Test 11 With Answers

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Approach Answer: General Studies Mains Mock Test 11 624 (2015)

All the questions are compulsory and carry 12.5 marks each. NOT MORE THAN 200 WORDS.

1. How has the process of liberalisation, which has otherwise led to high economic growth, affected the employment rate and the nature of employment in India?

Approach:

Briefly describe how the liberalisation has led to high economic growth in India.

Analyse the effect of liberalisation on the employment rate and the nature of employment in India both in organised and unorganised sectors.

Bring out both positive and negative effects.

Answer:

The process of liberalization, which began in 1990s is seen as a milestone in the economic history of India. Since the liberalization, the economic condition gradually started improving and today India is one of the fastest growing economies in the world with an average yearly growth rate of around 6-7 per cent.

Theoretically, acceleration in GDP growth of a labour-abundant country characterised by the market regime should push employment growth rate as well. However the impact of liberalisation on growth of employment in India is not as per the expectations.

A comparative analysis of GDP growth rate and employment growth rate is given below:


It is clear from the above table that even though the liberalisation process has resulted in higher economic growth, the growth in employment rate has declined.

Even during the high economic growth phase of 2005-12, employment growth rate was just 0.4% with the addition of just 13 million jobs. There has been continuous decline in employment elasticity as well. It declined sharply from 0.3 during 2000-05 to 0.05 during 2005-12.

Most of the new jobs were located in the informal sector with low earnings and no social protection resulting in casualization of jobs.

In the economy as a whole, the worker-population ratio declined in the 1990s for men and women in rural and urban areas in most age groups in the range 5-59.

Amongst the young school participation has increased as child and youth labour have declined.

There is an across the-board improvement in the growth rate of labour productivity and wages and it is estimated that average per capita earnings per annum increased.

However the liberalization process has mainly benefited the top 10 per cent of wage earners who now make 12 times more than the bottom 10 per cent, up from a ratio of six in the 1990s.

As per the NSSO data, only 18% of working people have regular wage salary employment. Roughly 30% are casual labourers, dependent on daily or periodic renewal of job opportunities. The remaining 52% are self-employed. Most of them are in agriculture, working as helpers in family owned businesses without salary.

Employment share of public sector has gradually reduced as the public sector withdrew from many areas. A healthy growth rate in employment has been registered in the private sector.

The liberalisation and globalisation process brought in more technological upgrades in manufacturing sector which increased the mechanisation and reduced the employment.

In case of service sector, the employment growth has not matched the growth in GDP contribution. The sector presently contributes nearly 55% of total GDP but has employed a mere 27%. The problem of skill development enabling labour migration to services remains inadequately addressed.

The conditions of employment in unorganised sector have not improved. The middlemen and employer continue to enjoy the benefits derived from their labour.

In the Index of Economic Freedom World Rankings for 2013, India was ranked 119th among 177 countries, putting India in the category of mostly unfree countries. The report clearly states that although there is improvement in labour freedom, it is offset by declining scores in other areas. Further, the report states that corruption is endemic throughout the economy and is becoming more serious.

2. Even though the Pradhan Mantri Jan-Dhan Yojana is an accelerated effort towards financial inclusion, mere opening of bank accounts will not transform into financial inclusion in India. Analyse.

Approach:

Briefly explain the objectives of Prime Ministers Jan Dhan Yojana towards financial inclusion.

Explain the issues to be dealt in addition to opening of bank accounts in order to achieve financial inclusion in India.

Conclude positively with a way forward.

Answer:

Financial inclusion denotes delivery of various financial services at an affordable cost to the vast sections of the disadvantaged and low-income groups. The objective of financial inclusion is to extend the scope of activities of the organized financial system to include within its ambit people with low incomes.

The Pradhan Mantri Jan-Dhan Yojana (JDY) was launched in August 2014 as an ambitious financial inclusion scheme. The yojana envisages universal access to banking facilities with at least one basic banking account for every household, access to credit, insurance and pension facility.

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It is estimated that nearly 14.7 crore accounts were opened till 31 March 2015. Even though the programme is an accelerated effort towards financial inclusion in India, mere opening of bank accounts will not transform into financial inclusion.

In addition to opening of bank accounts, there is a need to address various other issues in order to achieve financial inclusion:

According to the World Banks Global Financial Development Report (2014) only 11% of those who had a bank account had savings and only 8% took loans. Equally alarming are the number of bank accounts that are opened and lie dormant.

As per the RBI data almost 75% of savings accounts lie dormant. These figures get more dismal if we look at the accounts opened by business correspondents (BCs).

While it is true that bank accounts can be used to link different wage employment schemes such as MgNREGA, it does not ensure affordable credit from formal sources for the rural poor who continue to rely on informal sources of finance at high interest rates for their credit needs.

The poorer and more disadvantaged group of households in agriculture and allied activities form just a mere 1% of the savings in formal institutions.

The banks are faced with high operating cost in extending the financial services to the remote areas. High maintenance cost of these accounts as well as small ticket size of the transactions is also adding to the problem.

The current service delivery model of using BCs and mobile money to increase outreach faces a formidable trust barrier. The Inter Media India FII Tracker Survey (2013) report suggest that just 3% of households fully trust BCs with their financial transactions and only 1% of households trust the use of mobile money. This defeat the very purpose of making financial services more accessible and affordable for the poor.

There is a need for banks to mitigate the supply side processes that prevent poor and disadvantaged social groups from gaining access to the financial system. Despite the risk, financing of first time entrepreneurs is a must for financial inclusion and growth.

Low level of financial literacy is another major issue. Reaching out to the illiterate people or people who can handle only the regional languages is also difficult without developing a suitable communication mode.

There is a need to compute a more multidimensional index of financial inclusion to include both financial deepening indicators such as the number of bank accounts as well as financial habit indicators such as the number of bank accounts that are actually used.

Both access and use will be necessary to smooth consumption and reduce risks for the poor. The mere chasing of numerical targets of financial access becomes meaningless unless deeper issues that address financial capability and trust in service delivery are tackled simultaneously.

3. Successive Finance Commissions have tried to balance the twin issues of fiscal discipline and regional disparities. Yet, they have been criticized by both the rich and poor states for neglecting their needs. Discuss. How far has the 14th Finance Commission been able to address this issue?

Approach:

Briefly discuss the methodology of vertical and horizontal resource allocation used by Finance Commissions.

Bring out the criticism by the states of the resource allocation.

Mention the recommendations of the 14th Finance Commission in this regard.

Discuss to what extent FC has been successful in addressing this issue.

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Answer:

Finance Commission is the balancing wheel of the fiscal federalism in India. Most commissions have allocated the resources between the states on more or less the following criteria: Population, Area, Fiscal Capacity Distance (Difference in the per capita income etc.), Fiscal Discipline and Tax Effort. The first three can be categorized as equity criteria (82.5 percent weight) while the last two as efficiency criteria (17.5 percent weight).

States performing well feel that they are being punished for showing higher growth and fiscal discipline and their revenue is being diverted to poorer states lacking fiscal discipline and policy vision for development. While poorer states demand more as they are not able to get private sector investment because of backwardness and are stuck in a vicious. States also complain about lesser share to states from the central tax pool and devolution of funds by states to local bodies.

14th FC has recommended some major changes having centre-state and interstate fiscal ramifications, which have been accepted by the government. Prominent amongst them are:

Change in the criteria for horizontal resource allocation. 7.5%: Forest cover, 17.5%: Population, 15%: Area, 10%: Demographic change, 50%: Income distance. Thus, financial efficiency has been omitted. Because of forest cover criteria poor states in plains having minimal forest cover are going to lose their percent share. Meanwhile, 19 states stand to gain from the new arrangement, which include north-eastern states and tribal states. Thus, it has positively benefited underdeveloped hilly and tribal states but negatively impacted poor states in the plains.

42% share to states in the divisible tax pool. With greater devolution all the states will have greater fiscal resources at their disposal that can be used in their development programme. Moreover, it will ease the implementation of tax reform of GST Bill where the states fear a loss of revenue.

The Commission has recommended devolution of higher resources to the local bodies directly by the center. Separate allocation of funds to local bodies will unburden state governments which can use its resources elsewhere.

It has identified 30 centrally sponsored schemes (CCS) for transfer to the states. However, due to importance of the schemes and legal obligations, only 8 CCS would be delinked from support from the centre. With CSS being transferred to the states, states will have greater flexibility in operating these schemes and grudge of states regarding unilateral action by centre is going to be resolved.

These recommendations have lot of positives regarding hilly and tribal states, local bodies and autonomy of states. However, the developmental disparity and fiscal discipline issues still remain unresolved. With greater dependence on central taxes, fluctuation in tax revenue of centre will impact the fiscal health of states. With fiscal discipline becoming unimportant in funds allocation, the better performing states will tend to lose while poor performers will not be penalized. The criterion of forest cover should be implemented with greater flexibility for populous and poor states of the plains have little chance to improve upon these criteria and will continue to lose. Such improvisation needs to be made in the implementation of recommendations to create a balance between the fiscal discipline and developmental disparity.

4. Discuss the importance of unorganised sector in the Indian economy. Examine the measures taken by the government to overcome the challenges faced by the unorganized sector in the country.

Approach:

The answer should start with a general definition of unorganised sector. Statistical references are required to highlight its importance- contribution to employment, GDP, exports and downstream industries. Second part should begin with the challenges faced. The government initiatives mentioned

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must be specific and in consonance with the challenges mentioned. Examining requires evaluation of the potential of these initiatives against requirements. The answer should conclude with further steps required. The answer has been kept long for greater understanding; the student should exercise discretion in selecting for answer writing.

Answer:

Unorganised sector constitutes a pivotal part of the Indian economy. Various estimates (National Account Statistics, National Commission for Employment in Unorganised Sector, National Economic Census, etc.) suggest that about 90 per cent of workforce outside agriculture and 50 per cent of GDP are accounted for by this sector. Contribution to exports is also estimated around 40 per cent. According to NSSO, there are about 57.7 million non-corporate business units outside construction sector, mostly unregistered and self-employment units.

A majority of these operate in the rural areas, where the government finds it difficult to provide non-farm jobs. Also, a high proportion of socially and economically underprivileged sections of the society are concentrated in the informal economic activities. NSSO survey says that two-thirds of enterprises in this sector are owned by SCs, STs and OBCs.

The high growth witnessed in Indian economy in past two decades has been accompanied by increasing informalisation. There are now greater interlinkages between formal and informal economic activities. From providing finished goods for assembly line productions to e-waste collection and reprocessing, the unorganised sector is now deeply intertwined with the formal economy.

However, there are major hurdles that this sector faces. Apart from definitional problems, there are following challenges:

Access to finance- with most of the 57.7 million units unregistered, banks, perhaps rightly, do not finance them. Lack of institutional credit means exploitation by usurious moneylenders.

Access to technology partly because of limited finance and partly due to inertia. This hampers productivity and renders the enterprise uncompetitive.

Lack of skilled workforce

Managerial competence

Vulnerability of informal labour

Market uncertainty

Apart from these, lack of proper infrastructure poses greater difficulty due to the inability of unorganised sector to access costly means of transport and logistics.

Various commissions such as NCEUS (National Commission for Employment in Unorganised Sector) have deliberated on the definitional aspects as well as other challenges faced by the sector. However, lack of proper data for this hugely diverse sector makes the diagnosis difficult and prescription even harder to implement. Recognising the importance of this sector, the government has tried to address these challenges. Some of the initiatives have been examined below:

Setting of MUDRA bank with a corpus of 20,000 Cr. and a credit guarantee fund of 3,000 Cr. It will refinance the last mile financers - micro-finance institutions - which provide credit to the sector. However this model carries a financial risk. Also, it requires millions of these private financial intermediaries to be registered and integrated into the new architecture.

Skill India initiative for skilling of new entrants and existing labour force. However, the program is still falling way short of desired target of 50 million skilled workers each year.

Social sector schemes such as Atal Pension Yojana aim to provide pension cover to workers in unorganised sector. This will require mobilisation of almost 10cr. beneficiaries into the network.

Setting up of venture capital and technology upgradation fund and establishing a network of technology centres around the country. Also, technology upgradation is being encouraged through tax rebates.

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Dedicated e-commerce portal with the help of National Small Scale Corporation has been launched to provide wider market coverage.

The government programs are ambitious in nature but their success depends upon implementation and not just on targets. As such, it requires scaling up of execution. Jan Dhan accounts and AADHAR ids would be instrumental in achieving the above targets. In future, skill development programs can be offered not only for labours but also for entrepreneurs in a structural way such as at ITIs. Also, government would have to invest in R&D for this sector, including analysing changing consumer tastes and marketing of products.

Only recently has the potential of this sector been recognised and documented. For achieving a double-digit growth of Indian economy, it is imperative that the unorganised sectors needs are met in a sustainable manner and it moves gradually towards the formal economy.

5. "Labour reforms are often cited as the key to unlock the potential of Indian economy." In this context discuss the importance of labour reforms in India. Enumerate the measures taken by the government recently in this regard.

Approach:

Briefly elaborate the statement.

Discuss the need of labour reforms in India, the present issues and the benefits arising out of labour reforms.

Bring out the various measures taken by the government recently with regard to labour reforms in India.

Answer:

The real development of any country depends on the productive activities of labour force. With one of the largest labour force in the world, India has a great potential for growth and development. However due to many inherent issues and challenges, India has failed to reap the true potential of its labour force.

The need of labour reforms in India can be explained as:

Indias labour force was estimated to be about 490 million, or 40 % of the population, but 93 % of this force was in the unorganised sector. These workers are most likely to be not covered by most labour laws.

The primary policy challenge is to increase the employability of our labour force. And to shift labour from agricultural to non-agricultural jobs (where there is a projected need for 120 million skilled hands), along with social security measures.

The law on minimum wages and its implementation urgently needs reforms. There is no definition of minimum wages in the law. The penalties prescribed for violations of this law are absurdly low. Minimum wage boards are not re-constituted in time and minimum wages are revised after a considerable time lag.

Labour flexibility measures, especially in respect of hire and fire and contract labour, have caused industrial unrest and violence at many locations.

The Trade Unions Act, 1926, merely provides for voluntary registration of trade unions and not for recognition of trade unions, which is more relevant for collective bargaining.

The introduction of self-certification in some states and sectors, relaxation in inspections in several states, high person-power deficits and multiple tasks of inspectorates in the labour department have weakened the inspection regime. Labour inspections and conviction rates have significantly declined in the post-reform period.

Due to the inadequate number of judicial bodies and judicial officers, there are delays in dispensation of justice. These are costly not only for the workers but also for the employers.

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From the perspective of market, India has a multitude of restrictive labour laws and these have been found to adversely affect economic performance of manufacturing firms.

The Industrial Disputes Act (IDA) requires firms employing more than 100 workers to seek permission from their respective state governments in order to retrench or lay off workers.

Restrictive labour regulations make labour adjustments by firms very difficult and lead to rigidities in the Indian labour market. Since these laws apply to registered firms above a certain threshold of employment size they encourage firms to stay informal and small.

The industrial relations is a concurrent subject and the state governments have been able to make their own amendments to the IDA. Also the implementation of labour laws lies with the states. This has resulted in variation in labour-market rigidity across states.

Restrictive regulations raise effective labour costs and constrain the scale of production as the laws apply to firms above a certain threshold level of employment. This prevents firms from reaping economies of scale and being competitive in the world market.

These laws also discourage firms from employing a large number of permanent workers, and hence they tend to employ more casual or contract workers, who have limited incentive to learn on the job and acquire firm-specific skills.

Some of the important measures taken by the government recently with regard to labour reforms in India are:

Pandit Deendayal Upadhyay Shramev Jayate Karyakram: The programme seeks to improve employability, skill development and other conveniences for labour. The five components of the programme are:

A dedicated Shram Suvidha Portal An all-new Random Inspection Scheme Universal Account Number Apprentice Protsahan Yojana Revamped Rashtriya Swasthya Bima Yojana

The recently passed Apprentices (Amendment) Bill, 2014 makes various changes to the Apprentices Act 1961 to make apprenticeship more responsive to youth and industry. The bill seeks to provide apprenticeship training to non- engineering graduates and diploma holders, and new trades, including IT-enabled services, would be included in the scheme, allowing more employers to participate in training and employment of such workers.

The Factories (Amendment) Bill, 2014 aims to bring several changes in provisions of overtime, better working conditions, overnight work for women, adequate safeguard and transport facilities.

The labour ministry has recently proposed changes to the Industrial Disputes Act, 1947, for easier retrenchment of workers in the National Investment and Manufacturing Zones (NIMZs).

Even though many reforms have been made with respect to welfare of labour, very few measures have been taken to liberalise the labour laws in India. The pending second generation labour reforms should ensure reforms in both the aspects i.e. benefiting labour as well as the investors.

6. MUDRA bank has been termed as a game changer for micro finance sector in the country. What are the objectives of MUDRA Bank? Is there a need of such an institution when there already are multiple schemes and institutions operating for the same purpose?

Approach:

Describe the MUDRA Yojna briefly.

Bring out the argument whether such a scheme is needed or not.

Mention past and present schemes for the sector and their impact.

Give relevant facts/examples to support your view point.

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Answer: With an initial corpus of Rs 20000 crores and a credit guarantee corpus of Rs 3000 crores Government recently launched MUDRA (Micro Units Development Refinance Agency) to infuse finance into MSME sector of the country. Formal sector generates about 29.6 million while 57.8 million small and micro enterprises provide 128 million jobs. Almost 2/3rd of them belong to the SCs, STs and OBCs. More than half of them operate from rural areas, where financial outreach of formal channels is limited and delivering economic growth difficult. A focused approach of finance availability through MUDRA has immense potential in development of MSME sector that will bring inclusive growth.

Following are the objectives of the MUDRA:

Almost 90% of MSMEs depend upon the informal sector for financing where money lenders charge very high interest. Even the MFIs lend at a rate of about 25% to these enterprises because banks lend them at around 14%. MUDRA will partner state and regional level coordinators to enable them to provide refinance to last mile financiers of micro businesses and cut borrowing costs for the cash-starved domestic small businesses.

It will create a framework that regulates and provides refinancing capital flows to micro-finance institutions that are in turn in the business of lending to micro/small business entities engaged in manufacturing, trading and services activities.

MFIs do not meet the funding requirements of small entrepreneurs who want more than Rs.50,000 and up to a few lakhs. Commercial banks, too, are reluctant to give them loans. This lacuna will be addressed by the MUDRA bank.

It will help in bringing transparency, accountability and technology to the sector.

NABARD and SIDBI also refinance MSMEs. However, MUDRA will have sole focus on the Micro and Small businesses.

However, the following issues should be addressed to make MUDRA a success:

There already exist financing schemes like Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE), Portfolio Risk Fund (PRF) etc and many others apart from the technical and managerial support. Hence, it is not only lack of finance but also the multiplicity of schemes, poor implementation, problems like corruption and complex processes and lack of awareness which is impeding the growth of sector.

A redrawing of the functions of NABARD and SIDBI, which have not performed up to the mark, in the light of creation of MUDRA should be done.

Regulatory and credit functions of the MUDRA should be separated to avoid conflict of interest.

Small banks also have immense potential for the sector and can be used to supplement MUDRA.

Introduction of electronic transfer facility for the sector.

While the global trend is discourage shadow banking and use the main-line banking system to meet the financing needs of all segments we are creating one more refinancing agency. Hence, a thorough redress of these issues should be done to ensure credit flow to SMEs also called as missing middle and prevent MUDRA from being another lost opportunity.

7. Despite one of the longest coastlines in the world, Indias port facilities and shipping industry are beset by numerous problems. Explain. Discuss some of the corrective measures taken by the government to overcome these problems.

Approach:

The question is mainly focused on the problems of port infrastructure in India. So the answer should delve into the importance of the port infrastructure in current globalised world. The answer should focus on reasons for sub-optimal/inefficient port infrastructure. The second part asks the recent measures taken by the government to improve the port infrastructure.

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Answer:

India's 7,500-km coastline with 13 major ports and its strategic location on world trade routes gives it a natural advantage to control and direct shipments. Yet, India has not managed to get a dominant grip on shipping, even in its own continent.

Challenges to the shipping industry:

Rigid laws and a detached financial impetus.

The unfriendly taxation structure, wherein the domestic shipping operators need to pay high taxes.

The turnaround time at ports in India is one of the biggest handicaps.

Inadequate infrastructure and the inability of the Indian ports to meet the rising demand in container traffic. This takes us to the next major problem of ineffective port facilities.

Though, the Indian Ports are the gateways to international trade, as they handle over 90% of foreign trade by volume. However, the existing port infrastructure is insufficient to handle trade flows effectively.

Challenges to the port facilities:

The current capacity at major ports is overstretched, as 13 major Indian ports handle 56.7 percent of the all-India port throughput.

The handling capacity of ports in India has remained limited, while the demand has been rising, resulting in port congestion.

Several major ports lack sufficient draft for large crude tankers. Large vessels are berthed at Colombo, Singapore, or Dubai, and cargo is shipped to India later in smaller vessels, thereby escalating the freight cost.

Weak hinterland connectivity reduces accessibility.

Labor and equipment productivity levels are still very low due to the outdated equipment, poor training, low equipment handling levels by labor etc.

Some of the initiatives are:

Sagar Mala project: It seeks to create a string of ports around India's coastline to safeguard maritime interests. It would give a boost to the shipping industry by evolving a model of port led development. It also aims to integrate the development of the ports, the industrial clusters and hinterland, and efficient evacuation system through rail, road, inland and coastal waterways resulting ports becoming the drivers of economic activity in the coastal areas.

The government also signed a memorandum of understanding with Iran to develop the Chabahar port.

The government prioritized the expansion and modernization of ports as part of its five-year plan initiatives in 2007. It has been instrumental in redefining the role of ports from mere trade gateways to integral parts of the global and logistics chain.

Several projects are underway for the deepening of drafts at major ports as a part of the national maritime development program. For example, the Sethusamudram Shipping Canal Project.

The Port sector has been thrown open to private sector participation for the provision of port facilities at various major ports.

The commissioning of power projects based on imported coal and the setting up of steel projects and offshore exploration and production projects are likely to drive the Indian ports sector in the near future.

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8. "Make in India initiative is a big step in the direction towards making India an investment hub for manufacturing but what we need is Make for India and not Make in India". Critically analyse.

Approach:

Briefly introduce the programme Make in India.

Bring out the arguments in favour of the programme explaining the need of it and the critical outcomes.

Now explain that just make in India is not sufficient and there is also a need for Make for India i.e. manufacturing and innovating for the needs of India.

Answer:

Make In India is a new national program designed to transform India into a global manufacturing hub. It contains a raft of proposals designed to urge companies local and foreign to invest in India and make the country a manufacturing powerhouse.

The initiative is considered as a big step in the direction towards making India an investment hub for manufacturing.

With nearly 50% of population depending on agriculture activities and near 60% share of GDP is contributed by service sector, there is an urgent need to revive the manufacturing sector in India in order to grow sustainably.

Prime Minister Modi while inaugurating the programme highlighted that in addition to benefiting investors the programme will further boost the demand, spur development and hence create more jobs.

With a large engineering workforce and links with the English language, India has natural advantages in providing knowledge workers to global corporations.

The Special Economic Zones along with the recently eased government policies have provided for setting up export-oriented captives in India.

There is a large need for technological upgradation in manufacturing sector in India. The foreign investor will bring with them the latest technology and new ideas in manufacturing.

Indian exports have grown on the back of product and geographic diversification. For our exports to grow further, manufacturing (which accounts for 60% of the export basket) will have to become more competitive.

However in order to revive and develop the domestic manufacturing sector just the programme of Make In India is not sufficient. It should be complemented with Make for India i.e. manufacturing and innovating for the needs of India.

In most cases, the knowledge workers seem to be pursuing problems of their employers in western countries. The output of their work often tends to be irrelevant in India.

The value created is shared by a few producers in India and a lot of consumers in western countries. The Make in India campaign is trying to extend this trend into manufacturing from services.

Whereas the government policies in attracting more FDI and in encouraging the Indian outsourcing industry have been a success, the track record in encouraging companies to innovate and make in India and for India has been poor.

There is an urgent need to create an integrated domestic market which can move goods across state borders without being subjected to harassment. The implementation of GST will help in such a move. However, a completely export-oriented manufacturing policy sidesteps this issue since the goods produced will mostly go out.

Another key issue in India is a broken credit system that makes it difficult for new businesses to raise debt. The Make in India initiative will even further tilt the balance in favour of large

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domestic firms that hog all credit and can also tap international markets or foreign firms that have better access to capital in their home country.

Hence, the 'Make in India' manufacturing initiative should not be read too narrowly as merely seeking to mimic the export-led growth strategy followed by China. The approach should be more open making the Indian manufacturing more competitive.

9. Despite being an efficient and cheap means of transport, railway has consistently lost its share of freight to road transport. Enumerate the reasons for the same. How far can the high speed freight corridor help in addressing this issue?

Approach:

Enumeration of factors, behind the declining share of railways, like price differentials, investment in roads as compared to railways, last mile connectivity, etc. is required. In the second part the benefits of Dedicated Freight Corridor (DFC) should be linked to regaining the share of railways in freight- the gap between existing capacity and requirements can be utilised to highlight the same. The candidate must not fall for undermining roadways for railways. An integrated approach, mentioning the complementarities of the two should form the conclusion.

Answer:

The Indian railways market share in freight movement, which was once 90 percent has now come down to nearly 30 percent. With most of the freight traffic being lost to roads, this has affected railways finances and its ability to invest in infrastructure.

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The major reasons for declining share are:

Lack of capacity. Most of the freight traffic is carried between metro cities. The railway lines in these routes are already over-utilised, leading to shift of freight to roads.

Lack of investment in infrastructure. The major source of revenue for railways is budgetary allocation generated through cross-subsidisation of passenger traffic. Lack of investment from other sources like bonds and private institutions has compromised the ability of railways to invest further. On the other hand, private participation through PPP mode has been an important factor to develop Highways along major production centres.

Service Delivery - Effective Freight rates, Speed and Frequency. Even though railways costs are cheaper on per kilometre basis, the additional costs incurred due to slow movement and delays add to overall costs. The average speed of a goods train has come down to about 25Km/hr. The road sector on the other hand is competitive and offers better services and service quality.

Last mile connectivity provided by roads is not possible for railways which are linear and point-to-point.

According to a study by RITES, Indian railways discontinued the small and wagonload traffic in 1980s in order to concentrate on end-to-end transport of single commodity trainloads. While this resulted in significant growth of freight traffic by rail, the share of road transport in total freight traffic started increasing at a faster rate. This is reflected in steep drop of railway share in 90s.

Assuming an economic growth of 7-9 percent, freight traffic is expected to grow 6-7 times and passenger traffic about 15-16 times over the next two decades (according to Report of National Transport Development Policy Committee, 2014). As such, investments in High speed freight corridors are necessary to realise this potential. Currently, the government is developing two dedicated freight corridors (DFC) the Eastern and Western DFC. Overall the government plans to develop six high capacity, high-speed corridors along the Golden Quadrilateral and its diagonals. It can address some of the above constraints in the following manner:-

It requires huge investment in capacity building - it has been estimated that with the establishment of DFC, 55-70 percent of the existing freight traffic of the Indian Railways will move to it.

This decongestion will lead to easier and speedier movement of goods and passengers. The creation of additional capacity is expected to guarantee efficient, reliable, safe and economical

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options for carriage of goods to its customers, helping the railways to regain some of its lost share.

Also, the DFC will provide non-discriminatory access to qualified private operators, unlike CONCOR (Container Corporation of India), which was accused of discrimination such as prohibition of transport of ores and minerals by private operators.

Simultaneously, new passenger trains can then be added to the Indian Railways network without affecting movement of goods.

Overall, the road and rail network must complement each other. The high speed freight corridors will only be linear projects running through proposed industrial regions and connecting major production and consumption centres to ports. They will be serviced by feeder roads, railways and waterways, which will provide hinterland connectivity. Seamless integration of modes of transport at network hubs will be a challenge to ensure fast movement. Therefore, an integrated development of all means of transport is necessary to realise the potential economic growth.

10. "Recently decline in fiscal deficit has mainly come through reduction in expenditure rather than by the way of realization of higher revenue". Comment. Discuss the challenges in revenue mobilization in India and measures required to address this issue.

Approach:

The question is mainly centered on the challenges to the revenue mobilization and how to resolve them. Therefore, the answer should begin with the little elaboration of the given statement and then explaining the challenges. The answer should end with some suggestions.

Answer:

When government's total expenditures exceed the revenue that it generates (excluding money from borrowings) - it is called as fiscal deficit. In the face of burgeoning deficit, threatening the fiscal stability, the parliament enacted FRBM Act, 2003 to enforce rule based fiscal management. However, in the wake of financial crisis the strict regulations under FRBM Act were diluted. Thus, once again fiscal deficit increased to alarming level.

Fiscal consolidation is a reduction in the underlying fiscal deficit by shoring up revenues and pruning expenditures. To control the deficit, the government has undertaken fiscal consolidation measures. As a result, the fiscal deficit has come down from 4.1 of the GDP in 2014-15 to 3.9 per cent in 2015-16. However, it is alleged that fiscal policy is contractionary, focusing only on reducing expenditure, especially on social welfare measures.

In this context, following are the challenges to revenue mobilization:

1) Tax Revenue a) A narrow tax base. Tax payments tend to be concentrated only among a few taxpayers. For

example, only 3 percent of the population in India pays the personal income tax. b) Inefficient tax administrations. c) Structural factors. Higher shares of agriculture and service sectors in GDP are negatively

correlated with revenue to GDP ratios. d) Non implementation of some of the key tax reform measures, like GST and DTC.

2) Non-Tax Revenue

a) Non profitability of public sector, thereby requiring budgetary support. b) Low revenues from disinvestment measures, due to pessimistic market conditions.

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Thus, a second generation of tax reforms is needed given substantial benefits that the additional revenues can bring to the severely resource-constrained exchequer, and the moderate success of their past reforms. Accordingly, reform efforts should be focused in the following areas:

Broadening the tax base and simplifying tax structures. In this context, the speedy implementation of GST and DTC initiates are worth pursuing.

Strengthening tax administration and improving compliance. The institutional arrangements for tax administration should be granted more independence, insulated from political influences, and provided adequate financial and technical resources to enhance their data collection and assessment capacity.

Improving overall market sentiment by way of reforms in labor and financial market, leading to improved economic growth.

Balancing the commercial and service aspects of the public sector so that they become viable commercial entities along with service orientation wherever necessary.

11. What are Offshore Rupee Bonds? Giving examples, discuss their benefits with regards to mobilisation of resources for domestic sector. Also, comment on their role in internationalisation of Indian Rupee.

Approach:

The definition should clearly explain the meaning of all the three terms Offshore, Rupee and bonds. Giving examples of IFC (Masala bonds), or Railway finance corp. bonds, benefits such as alternate and cheaper source of finance, increasing foreign investor base, hedging, etc. can be provided. Internationalisation through greater offshore trading should be mentioned. The role of retaining investor confidence must be emphasised.

Answer:

Offshore Rupee Bonds (ORBs) are debt instruments offered in capital markets outside India and are denominated in Indian rupees (meaning that the principal amount is linked to exchange rate of rupee). They are offered and settled in dollars to raise Indian rupees from international investors. The issuer converts bond proceeds from dollars into rupees in the domestic (Indian) market and uses them to finance its requirements in India. As such, the currency risk in these bonds resides with the investor. The investor base in these bonds is much wider than the FIIs, which invest in the Indian markets.

ORBs have been issued in past by the International Finance Corporation (IFC) with a maturity upto seven years. The latest issue is called Masala Bonds which have a maturity of 10 years and are the first ORBs to be listed on London Stock Exchange. They are named so because masala is a globally recognised term that invokes culture and cuisine of India. Similar bonds are proposed to be offered by Indian Railway Finance Corporation and Asian Development bank. Reserve Bank of India has also allowed Indian corporates to issue ORBs. There are several benefits of ORBs, such as

Bringing liquidity and depth to offshore rupee market

Crowding in foreign investors to invest in rupee bonds and fund domestic investment

Paving the way for an alternative source of funding for Indian Companies

As currency risk is borne by the investor, the cost of borrowing as compared to External Commercial Borrowings (ECBs) comes down for the investor as there is no need for hedging.

The cost of borrowing has also been lesser than government bonds in domestic markets.

It has been estimated that domestic corporates are likely to raise $30 billion in ECBs this fiscal year, while their Offshore Bond issues are likely to be $6 billion. In the next fiscal year, the bond issuances are likely to be $12 billion, but the quantum of ECBs will remain stagnant at $30 billion. However, the cost of funds for Indian companies will significantly depend on their ratings, which will be lesser than AAA rated Masala bond.

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Internationalisation of the currency has two essential features:

A state where exporters from other countries (such as Oil companies in Saudi Arabia) agree to take payments in rupees, and

Where currency risks in international borrowings are borne by lenders rather than borrowers in India.

At the heart of internationalisation lies stability and confidence in the currency which makes it acceptable for cross-border transactions. Internationalisation is desired because countries that can borrow in their own currency are less susceptible to international crises. Please note that internationalisation is different from capital account convertibility, which means that domestic and foreign assets can be freely exchanged.

ORBs are a significant step towards internationalisation of rupee - they are international borrowings with currency risk at lenders' side. The Masala bonds were well received by foreign investors, notwithstanding the fact that rupee is still not fully convertible. ORBs are launch pad to sell strength of rupee to overseas investors as listing on foreign bourses will provide visibility and set benchmarks for yields in future issuances. Views on rupee will now be partially formed offshore, albeit in a very small way as ORBs will be subject to caps on external commercial borrowings. They could also increase demands for similar products as liquidity of these bonds rises. This also shows the confidence of international investors in Indian economy and rupee. This will require the government and the central bank to impart stability and confidence in the rupee internationally. Critical elements such as fiscal policy, current account balances and inflation have to be benchmarked to best standards to retain investor confidence in rupee. Putting these elements on a firm footing will be essential requirement for rupee internationalisation.

12. Unlike many other countries, small enterprises in India remain small and even shrink. Bring out the factors responsible for such a trend in India. What steps have been taken by the government in this regard?

Approach:

Explain the scenario regarding small enterprises in India.

Make a comparison with other countries.

Bring out the factors responsible for such a trend.

Mention some reform measures taken by the government.

Answer:

According to study done by Hseih and Klenow (2011), surviving small firms in USA grow spectacularly; in Mexico grow moderately while in India they shrink. Within the MSME the medium firms are almost of negligible percentage with almost 95% micro, 4.8% small and 0.2% medium. This is strange considering the long-time sector has been supported by the government notwithstanding the fact that a separate ministry was established in 1954. It indicates the too many firms in India remain small, unregistered, informal and shrink rather than increase in size and operation.

Following factors can be the cause of this phenomenon:

To avoid regulations and taxes firms try to remain small-they hire temporary workers due to strict labor laws and dont have much incentive to invest in skill up gradation; they dont make capital investments and technology up gradation so that to avoid tax net- all these factors results in low productivity. Moreover, small scale of operation adds to their disadvantage. As a result they have little incentive to grow. Hence, they either stay small or further shrink.

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Indias low rank on ease of doing business (132/173) indicates that continuing business in India is an arduous task. Many processes especially at state level are too cumbersome and delaying. Thus it is distinctly demotivating to expand business.

An easy exit from loss making business releases the capital, which can be invested elsewhere to expand business. A complex process of exit in India acts as a disincentive.

As soon as the business migrates from micro and small to medium and large, almost all the governmental perks are lost.

Most government schemes like PMEGY or Deendayal Upadhyay Antodaya Yojana focus on incentivizing starting of a business but dont incentivize operation and up scaling of business.

Lack of financial access to small firms. Further, getting loans from a bank for a startup is easier than for operational expenditure.

Unfortunately, successive governments have failed to address this issue. While most of the schemes continue to promote micro and small enterprises little has been done to support the upscaling of small firms. However, some reforms taken by the government have considerable potential to arrest this trend. Some of them are as follows:

Make in India: It is expected to bring capital investment in the manufacturing sector in which most of the small firms operate.

Shramev Jayate: Labor reforms and self-certification will help in reducing the bureaucratic hassle and exploitation of small firms. Apprenticeship programme under the scheme is expected to provide low paying small firms with technically skilled manpower.

MUDRA: Will help in providing finance to small enterprises through MFIs etc.

Credit Linked Capital Subsidy Scheme (CLCSS) for technology upgradation of micro and small enterprises.

Micro and Small Enterprises Cluster Development Programme to develop a cluster of small enterprises producing similar types of services and goods.

National Skill Development Mission will also benefit the small enterprises in improving their productivity.

However, government needs to give this trend separate focus and try to bring in reforms specially for upscaling of firms in the problem areas of labor laws, tax exemption, technology support, capital availability, and FDI etc. A movement from small to medium and large enterprise will improve the productivity of firms and also arrest the casualisation of workforce and better use of demographic dividend.

13. How is the newly proposed GST different from the present tax system for goods and services? Examine the benefits that can accrue to the Indian economy with its introduction. Discuss the various issues in the implementation of GST in India.

Approach:

Briefly introduce the newly proposed Goods and Service Tax (GST).

Explain the difference between the provisions of the proposed GST and the present tax system for goods and services.

Write about the benefits from the new system of GST.

Discuss various issues which may arise during the implementation of GST.

Answer:

Goods and Services Tax (GST) is the proposed unified indirect tax subsuming the large number of central and state taxes on Goods and Services.

GST differs from the present tax system for goods and services in the following ways:

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The indirect tax system is currently mired in multi-layered taxes levied by the Centre and state governments at different stages of the supply chain such as excise duty, octroi, central sales tax (CST) and value-added tax (VAT), among others. In GST, all these will be subsumed under a single regime.

Through GST, the centre and states will tax goods and services in identical rates and the proceeds will be shared on the basis of fixed formula. This will dramatically improve the tax administration.

GST will have three components: Central GST; state GST and integrated GST. CGST and IGST will be levied by the Centre while SGST will be levied by states. IGST would be levied on inter-state supply of goods or services. This tax will be levied by the Centre and the requisite payments will be made to the state in which the goods or services are consumed. Import of goods or services would be treated as inter-state supplies and would be subject to IGST.

The benefits of the new GST that can accrue to the Indian economy with its introduction are:

As per the estimates by the National Council of Applied Economic Research the implementation of GST can enhance Indias GDP by 0.9-1.7% as the current system of multiple taxes was leading to distortion in allocation of resources as well as production inefficiencies.

GST will remove the cascading effect since currently both state VAT and CENVAT are levied on goods at point of sale and production stages respectively. GST will be destination based i.e. the tax will be levied on the basis of the place of consumption not production.

Businesses that produce their products in one state and sell in another end up paying a number of taxes, which in turn increase the cost of the final product for the consumer. GST will eliminate this and reduce the end cost of a product.

The present indirect system of taxes suffers from many infirmities, mainly exemptions. Through a uniform and transparent tax structure, GST aims to improve tax compliances.

GST aims to stitch together a common market by dismantling fiscal barriers between states. It is a single national uniform tax levied across India on all goods and services.

Under the GST structure, every company gets a deduction on the taxes already paid by its suppliers. That results in every buyer ensuring that his supplier has paid his part to claim his deductions.

With the increase of international trade in services, the GST has become a preferred global standard. All OECD countries, except the US, follow this taxation structure.

Some of the important issues in the implementation of GST are:

States had expressed concerns over revenue sharing between them and the Centre, and have said that there would be significant loss in tax collection. Also, states had requested power to tax petroleum and liquor products.

GST faces political hurdles as it could rob state governments of discretionary fiscal power.

In order to implement GST, there is a requirement of a robust country-wide IT network and infrastructure to make the implementation seamless.

Certain products such as alcohol, tobacco and petroleum products are excluded from GST. On these products the present high structure of taxes will continue and the situation gets further compounded due to break in GST credit chain at either end of the supply chain. The resulting cascading burden appears to be substantial and is surely going to impact the economy.

Since the constitutional amendment bill introducing GST is still pending in the parliament, there is very less time for implementation before the scheduled date with many tasks to be performed in the interim. These include framing of laws and rules and getting the administration ready for radical changes that this reform proposes.

All the states may not be ready for the implementation of GST before the deadline. There is a need for nation-wide implementation of GST at the same time. A partial implementation of GST may in a way defeat the entire purpose.

Not much has been done to promote the understanding and awareness of the reform among the consumers.

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14. A new way of measuring GDP created the world's fastest-growing major economy overnight. In the context of India analyse the benefits and concerns raised by the new methodology adopted to calculate GDP figures by the Central Statistical Organisation.

Approach:

The question requires and understanding of how GDP is calculated and what the new changes amount to. Answer should be structured as follows:

As introduction briefly enumerate the salient features of changes made.

Discuss the key benefits as argued by the government sources and Media debates

Concerns should be linked to the extent to which the new data reflects reality, include concerns raised by the RBI and other economic observers

Answer:

GDP is the total value of goods and services produced within the country during a year. The calculation so far was based on factor or basic cost, the new method:

Takes into account market prices paid by consumers.

Introduces the concept of Gross Value Added (GVA) at the aggregate and various sectoral levels.

Changes base year 2004-05 to 2011-12.

According to the arguments put forward these changes would have the following benefits:

It is in line with international practice which involves calculation at market costs.

The move is expected to better capture the changing structure of the Indian economy. e.g New GDP series will be based on data from MCA21, bringing in more companies from the unlisted and informal sectors as compared to the Annual Survey of Industries used till now.

The base year change ensures that the products and services included in the GDP calculation do remain contemporary and reflect the present state of the economy e.g. the latest change in base year has included the recycling industry which didnt figure in the earlier GDP computations.

Global investors use growth prospect numbers to allocate their investment allocations between countries - GDP is a key metric here. So news that Indias GDP growth has averaged 6 per cent for the last three years and not 4.6 per cent as thought earlier, may help investors view India in a more favourable light.

The revised methodology, however, poses several concerns as well:

The revision has bumped up Indias growth numbers sharply and put them at odds with other leading indicators of industrial activity, such as the Index of Industrial Production (IIP), which still shows weakness.

While the new GDP shows 5.3 per cent growth in manufacturing in 2013-14, the actual performance of NSE-listed companies in the manufacturing space shows that earnings have been declining in the last two years (by 4 per cent in 2013-14).

Overall the changes put the Indian economy in a better light than was thought previously. The concerns on the other hand relate to the disparity in other figures that do not corroborate the positive story brought about by new changes. The need is to disseminate information in a better way and bring the major indicators in tune with each other.

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15. In recent years, savings rate in the Indian economy has witnessed a consistent decline. What are the factors responsible for this trend? How has the composition of savings changed in the last few years? Suggest measures to improve and better channelize household savings.

Approach:

Gross Domestic Savings, investment, Gross Capital formation are invariably linked with growth. Answer should be structured as follows:

Introduce by mentioning the peak in savings in 2008 followed by a down turn.

Enumerate the causes attributed for the declining trend in savings.

Composition of Savings in terms of the share of Household saving, Public or government savings and Corporate savings should be highlighted

Measures to better channelize household savings should be in the context of decline in financial savings and a rise in physical savings such as land and gold in recent years.

Answer:

High Saving rates have been linked with high growth. The composition of domestic savings in India includes three sources i.e. households, the private corporate sector, and the public sector. National savings rate in India had hit an all-time high of 36.9 per cent in FY08, but has been consistently declining ever since. According to the Economic Survey 2014-15 the gross domestic saving, has declined from 33.9 per cent of the GDP in 2011-12 to 31.8 per cent in 2012-13 and further to 30.6 per cent in 2013-14. Factors that can be attributed for this trend are:

Slowdown in overall economic growth

Diminishing returns on Savings for the Household sector due to factors such as inflation.

Decreasing productivity and profit in the Corporate sector.

As far as the changes in the composition of saving in the last few years is concerned the following can be observed:

Household savings remain the largest contributor but its share has been declining. From 25.9 % of GDP in 2009 to 17.8% in 2013-14.

The corporate sector as part of the Domestic savings has seen and upward trend and constitutes the second largest share after the household sector.

The share of Public sector savings has seen a consistent decline over the years From 5% of the GDP in 2008- it came down to 1.6% in 2013-14.

A sharp decline in the household savings and a decline in financial savings (bank deposits insurance, shares etc) vis--vis physical savings (Real Estate, Gold etc.) has been identified as key areas of concerns. Following Suggestion can be made to better channelize household savings in India:

Curbing inflation

Expanding financial inclusion

Offering new products such as inflation indexed bonds.

Improving saver access to financial products.

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16. Increase in the cap for FDI in Insurance sector to 49% was long due. How is it going to benefit the insurance sector in India? What are main reasons for the opposition to this move?

Approach:

The Answer should be structured as follows:

Enumerate the projected benefits of increasing FDI cap in the insurance sector

Provide arguments that have been put forward in opposition to the increase in FDI in the sector

Conclude by underlining the need for investment for better economic growth along with an efficient regulatory mechanism as safeguard.

Answer:

The bill raising FDI in insurance sector from 26% to 49 %, pending since 2008, was passed recently. While there is opposition for the move from certain segments, overall it is argued that following benefits will accrue from it:

Of the estimated Rs 44,500 crore required in the insurance sector through the next five years, Rs 21,805 crore is expected to be through FDI flow.

With FDI cap being raised up to 49 per cent now, the life insurance cover will nearly double to 6 per cent of population in the next five years and to more than 10 per cent by 2025

Opening up of insurance and pension sector helps Indian government and companies to access long-term funding for infrastructure projects.

Raising the FDI cap would result in increase in employment in the sector.

Availability of better and wide range of insurance products to customers at larger competitive prices is another benefit expected from the hike in FDI cap. Despite the above mentioned benefits the move has been opposed, as seen in a long delay in its passage, on the following grounds:

Private insurance companies have been found to be delinquent all across the world. E.g. the case of AIG in the United States

The move amounts to hand over an industry of national interest and the savings of Indian households to foreign control.

Indian investors will not be well-served by the foreign entities.

Most of the arguments against FDI in insurance are based on the fear of involvement of private foreign players in a sensitive sector. However, the answer lies in better regulation through agencies such as IRDA to safeguard interest of multitude of small investors.

17. "Dedicated freight corridors have a huge potential to revive the manufacturing sector in the country" Explain. What are the various issues which have slowed down the implementation of these projects?

Approach:

One can briefly list out the major DFC projects (envisaged and under construction). Thereafter, the answer should focus on importance of DFCs for manufacturing sector, a general discussion or benefits to economy at large will not fetch marks. Second part of the answer has to focus on reasons responsible for slowing down the implementation of DFC projects.

Answer: Under the Dedicated Freight Corridor (DFC) Project, freight rail lines will be constructed along the Western Corridor between Delhi and Mumbai and the Eastern Corridor between Ludhiana, Delhi and Sonnagar.

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How can DFCs help in reviving the manufacturing sector:

Dedicated Freight Corridors are proposed to adopt world class and state-of-the-art technology. Significant improvement is proposed to be made in the existing carrying capacity by modifying basic design features. Both these improvements will allow longer and heavier trains to ply on the Dedicated Freight Corridors. This will provide infrastructure to allow heavy loaded trains to move.

Its completion will have a major impact on improving transportation infrastructure which will enhance attractiveness of India as an investment destination including the manufacturing sector

The time taken would be considerably, thereby reducing the shipping time.

It would also introduce time tabled freight services and guaranteed transit time

Once completed, the dedicated freight corridors will enable Indian Railways to improve its customer orientation and meet market needs more effectively thereby affecting the entire business ecosystem.

Unlike the existing rail network, which runs on a combination of diesel and electrical locomotives, the proposed DFC corridor will operate entirely through electric locomotives, thereby lowering the transportation costs for the manufacturing sector which are considerably higher when compared to developed countries of the world.

Issues slowing the implementation of projects

Land Acquisition: Like any other infrastructure projects, there are stretches of land that have been difficult to acquire for the government. For example, the western corridor of DFC was to pass through Panvel and then proceed towards Jawaharlal Nehru Port Trust (JNPT). But acquiring land for DFC has been difficult at Panvel where several other projects are also converging like proposed CST-Panvel fast corridor, upcoming airport at Navi Mumbai, suburban sections on the Virar- Vasai-Diva-Panvel line and finally, construction of the Panvel Coaching complex.

Management change: Frequent management changes and availability of adequate resources at the mid level have been a bane for DFC till date. The company continues to suffer lack of institutional strength as a result of non-availability of adequate resources at the middle level.

Not enough bidders: Given the conditions set by the Japanese government (which is giving soft loans) and which stipulates involvement of a Japanese partner, the total number of bidders has been low for the Western corridor.

Cancelled Tenders: Cancellation of a tender and iterating the process again have a ripple effect on the overall advancement of the project.

18. How is the EPC model of investment in infrastructure different from the BOT model? What are reasons behind a favorable push for the EPC model over PPP in road sector in recent years?

Approach:

The answer should be divided into two parts, out of which the first one should focus on explaining the meaning of EPC model. Some of similarities and differences with the traditional BOT model should be discussed. The second part should clearly bring out the problems in the BOT model and how EPC overcomes these problems in its unique way and is better over the BOT model.

Answer:

EPC Model of investment in Infrastructure Sector

EPC stands for engineering, procurement and construction. It is a common form of contract arrangement in the infrastructure sector and sometimes cited as a variation of PPP. In this model the project is awarded to the private players through a bidding process.

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Unlike the BOT model, the government funds the entire project under EPC and a developer undertakes the necessary construction work. A type of arrangement in which the private sector builds an infrastructure project, operates it and eventually transfers ownership of the project to the government. In many instances, the government becomes the firm's only customer and promises to purchase at least a predetermined amount of the project's output

The winner of the bid enters into a contract with the government which includes the fixed rate of project execution with timelines and may also include penalties for time overrun.

Why is EPC being preferred over the PPP?

Lack of financial viability, delay in project clearances and approval and the slowdown in the economy has prevented private players from taking up large infrastructure projects on a PPP basis.

There are no private equity funds which are willing to come in at this moment to take up these projects.

Also, the possibility of unnecessary litigations has also discouraged the private sector to enter into PPP contracts with the government.

This results in most of the private players not taking part in the bidding process under PPP mode.

Whereas in the EPC mode entire investment is made by the government and a private player is the contractor for construction.

During 2013-14, the Surface Transport ministry could not award even a single project through PPP mode, while 2,500 km were awarded under the engineering-procurement-construction (EPC) mode.

Additionally, an EPC project can be completed at a predetermined cost and schedule and the contract also incorporates the level of performance guaranteed by the private player unlike the PPP contract.

19. "Unshackling the banks from government control and finance ministrys interference is the only way forward to ensure the long-term revival of nationalised banks." Critically evaluate P J Nayak committees recommendations to dismantle the governments stakes in nationalized banks.

Approach:

Answer can begin by giving a brief account of the PJ Nayak committee's recommendations with regards to diluting of government stake in PSBs. Thereafter students can give arguments for and against this kind of a move and conclude suitably with a balanced stand on the issue.

Answer:

PJ Nayak Committee on the governance of Indian banks has made several important recommendations for the ownership of public sector banks so as to rid them of the deficiencies that lie at the root of their deteriorating performance. The key recommendation is that the government should transfer its holdings in these banks to a bank investment company (BIC) and bring down these holdings to under 50 per cent. The BIC will act like a passive wealth fund for government holdings with the sole aim of maximizing the government's returns.

Views for the move

Its most significant recommendations could put the entire public sector banking system on to a new, sustainable performance and risk management trajectory.

Excessive and misdirected government control is at the heart of the problem. Consequently, reducing the government equity stake to minority levels and then empowering boards and managements to function within the performance and accountability frameworks of typical

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corporate organisations is the best way for these banks to get themselves out of the three-way trap.

Corporate governance in public sector banks is weak, with most of the so-called independent directors appointed at government whims and fancy and are, therefore, not particularly qualified for their roles. However, the committee has conceded that theoretically at least, the board of directors of any PSB should be expected to represent a healthy balance of diverse interests and regions.

Government interference has meant that policy objectives rather than commercial considerations dictate a PSBs working. A less charitable way of saying is that it is because of government pressure that several PSBs have lent to unbankable companies. Not all the worryingly high non-performing assets that banks are saddled with are due to government interference but if banks had decided on purely commercial considerations, they would most certainly had been better off.

There has been a lack of transparency in appointing top managers of PSBs. Most of them are not able to stand up to government interference and this has largely contributed to weak governance.

PSBs lag behind private banks with respect to a wide range of parameters such as profitability and asset quality. This move can help address all of the above.

Views against the move

There is no reason to suppose that simply by creating an extra layer - that is, the BIC - bank managements will become more professional and be left alone to do their own thing. If a phone call comes to a bank's chairman and managing director, or CMD, today, it can continue to do so even though he is not appointed by the finance ministry but by the BIC or a BIC-appointed board. Crucially, the BIC board will be appointed by the finance ministry.

On the other hand, under the system proposed, there is the risk of even less accountability, given that bank officials will not need to fear the government vigilance system being on their back.

Nationalisation of banks has served an indisputable developmental purpose. It has vastly expanded the public's access to banking, financed small industries and transformed the nation's savings rate. The government has also used SBI to raise foreign exchange from international markets during the balance of payments pressure points.

Over and above, after the global financial crisis of 2008, in which private developed-country banks that were too big to fail had to be bailed out, there is a case for treating the financial sector differently from the rest of the economy. The financial sector is too important to be left entirely in the hands of private sector.

Many of the suggestions are radical and the document is considered as a guide for future reforms but needs to be looked into before implementation.

20. "Smart grids would make it possible to ensure a stable, reliable, safe and affordable power supply in the country". In light of this statement elaborate the role that can be played by smart grids in solving Indias energy problems.

Approach: This question demands one to list the advantages of Smart Grids as a concept, there is no need to get into technicalities of the Smart Grid in this question. Students should also talk about how Smart Grids can help bringing in more efficiency and solves energy problems of a developing country as India.

Answer:

Smart grids are sophisticated, digitally enhanced power systems where the use of modern communications and control technologies allows much greater robustness, efficiency and flexibility than todays power systems.

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India generates about 229GW of electricity making it one of the 5th largest electricity producer in the world. Much of the generated electricity is wasted during the transmission and this account to 40 percent of loss every year. Presently our electricity system is facing a number of challenges. These are shortage of power, power theft, and inaccessibility of electricity in rural areas, huge losses in the grid, poor reliability and inefficient power consumption.

In order to tackle above problems including production waste and to support the demand of electricity Government has initiated a project by the name of Smart Grid. Smart Grid envisages providing choices to each and every customer for deciding the timing and amount of power consumption based upon the price of the power at a particular moment of time.

Affordability

Apart from providing choices to the consumer and motivating them to participate in the operations of the grid, causing energy efficiency and accommodating all generation and storage options. Power utilities around the world are adopting smart grid technologies to make the power infrastructure robust, self-healing, adaptive, interactive and cost effective.

It will save around 15-20% of electricity in the country. Lower operating and maintenance costs thereby meaning lower peak demand

By reducing the peak demand, a Smart Grid can reduce the need for additional transmission lines.

Stability

A smart grid will have high quality of power and reduces the occurrence of distortions of power supply

Reliability

Higher customer satisfaction.

Improved level of service with fewer inconveniences

Reduced out-of-pocket costs resulting from loss of power

Virtual elimination of blackouts

Improved infrastructure boosts economic development

Safety

Give further impetus to renewable energy sources because of the functioning of smart grid.

Improved opportunity to optimize energy-consumption behaviour resulting in a positive environmental impact.

Would result in reduction in carbon emissions.

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