Daily Quiz: UPSC Prelims Marathon (Economy) – July 7, 2020

The Balance of Payments and International Investment Position Manual (BPM6) of the International Monetary Fund (IMF) defines the Balance of Payments (BoP) as a statistical statement that summarizes economic transactions between residents and non-residents during a specific time period.

The BoP, thus, includes all transactions showing:

• transactions in goods, services and income between an economy and the rest of the world,
• changes of ownership and other changes in that economy’s monetary gold, special drawing rights (SDRs), and financial claims on and liabilities to the rest of the world, and
• Unrequited transfers.

These transactions are categorized into

• The “current account” including “goods and services”, the “primary income”, and the “secondary income”,
• The “capital account”, and
• The “financial account”.

The chequered history of evolution, developments, transformations and coming of age of the Directorate General of Commercial Intelligence And Statistics (Ministry of Commerce and Industry) has been a mammoth exercise spread over a span of one hundred and forty years and carried out under the stewardship of capable and pragmatic visionaries.

• The Organization traces its origin to a statistical branch established in the Finance Department of the Government of India way back in 1862. Sir William W. Hunter was the first DG of the DGCI & S or the Director General of Statistics as he was designated, back in 1871.
• The DGCI&S compiles and releases monthly export & import data on merchandise trade.
• It also compiles and releases yearly data on inter-state movement of goods in India by river, rail & air; customs & excise revenue collections of the Indian union, inland coasting trade consignments of India and foreign coastal cargo movements of India.

Directorate General of Foreign Trade (DGFT) organization is an attached office of the Ministry of Commerce and Industry and is headed by Director General of Foreign Trade.

• Right from its inception till 1991, when liberalization in the economic policies of the Government took place, this organization has been essentially involved in the regulation and promotion of foreign trade through regulation.
• Keeping in line with liberalization and globalization and the overall objective of increasing of exports, DGFT has since been assigned the role of “facilitator”.
• The shift was from prohibition and control of imports/exports to promotion and facilitation of exports/imports, keeping in view the interests of the country.
• This Directorate, with headquarters at New Delhi, is responsible for formulating and implementing the Foreign Trade Policy with the main objective of promoting India’s exports.
• The DGFT also issues scrips/authorization to exporters and monitors their corresponding obligations through a network of 38 regional offices and an extension counter at Indore.

Besides, economic reforms in various sectors, various Committees were set up from time to time (by the Government of India and by RBI) to discuss policy issues related to international trade and balance of payments.

Some of the important Committees were –

• Committee on Export – Import Policies & Procedures (Alexander Committee, 1978),
• Committee on Trade policy (Abid Hussain Committee, 1984),
• High – level Committee on Balance of Payments (Rangarajan Committee 1993), and
• Committee on Capital Account Convertibility (Tarapore Committee I 1997 & Tarapore Committee II 2006).
• In 2003, the Vajpayee government forms a task force under Vijay Kelkar to recommend tax reforms. In 2004, Vijay Kelkar, then advisor to the Finance Ministry, recommends GST to replace the existing tax regime.

Export-Import Bank of India (EXIM Bank) is a specialized financial institution, wholly owned by Government of India, set up in 1982, for financing, facilitating and promoting foreign trade of India.

EXIM Bank extends Lines of Credit (LOCs) to

• overseas financial institutions,
• regional development banks,
• sovereign governments and
• other entities overseas,

to enable buyers in those countries to import developmental and infrastructure projects, equipments, goods and services from India, on deferred credit terms.

The introduction of the Goods and Services Tax (GST) is a very significant step in the field of indirect tax reforms in India.

By amalgamating a large number of Central and State taxes into a single tax, GST will mitigate ill effects of cascading or double taxation in a major way and pave the way for a common national market.

The government rolled out GST with effect from 1st July 2017. State taxes that would be subsumed within the GST are:-

• State VAT
• Central Sales Tax
• Purchase Tax
• Luxury Tax
• Entry Tax (All forms)
• Entertainment Tax and Amusement Tax (except those levied by the local bodies)
• Taxes on advertisements
• Taxes on lotteries, betting and gambling
• State cesses and surcharges in so far as they relate to supply of goods and services.

In simple terms, buyback of shares means a situation when the company repurchases its own shares. A company may opt to buy back the shares under any one of the following situations:

• When the quoted price on the stock exchange for the company’s share does not represent the true value of the shares; or
• When the company doesn’t have paths to invest its accumulated funds, and it goes for buyback of shares with a view to return the capital; or
• When the promoters are planning to increase their shareholding in the company.

A company which has distributable surplus has the following two options:

• Declare dividend; or
• Purchase its own shares (i.e. buyback its shares).

The declared dividend is chargeable to Dividend Distribution Tax, whereas, earlier, the amount distributed as buy-back of shares was chargeable to capital gains. Being treated as capital gains, the income tax was paid at lower rates on buyback of shares.

In order to avoid the tax, unlisted companies started resorting to buyback of shares instead of declaring dividends. As an anti-tax avoidance measure, the government introduced Section 115QA under the Income Tax Act vide the Finance Act, 2013.

Provisions of Section 115QA were initially applicable only to unlisted companies. However, vide the Finance (No. 2) Act, 2019, the provisions of Section 115QA were amended and the same is made applicable to the listed companies also. The amended Section 115QA basically aims to bring the tax on dividend and the tax on buyback of shares at par.

The Reserve Bank of India (RBI) will simultaneously buy and sale government securities worth ₹10,000crore each in December 2019 under its open market operations — a move aimed at managing the yields.

• The RBI will purchase the longer-term maturities, that are trading at a spread of 150 bps (basis points) over the repo rate, so that the yield of these papers will soften and sell the shorter duration ones.
• The central bank said it will buy ₹10,000 crore of 6.45% government bonds maturing in 2029 and simultaneously sell ₹10,000 crore of short-term bonds maturing in 2020.
• Operation Twist is a move taken by U.S. Federal Reserve in 2011-12 to make long-term borrowing cheaper.

The Kerala Rail Development Corporation (KRDCL) is confident that the ₹66,405-crore Thiruvananthapuram-Kasaragod semi-high-speed rail corridor project (named Silver Line) for which year 2024 has been set as the deadline, will be economically feasible and attain operational break-even within 10 years of being commissioned.

• Of the total cost of the 532-km project, around 50% will be loan at less than 1% interest from multilateral lending agencies such as KfW, AIIB (Asian Infrastructure Investment Bank), JICA (Japan International Cooperation Agency), or ADB (Asian Development Bank).
• Repayment is assured since there will be a rate of return of 8.1% on the investment. The balance amount will be raised from equity and (subordinate) debt from from the State and Central governments.
  

The Reserve Bank of India (RBI) board finalized a three- year roadmap to improve regulation and supervision, among other functions of the central bank.

This medium term strategy — named Utkarsh 2022 — is in line with the global central banks’ plan to strengthen the regulatory and supervisory mechanism.