Daily Quiz: UPSC Prelims Marathon – March 3, 2020

A graph showing the degree of inequality in income and wealth in a given population or an economy. It is a rigorous way to measure income inequality. In this method (for example), personal incomes in an economy are arranged in increasing order; the cumulative share of total income is then plotted against the cumulative share of the population. The curve’s slope is thus proportional to per capita income at each point of the population distribution. In the case of complete equality of income, the lorenz curve will be a straight line and with greater curvature the inequality rises proportionally–the Gini Coefficient measures this inequality.

Presently, India is rated by six international credit rating agencies, namely Standard and Poor’s (S&P), Moody’s Investor Services, FITCH, Dominion Bond Rating Service (DBRS), the Japanese Credit Rating Agency (JCRA), and the Rating and Investment Information Inc., Tokyo(R&I).

Though, India has today one of the fastest growth rates in the world, for the past few years, certain financial issues have been worsening. In the aftermath of the global financial crisis (GFC) of 2007, India has been trying to come to grips with the ‘twin balance sheet’ (TBS) problem—

(i) High NPAs of the PSBs; and

(ii) Highly stressed balance sheet of the private corporate sector.

India has taken several steps by now to recover and control the bad loans of the banks. But they have not been very effective and banks are even today under high stress. On the other hand, India has been waiting for a recovery in the corporate sector for their balance sheet to come in good health but to no avail.

Global demographics saw a turning point in 2016—for the first time since 1950, the combined WA population (age group 15–59 years) of the advanced countries declined. As per the projections of the UNO, for the next three decades China and Russia will see their WA declining by over 20 per cent. However, India seems to be in a demographic sweet spot with its WA population—projected to grow by a third over the same period. Economic research of the last two decades has suggested that the higher growth rates in East Asia were driven by demographic changes.

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.