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Reining in CAD and Rupee
Why in News?
To contain the widening current account deficit (CAD) and check the fall of the rupee, the government recently announced specific steps to attract dollars and address volatility in the financial markets.
Background
• The recent fall in the value of Rupee has been mainly caused by pulling out of Foreign Portfolio Investors (FPIs) and decline in demands of Indian exports, along with the rising crude prices, fears of an escalating trade war and higher US interest rates.
• India’s CAD jumped to 2.4 per cent of Gross Domestic Product in the first quarter of 2018-19, from 1.9 per cent in March 2018.
• Data shows India’s foreign exchange reserves have been falling steadily over the past five months.
Recent Steps taken to attract dollars
• Enabling more companies to raise External
Commercial Borrowings (ECBs).
About Masala Bonds:
Masala bonds are rupee-denominated debt securities issued outside India by Indian companies.
The bonds are directly pegged to the Indian currency. So, investors directly take the currency risk or exchange rate risks.
External Commercial Borrowings
It is the financial instrument used to borrow money from the foreign sources of financing to invest in the commercial activities of the domestic country. Simply, borrowing money from the non-resident lenders and investing it in the commercial activities of India is called as external commercial borrowings.
Withholding Tax
It is an amount that an employer withholds from employees' wages and pays directly to the government. The amount withheld is a credit against the income taxes the employee must pay during the year. It also is a tax levied on income (interest and dividends) from securities owned by a non-resident as well as other income paid to nonresidents of a country.
• Manufacturing firms can get ECBs up to $50 m with minimum maturity of 1 year as compared to earlier three.
32
• Removal of exposure limit of 20% of FPI’s corporate bond portfolio to a single corporate group.
• Masala bonds issued in 2018-19 exempt from withholding tax.
• Easing of curbs on marketing, underwriting of Masala bonds.
Way Forward
• Until the RBI can rein in domestic inflation and the government can take steps to boost exports and curb imports, emergency measures like the issuance of NRI bonds can only offer temporary respite to the rupee.
• The government will also take steps to cut imports of non-essential items such as steel, furniture, etc. and to boost exports.
• The government is also looking to expand the phased manufacturing plan to include some sections of the consumer durables industry.
Pradhan Mantri Jan Dhan Yojana
Why in News?
The government decided to make the Pradhan Mantri Jan Dhan Yojana (PMJDY) an open-ended scheme, meaning that it will continue indefinitely.
Pradhan Mantri Jan Dhan Yojana
• It is a financial inclusion program of Government of India, that aims to expand and make affordable access to financial services such as bank accounts, remittances, credit, insurance and pensions.
• It focuses on coverage of households as against the earlier
New incentives
• The overdraft facility has been doubled from Rs. 5,000 to Rs. 10,000.
• There will be no conditions attached for over-draft of up to Rs 2,000. Also, the upper age limit for availing the facility has been hiked to 65 from the earlier 60 years.
• Accidental insurance cover for new RuPay Cardholders has been raised from Rs 1 lakh to Rs 2 lakh.
plan which focused on coverage of villages. It focuses on coverage of rural as well as urban areas. Any individual above the age of 10 years can open BSBDA Account.
• The plan envisages universal access to banking facilities with at least one basic banking account for every household, financial literacy, access to credit, insurance and pension facility. In addition, the beneficiaries would get RuPay Debit card having inbuilt accident insurance cover of Rs. 1 lakh.
• The plan also envisages channelling all Government benefits (from Centre / State / Local Body) to the beneficiary’s accounts and pushing the Direct Benefits Transfer (DBT) scheme of the Union Government. The technological issues like poor connectivity, on-line transactions will be addressed.
Significance
• In spite of a strong position on world economic map India suffers from the problem of poverty and poor financial inclusiveness. Census, 2011 estimates that only 58.7% of the households have access to banking services.
• Poor households in India, in the absence of access to formal credit, have to deal with moneylenders who charge exorbitant rates of interest. Household Survey on India’s Citizen Environment and Consumer Economy, 2016, shows that within the poorest section of the population two in three taking credit from informal sources.
• Though access to formal financial institutions has improved over time but still thousands of villages not have a bank branch and less than 10 percent of all commercial bank credit goes to rural area which is the dwelling area for around 70 percent of the total population of India.
Achievements
• Reducing Percentage of Zero Balance Accounts: Share of zero-balance accounts which indicates lack of activity has fallen from 67% of the 125.47 million Jan Dhan Accounts in 2015 to only 28.88% of the 210 million Jan Dhan Accounts in 2016.
33
• Rising Deposits in Accounts: From 2016-17 the total deposits in these accounts has increased more than thrice. This shows the build-up of confidence which the government has succeeded to develop among the poor.
• Plugging Leakages from Subsidy: According to the Economic Survey for 2015-16 leakages in LPG subsidy transfers fell 24% and the exclusion of beneficiaries had been greatly reduced, due to forced banking infrastructure created by Jan Dhan Accounts, Aadhaar and Mobile networks, the combination named as JAM trinity.
Challenges
• Internet Connectivity Problem: The inadequate infrastructure base for internet facilities basically in tribal and hilly areas making it difficult for Business Correspondents to deliver the required basic banking services
• Diversion of Funds for Overdraft Facility: The overdraft facility that the Jan Dhan scheme commits could be valuable for the poor but clarity has still not emerged on where the funds would be diverted from to finance it.
• Increasing Cost of Business Correspondents: If these accounts have to be functional and not remain dormant
then the density of banking correspondent has to be increased, which will increase the cost of delivering the
banking services.
• Managing Multiple Saving Bank Accounts: Many of the individuals who already have savings bank accounts
in other banks opened account under PMJDY for benefiting from the Rs. 1 Lakh accident insurance and
overdraft. As per norms PMJDY is only for those who do not have any bank account either in public or private sector banking setup
• Tackling Unaccounted Money Deposited During Notebandi: After the announcement of Demonetization total deposits in 255 million Jan Dhan accounts have increased to Rs 642521 million by November 2016.
Way forward
• Launching massive campaign programmes among the poor households and also focus on improving the level of financial literacy and education that can help them recognize the benefits they can avail under the scheme and the responsibilities associated with it.
• The network of post offices which spread across the nation even in the remotest areas can be utilised for
effective implementation of the Jan Dhan Yojana. Introduction of Indian Post Payment Banks is a way
forward.
• The policy focus should shift from the quantity of inclusion to the quality of inclusion. The measure of success of the scheme should include clearly-defined targets for usage and transactions.
• The trust mechanism should be improved between people and bank officials as there seems to be lack of
trust in banking correspondents due to which borrowing from money lenders is still prevalent.
• It is recommended that internet connectivity and speed should be increased in tribal and hilly areas so that the confidence and ease of doing banking transactions can be entertained.
Reining in CAD and Rupee
Why in News?
To contain the widening current account deficit (CAD) and check the fall of the rupee, the government recently announced specific steps to attract dollars and address volatility in the financial markets.
Background
• The recent fall in the value of Rupee has been mainly caused by pulling out of Foreign Portfolio Investors (FPIs) and decline in demands of Indian exports, along with the rising crude prices, fears of an escalating trade war and higher US interest rates.
• India’s CAD jumped to 2.4 per cent of Gross Domestic Product in the first quarter of 2018-19, from 1.9 per cent in March 2018.
• Data shows India’s foreign exchange reserves have been falling steadily over the past five months.
Recent Steps taken to attract dollars
• Enabling more companies to raise External
Commercial Borrowings (ECBs).
About Masala Bonds:
Masala bonds are rupee-denominated debt securities issued outside India by Indian companies.
The bonds are directly pegged to the Indian currency. So, investors directly take the currency risk or exchange rate risks.
External Commercial Borrowings
It is the financial instrument used to borrow money from the foreign sources of financing to invest in the commercial activities of the domestic country. Simply, borrowing money from the non-resident lenders and investing it in the commercial activities of India is called as external commercial borrowings.
Withholding Tax
It is an amount that an employer withholds from employees' wages and pays directly to the government. The amount withheld is a credit against the income taxes the employee must pay during the year. It also is a tax levied on income (interest and dividends) from securities owned by a non-resident as well as other income paid to nonresidents of a country.
• Manufacturing firms can get ECBs up to $50 m with minimum maturity of 1 year as compared to earlier three.
32
• Removal of exposure limit of 20% of FPI’s corporate bond portfolio to a single corporate group.
• Masala bonds issued in 2018-19 exempt from withholding tax.
• Easing of curbs on marketing, underwriting of Masala bonds.
Way Forward
• Until the RBI can rein in domestic inflation and the government can take steps to boost exports and curb imports, emergency measures like the issuance of NRI bonds can only offer temporary respite to the rupee.
• The government will also take steps to cut imports of non-essential items such as steel, furniture, etc. and to boost exports.
• The government is also looking to expand the phased manufacturing plan to include some sections of the consumer durables industry.
Pradhan Mantri Jan Dhan Yojana
Why in News?
The government decided to make the Pradhan Mantri Jan Dhan Yojana (PMJDY) an open-ended scheme, meaning that it will continue indefinitely.
Pradhan Mantri Jan Dhan Yojana
• It is a financial inclusion program of Government of India, that aims to expand and make affordable access to financial services such as bank accounts, remittances, credit, insurance and pensions.
• It focuses on coverage of households as against the earlier
New incentives
• The overdraft facility has been doubled from Rs. 5,000 to Rs. 10,000.
• There will be no conditions attached for over-draft of up to Rs 2,000. Also, the upper age limit for availing the facility has been hiked to 65 from the earlier 60 years.
• Accidental insurance cover for new RuPay Cardholders has been raised from Rs 1 lakh to Rs 2 lakh.
plan which focused on coverage of villages. It focuses on coverage of rural as well as urban areas. Any individual above the age of 10 years can open BSBDA Account.
• The plan envisages universal access to banking facilities with at least one basic banking account for every household, financial literacy, access to credit, insurance and pension facility. In addition, the beneficiaries would get RuPay Debit card having inbuilt accident insurance cover of Rs. 1 lakh.
• The plan also envisages channelling all Government benefits (from Centre / State / Local Body) to the beneficiary’s accounts and pushing the Direct Benefits Transfer (DBT) scheme of the Union Government. The technological issues like poor connectivity, on-line transactions will be addressed.
Significance
• In spite of a strong position on world economic map India suffers from the problem of poverty and poor financial inclusiveness. Census, 2011 estimates that only 58.7% of the households have access to banking services.
• Poor households in India, in the absence of access to formal credit, have to deal with moneylenders who charge exorbitant rates of interest. Household Survey on India’s Citizen Environment and Consumer Economy, 2016, shows that within the poorest section of the population two in three taking credit from informal sources.
• Though access to formal financial institutions has improved over time but still thousands of villages not have a bank branch and less than 10 percent of all commercial bank credit goes to rural area which is the dwelling area for around 70 percent of the total population of India.
Achievements
• Reducing Percentage of Zero Balance Accounts: Share of zero-balance accounts which indicates lack of activity has fallen from 67% of the 125.47 million Jan Dhan Accounts in 2015 to only 28.88% of the 210 million Jan Dhan Accounts in 2016.
33
• Rising Deposits in Accounts: From 2016-17 the total deposits in these accounts has increased more than thrice. This shows the build-up of confidence which the government has succeeded to develop among the poor.
• Plugging Leakages from Subsidy: According to the Economic Survey for 2015-16 leakages in LPG subsidy transfers fell 24% and the exclusion of beneficiaries had been greatly reduced, due to forced banking infrastructure created by Jan Dhan Accounts, Aadhaar and Mobile networks, the combination named as JAM trinity.
Challenges
• Internet Connectivity Problem: The inadequate infrastructure base for internet facilities basically in tribal and hilly areas making it difficult for Business Correspondents to deliver the required basic banking services
• Diversion of Funds for Overdraft Facility: The overdraft facility that the Jan Dhan scheme commits could be valuable for the poor but clarity has still not emerged on where the funds would be diverted from to finance it.
• Increasing Cost of Business Correspondents: If these accounts have to be functional and not remain dormant
then the density of banking correspondent has to be increased, which will increase the cost of delivering the
banking services.
• Managing Multiple Saving Bank Accounts: Many of the individuals who already have savings bank accounts
in other banks opened account under PMJDY for benefiting from the Rs. 1 Lakh accident insurance and
overdraft. As per norms PMJDY is only for those who do not have any bank account either in public or private sector banking setup
• Tackling Unaccounted Money Deposited During Notebandi: After the announcement of Demonetization total deposits in 255 million Jan Dhan accounts have increased to Rs 642521 million by November 2016.
Way forward
• Launching massive campaign programmes among the poor households and also focus on improving the level of financial literacy and education that can help them recognize the benefits they can avail under the scheme and the responsibilities associated with it.
• The network of post offices which spread across the nation even in the remotest areas can be utilised for
effective implementation of the Jan Dhan Yojana. Introduction of Indian Post Payment Banks is a way
forward.
• The policy focus should shift from the quantity of inclusion to the quality of inclusion. The measure of success of the scheme should include clearly-defined targets for usage and transactions.
• The trust mechanism should be improved between people and bank officials as there seems to be lack of
trust in banking correspondents due to which borrowing from money lenders is still prevalent.
• It is recommended that internet connectivity and speed should be increased in tribal and hilly areas so that the confidence and ease of doing banking transactions can be entertained.
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