Daily Quiz: UPSC Prelims Marathon (Economy) – September 29, 2020

Call money rate is the rate at which short term funds are borrowed and lent in the money market.

• The duration of the call money loan is 1 day.
• Banks resort to these type of loans to fill the asset liability mismatch, comply with the statutory CRR and SLR requirements and to meet the sudden demand of funds.
• RBI, banks, primary dealers etc are the participants of the call money market.
• Demand and supply of liquidity affect the call money rate.
• A tight liquidity condition leads to a rise in call money rate and vice versa.

WEO is a survey by the IMF that is usually published twice a year in the months of April and October.

• It analyzes and predicts global economic developments during the near and medium term.
• In response to the growing demand for more frequent forecast updates, the WEO Update is published in January and July between the two main WEO publications released usually in April and October.

CDS is in operation in India since October 2011-launched in only corporate bonds.

• The eligible participants are commercial banks, primary dealers, NBFCs, insurance companies and mutual funds.
• CDS is a credit derivative transaction in which two parties enter into an agreement, whereby one party (called as the ‘protection buyer’) pays the other party (called as the ‘protection seller’) periodic payments for the specified life of the agreement.
• The protection seller makes no payment unless a credit event relating to a pre-determined reference asset occurs.
• If such an event occurs, it triggers the Protection Seller’s settlement obligation, which can be either cash or physical (India follows physical settlement).
• It means, CDS is a credit derivative that can be used to transfer credit risk from the investor exposed to the risk (called protection buyer) to an investor willing to take risk (called protection seller).
• It operates like an insurance policy. In an insurance policy, the insurance firm pays the loss amount to the insured party.

The 2019 Nobel Prize in Economic Sciences was awarded to three economists on Monday for their pioneering research into the use of experimental approaches to fight global poverty.

• The trio, based in the United States, includes Abhijit Banerjee and Esther Duflo, who currently work at the Massachusetts Institute of Technology, and Michael Kremer of Harvard University.
• The Prize committee noted that these economists “introduced a new approach to obtaining reliable answers about the best ways to fight global poverty.”
• The new Nobel laureates are considered to be instrumental in using randomized controlled trials to test the effectiveness of various policy interventions to alleviate poverty.

The New Arrangement to Borrow is the fund mobilization arrangement of the IMF to mobilize additional funds through borrowing from member countries.

• Under NAB, member countries and institutions can stand ready to lend to the Fund.
• The NAB is structured as a set of credit arrangements between the IMF and 38-member countries (can be changed) and institutions.
• The NAB was proposed for the first time at the 1995 G-7 Halifax Summit following the Mexican financial crisis.
• In January 1997, the IMF’s Executive Board adopted a decision establishing the NAB, which became effective in November 1998.
• The NAB was revived in the context of the global financial crisis in 2009; to meet the lending requirements of the Euro zone crisis.

FERA was mainly formulated to deal with deep crunch of foreign exchange post world war II and hence was a rigid piece of legislation which have left all the businesspeople and Indian citizens at the mercy of Enforcement Directorate as violence of FERA was considered a criminal act and there were major penalties associated with it.

• FEMA or Foreign Exchange Management Act was introduced in the year 1999 to replace FERA (Foreign Exchange Regulations Act).
• FEMA came into act on 1st of June 2000. The Scope and Objective of FEMA was mainly to amend the laws related to foreign exchange to facilitate external trade and payments and to develop the foreign exchange market in India.
• FEMA was a liberal from of its prior version (FERA). It extends to whole of the country. It introduced resident ship in place of citizenship.
• FEMA is more human and natural in nature and removed all kinds of restrictions on withdrawal of foreign exchange.
• FEMA also introduced RFC (Resident foreign currency account). It specifically deals with possession and retention of foreign currency and includes all kinds of foreign securities and immovable property.

All expenditures incurred by the government are either of revenue kind or current kind or compulsive kind. The basic identity of such expenditures is that they are of consumptive kind and do not involve creation of productive assets. They are either used in running of a productive process or running a government. A broad category of things that fall under such expenditures in India are:

• Interest payment by the government on the internal and external loans;
• Salaries, Pension and Provident Fund paid by the government to government employees;
• Subsidies forwarded to all sectors by the government;
• Defense expenditures by the government;
• Postal Deficits of the government;
• Law and order expenditures (i.e., police & paramilitary);
• Expenditures on social services (includes all social sector expenditures as education, health care, social security, poverty alleviation, etc.) and general services (tax collection, etc.);
• Grants given by the government to Indian states and foreign countries.

The FRBM Review Committee headed by former Revenue Secretary, NK Singh was appointed by the government to review the implementation of FRBM.

In its report submitted in January 2017, titled, ‘The Committee in its Responsible Growth: A Debt and Fiscal Framework for 21st Century India’, the Committee suggested that a rule based fiscal policy by limiting government debt, fiscal deficit and revenue deficits to certain targets is good for fiscal consolidation in India.

Following are the main recommendations of the NK Singh Committee.

• Public debt to GDP ratio should be considered as a medium-term anchor for fiscal policy in India. The combined debt-to-GDP ratio of the centre and states should be brought down to 60 per cent by 2023 (comprising of 40 per cent for the Centre and 20% for states) as against the existing 49.4 per cent, and 21per cent respectively.
• Fiscal deficit as the operating target: The Committee advocated fiscal deficit as the operating target to bring down public debt. For fiscal consolidation, the centre should reduce its fiscal deficit from the current 3.5% (2017) to 2.5% by 2023.
• Revenue deficit target: The Committee also recommends that the central government should reduce its revenue deficit steadily by 0.25 percentage (of GDP) points each year, to reach 0.8% by 2023, from a projected value of 2.3% in 2017.
• Formation of Fiscal Council to advice the government: The Committee advocated formation of institutions to ensure fiscal prudence in accordance with the FRBM spirit. It recommended setting up an independent Fiscal Council. The Council will provide several advisory functions.
• Escape Clause to accommodate counter cyclical issues.

Assets Reconstruction Companies (ARCs) acquire non-performing assets (NPAs) from banks or financial institutions along with the underlying securities mortgaged and/or hypothecated by the borrowers to the lenders.

• The ARCs then try and manage or resolve these NPAs acquired from banks. It can even infuse more funds in order to reconstruct the asset.
• If reconstruction is not possible and the borrower is unwilling to repay the loan, the ARCs even sell the secured assets.
• ARCs acquire NPAs by way of ‘true sale’, i.e., once an NPA has been sold, the seller has no further interest in that asset.
• ARCs are a product of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act).

The Basel Accords (i.e., Basel I, II and now III) are a set of agreements set by the Basel Committee on Bank Supervision (BCBS), which provides recommendations on banking regulations in regards to capital risk, market risk and operational risk.
• The purpose of the accords is to ensure that financial institutions have enough capital on account to meet obligations and absorb unexpected losses.
• They are of paramount importance to the banking world and are presently implemented by over 100 countries across the world.