Answered: Mains Marathon – UPSC Mains Current Affairs Questions – July 31

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1. Financial sector is backbone of the Indian economy. Discuss the factors affecting financial system of India. Suggest solutions to improve the financial sector in India.(GS 3)

The Hindu | Link

Factors affecting financial system in India :-

• The inability of banks to quickly enforce security and access to collateral, and the capital constraints in recognizing large loan losses.
• Volatility in global commodity prices has had a major impact on Indian companies. This has led to non-performing loans and provisioning for credit losses becoming a key area of concern for the Indian financial system.
• Multiple regulators and their overlapping functions.
• Lack of Autonomy
• Financial Literacy:
  • Indian masses are still finding it difficult to understand the technicalities of the market.
• Financial Inclusion:
  • Still significant portion of population is outside the banking net.
• Obsolete & Complex laws:
  • Financial sector is still carrying the legacy of British rule such As RBI still functions based on RBI act 1934 , Banking Rules ,1949
    Lack of Vibrant Bond Market in India causing adverse impact.
• Growing NPA challenge & Chakravyuh challenge due to global slowdown.
• People not ready to invest their savings in equity and bond markets, which provides good boost to our companies.
• Despite the absolute size of the insurance sector, penetration in this sector leaves much to be desired.

Solutions to improve financial sector in India :-

• Reducing the fiscal deficit, to reduce the risk of macroeconomic instability and to increase the availability of finance to the private sector
• improving the legal, regulatory and supervisory frameworks, in order to improve banks’ credit and risk management
• improving systems for dealing with weak banks
• developing capital markets further. Expansion of Bond markets , Masala Bond is a good step towards this.
• developing pensions and insurance to increase finance for long term investments, including infrastructure
• improving financial services to improve the welfare of customers and meet the challenge of globalization of financial services
• managing links to external capital markets.
• Financial Regulators should be given autonomy to flourish the sector
• Financial Literacy should be promoted. PMDISHA, VISAKA, FLCC  need to be implemented effectively.
• Jan dhan Yojana , Payment Bank, JAM trinity to achieve financial inclusion and efficiency,
• Implemention of SaiKrishna committee recommendation for UFC (uniform financial code)
• Implementation of HR khan committee for bond market
• Implementation of RBI initiated prompt corrective actions recently.
• The banks and financial institutions should adopt uniform accounting practices. This is particularly required with regard to income recognition and provisioning against doubtful debts. Valuation of investments should be done on the lines suggested by Ghosh Committee on financial accounts
• The balance sheets of banks and financial institutions should be made transparent. Full disclosure be made as per international accounting standards committee norms. This may be done after implementing income recognition and provisioning norms.

2. Doklam,  like other recent stand-offs inDepsang or Demchok, is not about a road: It is is a message about China’s ire at India building alliances with its adversaries in Asia, and with the United States. Critically examine. (GS 2)

Indian Express

There have been many instances recently which show that the doklam issue might be because of China’s insecurities about India’s building alliances because of various factors like:-

• China was strongly concerned with the trination Malabar exercise of India,US,Japan .
• In the south China dispute India supported Phillipines and China is irked by it.
• The relations with US with respect to defence and trade has improved and The pursuit of pivot of Asia policy by US trying to contain China is on track.
  • India-US became major defence partner & signed DTTI , LEMOA
• India – Vietnam Brahmos Deal , and deal regarding mining of natural resources.
• Asia- Afrcia growth corridor by India and Japan to Counter BRI.
• Indian Ocean National Symposium and IORA to maintain strategic balance in Indian Ocean region
• On the other front , India signing Civil nuclear deal with many countries without being part of NSG inspite China holding NSG entry
• The visit of Dalai Lama to India, India’s relations with Taiwan did not go down well for China.

Apart from these reasons there are other reasons as well :-

• China’s aggressive nature is already visible in the south China sea disputed  but this issue might be because of India’s complacence with respect to not being part of OBOR.
• Experts say that for the first time ever, India is militarily engaging a state actor  from the soil of a third country. This is a leap into the unknown.
• It is militarily intervening on behalf of a friendly partner country to uphold the latter’s claims of sovereignty to a patch of territory which the partner country does not effectively control.
• The China-India-Bhutan is not the only unresolved tri-junction along India’s northern frontier. Payback in the same coin could be highly unpalatable for India.

The Doklam issue is a complex issue with three countries involved so the respective governments must ensure that every step it takes is in consultation with Bhutan and make it clear that any final decision it takes will not be about a “win or lose” for India, but dictated by what is in Bhutan’s best interests. Both India and China should let go of past baggage and demarcate the boundary so that border disputes do not affect their bilateral relations altogether.

3. Examine the impact of tax evasion on Indian economy. Discuss the measures taken by the government to tackle tax evasion in India.(GS 3)

The Hindu | TOI

Introduction :-

• Tax evasion is the deliberate, misrepresentation or concealment of the true state of their affairs to the tax authorities to reduce their tax liability or to avoid the tax liability by declaring less incomes, profits or gains than actually what they earned or overstating their expenses.
• Thus tax evasion is not a problem in development of country but also harmful for the country.

Impact of tax evasion on Indian economy :-

• Less Tax for the Government:
  • Many times, the Indian Government has failed to collect the estimated amount of tax from the people because of tax evasion.
• Rise in Black money which causes the following impact:
  • Uncontrollable Inflation:
    • When black money is out in the market, the amount of money in the system is higher than the Government expects. This causes the prices of commodities to increase to a level beyond normal.
  • Leads to Mass Poverty:
    • The distribution of wealth and income in our country has been severely affected by the growth of underground economy.
  • Lack of Technology:
    • Due to the existence of black money, India is facing the problem of shortage of capital. This has the direct impact on the up gradation of technology in all sectors.
  • Impact on Growth by moving investments on Gold, Stones and Jewellery:
    • People who are looking to turn black money into white money are largely investing in precious metals like Gold and other jewelry. This flow of underground money has caused Indian economy to stall on its growth.
  • Corruption:
    • While corruption creates black money in the economy, it can also be a result of the growing underground market
  • Inflated Real Estate:
    • When people with deep pockets are ready to pay more for a piece of land, the price of surrounding land also tends to increase; thus artificially inflating the prices of an entire area.
  • Transfer of Indian Funds Abroad to Safe Heavens:
    • The black money generated in India is kept in foreign tax havens.
  • Encourages Anti-Social Activity:
  • Black money is always promoting anti-social activities in the society. The anti-social effects of black money include activities like terrorism, a huge threat already to our country.
• Tax evasion has been causing reduction in country’s economic growth
• Increase in prices of land and houses
• Tax evasion leads to poor standards of living of the rural masses and the people BPL as the government cannot undertake welfare measures at the national
• It also brings disequilibrium in the economic condition of the country resulting in the rich becoming richer and the poor becoming poorer.
• Due to tax evasion of majority of the rich population, the government is forced to increase the rates of tax every assessment year for increasing its revenue which results in increased tax burden of those who pay taxes
• Majority of the developmental activities do not take place due to tax evasion.

Measures taken to tackle tax evasion :-

• Recently  Union budget 2017-18 has unveiled several measures to check tax evasion and promote compliance. These include:
  • penalties for delayed or wrong filing of tax returns
  • bringing more entities under the mandatory filing net
  • making tax deducted at source at 5% mandatory for house rent payments to landlords exceeding Rs50,000 a month
  • expanding the powers of survey of taxmen to allow reopening of past returns of up to 10 years in cases where search operations disclose unaccounted wealth over Rs50 lakh.
  • The budget also proposes to make professionals like chartered accountants accountable and widen the scope of anti-abuse provisions related to receiving money or property without any consideration.
• recent step like registration and filing on the GSTN is a step in that direction.
• Reducing tax rates: Finance Act,2017 brought down corporate tax rate from 30-25% for certain threshold, promises to bring it down even further. Reorganizes slabs for individuals, also increases scope for deductions.
• Income Deceleration Scheme and PM Garib Kalyan Yojana- disclosure with monetary penalty, no further scrutiny.
• Demonetization- To bring black money back in the system, account for it and pay taxes.
• Enforcing General Anti Avoidance Rules as part of OECD’s BEPS projects to take action on entities established with the sole intention of saving taxes.
• Financial Action task force to increase cooperation and exchange of information with countries like US.
• Amendment in DTAA treaties, laying down stricter norms for FDI inflow.
• linking of pan with Aadhar.

Measures further needed are :- (EXTRA)

• Simplified Tax Laws and procedures:
  • The Indian Tax System has been bombarded with many complex and cumbersome procedures as compared with the tax system of the world economies. This issue must be resolved as early as possible as it invokes a positive response.
• Increased awareness among the taxpayers:
  • Proper measures must be ensured at various levels to educate the taxpayers about the importance of tax as a major source of revenue to the government through various seminars and conferences through media.
• Corruption free officials and taxpayers:
  • People also resort to bribery to evade tax i.e they bribe the tax officials to reduce or evade tax completely. This practice must be stopped and both the parties must not resort to this illegal practice.
• Stronger penalties for non compliance:
  • The penalties for non compliance of the tax procedures must be made stronger in addition to which it must also be ensured that these penalties are properly implemented.
• Sense of responsibility among the taxpayers :
  • The taxpayers must also realize that compliance with the tax procedures are crucial for the overall development of the economy and must develop a sense of responsibility that the non compliance of these procedures are detrimental to their individual growth as well.
• Use of Media :
  • Tax laws should permit wide publicity through media regarding persons found guilty of tax evasion irrespective of their power, position and status in the society.