Daily Answer Writing

Model Answer

What are Non-Performing Assets (NPAs)?

A Non-Performing Asset (NPA) refers to a loan or advance for which the principal or interest payment is overdue for more than 90 days. In India, for agricultural loans, overdue payments are determined based on cropping seasons. NPAs are further categorized into:

1. Sub-standard Assets: Loans classified as NPAs for less than 12 months.
2. Doubtful Assets: Loans classified as NPAs for over 12 months.
3. Loss Assets: Loans where loss is identified by the bank, auditors, or the RBI, but not fully written off.

As per RBI data, gross NPAs of scheduled commercial banks peaked at ₹9.5 trillion in FY19 but reduced to ₹8 trillion by September 2021.

Recent Measures to Address NPAs

1. Recognition of NPAs

• Asset Quality Review (2015): Introduced to identify NPAs transparently.
• Central Repository of Information on Large Credits (CRILC): Tracks large credits to spot early signs of borrower distress.
• Prompt Corrective Action (PCA) Framework: Strengthens banks with weak financial metrics.

2. Recapitalization of Banks

• Mission Indradhanush (2015): Infused ₹3 trillion in public sector banks to meet capital norms.
• National Asset Reconstruction Company (NARCL): Established in 2021 to acquire ₹2 lakh crore of stressed assets with a ₹30,600 crore government guarantee.

3. Insolvency Resolution

• Insolvency and Bankruptcy Code (IBC, 2016): Ensures time-bound recovery of insolvent accounts.
• Project Sashakt: Focuses on resolving high-value assets with specific strategies based on loan amounts.

4. Banking Reforms

• Enhanced credit risk management with stricter provisioning and sectoral analysis.
• Expanded RBI powers to intervene in failing banks.
• Initiated reforms in public sector banks (PSBs) with online platforms and third-party data usage.

Conclusion

The Indian government’s multi-pronged approach under the 4R strategy has improved the NPA situation, ensuring a healthier financial system. These reforms have also strengthened the banking sector’s resilience and governance structure.

Model Answer

Key Features of Goods and Services Tax (GST)

The Goods and Services Tax (GST) is a comprehensive indirect tax that was implemented in India on July 1, 2017, replacing several existing taxes such as excise duty, VAT, and service tax. It is levied on the supply of goods and services and follows a destination-based taxation model. Some of the key features include:

• Dual GST System: India follows a dual GST structure, where both the Central GST (CGST) and State GST (SGST) are levied on the same taxable event. For inter-state transactions, Integrated GST (IGST) is applied.
• Destination-Based Taxation: Unlike the origin-based taxation system, GST is applied at the point of consumption rather than the point of production.
• Tax on Supply: GST is applied on the supply of goods and services, rather than on the sale or manufacture of goods or provision of services.

Achievements of GST since Implementation

Since its introduction in 2017, GST has contributed significantly to India’s economy:

1. Widened Tax Base: The number of GST registrants grew from 66.25 lakh to 1.28 crore between 2017-2021, effectively doubling the tax base.
2. Ease of Compliance: GST simplified indirect tax compliance by consolidating multiple taxes and reducing the need for businesses to deal with various authorities.
3. Increased Logistics Efficiency: The implementation of e-way bills and the removal of interstate barriers has reduced transit time by over 50%.
4. Reduced Transaction Costs: GST eliminated the Central Sales Tax, cutting down the additional 2% cost on interstate transactions.
5. Enhanced Transparency: The GST portal allows taxpayers to track their tax payments and compliance, improving transparency.

Challenges Faced by GST

Despite its achievements, GST still faces several challenges:

1. Overestimation of GST Collections: Actual collections have often fallen short of initial estimates, raising concerns about the system’s effectiveness.
2. Complex Tax Slabs: The multiple tax slabs and frequent revisions lead to confusion and unethical practices.
3. Complicated Filing System: The cumbersome return filing process demands numerous documents, making compliance burdensome.
4. Conflicting AAR Judgments: Discrepancies in Advance Ruling Authority decisions across states lead to inconsistencies.
5. Tax Evasion and Fraud: The use of fake invoices and e-way bills contributes to significant revenue losses, estimated at Rs. 40,000 crore.

Conclusion

While GST has led to substantial reforms, including widening the tax base and improving compliance, its full potential can only be realized with ongoing reforms, such as simplifying the return filing process and addressing tax evasion issues.

Model Answer

Digitization of Land Records: Advantages and Challenges

Introduction

Access to land is crucial for economic growth and poverty reduction. Digitization of land records offers transformative benefits by improving transparency, reducing conflicts, and enhancing land utilization. However, it faces several challenges that require comprehensive solutions.

Advantages of Digitization of Land Records

1. Reduction in Litigations and Court Burden

• Land disputes in India take 20 years on average to resolve, as per a NITI Aayog report.
• Digitization minimizes disputes by offering clear and updated ownership records, reducing the burden on courts.

2. Enhanced Agricultural Credit

• Farmers can use digitized land records as collateral for loans, leading to faster disbursal of agriculture credit.
• Online equitable mortgage creation further simplifies this process.

3. Infrastructure Development

• Projects often face delays due to unclear records. Digitization ensures availability of encumbrance-free land, accelerating project implementation.

4. Urbanization and Housing

• Provides clarity over ownership for slum dwellers and unauthorized colonies, enabling urban local bodies to deliver services effectively.

5. Curtailing Benami Transactions

• The Standing Committee on Finance (2015) emphasized that digitized records eliminate non-transparent transactions, reducing black money.

Challenges in Digitization of Land Records

1. Legal Framework and Historical Legacy

• The Zamindari system has led to fragmented records. India lacks a guaranteed ownership framework for land.

2. Lack of Unified Manpower

• Shortages of skilled staff hinder the continuous updating of records.

3. Poor Coordination Across Departments

• Revenue, survey, settlement, and registration departments lack synergy, affecting record accuracy.

4. Digital Divide

• Rural areas face challenges due to digital illiteracy and limited internet penetration.

5. Resistance to Surveys and Compensation Issues

• Landowners often resist joint surveys and demand higher compensation, causing project delays.

Conclusion

While digitization of land records is a commendable initiative that can unlock India’s developmental potential, its success depends on addressing legal, administrative, and infrastructural challenges. A holistic and technology-driven approach will ensure its effective implementation.

Model Answer

What is meant by a flexible exchange rate?

A flexible exchange rate is a monetary system where the value of a country’s currency is determined by market forces, i.e., supply and demand in the foreign exchange market. Unlike a fixed exchange rate system, where the government sets the value of the currency, in a flexible exchange rate regime, the government does not intervene directly to control the rate. In this system, the value of a currency fluctuates based on various factors, including international trade, investment flows, and market speculation.

Factors Influencing the Appreciation and Depreciation of the Indian Rupee

1. Speculation
   Speculation plays a key role in exchange rate movements. When investors believe the US dollar will increase in value compared to the Indian rupee, they purchase dollars in anticipation of profits. This increased demand for dollars leads to depreciation of the rupee relative to the dollar.
2. Inflation
   Countries with lower inflation typically have stronger currencies because inflation reduces the purchasing power of money. When India experiences higher inflation compared to other countries, the rupee loses value, leading to depreciation against the dollar.
3. Interest Rates
   Higher interest rates in India compared to other countries can lead to an appreciation of the rupee, as foreign investors are attracted by higher returns on investments. However, if interest rates are excessively high for prolonged periods, inflation may rise, leading to depreciation.
4. Income and Economic Growth
   If India’s aggregate demand grows faster than other countries, it often leads to an increase in imports, which can cause the rupee to depreciate. Conversely, if India’s exports grow faster than imports, the rupee may appreciate.
5. Public Debt
   High levels of government debt can lead to inflation and economic instability, contributing to a depreciation of the rupee as investors lose confidence in the currency.
6. Current Account Deficit
   Countries with large current account deficits (where imports exceed exports) tend to see their currency depreciate, as more foreign currency is needed to pay for imports.
7. Political Stability and Economic Growth
   Strong political stability and robust economic growth attract foreign investment, which can strengthen the domestic currency.

In conclusion, a flexible exchange rate reflects the balance of these factors, and fluctuations in the Indian rupee’s value are influenced by shifts in demand, economic conditions, and market perceptions.

Model Answer

Objectives of Government Budgeting

The government budget serves several key objectives aimed at achieving economic stability and welfare for society. The main goals of government budgeting are:

1. Allocation of Resources: The government allocates resources for the provision of public goods and services, such as national defense, infrastructure, and government administration, which are not efficiently provided by the market. These are crucial for the functioning of the economy and society as a whole.
2. Redistribution of Income: Through the budget, the government can collect taxes and make transfers, which affect the disposable income of households. By doing so, it aims to reduce income inequality and ensure a fair distribution of wealth, as deemed appropriate by societal norms.
3. Economic Stabilization: Government intervention is essential to stabilize the economy during periods of insufficient demand or economic downturns. By raising aggregate demand through fiscal policies, the government helps in utilizing resources effectively and restoring employment.

Key Components of the Government Budget in India

The Indian government budget consists of two major components:

1. Revenue Budget:
   • Revenue Receipts: These are the government’s income, including taxes and non-tax revenues, which do not lead to any liability for the government.
   • Revenue Expenditure: This includes expenditure that does not result in the creation of physical or financial assets. It covers the functioning of government services, interest on debts, and grants to other entities.
2. Capital Budget:
   • Capital Receipts: These are funds the government receives through loans or by selling assets. These receipts create future liabilities as loans need to be repaid.
   • Capital Expenditure: It refers to spending that results in the creation of assets or reduction in liabilities. This includes investment in infrastructure, land, machinery, and loans to states or public sector enterprises.

These components together reflect the government’s fiscal strategy to manage the economy.