Daily Answer Writing

Model Answer

Introduction

The MSME (Micro, Small, and Medium Enterprises) sector is vital for India’s inclusive growth, contributing around 45% to manufacturing output, 40% to exports, and forming one-third of India’s GDP (RBI). It provides employment to approximately 11.1 crore people and plays a key role in reducing unemployment and boosting the rural economy. Despite its importance, the MSME sector faces several challenges.

Challenges

1. Infrastructure Bottlenecks:
   MSME clusters often lack adequate infrastructure and support systems, limiting their ability to scale operations and hinder business growth. This shortage of infrastructure impacts both daily operations and long-term development prospects.
2. Access to Credit and Formalization Issues:
   MSMEs primarily operate informally, making it difficult to assess their creditworthiness and provide financial support. Moreover, the small scale of their operations limits their ability to raise risk capital, making growth even more challenging.
3. Delayed Payments:
   Many MSMEs function as ancillary units for larger industries and face chronic delayed payments, which affect their cash flow and working capital. Although the MSME Development Act, 2006 penalizes delayed payments, the sector’s weak bargaining power and fear of losing business prevent the provision from being invoked effectively.
4. Competition and Technological Lag:
   The MSME sector often relies on traditional methods and outdated technologies, resulting in low levels of innovation and competitiveness. This makes it difficult for MSMEs to compete with larger, more advanced businesses, hindering their ability to thrive.

Government Initiatives

To support MSMEs, the government has launched several schemes, including the Scheme of Fund for Regeneration of Traditional Industries (SFURTI), Credit Guarantee Fund Scheme for Micro and Small Enterprises, and the Credit Linked Capital Subsidy Scheme (CLCSS). However, further reforms, like those recommended by the U. K. Sinha Committee, are needed to strengthen the MSME Development Act and ensure long-term growth.

Conclusion

Addressing these challenges is crucial for unlocking the full potential of MSMEs, driving inclusive growth, and ensuring economic prosperity for all sections of society.

Model Answer

Introduction

Central Bank Digital Currency (CBDC) is a digital form of central bank-issued currency, distinct from physical cash. It serves as both a medium of exchange and a store of value, and it is denominated in an existing unit of account. CBDC can be issued through three models: direct, indirect, and hybrid.

Policy Implications of CBDC in India

1. Monetary Policy Transmission
   CBDC does not fundamentally change the mechanics of monetary policy but could enhance its effectiveness by enabling more timely transmission. The impact will depend on whether the CBDC is interest-bearing or non-interest-bearing, remunerative or non-remunerative, and whether it is anonymous or identity-oriented. These factors will influence its role in monetary policy.
2. Liquidity Management
   A rise in CBDC demand could lead to a shift from bank deposits to digital currency, potentially reducing available bank liquidity. This shift may change the behavior of the public in terms of money holdings—whether in physical or digital form—and may affect the overall banking system.
3. Financial Stability
   In the event of a financial crisis, CBDC could trigger a rapid shift of funds from banks, causing a “bank run.” This could destabilize financial institutions and force banks to depend on more expensive and unstable funding sources. Therefore, managing CBDC’s impact on bank deposits and ensuring financial stability will be crucial.
4. Legal Implications
   The existing legal frameworks, such as the Banking Regulation Act, need updates to accommodate CBDCs. Depending on the type of CBDC issued (account-based or token-based), different legal considerations will come into play.

Current Developments

The Reserve Bank of India (RBI) is actively working on implementing CBDCs in phases, conducting pilot programs to evaluate their implications and minimize disruption.

Model Answer

Internationalization of the Rupee: Benefits and Risks

The internationalization of the rupee refers to increasing its use in cross-border transactions, thereby enhancing its global stature. Currently, the rupee is fully convertible in the current account, but only partially in the capital account. It represents only 1.7% of the global foreign exchange turnover, compared to the dollar’s 88.3%, indicating significant room for growth.

Benefits of Internationalization of the Rupee

1. Mitigates Currency Risk: By using the rupee in international trade, Indian businesses can reduce their exposure to foreign currency fluctuations. This lowers operational costs and promotes business expansion globally.
2. Less Vulnerable to External Shocks: Decreasing dependence on foreign currencies protects India from external shocks. For example, during the 2013 “Taper Tantrum,” India faced adverse impacts due to the strengthening of the US dollar, which led to capital outflows and currency volatility.
3. Reduces Foreign Exchange Reserves Requirement: A more prominent role for the rupee in global trade could reduce India’s reliance on foreign exchange reserves, which are costly to maintain, and alleviate income transfers to advanced economies.
4. Improved Bargaining Power: As the rupee becomes more widely used internationally, India’s global influence and economic power would increase, improving the country’s standing in global trade negotiations.

Risks Associated with Internationalization

1. Impact on Monetary Policy: Greater international use of the rupee could limit the Reserve Bank of India’s ability to control domestic money supply and interest rates. India’s monetary policy would need to adapt to this challenge.
2. Dependence on Foreign Capital: If a large portion of India’s trade is conducted in rupees, non-residents may hold substantial rupee balances in India. This could increase vulnerability to global economic fluctuations.
3. Reduced Reserve Accretion: With less reliance on foreign currencies, India may experience a reduction in its foreign exchange reserves, which help manage exchange rate volatility.
4. Hot Money Outflows: Complete internationalization of the rupee could lead to an increase in speculative investments (hot money), making India more vulnerable to sudden capital outflows during global financial crises.

In conclusion, while internationalizing the rupee presents a potential boost to India’s global influence, it also introduces significant risks, particularly concerning monetary policy and financial stability. As India seeks to become an economic superpower, these challenges must be carefully managed to avoid compromising long-term growth.

Model Answer

Introduction

Audit reports on various development initiatives and government finances have highlighted several inefficiencies in public expenditure, which hinder the effective utilization of funds. These inefficiencies include:

1. Non-Spending of Allocated Funds: A recurring issue is the non-utilization of allocated funds. For instance, a report by the Comptroller and Auditor General (CAG) on the Clean Ganga Mission in 2017 pointed out that Rs. 2500 crores remained unspent, indicating a failure in governance structures at multiple levels.
2. Diversion of Funds: Funds meant for specific purposes often get diverted. The 2017 CAG report on Jammu and Kashmir’s disaster management revealed that 25% of the allocated funds were used for ineligible works, deviating from their intended purpose.
3. Irregular and Wasteful Expenditure: A 2020 CAG report on Goa’s government departments exposed wasteful expenditures, highlighting inefficiencies in fund management.
4. Misallocation and Misutilization: Welfare schemes like the Mid-Day Meal Scheme and PM Awas Yojana have seen misallocation and leakages, leading to ineffective fund utilization and delayed payments.

Measures to Address Inefficiencies

Several measures have been suggested to enhance expenditure efficiency:

1. Reorienting the Budget with SDGs: Aligning the budget with Sustainable Development Goals (SDGs) can ensure that public expenditure contributes effectively to national development. States like Haryana and Maharashtra have made progress in this direction.
2. Expenditure Reforms: Introducing sunset clauses in expenditure programs, utilizing technology like e-procurement, and rationalizing schemes can help ensure better use of public funds.
3. Better Scheme Formulation: Schemes should be formulated after adequate consultation with state governments to avoid duplication and ensure optimal use of resources.
4. Expert Institutions for Oversight: Institutions like NITI Aayog can provide directives to improve expenditure efficiency. A body like the Centre-State Expenditure Commission could lay down priorities for better fund management.

By implementing these measures and ensuring greater transparency, the inefficiencies in public expenditure can be addressed, leading to more effective and impactful development outcomes.