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Indian Economy (UPSC 2017 Prelims Special)- Monetary and Fiscal Policy
                                                                                                    April 15, 2017

1. Google tax / Equalisation Levy
  • It will apply to payments for online advertisements made by Indian business entities to non-residents (such as Google, Yahoo, Twitter, Facebook) where the aggregate payment in a financial year to a non-resident exceeds Rs 1 lakh.
  • Only B2B transactions attract this levy.
  • India became the first country to impose equalisation levy, popularly being called Google Tax
2. FDI Inflows
  • According to data released by Department of Industrial Policy & Promotion (DIPP), India attracted $ 46 billion in 2016 which is 18% higher compared to previous year.
  • Highest FDI included – Services, Telecom, Trading, Computer Hardware and Software.
  • Bulk of the FDI came from Singapore, followed by Mauritius.  
3. Minimum Support Price (MSP)
  • Minimum Support Price (MSP) is a form of market intervention by the Government of India to insure agricultural producers against any sharp fall in farm prices.
  • Announced by the Government of India at the beginning of the sowing season for certain crops.
  • The Cabinet Committee on Economic Affairs (CCEA), Government of India, determines the MSP based on the recommendations of the Commission for Agricultural Cost and Prices (CACP). 
  • 26 commodities are currently covered.
  • Procurement of agricultural crops is made by the Food Corporation of India (FCI), state agencies and cooperatives.
  • A counterpart of the MSP is the Market Intervention Scheme (MIS), under which the state government procures perishable commodities like vegetable items.
4. Merchant Discount Rate 
  • Merchant Discount Rate or MDR is a charge that merchants pay every time a debit card or credit card is swiped at their end for a transaction by a customer.
  • This charge, typically 1% of the transaction, goes to the company that has installed the Point of Sale (PoS) machine, the network provider such as MasterCard, Visa or RuPay, and the card-issuing bank.
5. Fat Tax
  • A fat tax is a tax or surcharge that is placed upon fattening food and beverages. 
  • Kerala is the first state in India to introduce a 14.5% “fat tax” on pizzas, burgers, sandwiches and tacos sold through branded outlets. This is in sync with the World Health Organization’s advocacy of using fiscal tools to promote healthy eating.
6. General Anti Avoidance Rules 
  • General Anti-Avoidance Rule (GAAR) is an anti-tax avoidance regulation to check tax evasion and avoidance. 
  • GAAR seeks to prevent companies from routing transactions through other countries to avoid taxes.
  • GAAR is set of rules under the Income Tax Act (under the proposed Direct Tax Code).
  • It contains provision allowing the government to retroactively tax overseas deals involving local assets.
  • It empowers officials to deny the tax benefits on transactions or arrangements which do not have any commercial substance or consideration other than achieving tax benefit.
  • It could also be used by the government to target participatory notes (P-Notes).
  • GAAR seeks to give the IT department powers to scrutinize transactions structured in such a way as to deliberately avoid paying tax in India.
  • It will not be invoked in cases where investments are routed through tax treaties that have a sufficient limitation of benefit (LOB) clause to address tax avoidance.
  • GAAR will not apply on foreign portfolio investor if its jurisdiction is based on nontax commercial considerations and the main purpose is not to obtain tax benefits.
  • The Parthasarathy Shome panel was formed in 2012, for drawing up the final guidelines on GAAR and mainly to bring about tax clarity and address the concerns of foreign investors.
  • India will be the 17th nation in the world to have laws that aim to close tax loopholes.
  • At present, GAAR is in force in nations like Australia, Singapore, China and the UK.
7. Non-bank financial companies (NBFCs)
  • Non-bank financial companies (NBFCs) are financial institutions that provide banking services without meeting the legal definition of a bank, i.e. one that does not hold a banking license.
  • The Reserve Bank of India is entrusted with the responsibility of regulating and supervising the Non-Banking Financial Companies by virtue of powers vested under Reserve Bank of India Act, 1934.
  • NBFC cannot accept demand deposits (they can accept term deposits).
  • NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on itself.
  • Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to depositors of NBFCs, unlike in case of banks.
  • The NBFCs do the business of loans and advances, acquisition of shares, stock, bonds, debentures, securities issued by Government.
  • A Non Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956 of India.
8. Wholesale Price Index (WPI)
  • In general, reflects the rate of change in prices of all goods and services in an economy over a period of time.
  • In India, headline inflation is measured through the WPI – which consists of 676 commodities (services are not included in WPI in India).
  • It is measured on year-on-year basis i.e., rate of change in price level in a given month Vis a Vis corresponding month of last year. This is also known as point to point inflation.

In India, there are three main components in WPI –
  1. Primary Articles (weight: 20.12%),
  2. Fuel & Power (weight: 14.91%) and Manufactured Products (weight: 64.97).
  3. This includes “Food Articles” in the Primary Articles (14.34%) and “Food Products” in the Manufactured Products category (9.97%). (WPI) is computed by the Office of the Economic Adviser in Ministry of commerce & Industry, Government of India. WPI is released monthly. Current WPI Base year is 2004-05.
  4. WPI covers all goods including intermediate goods transacted in the economy.
9. Consumer Price Indices (CPI)
  • Consumer Price Indices (CPI) released at national level are:
  • CPI for Industrial Workers (IW) 
  • CPI for Agricultural Labourers (AL)/ Rural Labourers (RL)
  • CPI (Rural/Urban/Combined)
  • While the first two are compiled and released by the Labour Bureau in the Ministry of Labour and Employment, the third by the Central Statistics Office (CSO) in the Ministry of Statistics and Programme Implementation.
  • In India, RBI uses CPI (combined) released by CSO for inflation purpose. 
  • Base year for CPI (Rural, Urban, and Combined) is 2012.
  • The number of items in CPI basket include 448 in rural and 460 in urban. Thus, it makes it clear that CPI basket is broader than WPI basket. 
  • CPI covers consumer goods and consumer services. 
10. Strategic Disinvestment
  • In Strategic disinvestment the management control and a significant proportion of a PSU’s share goes to a private sector strategic partner.
  • Strategic disinvestment of a PSU is different from the ordinary disinvestment in which management of PSU is retained with Government.
  • For example, in a PSU, where the government holding 51%, and out of this, sale of 25% to the strategic partner while the government holding 26% share also is a case of strategic sale. Here, the remaining shares (49%) will be dispersed among the public.
11. Index of Industrial Production (IIP)
  • The Index of Industrial Production (IIP) is an index for India which details out the growth of various sectors in an economy
  • The IIP is compiled and published every month by Central Statistics Office (CSO) of the Union Ministry of Statistics and Programme Implementation.
  • It covers 682 items comprising Manufacturing (620 items), Mining (61 items) & Electricity (1 item). 
  • The current base year is 2004-05.
  • The eight Core Industries comprise nearly 38 % of the weight of items included in IIP.
12. Universal Basic Income (UBI)
  • The Economic Survey 2016-17 tabled in Parliament has advocated for the concept of Universal Basic Income (UBI) as an alternative to the various social welfare schemes in an effort to reduce poverty.
  • A basic income is a form of social security in which all citizens of a country regularly receive an unconditional sum of money, either from a government in addition to any income received from elsewhere.
  • It is based on the principles of universality and unconditionality. However, it forfeits other government aided benefits.
  • Recently, government of Finland announced the introduction on a trial basis for UBI involving 2,000 unemployed people.
  • In June 2016, Swiss voters in referendum had overwhelmingly rejected proposal to introduce basic income for all.
13. Government shifts disinvestment advising role to Department of Economic Affairs
  • The Union Government has transferred the advising role of Department of Investment and Public Asset Management (DIPAM) on utilisation of the proceeds from disinvestment to the Department of Economic Affairs (DEA).
  • The DEA in the Union Finance Ministry will now be in charge of financial policy in regard to the utilisation of proceeds of disinvestment channelised into the National Investment Fund (NIF).
  • The National Investment Fund was created in 2005 in which the proceeds from the disinvestment of Central Public Sector Enterprises (CPSEs) were to be channelised.