (MonPolicy) and 1C

32.13.1 🔪🔪🥵 Strong dollars squeezes global credit

मजबूत डॉलर से वैश्विक कर्ज उपलब्धता को निचोड़ के रख देता है

🔠 MCQ. Statement I: A very strong US Dollar squeezes global credit. (UPSC-EPFO-2023)

Statement II: Many countries and companies outside America borrow in Dollars.
(a) Both statement I and II are correct and statement II is the correct explanation for I
(b) Both statement I and II are correct and statement II is not the correct explanation for statement I
(c) Statement I is correct but II is incorrect (d) Statement I is incorrect but II is correct

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32.13.2 💱⚔️ Misc. Concepts: Helicopter Money & Zero interest rate regimes

🔠❓MCQ. Find Correct Statements (Prelims-2022)

1. Tight monetary policy of US Federal Reserve could lead to capital flight. (अमरीका में सं कु चन वादी मौद्रिक नीति के
चलते भारत में से पूं जी का गमन हो सकता है)
2. Capital flight may increase the interest cost of firms with existing External Commercial Borrowings
(ECBs). (पूं जी गमन के चलते जिन कं पनियों ने विदेशी वाणिज्यिक कर लिया है उनके ब्याज का ख़र्चा बढ़ सकता है)
3. Devaluation of domestic currency decreases the currency risk associated with ECBs. (स्थानीय मुद्रा को कमज़ोर
करने से विदेशी वाणिज्यिक कर्ज़ के साथ जुड़े मुद्रा जोखिम कम हो सकते हैं )
Codes: (a) 1 and 2 only (b) 2 and 3 only. (c) 1 and 3 only. (d) 1, 2 and 3

🔠❓MCQ. In the context of India, which of the following factors are contributors to reducing the risk of a
currency crisis? ( Prelims-2019)
1. The foreign currency earnings of India’s IT sector.
2. Increasing the government expenditure.
3. Remittances from Indians abroad.
Answer Codes: (a) 1 only (b) 1 and 3 only (c) 2 only (d) 1,2 and 3 only

🔠❓MCQ. Which one of the following is not the most likely measure the Government/RBI takes to stop the
slide of Indian rupee? (Prelims-2019)
(a) Curbing imports of non-essential goods and promoting exports
(b) Encouraging Indian borrowers to issue rupee denominated Masala bonds
(c) Easing conditions relating to external commercial borrowing

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(d) Following an expansionary monetary policy

🔠❓MCQ. The price of any currency in international market is decided by: (Pre-2012)
1. The World Bank.
2. Demand for goods/services provided by the country concerned.
3. Stability of the government of the concerned country. [उस देश में सरकार की स्थिरता]
4. Economic potential of the country in question. [उस देश की आर्थिक क्षमता]
Answer codes: (a) 1, 2, 3 and 4 (b) 2 and 3 (c) 3 and 4 (d) 1 and 4

🔠❓MCQ. If another global financial crisis happens in the near future, which of the following
actions/policies are most likely to give some immunity to India? (Prelims-2020)
1. Not depending on short-term foreign borrowings [लघु अवधि के विदेशी कर्ज पर निर्भर न रहा जाए]
2. Opening up to more foreign banks [अधिक विदेशी बैंको को शाखाएँ खुलने दी जाए]
3. Maintaining full capital account convertibility [पूंजी खाते पर पूर्ण रूप से परिवर्तनशीलता]
Codes: [a) 1 only [b) 1 and 2 only [c) 3 only [d) 1, 2 and 3

🔠❓MCQ. Consider the following actions which the Government can take: (Prelims-2011)
1. Devaluing the domestic currency. [देसी मुद्रा को कमजोर करें]
2. Reduction in the export subsidy. [निर्यात-सब्सिडी कम करें]
3. Adopting suitable policies to attract greater FDI and Flls. [विदेशी निवेश को बढ़ोतरी दें]
Which of the above can help in reducing the current account deficit?
Codes: A) 1 and 2 B) 2 and 3 C) 3 only D) 1 and 3

🔠❓The effect of devaluation of a currency is that it necessarily _ _ _ . [Pre-2021]

1. improves the competitiveness of the domestic exports in the foreign markets
2. increases the foreign value of domestic currency [स्थानिक मुद्रा के विदेशी मूल्य में बढ़ोतरी होगी]
3. improves the trade balance [व्यापार सं तुलन बेहतर होगा]
Codes: a) 1 Only b) 1 and 2 c) 3 Only d) 2 and 3

32.14 💱E XCHANGE RATE → MISCELLANEOUS TERMINOLOGIES

💱
32.14.1 NEER and REER? (Hindi not imp because only prelim relevant)
In real life we are not just trading with USA but other countries, using foreign currencies other than
US dollars (Euro, Pound, Yen, Yuan etc).

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 Therefore, only tracking $1=60, $1=70 will not give a full picture. So, RBI also calculates
geometric average of rupee’s exchange rate against upto 36 types of foreign currencies. The
formula will give weightage to each of those 36 foreign currencies depending on their trade-
volume with India.

 The result is called “Nominal effective exchange rate (NEER)”.

 When NEER is mathematically adjusted as per the CPI-inflation price-levels in India and those
foreign countries, it’s called “Real effective exchange rate (REER)”.

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 REER interpreted as the quantity of domestic goods required to purchase one unit of a given
basket of foreign goods, says NCERT.

 NEER vs REER values help finding whether a currency is really weakening (depreciating) against
foreign currencies or not, thus helps to know our international competitiveness in exports.
 For example: REER ⏬ = foreigners will find our export prices attractive. REER⏫ = foreigners
will find our export prices less attractive. Says 📔📔ES20. How?NotIMP
 2018’s analysis reveals that though Indian rupee weakened against dollar $1=₹ 63 → ₹ 74, but
rupee has not so greatly weakened against other foreign currencies.
NEER EXCHANGE RATE PERCENTAGE CHANGE as per ES23 📙
USD (NEER) +7.8%
INR (NEER) -4.8%
📙
So, ES23 said: it is not that the INR has weakened, but it is the US dollar that has strengthened.
(ऐसा नहीं है कि भारत का रुपया कमजोर हुआ है बल्कि डॉलर मजबूत हुआ है यह कहना उचित होगा)

🔠❓MCQ. Find Correct Statements (Prelims-2022)

1. An increase in Nominal Effective Exchange Rate (NEER) indicates the appreciation of rupee. (नीर
बढ़ा तो मतलब यह पैसा मज़बूत हुआ)
2. An increase in the Real Effective Exchange Rate (REER) indicates an improvement in trade
competitiveness. (रिर बढ़ा तो मतलब है विश्व व्यापार प्रतिस्पर्धा (में भारतीय उत्पादों की) स्थिति बेहतर हुई)
3. An increasing trend in domestic inflation relative to inflation in other countries is likely to cause
an increasing divergence between NEER and REER. (यदि भारत में अन्य देशों के मुक़ाबले महँगाई बढ़ेगी तो के

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 नीर-रिर के बीच ज़्यादा खाई दिखेगी)
Codes: (a) 1 and 2 only (b) 2 and 3 only (c) 1 and 3 only (d) 1, 2 and 3

32.14.2 🧨 Afghan Currency is the Best Performing Currency in the world? (2023)

32.14.3 💱 Purchasing Power Parity: क्रय शक्ति समता (PPP)

 Hypothetical concept that tries to compare two currencies’ exchange rate through their
purchasing power in respective countries. (एक समान वस्तुएँ ख़रीदने के ख़र्च के अनुपात में विनिमय दर)
 So, If 1 cup of coffee in India = ₹ 20 whereas 1 cup of coffee costs $2 in USA then Dollar to Rupee

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 exchange rate (PPP) should be $1 = ₹ 10. (According to OECD: exact figure is $1=₹ 17@PPP).
 This (hypothetical) exchange rate can happen in real life, if both the countries have Floating
Exchange Rate without any intervention of the respective Central banks; and if the bilateral
trade is free of protectionism (= without tariff or non-tariff barriers).
 GDP is the total market value of all goods and services produced in a country within a year.
When we convert these GDP values from local currencies into PPP $ exchange rates, the largest
economies of the world (GDP, PPP wise) are 1) USA 2) China 3) India 4) Japan 5) Germany
Big Mac Index  The Economist magazine’s informal index to measure PPP exchange rate using
the price of one McDonald burger in USA vs the respective country.
Twin Deficit  It’s the term used when both Current Account Deficit and Fiscal Deficit are
दोहरा घाटा high : चालू खाता घाटा और राजकोषीय घाटा
🔠❓MCQ. Find correct statement(s) (UPSC-Prelims-2020)
1. Purchasing Power Parity (PPP) exchange rates are calculated by the prices of the same basket of
goods and services in different countries.
2. In terms of PPP dollars, India is the sixth largest economy in the world.
Codes: (a) 1 only (b) 2 only (c) Both 1 and 2(d) Neither 1 nor 2

32.14.4 ✍ 🏻🎺 Mock Questions for Mains:

Centered around the themes of – measures taken by government/RBI to reduce current account
deficit, stabilise the rupee exchange rate, reforms taken in the FDI and its implications. Etc They’re
shifted to the Mains Handout.

📑Next HDT: Pillar3C: WTO & other International Economic Orgs, Trade
Agreements, Protectionism and burning issues.

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