NABARD GRADE A PREVIOUS YEAR PAPER OF ESI
VERY IMPORTANT TOPIC FOR RBI GRADE B 2019 EXAM Transition from Libor to Sonia
The FCA has advised that LIBOR (the London Interbank Offered Rate) will end in 2021 and are encouraging the adoption of SONIA (the Sterling Overnight Index Average) as the alternative interest rate benchmark.By some estimates, LIBOR determines rates on $350 trillion of financial products worldwide, so moving away from it is clearly a big change. Key businesses and functions that will be affected include commercial lending, retail banking and wealth management.What is LIBOR?LIBOR has been the UK’s standard benchmark interest rate for corporate lending, leasing and residential loans since the mid1980s, and has been adopted globally; set by a panel of international member banks, many financial institutions, mortgage lenders and credit card agencies set their own rates relative to it.LIBOR is currently determined by the ICE Benchmark Administration (IBA), which consults with a panel of banks to obtain estimates of the current costs of borrowing. Using this information, the IBA is able to provide a forward looking rate which is used to calculate interest rates on loans.Why are we moving away from LIBOR?Confidence in LIBOR has dropped due to the reliance on panel banks setting fair and accurate estimates of the cost of lending, which may not reflect the true market position and could be at risk of manipulation (the 2012 LIBOR rigging scandal often being quoted).Despite recent reforms to LIBOR, the FCA considers that the lack of underlying transaction data means that the validity of the opinion based submissions of panel banks remains questionable. In June 2019, the Bank of England (BOE) and the FCA jointly hosted a panel-based titled “Last Orders: Calling Time on LIBOR.” LIBOR isn’t being eliminated however, and technically could still be available after 2021, but regulators will no longer force or encourage banks to continue supporting the benchmark after that date. The FCA has asked banks to voluntarily sustain LIBOR until 2021.What is the alternative to LIBOR?Whereas LIBOR was adopted globally, market developments suggest the transition is now towards different countries applying their own local reference rate. In the U.S., there is SOFR (Secured Overnight Financing Rate), Japan has TONA (Tokyo Overnight Average) and the European Bank has developed the Euro Short-Term Rate (ESTER). In April 2017, the Bank of England’s Working Group on Sterling Risk-Free Reference Rates adopted the SONIA benchmark as their preferred RFR and since then has been working with the FCA on how to transition to using SONIA across British Sterling markets, with a mandate to encourage a broad-based transition to using SONIA in bond, loan and derivatives markets.SONIA, the Sterling Overnight Index Average, is the effective interest rate paid by banks for unsecured transactions taking place “overnight” (in off-market hours) in the British Sterling market. It is “risk free” or “nearly risk-free” and doesn’t factor in any credit risk taken by lenders. The advantage of SONIA is that it does not rely on submissions made by panel banks but is instead based on a weighted average of actual overnight funding on the wholesale money markets. SONIA is therefore much more in tune with actual market conditions. Regulators anticipate that the switch from LIBOR to SONIA will create more predictability in the UK debt market.Challenges for Borrowers / LendersThe main challenge with SONIA is that it is a “backward looking” screen rate (as are SOFRA, TONA and the others). Interest calculated using SONIA is only known once the rate has been applied. Furthermore, because it is an overnight rate this means it changes on a daily basis. Loan agreements using SONIA cannot set a fixed interest rate across the term of the loan (e.g. 3, 6 or 12 months). The loss of cash flow visibility will be a challenge for Borrowers. Also, using SONIA it may be more difficult for borrowers to prepay principal or refinance mid period, since calculations cannot be carried out in advance of the prepayment being made. Lenders will also need to factor in their credit risk if using SONIA.In an attempt to resolve the above the Bank of England Working Group has held public consultations on the possibility of introducing a Term SONIA Reference Rate (TSRR) which could potentially be tested in 2019. If TSRR is adopted it will go a long way to maintaining the structure of the current drafting in current contracts and allow the final rate to be known in advance of repayment dates from the outset of each interest accrual period. However, its introduction is not a certainty at this juncture.Action Points for Borrowers and LendersWhilst we anticipate LIBOR is unlikely to be widely used as a reference rate from the end of 2021, exactly how this will play out in the market is still uncertain, and we will continue to monitor the situation.To best prepare for the transition we would advise Borrowers and Lenders to review their existing lending documentation. Well drafted contracts should include fall-back provisions specifying an alternative rate for when LIBOR becomes unavailable. Such provisions might say, for example, that if LIBOR is unavailable, the rate last used will continue unchanged. Whilst this may be acceptable in the short term, a party losing out on an unfavourable interest rate may seek to re-negotiate whilst the gaining party will want to retain existing terms. Borrowers should liaise with their bank relationship managers to discuss further.Banks and other corporates with significant LIBOR exposure should start preparing for the change if they haven’t already done so, including contract analysis. It might also be reasonable to assume that month end processing and reconciliation will be more time consuming and complicated for Lenders and Borrowers alike, so this should be factored in to planning, as well as the potential for tax implications.
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Key Announcements Of Union Budget 2019-20:
- PAN and Aadhaar will become interchangeable. One can use your Aadhaar number to file I-T Returns soon
- Rs 5 lakh minimum limit announced for taxpayers.
- 3% surcharge hike on an income of Rs 2 crore and 7% on Rs 5 crore and above
- Corporate tax with turnover of up to Rs 400 crore slashed to 25 per cent from a current rate of 30 per cent
- MDR charges waived on cashless payment
- Fiscal deficit in FY 19 at 3.3% of the GDP
- GST rate on electric vehicles lowered to 5%
- Nari tu Narayani: Women SHG Interest Subvention Programme to be expanded to all districts in India
- Rs 1 lakh loan to be provided for SHG women members under Mudra Scheme
- Additional income tax deduction of Rs 1.5 lakh on interest on loans taken to purchase electric vehicles
- Additional deduction of Rs 5 lakh on loans up to March 31 2020 for buying affordable houses, giving Rs 7 lakh benefit to home buyers.
- To provide Aadhaar cards for NRIs with Indian passports, after their arrival in India, with no waiting period.
- Rs 20 coin coming up
- Regulation of HFCs (Housing Finance Cos) to move to RBI from National Housing Bank
- Excise duty on fuel hiked by Rs 1
- To resolve the angel tax issue, startups will not be subject to any scrutiny in respect to valuation. Funds raised by startups will not require any scrutiny by the I-T department.
- TDS of 2% on cash withdrawals exceeding Rs 1 crore in a year from bank accounts, to discourage business payments in cash.
- Period of exemption for capital gains arising from sale of house for investment in startups to be extended to March 31, 2021
- Rs 70,000 crore in recapitalisation for public sector banks
- Rs 1.05 lakh crore disinvestment target for the year.
- TV channel to be launched for promoting startups and to help matchmaking for funds
- Rs 50 lakh crores proposed for Railway infrastructure
- By 2022, the 75th year of Independence, every single rural family, except those who are unwilling to take the connection, will have electricity and clean cooking facility
- The pension benefit will be extended to 3 crore retail traders under PM Karam Yogi Maan Dhan Scheme. It requires only Aadhaar numbers and bank accounts
- Rs 1 crore worth of loans proposed to MSMEs
- 2% interest subvention for GST-registered MSME on fresh or incremental loans
- Investment by FIIs and FDIs in debt securities in infrastructure debt funds to be allowed. Minimum public shareholding in listed companies can be increased from 25% to 35%
- Global Investors Meet to happen in India
Anti Poverty & Employment Generation Programmes
As per the estimation by the Tendulkar Committee the number of Below Poverty Line (BPL) declined to 21.9% of the population in 2011-12 from 29.8% in 2009-10 and 37.2% in 2004-05. The Global Multidimensional Poverty Index-2018 released by the UN noted that 271 million people moved out of poverty between 2005/06 and 2015/16 in India. The poverty rate in the country has nearly halved, falling from 55% to 28% over the ten-year period.Still a big part of the population in india is living Below the Povert Line. As per Tendulkar Committee this estimation is around 21.9% of the total population of the country.
Anti poverty measures and Employment Generating programmes are:
1. Integrated Rural Development Programme (IRDP):The Integrated Rural Development Programme (IRDP), which was introduced in 1978-79 and universalized from 2nd October, 1980, aimed at providing assistance to the rural poor in the form of subsidy and bank credit for productive employment opportunities through successive plan periods. On 1st April, 1999, the IRDP and allied programmes were merged into a single programme known as Swarnajayanti Gram Swarozgar Yojana (SGSY). The SGSY emphasizes on organizing the rural poor into self-help groups, capacity-building, planning of activity clusters, infrastructure support, technology, credit and marketing linkages.
2. Jawahar Rozgar Yojana/Jawahar Gram Samriddhi Yojana:Under the Wage Employment Programmes, the National Rural Employment Programme (NREP) and Rural Landless Employment Guarantee Programme (RLEGP) were started in Sixth and Seventh Plans. The NREP and RLEGP were merged in April 1989 under Jawahar Rozgar Yojana (JRY). The JRY was meant to generate meaningful employment opportunities for the unemployed and underemployed in rural areas through the creation of economic infrastructure and community and social assets. The JRY was revamped from 1st April, 1999, as Jawahar Gram Samriddhi Yojana (JGSY). It now became a programme for the creation of rural economic infrastructure with employment generation as the secondary objective.
3. Rural Housing – Indira Awaas Yojana:The Indira Awaas Yojana (LAY) programme aims at providing free housing to Below Poverty Line (BPL) families in rural areas and main targets would be the households of SC/STs. It was first merged with the Jawahar Rozgar Yojana (JRY) in 1989 and in 1996 it broke away from JRY into a separate housing scheme for the rural poor.
4. Food for Work Programme:The Food for Work Programme was started in 2000-01 as a component of EAS full form??. It was first launched in eight drought-affected states of Chhattisgarh, Gujarat, Himachal Pradesh, Madhya Pradesh, Orissa, Rajasthan, Maharashtra and Uttaranchal. It aims at enhancing food security through wage employment. Food grains are supplied to states free of cost, however, the supply of food grains from the Food Corporation of India (FCI) godowns has been slow.
5. Sampoorna Gramin Rozgar Yojana (SGRY):The JGSY, EAS and Food for Work Programme were revamped and merged under the new Sampoorna Gramin Rozgar Yojana (SGRY) Scheme from 1st September, 2001. The main objective of the scheme continues to be the generation of wage employment, creation of durable economic infrastructure in rural areas and provision of food and nutrition security for the poor.
6. Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) 2005:It was launched on February 2, 2005. The Act provides 100 days assured employment every year to every rural household. One-third of the proposed jobs would be reserved for women. The central government will also establish National Employment Guarantee Funds. Similarly, state governments will establish State Employment Guarantee Funds for implementation of the scheme. Under the programme, if an applicant is not provided employment within 15 days s/he will be entitled to a daily unemployment allowance.
Salient features of MGNREGA are:I. Right based frameworkII. Time bound guarantee of employmentIII. Labour intensive workIV. Women empowermentV. Transparency and accountabilityVI. Adequate funding by central government
7. National Food for Work Programme:It was launched on November 14, 2004 in 150 most backward districts of the country. The objective of the programme was to provide additional resources available under Sampoorna Grameen Rojgar Yojna. This was 100% centrally funded programme. Now this programme has been subsumed in the MGNREGA from Feb 2, 2006.
8. National Rural Livelihood Mission: Ajeevika (2011)It is the skill and placement initiative of Ministry of Rural development. It is a part of National Rural Livelihood Mission (NRLM)–the mission for poverty reduction is called Ajeevika (2011). It evolves out the need to diversify the needs of the rural poor and provide them jobs with regular income on monthly basis. Self Help groups are formed at the village level to help the needy.
9. Pradhan Mantri Kaushal Vikas Yojna:The cabinet on March 21, 2015 cleared the scheme to provide skill training to 1.4 million youth with an overall outlay of Rs. 1120 crore. This plan is implemented with the help of Ministry of Skill Development and Entrepreneurship through the National Skill Development Corporation. It will focus on fresh entrant to the labour market, especially labour market and class X and XII dropouts.
10. National Heritage Development and Augmentation Yojna (HRIDAY):HRIDAY scheme was launched (21 Jan. 2015) to preserve and rejuvenate the rich cultural heritage of the country. This Rs. 500 crore programme was launched by Urban Development Ministry in New Delhi. Initially it is launched in 12 cities: Amritsar, Varanasi, Gaya, Puri, Ajmer, Mathura, Dwarka, Badami, Velankanni, Kanchipuram, Warangal and Amarvati. These programmes played/are playing a very crucial role in the development of the all sections of the society so that the concept of holistic development can be ensured in the real sense.
WHAT SHOULD BE READ FROM THE ECONOMIC SURVEY?
The answer is really simple. Go through your ESI and FM syllabus and identify the topics which have a current/factual/data orientation and date pertaining to which can be found in the Survey.
The list of such topics is as follows:
Measurement of growth: National Income and per capita income Poverty Alleviation and Employment Generation in India Sustainable Development and Environmental issues Industrial and Labour Policy Monetary and Fiscal Policy Balance of Payments Export-Import Policy WTO Demographic Trends Urbanization and Migration Gender Issues Social Justice : Positive Discrimination in favor of the under privileged Human Development Social Sectors in India Health and Education The Union Budget – Direct and Indirect taxes; Non-tax sources of Revenue GST Thirteenth Finance Commission and GST, Finance Commission Fiscal Policy Fiscal Responsibility and Budget Management Act (FRBM), Inflation: Definition, trends, estimates, consequences, and remedies (control): WPI, CPI – components and trends. Latest trends, latest data, latest committees, latest terms and phrases, etc related to all the above topics can be found in the Survey.
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Purchasing Power Parity (PPP)
It states that the exchange rate of a currency with another (currency) is in equilibrium when their domestic purchasing power are equivalent at that exchange rate.
It means that a good should cost same in India and USA after considering the exchange rate of Indian Rupee (INR) and US Dollar (USD).
Suppose, the current exchange rate of Indian rupee to US Dollar is Rs. 60 perUSD (i.e., 1 USD = Rs. 60). Now suppose a laptop costs Rs. 60,000 in India.
According to the PPP theory, the laptop should cost USD (60,000 / 60) = USD 1,000 (considering the current exchange rate of these two currencies) to maintain parity in purchasing power of these two currencies.
But, it may happen that the actual market price of the laptop in USA is USD 800 (say) (equivalent to Rs. 48,000 in India). Therefore, there is an advantage of buying the laptop in USA at much less price than India (Rs. 12,000 less) (it means that the purchasing power is not in parity between these two currencies)
Indian consumers will go to the exchange office and sell their INR and buy USD, and then buy the laptop from USA. It will cause the Indian currency less valuablethan the US dollar.
The demand of laptop sold in India will decrease (since high price), and the priceof laptop will go down. In contrast, the demand of laptop in USA will increase, and the price will rise accordingly.
These factors will cause the exchange rate (of the currencies) and the prices (of laptops) to change such that there is purchasing power parity in both the currencies.
PPP theory tells us that the price differences between countries are not sustainable in the long run, as market forces will equalize prices between the countries and change the exchange rates accordingly.
(Relate the above example with companies that can buy goods in much less price from foreign countries and sell in much less price in India than its counterparts. For this reason, there are several laws or restrictions on imports and a provision of levying customs duty, etc.)