Daily Quiz: UPSC Prelims Marathon (Economy) – September 22, 2020

India will hold annual mega shopping festivals in four places starting March 2020 on four themes — Gems and Jewellery, handicrafts/yoga/tourism, textiles, and leather.

The effective tax rate is the average tax rate paid by an individual or a corporation.

• The effective tax rate for individuals is the average rate at which their earned income, such as wages, and unearned income, such as stock dividends, is taxed.
• The effective tax rate for a corporation is the average rate at which its pre-tax profits are taxed, while the statutory tax rate is the legal percentage established by law.
• The effective tax rate is a more accurate representation of a person’s or corporations overall tax liability than their marginal tax rate, and it is typically lower.
• When considering a marginal versus an effective tax rate, bear in mind that the marginal tax rate refers to the highest tax bracket into which their income falls.

Finance Minister Nirmala Sitharaman announced a significant cut in corporate tax rates, thus bringing down the effective tax rate (including various cesses and surcharges) on corporations from 35% to 25%.

• Also under the new corporate tax policy, new companies that set up manufacturing facilities in India starting in October and commence production before the end of March, 2023 will be taxed at an effective rate of 17%.
• Following the government’s decision, both the NIFTY and the SENSEX rose over 5%, which is their biggest one-day rise in a decade.
• Tax cuts, by putting more money in the hands of the private sector, can offer people more incentive to produce and contribute to the economy. Thus the present tax cut can help the wider economy grow.
• The corporate tax rate, it is worth noting, is also a major determinant of how investors allocate capital across various economies.
• So there is constant pressure on governments across the world to offer the lowest tax rates in order to attract investors.
• The present cut in taxes can make India more competitive on the global stage by making Indian corporate tax rates comparable to that of rates in East Asia.
• The tax cut, however, is expected to cause a yearly revenue loss of ₹1.45 lakh crore to the government which is struggling to meet its fiscal deficit target.
• At the same time, if it manages to sufficiently revive the economy, the present tax cut can help boost tax collections and compensate for the loss of revenue.

The SIDBI Assistance to Facilitate Emergency response against Corona virus – SAFE PLUS will be offered collateral free and disbursed within 48 hours.

• SIDBI informed that the loans will be offered at an interest rate of five per cent.
• Meanwhile, the bank further informed that the limit of SAFE loans, announced a few days back has been enhanced from 50 lakh rupees to two crore rupees.
• The scheme was launched to provide financial assistance to MSMEs engaged in manufacturing of hand sanitizers, masks, gloves, head gear, bodysuits, shoe-covers, ventilators and goggles used in dealing with COVID-19.

LTRO is a tool that lets banks borrow one to three-year funds from the central bank at the repo rate, by providing government securities with similar or higher tenure as collateral.

• This helps banks get funds for a longer duration as compared to the short-term (up to 28 days) liquidity provided by the RBI through other tools such as Liquidity Adjustment Facility (LAF) and Marginal Standing Facility (MSF).
• It is called ‘Targeted’ LTRO as in this case, the central bank wants banks opting for funds under this option to be specifically invested in investment-grade corporate debt
• LTROs provide banks with access to cheaper capital from the RBI.
• This, in turn, encourages them to lend more and spur economic activity. They can also invest these long-term funds in assets that yield better returns to improve profitability.
• Also, as banks provide government securities as collateral, the demand for such government bonds increases and helps in lowering yield.
• RBI stipulated that small and mid-sized NBFCs and micro-finance institutions (MFIs) should receive at least 50% of these funds.
• Banks can avail ₹ 50,000 crore through the targeted long-term repo operation

Recently, the Telangana Chief Minister suggested that the helicopter money can help states to come out of the economic chaos created by Covid-19 pandemic.

• Helicopter money is an unconventional monetary policy tool, which involves printing large sums of money and distributing it to the public, to stimulate the economy during a recession (decline in general economic activity) or when interest rates fall to zero.
• The term was coined by American economist Milton Friedman; it basically denotes a helicopter dropping money from the sky.

Under Priority Sector Lending (PSL) guidelines, banks have to set aside a specific portion of bank lending to sectors deemed important by the central bank.

The following are the categories listed by RBI under PSL:

• Agriculture
• Micro, Small and Medium Enterprises
• Export Credit
• Education
• Housing
• Social Infrastructure
• Renewable Energy

In 1996 it was decided to allow the establishment of local banks in the private sector.

• These banks were expected to bridge the gaps in credit availability and enhance the institutional credit framework in the rural and semi-urban areas and provide efficient and competitive financial intermediation services in their area of operation.
• The minimum start-up capital of a LAB was fixed at Rs.5 crore.
• The promoters of these banks were required to bring in the entire minimum share capital up-front.
• It was also decided that a family among the promoter group could hold equity not exceeding 40% of the capital.
• The NRI contributions to the equity of the bank were not to exceed 40% of the paid-up capital.
• The entire initial capital subscribed by the promoters (including their friends and relatives/associates) would carry a lock in period of three years from the date of licensing of the bank.
• Further, the promoters’ equity to the extent of 40% of the initial paid- up capital was to be locked in at least for two years beyond the aforesaid period of three years subject to review before expiry of five years from the date of licensing of the bank.
• The promoters of a LAB could be individuals, corporate entities and societies. The number of NRI promoters was not to exceed 20% of the total number of promoters.

The economic profile of India was in complete distress at the time of Independence.

• Being a typical case of colonial economy, India was serving a purpose of development not for herself but for a foreign land—the United Kingdom.
• Both agriculture and industry were having structural distortions while the state was playing not even a marginal role.
• During the half century before India became independent, the world was having accelerated development and expansion in its agriculture and industry on the shoulders of the active role being played by the states, with the same happening in the UK itself.
• There was not only the unilateral transfer of investible capital to Britain by the colonial state (the ‘drain of wealth’), but the unequal exchange was day by day crippling India’s commerce, trade and the thriving handloom industry, too.

Wholesale Price Index (WPI) measures the average change in the prices of commodities for bulk sale at the level of early stage of transactions.

The index basket of the WPI covers commodities falling under the three major groups namely Primary Articles, Fuel and Power and Manufactured products. (The index basket of the present 2011-12 series has a total of 697items including 117 items for Primary Articles, 16 items for Fuel & Power and 564 items for Manufactured Products.)