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IASbaba’s TLP 2016 [2nd March]: UPSC Mains GS Questions [HOT]: Synopsis

  • IASbaba
  • March 3, 2016
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IASbaba’s TLP 2016 [2nd March]: UPSC Mains GS Questions [HOT]: Synopsis

 


1. What do you understand by the term ‘ever-greening of loans’? Why it was in news recently? What are it’s implications for the economy? Also evaluate the reasons for the increasing number of bad loans and non performing assets in the public sector vis a vis the private sector.

  • Ever-greening of loans:
  • Banks providing additional loans to stressed borrowers, often indirectly, to enable them to repay existing loans. The loan then is used to either payoff interest or principal of previous loan to prevent it from becoming NPA
  • Also banks issue large no of loans in the year end that is used to prevent earlier loan from becoming NPA.
  • Illustration:  say a bank  disburse a loan of  Rs 10000 to a farmer and the account become overdue after a year or two , the same bank sanction a loan of Rs20000 or Rs.30000 which enable farmer to repay first loan and avail only extra loan . In the same way bank use to sanction inflated loan year after year which keeps the account always standard.
  • Examples: $4 billion of Air India debt and about $5.5 billion of loans at loss-making state electricity boards, $1.4 billion loan restructuring of kingfisher Airlines
  • Reason for being in news:
  1. SC reprimanded RBI in for this practice in Kingfisher case
  2. RBI issued guidelines for the banks to desist from this practice
  • Effects on economy:
  1. Banks need to maintain higher Capital Adequacy Ratio (CAR) to continue operations which hinders their credit creation capacity
  2. Interest rates will increase, making borrowing dearer
  3. Will have crowding out effect on the economy where only few companies will get loans while others cannot avail loans
  4. Employment generation will be less as new firms cannot get loans to open and existing firms will not be able to expand
  5. Government will be forced to recapitalize the banks from tax-payers money , which otherwise can be used for productive pursuits
  6. Health of banking sector as a whole is threatened as it will cause a 2008 like burst
  • Reasons for increased share of PSB vis-à-vis private sector banks:
  1. Motive: PSBs focus more on social justice, economic inclusion and capital development whereas private sector is profit oriented
  2. PSBs giving loans to core sectors of economy (energy , infrastructure , textiles)etc which have been adversely affected by global economic slowdown
  3. Corruption and nepotism in banking appointments for higher positions
  4. Crony capitalism, politicians-industry nexus compelling banks to continue ever-greening
  5. Scrutiny is lax in PSBs compared to private sector
  6. Inefficiency in PSBs compared to private sector
  7. Lack of proper monitoring and absence of early warning systems in PSBs to identify such loans which are on the verge of becoming NPAs
  • Conclusion:

Give your suggestions if any and conclude.

Best Answer: Vajrasattva

Ever-greening of loans refers to providing additional loans to stressed borrowers, often indirectly, to enable them to repay existing loans and keep the account books running. Evergreen loans are usually in the form of a short-term line of credit that is routinely renewed leaving the principal remaining outstanding for the long term leads to NPA.

It was in news recently due to public sector banks announced a significant rise in their provisioning for non-performing assets in the quarter ended December 2015.Also as per recent Economic Survey, Non performing assets (NPA) has been rising since 2010. The situation is not sustainable; a decisive solution is needed.

There are severe implications for the economy as,

It would create a shortage for operating expenditure for banks due to which they would get extra cautious in lending & will cut down the credit for the common man and the important sectors like agriculture etc..

It would also stall many critical projects due to unavailability of credit.

Increased incidents of crony capitalism where the wealthy will get the loan and they default.

The reasons for increasing number of bad loans and NPA’s in the PSB’s vis-a-vis private sector banks are:

One of the main causes of NPAs into public sector is the directed loans system under which commercial banks are required a prescribed percentage of their credit to priority sectors (40%) & under stress sectors.

Corrupt nexus between Govt-Corporate and bank officials which led to reckless lending and defaulting cycles which were not reported.

Inefficient borrower screening, poor credit appraisal and inadequate post disbursement supervision makes them poorly managed leading to NPAs.

Lack of clear guidelines in PPP models, no mid-term restructuring mechanism

Poor monitoring of credits and failure to recognize early warning signals as compare to private sector

Lack of professional approach in lending and recovery

Also, lack of following of PJ Nayak Committee report with stress on efficient management practices makes the situation worse.

Evergreening might be useful to keep the loans standard in short term but in long run it invites the problem which could be solved with the help of the four R’s: Recognition, Recapitalization, Resolution, and Reform as mentioned in recent Economic Survey


2. The success of the smart city project will depend on how stakeholders like municipal authorities, special purpose vehicles and the bureaucracy come together to chalk out a coordinated strategy for the activities being undertaken. Discuss.

Introduction:

  1. What is a smart city?
  2. It aims to enhance the quality of urban living and provide people centric urban development.

Why the need of coordination:

  1. Accountability and transparency should be maintained with checks and balances.
  2. Issues of urban poverty, pollution, and livelihood are often neglected.
  3. Political unrest and governance challenges often become a hindrance for the private sector entities to function properly.
  4. Technological advancements and investment required can’t be managed and operated by a single stakeholder without misappropriation of funds.

The 3 stakeholders:

  1. Municipalities are responsible of implementation at grass root level. They take care of the local needs, give approvals to projects and help in mobilization of resources.
  2. SPV’s are enforcers and financers in the project. They ensure optimal utilization of resources and plan out the development objectives.
  3. Bureaucracy is responsible for implementation of govt. Schemes, logistics data, minimization of red-tapism and easy clearance of projects.

Execution needs to be carried out with proper coordination between municipalities and SPV’s along with management of funds. Overall functioning and coordination can be done by the bureaucracy.

Way forward/conclusion:

  1. Citizen participation and monitoring.
  2. Financial independence to the local bodies.
  3. e governance to enhance transparency.
  4. Municipal bonds and inclusion of more private investments by loosening bureaucratic grip.

 

Best answer: CSE2016 aspirant

Government rolled out flagship scheme of ‘Smart City Project’ aimed at modernizing Indian cities by improving housing, transport and other necessary facilities for citizens and promoting e-governance. To streamline the execution of developmental programs planned by the authorities, an independent body Special Purpose Vehicle (SPV) was created to initiate, access, approve and appraise the implementation of plan.

Problems faced by cities:

(1) Financial crisis:
—-> City authorities are inefficient enough to generate revenue for city development.
—-> Lack of innovative ideas.
—-> Lack of interest shown by private parties in investing in development programs

(2) Lack of coordination:
—-> many schemes do not get executed due to differences and inefficient coordination between different stakeholders.

What is the way out?

(1) Efficient and well coordinated action plan:
Action plan should not be superficial, on the other hand should be easily manageable. It should take care of interests of all the stakeholders and people residing in the cities.

(2) Efficient management and workforce:
Skilled workforce will bring in more productivity in execution of plans.

(3) Proper database:
Municipal authorities should develop a exhaustive database of the citizens and various businesses operating in city. This database can be used by SPVs to target the needs of citizens better.

(4) Bureaucracy’s role:
It should strive to make the business easier in cities by providing various incentives to the private investors to invest in developmental activities like tax exemptions, etc.

(5) Non interference of stake holders in each other’s job :
All stakeholders should be provided sufficient independence to minimize the delay in execution.

(6) Transparency and accountability:
They are required in the working of the authorities.

(7) Bottom Up approach
Decentralization in decision making: giving citizens enough voice in action plan can be crucial in winning their support in the program and acting based on ground realities.

‘Smart City program’ has the potential to change the image of India and it’s cities in front of the world. Coordinated efforts are required for success of this program.


3. Discuss the concept of tax to GDP ratio. What does a lower tax to GDP ratio indicate? How does it affect a developing economy like India? What reform measures are required to improve it? Discuss.

Concept of tax to GDP ratio

Tax-GDP ratio is one of the methods used to assess a country’s development and is calculated by dividing the tax revenue collected by the Government from the GDP of that country. Tax and GDP are related, since a higher GDP will automatically lead to a higher tax collection.

India’s Tax to GDP ratio remained around 15% which is lower than similarly placed developing countries leave alone, the Tax to GDP ratio of developed countries.

 

Lower tax to GDP ratio indicates (should include some of the following)

  • Structural factors
  1. Constitutional assignment of taxes
  2. High contribution of primary sector: Agriculture
  3. Large presence of informal sector
  • Low per capita income
  • Large quantum of exemptions: SMEs
  • Shadow economy
  • Non GST regime: Issues
  1. Multiplicity and dispersion of rates
  2. Fragmented and overlapping bases
  3. Taxation of inputs
  4. Distortions in domestic taxation of trade

 

Affects of lower tax-GDP ratio on developing countries like India

  • Affects growth dividend: As it impacts raising resources for financing public investment, producing public goods of adequate quality and quantity, and supporting enhanced spending on social programmes in areas such as education and health.
  • Affects fiscal discipline: Leads to inefficient mobilization of resources, state has to borrow at high interest rates to fund its expenses affecting growth and increasing additional burden of Interest payment in future.
  • Affects equality: Increases inequality leading to various other problems threatening the social fabric and the internal security.
  • Poor Tax to GDP ratio has implications for high fiscal deficit and lower allocation of planned expenditure.
  • High inflation and related spillover effect on exchange rate and interest rate.

 

Reforms

  • Increasing the Tax base: Only 4% of India’s population pay Direct tax. Thus government should create more jobs to broaden the tax base. Also tax evasion needs to be dealt seriously.
  • Simplify tax procedures
  • Structural reforms – bringing reforms in tax related legislation like GST, DCT, GAAR, DTAA will increase the tax collection.Implementation of GST and Direct Tax Code
  • Stringent Law on Tax evasion. : a strong anti- tax evasion Law should be made and should be implemented with zeal.
  • Tax holidays to power firms can be reduced
  • High degree usage of IT tools in the economy and paving way for more cashless transactions, and ensuring liberal platforms for grievance redressal.

 

Conclusion

Revenues must be raised by minimising the three costs associated with taxation namely, the cost of collection, the compliance cost and the distortion costs as people change their behaviour in response to tax policy.

 

Best answer: Ashish

Tax to GDP ratio = Gross Tax collected/GDP of a nation, indicating how fairly the state is able to mobilize taxes to provide public goods and services in an economy.

A lower Tax/GDP ratio indicates :

– Lower mobilization of taxes hence pointing to increasing inequality which the state has been unable to cointain.
– Incongruent tax slabs and exemptions
– A low tax base indicating high levels of poverty
– Also points towards malpractices like Base Erosion and Profit Sharing (BEPS) and Transfer mispricing being carried out under the nose

Affect of lower tax/GDP ratio on developing countries like India :

– Leads to inefficient mobilization of resources, state has to borrow at high interest rates to fund its expenses affecting growth and increasing additional burden of Interest payment in future.
– Increases inequality leading to various other problems threatening the social fabric and the internal security.
– Lowers government spending on various social avenues like education, health etc
– It is a cause for the increase of revenue expenditure which does not create assets.
– Problems like inflation, Fiscal deficit, currency slide can be linked to it

Reform measures required :

– The state needs to widen the tax base bringing the rich under the tax net e.g even the rich farmers, the millionaire vada pav walas of the marine drive need to be brought under the net.
– Rationalize tax exemptions
– Simplify tax procedures ( Justice Easwar committee has good suggestions on these e.g presumptive tax for SMEs, Income computing and disclosure system etc)
– Implementing country-by-country Reporting (CBCR) as mandated by OECD-G20 BEPS project is a good step to address issue of base erosion, profit sharing and transfer mispricing by MNEs.
– Greater use of ICTs in governance to reduce tax evasion and corrupt practices.
– Implementation of GST and Direct Tax Code
– Curbing black money and parallel economy

A number of steps are needed for including increasing the tax rates to improve the tax/GDP ratio. However, in recent times it has been seen that a greater emphasis has been given to generate more revenues from indirect tax sources which are considered to be regressive in nature. A step in this direction should be a well debated one.

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