Doubt Clearance Thread: UPSC 2021
"When in doubt, observe and ask questions. When certain, observe at length and ask many more questions."
Created this thread as a one stop solution for all members so that all the doubts wherein any conceptual clarification is required can be solved here.
TheNotorious,Are subsidies part of transfer payment?
A transfer payment is a one-way payment to a person or organization which has given or exchanged no goods or services for it.
Generally, the phrase "transfer payment" is used to describe government payments to individuals through social programs such as welfare, student grants, and even Social Security. However, government payments to corporations—including unconditional bailouts and subsidies—are not commonly described as transfer payments.
Source: Investopedia
Still confused :/
Source- Wikipedia
Source- Encyclopedia.com
@Caffeinity By devaluation, you essentially reducing the purchasing power of the currency. Imagine a pie that equally divided into four parts. Now each part is 1/4th of the pie. Now if you slice it twice in such a manner that each part is 1/8th, obviously the piece remains one, but its 'value' decreases. If you had promised someone to give '02 'slices of your pie, you would obviously prefer to divide it into 8 slices than 4 to give them a lesser share.Similarly, if a govt has borrowed let's say 100000 INR, they can devalue the currency to their advantage. If each USD was worth 50 rupees earlier (assume), now if rupee is devalued such that 1 USD = 100 rupees. Then, when the govt repays the fixed debt, what was effectively worth 2000 USD now is worth 1000 only. Hence, burden reduced.
Devalued currency leads to increase in exports.
Higher exports bring in more forex.
Higher forex will increase the repayment ability wrt foreign loan.
Higher ability to repay eventually leads to reduction in sovereign debt burden.
Is this a right way to think as well?
@Caffeinity By devaluation, you essentially reducing the purchasing power of the currency. Imagine a pie that equally divided into four parts. Now each part is 1/4th of the pie. Now if you slice it twice in such a manner that each part is 1/8th, obviously the piece remains one, but its 'value' decreases. If you had promised someone to give '02 'slices of your pie, you would obviously prefer to divide it into 8 slices than 4 to give them a lesser share.Similarly, if a govt has borrowed let's say 100000 INR, they can devalue the currency to their advantage. If each USD was worth 50 rupees earlier (assume), now if rupee is devalued such that 1 USD = 100 rupees. Then, when the govt repays the fixed debt, what was effectively worth 2000 USD now is worth 1000 only. Hence, burden reduced.
Doesn't this work only if the debt is rupee denominated?
@Caffeinity By devaluation, you essentially reducing the purchasing power of the currency. Imagine a pie that equally divided into four parts. Now each part is 1/4th of the pie. Now if you slice it twice in such a manner that each part is 1/8th, obviously the piece remains one, but its 'value' decreases. If you had promised someone to give '02 'slices of your pie, you would obviously prefer to divide it into 8 slices than 4 to give them a lesser share.Similarly, if a govt has borrowed let's say 100000 INR, they can devalue the currency to their advantage. If each USD was worth 50 rupees earlier (assume), now if rupee is devalued such that 1 USD = 100 rupees. Then, when the govt repays the fixed debt, what was effectively worth 2000 USD now is worth 1000 only. Hence, burden reduced.
Doesn't this work only if the debt is rupee denominated?
Yes I was going to answer this only. It would work only when the debt is taken in rupee denomination as how masala bond works.
sstarrr,Apollo11@Caffeinity By devaluation, you essentially reducing the purchasing power of the currency. Imagine a pie that equally divided into four parts. Now each part is 1/4th of the pie. Now if you slice it twice in such a manner that each part is 1/8th, obviously the piece remains one, but its 'value' decreases. If you had promised someone to give '02 'slices of your pie, you would obviously prefer to divide it into 8 slices than 4 to give them a lesser share.Similarly, if a govt has borrowed let's say 100000 INR, they can devalue the currency to their advantage. If each USD was worth 50 rupees earlier (assume), now if rupee is devalued such that 1 USD = 100 rupees. Then, when the govt repays the fixed debt, what was effectively worth 2000 USD now is worth 1000 only. Hence, burden reduced.
Doesn't this work only if the debt is rupee denominated?
Yes I was going to answer this only. It would work only when the debt is taken in rupee denomination as how masala bond works.
That's right . Essentially, if a country's currency is devalued, the sovereign debt burden increases - for the other currencies dominated loans or bonds (like dollars mostly- it can be other currency dominated loans as well)- as now we will have to pay more Indian rupee for the same amount of dollars.
So devaluation does leads to increase in soverign debt burden.
balwintejas,Apollo11I will tell you one thing, when we calculate national income ( GNP or NNP), we don't include transfer payments , but when the case comes at Market price V FC, then in MP we add taxes and deduct subsidies.
But when we calculate the net disposable income- we include transfer payments, which does mean there is some difference between the two.
Please explain option 'c' and 'd'
I could be wrong but I believe option A is right.
A is right as RBI loans it to the govt directly by buying Govt bonds/bills through primary market.
B is wrong as FRBM act doesnt allow it (though amendement has allowed only in special circumstances- so not sure about this)
C is wrong - even as monetisation means creating fresh money to finance govt spending directly , i.e. it monetises FD but still it is part of FD.-
http://www.arthapedia.in/index.php?title=Deficit_Measurement_in_India
D is wrong as ultimately govt has to pay back these loans from RBI later. So it does increase public debt as they are part of internal debt cumulatively.
Is monetization of deficit considered as a debt though? I had thought they're not loans given by the RBI. The loans given by RBI are through Ways and Means Advances (WMAs). So in this case, it wouldn't be considered as public debt.
@TheNotorious I am not very sure of this relationship. China is notorious for manipulating currency to promote exports, but as@sstarrr and@balwintejas have explained, that won't help in case of non-yuan denominated debt.
As per RBI report on India’s external debt, Debt in terms of USD has the maximum share(more than 50%).
Im not sure what is the major currency which India uses for global trade but worldwide, USD is the most transacted currency globally. Plus, wrt India’s forex, though there are many currencies under Foreign Currency Assets, but ultimately they are converted to USD. So due to the above two reasons, I’m assuming India mostly deals in USD(I may be totally wrong here).
So, if currency is devaluated, it will boost exports. Exports will bring in more forex( assuming USD due to the above mentioned reason that ultimately all foreign currencies are converted into USD under foreign currency asset section of rbi’s forex reserve)and since as per RBI’s report the USD dominates India’s external debt, so more influx of forex (more USD) due to higher exports, will enable India to make more payments wrt it’s external debt, hence reducing debt burden.
keeping aside a certain amount as a percentage of loan in as a safety measure for loan going bad. For ex If bank loans 10 lakhs then it maybe require to set aside 2 lakh rupees which cant be used for any other purpose. This is the reason why Bad banks are created so that once bad loans are off the books of the bank the money that's stuck as provisions gets unlockedWHAT IS MEANT BY PROVISIONING OF LOANS?
sjerngal,WHAT IS MEANT BY PROVISIONING OF LOANS?
Hypothetically assume a bank received 100₹ by a single person as deposit and decided to lend these 100₹ to 10 different people(₹10 each).
Now the bank again receives 100₹ as deposits and decides to lend this ₹100 amount to same 10 people as well.
But this time, 2 out of 10 people defaulted while repayment of loans which were sanctioned out of initial ₹100 deposited amount. So this time, the bank will lend only ₹80 out of the new 100₹ to 8 people and not complete ₹100 because bank was not able to recover ₹20 from the earlier lent amount, so it is keeping aside ₹20 from the new ₹100 deposit and lending ₹80 only.
The bank has to return the initial ₹100 deposited by the person as well at some point in time. If the bank lends entire 100₹ amount this time too, there will be a deficit of ₹20 ( one which weren’t repaid by 2 borrowers).
So to balance the loss of non recovery of ₹20, the bank is lending 80₹ this time. This reduction of 20₹ in lending amount from the new deposit of ₹100 is called provisioning.
UPSC official key gave 'd' as the answer. What is the correct reason then?
The Court Fee was removed and now everybody could drag anybody to courts.
[I did not know this earlier, but I just checked it. ]
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