Current account convertibility - effect on Forex

Sir, did full current account convertibility helped increase/decrease the foreign exchanges reserves of India? Our forex reserves increased tremendously, but what is the role of full current account convertibility in it?

Interesting question!!

The forex reserves have been mostly from the FIIs.

And remittances, which kept on increasing.

So, one can say that, it did improve on the remittances.

But then, with the falling rupee and less investment proposals across the globe, increase in remittances is hardly a surprise!

So, we can say that, CrA may have done less good, but no harm!!

CrA is the precursor to CA convertibility!

Ok Sir. If at all CrA played a role, what/how could it be? Increase in confidence of investors/migrants?

CrA is a limited factor.

Only for migrants. Investors will look for CA convertibility.

Memorizing schemes via Maps

Sir I have problems in doing the schemes and programmes. The ones that have been revised is important I know. But sir would such programmes also come which have been discontinued?

A little guidance regarding them would be of much help! Any memorization tools Sir? :)

See, one effect way to memorise is tag it with maps.

Or pictures or diagrams!!

Like we did the constitutional clock!!!

Or how we learnt to draw the map of India and mark the points

The sites of IVC can be joined and imagined as a tail of a monkey or snake and mark the timeline on that!!

For the programmes, identify the programme with a particular issue. Say; malnutrition. Then make a mark there!! It will be Orissa!

Like that, mark in the Indian map. So you have all the programmes of the govt marked on the map!

e.g.: industrial development: mark on Gujarat.

Women empowerment: mark in Kerala

IT: Karnataka

Like this you can do the tagging!!

Best way to remember: tag the issues geographically!

Mark the maps and keep referring them daily when you have food or relaxing.

You should have one map for each topic.

If you can have 100 such maps, you will clear Prelims easily.

You need to keep on seeing them! They get stored in the brain as a pic. And pic is easy to retrieve.

That’s how you remember the way to your home without much difficulty.

There are schemes pertaining to say all rural areas of India such as National Health mission. How do we trace them?

You need to make an assumption of what is required where in India. Rural for me makes me think of MP, for you it could be Bihar!

This assumption is unique to each of us.               

Eg: for me, forest means, Bastar. For some it could be NE, for some it could be Western Ghats!! Whatever it may be, fix it in your mind.

This shall be your mental picture of the country!! And you apply it when such issues come!!

Once you connect rural with Orissa, then all rural issues will come there.

For me, agri means, UP, Andhra and TN

Sugarcane=UP

Rice=Andhra

Sir, in preparing schemes and programmes of Govt of India, It often happens that some feature is there which I'm not sure about. How to prepare schemes from preliminary test perspective? For mains it is much easy to remember 5-6 main points about it but for prelims I need guidance from you.

For prelims:

1. Remember the salient feature of the scheme.

2. Where did it work? Why is famous?

Only those schemes which were/are famous will be asked.

Always remember that UPSC expects you to be alert!! Means, they will ask what you COULD have come across as a diligent reader!!

They won’t ask anything that NEVER came in news or NEVER could have been a basic issue.

e.g.: basics of science, constitution, law etc. PLUS, what came in news.

How to revise for the locations sir? Do I make list of locations that came in current affairs from Prelims RAG keep them marked in few Maps? Any suggestions on this sir

CA can’t be marked in maps, as it will be too cumbersome. Your brain will get confused.

Locations shall be marked in the map, but subject wise.

Like: Indian space programme. You can mark all locations in the map.

Defence manufacturing: in one map.

S&T: one map

Like this make subject wise maps.

May be 50-60 of them!!

GST - Domestic manufacturing (Countervailing duty as input cost)

Q. Have a question about countervailing duties on imports in India. I read in the eco survey that input taxes on domestic manufacturing will continue even after gst will be introduced... So the countervailing duty won't give an advantage to the domestic mfgs. Didn't understand how input taxes will be levied even after gst comes. Isn't gst an all composing tax?

We need to know what is 'input tax'?

When gst is introduced, it says the countervailing duties will become equivalent to any other type of input tax

Whether a tax is input tax or output tax is based on whether the taxed goods are further consumed in manufacturing or sold as such

Gst can be both depending on what goods we are talking about

So that will offset the disadvantage to the domestic manufacturers?

No

It says that whatever advantage the countervailing duties give to the domestic manufacturer may not materialize in gst scenario.

Sir in the case of manufacturing goods?

Let's say the goods is a car engine - is it input or output?

It is input for the car manufacturer

If a company is just selling car engines, it is output

In gst scenario, let's say a car manufacturer buys car engine

With countervailing duties in place, domestic car engine will be cheaper than or competitive with foreign car engine

However when working out gst for the car, the countervailing duty will be regarded as an input tax and will be credited to the car manufacturer making it to favour the foreign car engine.

Gst is also a value added tax

Is the countervailing duty imposed on the import or is it given as a subsidy to the domestic mfg?

It is imposed on the import

The countervailing duty will be credited to the car mfg...so in the end, the foreign engine ends up being cheaper! N the domestic mfg suffers?

Yes, So do the exemptions.

It differs in what you are importing and which price you want to bring down.

Plan and Non-plan expenditure

Why can't we put welfare schemes under plan expenditure? In the wake of governments recent cut in the non-plan expenditure part of budget (Exceeds 70% of total expenditure).

Plan: where the govt starts/initiates a new plan and allocates funds for that. Eg Funds for construction of new road, or new railway line.

Plan expenditure is a one time expenditure

Non-plan: the routine expenditure of the govt. Example: salary, the maintenance of such road, or railway lines the next year onwards will be included in non-plan.

Non-plan as you can see, is regular yearly expenditure.

Needless to say, the non-plan has to be high, as the expenditure is majorly in salary, provisions etc. the non-plan is ideally met by the revenues, that is the regular income that comes from tax, thus both equal each other.

Then where will the money come for plan expenditire?

For that the govt borrows money.

Borrowing has a cost. govt has to pay interest on that.

The logic is that, though govt pays interest, the money spent on such new road and rails is expected to increase the total productivity, and thus increase the GDP, and this increase the total revenue (tax) to the govt!

Every year govt pays interest for all the loans it has borrowed. So, the interest expenditure will be plan or non-plan? – Non plan

So, the interest becomes a part of non-plan expenditure of the govt!! Recently there are discussions to join both plan and non-plan as both are anyway expenditures.

Plan expd came because the govt wanted to be a 'welfare state' and provide new things! Else, road, rail etc can be constructed by the private companies!!

What is the duty of the govt?

To maintain army, police, run school, hospitals etc. All these run on non-plan, regular routine expd.

Compare this:

Buying a car is a plan expenditure. buying petrol for that car is non-paln. if you own some 30cars, every montg you will spend huge amount on petrol!

Gold Monetization Scheme, Curbing Gold Imports

Monetising of Gold! Can u all input the views.. How it is useful in gearing up economy?

 The Union Finance Minister Shri Arun Jaitley has announced several steps for monetizing gold in Budget 2015. These are;
 Gold Deposit Scheme – Govt proposes to introduce ‘Gold Monetisation Scheme’ (Gold Deposit Scheme). This scheme will replace the existing Gold Deposit and Gold Metal Loan Schemes.
 Sovereign Gold Bond – The Finance Minister also announced the development of an alternate financial asset, a Sovereign Gold Bond, as an alternative to purchasing metal gold.
 Gold coins with Ashok Chakra – Government will also introduce Indian Gold Coin, which will carry the Ashok Chakra on its face. This may help in reducing the demand for coins minted outside India and also help to recycle the gold available in the country.
 

 

Special Drawing Rights (SDR) and Reverse Tranche Position (RTP) of IMF

(Question #2) IMF members often need to buy SDRs to discharge obligations to the IMF, or they may wish to sell SDRs in order to adjust the composition of their reserves. The IMF may act as an intermediary between members and prescribed holders to ensure that SDRs can be exchanged for freely usable currencies""... Is the SDR is a kind of security paper ? If India holding this SDR means, then it can able to fill its forex reserves with dollar by giving this SDR to any other nation which has dollar reserve?

Features of SDR:

·         The SDR is neither a currency, nor a claim on the IMF.

·      Rather, it is a potential claim on the freely usable currencies of IMF members. Holders of SDRs can obtain these currencies in exchange for their SDRs in two ways

o   First, through the arrangement of voluntary exchanges between members; and

o   Second, by the IMF designating members with strong external positions to purchase SDRs from members with weak external positions.

·         In addition to its role as a supplementary reserve asset, the SDR serves as the unit of account of the IMF and some other international organizations.

Origin and background of SDR:

·         Origin of SDR was created by the IMF in 1969 to support the Bretton Woods fixed exchange rate system.

·         Contemporary role of SDR  came to prominence in 2009 SDR allocations totaling SDR 182.6 billion have played a critical role in providing liquidity to the global economic system and supplementing member countries’ official reserves amid the global financial crisis

Basket of SDR

·         SDR basket consists of the euro, Japanese yen, pound sterling, and U.S. dollar.

·         Basket composition is reviewed every five years by the Executive Board.

·         In the most recent review (in November 2010), the weights of the currencies in the SDR basket were revised based on the value of the exports of goods and services and the amount of reserves denominated in the respective currencies that were held by other members of the IMF.

·          In October 2011, the IMF Executive Board held the view that the current criteria for SDR basket selection remained appropriate. Next review will take place by 2015

SDR interest rate

·         The interest paid to members on their SDR holdings and charged on their SDR allocation, and the interest paid to members on a portion of their quota subscriptions.

·         SDR interest rate is determined weekly.

Allocation of SDRs

·         General allocations of SDRs is based on a long-term global need to supplement existing reserve assets. General SDR allocations have been made only three times- to help mitigate the effects of the financial crisis, a third general SDR allocation of SDR 161.2 billion was made on August 28, 2009

·         SDRs are given to member countries by the IMF. Using SDRs they can buy other currencies. They are issued to member countries in proportion to their share in IMF. If they use it they have to pay interest. Members not using SDRs will get interest. For a country SDRs are as good as forex reserves.

·         

General allocations of SDRs have to be based on a long-term global need to supplement existing reserve assets. Decisions on general allocations are made for successive basic periods of up to five years, although general SDR allocations have been made only three times. The first allocation was for a total amount of SDR 9.3 billion, distributed in 1970-72, and the second allocated SDR 12.1 billion, distributed in 1979-81. These two allocations resulted in cumulative SDR allocations of SDR 21.4 billion. To help mitigate the effects of the financial crisis, a third general SDR allocation of SDR 161.2 billion was made on August 28, 2009.

·         Separately, the Fourth Amendment to the Articles of Agreement became effective August 10, 2009 and provided for a special one-time allocation of SDR 21.5 billion. The purpose of the Fourth Amendment was to enable all members of the IMF to participate in the SDR system on an equitable basis and rectify the fact that countries that joined the IMF after 1981—more than one fifth of the current IMF membership—never received an SDR allocation until 2009. The 2009 general and special SDR allocations together raised total cumulative SDR allocations to SDR 204 billion.

(Question #3) Reserve Tranche Position (RTP) of any country can be defined as the difference between Member's quota and IMF's holding of its currency."". How this is happening in India ?

Reserve Tranche Position (RTP) of any country can be defined as the difference between Member's quota and IMF's holding of its currency. It is accounted among a country's foreign exchange reserve. Reserve Bank of India (RBI) gives update on the situation of current Reserve Tranche Position (RTP) in its weekly statistical supplement. its value keeps on fluctuating due to frequent changes in world major currencies prizes.