Daily Prelims Notes 19 May 2022

Daily Prelims Notes

19 May 2022

Table Of Contents

1. Liberalised Remittance Scheme
2. Revised Guarantee Policy and FRBM
3. Recession and high price
4. Supreme Court frees Perarivalan in former Prime Minister Rajiv Gandhi assassination case
5. Re-imagining museums: Upgradation and Modernisation
6. India’s vulnerability to drought 
7. Futures and Options

1. Liberalised Remittance Scheme

Subject: Economy

Section: External Sector

Outward forex remittances under the Reserve Bank of India’s liberalised remittance scheme (LRS) hit an all time high in FY22 as Indians splurged on overseas education and international travel.

Outward Remittances:

Outward remittance is a transfer of funds in the form of foreign exchange by a person from India, to a beneficiary outside India (except for Nepal and Bhutan) for any bonafide purposes as permissible under Foreign Exchange Management Act (FEMA), 1999.

Purpose:

• Cover educational costs
• Cover living expenses of a family member
• Pay for travel trips taken
• Medical treatments
• Buying assets abroad
• Gifting or donating to an individual or organisation

About Liberalised Remittance Scheme (LRS):

Under the Liberalised Remittance Scheme, all resident individuals, including minors, are allowed to freely remit up to USD 2,50,000 per financial year (April – March) for any permissible current or capital account transaction or a combination of both.

The Scheme was introduced on February 4, 2004, with a limit of USD 25,000. The LRS limit has been revised in stages consistent with prevailing macro and micro economic conditions.

Individuals can avail of foreign exchange facility for the following purposes within the LRS limit of USD 2,50,000 on financial year basis:

• Private visits to any country (except Nepal and Bhutan)
• Gift or donation
• Going abroad for employment
• Emigration
• Maintenance of close relatives abroad
• Travel for business, or attending a conference or specialised training or for meeting expenses for meeting medical expenses, or check-up abroad, or for accompanying as attendant to a patient going abroad for medical treatment/ check-up
• Expenses in connection with medical treatment abroad
• Studies abroad
• Any other current account transaction which is not covered under the definition of current account in FEMA 1999.

The Scheme is not available to corporates, partnership firms, HUF, Trusts etc. The remittance facility under the Scheme is not available for the following:

• Remittance for any purpose specifically prohibited under Schedule-I (like purchase of lottery tickets/sweepstakes, proscribed magazines, etc.) or any item restricted under Schedule II of Foreign Exchange Management (Current Account Transactions) Rules, 2000.
• Remittance from India for margins or margin calls to overseas exchanges / overseas counterparty.
• Remittances for purchase of FCCBs issued by Indian companies in the overseas secondary market.
• Remittance for trading in foreign exchange abroad.
• Capital account remittances, directly or indirectly, to countries identified by the Financial Action Task Force (FATF) as “non- cooperative countries and territories”, from time to time.
• Remittances directly or indirectly to those individuals and entities identified as posing significant risk of committing acts of terrorism as advised separately by the Reserve Bank to the banks.

Individuals can also open, maintain and hold foreign currency accounts with banks outside India for carrying out transactions permitted under the scheme.

2. Revised Guarantee Policy and FRBM

Subject: Economy

Section: Fiscal Policy

Why in the news?

Finance Ministry has come out with a new Government Guarantee Policy, which aims to include all the changes in General Financial Rules and financial policies.

Need:

• Such a policy is required as the volume of sovereign guarantees undertaken during a financial year is limited to 0.5 per cent of the GDP as per the Fiscal Responsibility and Budget Management Act, 2003.
• It intends to improve the viability of projects or activities undertaken by Central entities with significant social and economic benefits.
• It also enables Central PSUs to raise resources at lower interest charges or on more favourable terms.
• Its objective is to fulfill the requirement in cases where sovereign guarantee is a precondition for concessional loans from bilateral/multilateral agencies to Central PSUs.

Details:

• Ministries and departments will have to submit the initial proposal on a dedicated portal and then send a physical copy to the budget division, which will process it.
• Approval or otherwise will be conveyed to ministries/departments through a guarantee portal.
• Once approved, the ministry/department may enter into a guarantee agreement.
• The ministry/department will pay an applicable guarantee fee on the day of signing the agreement and thereafter, on April 1 every year.
• Guarantee fee has been categorised into two based on risk rating:
  • For category ‘A’, the fee will be 0.5-0.6 percent depending upon tenor
  • For category ‘B’, it will be 0.7-0.9 percent.
• Details such as loan drawn history, repayments, etc. needs to be updated on the portal and a review report sent to the budget division.

Fiscal Responsibility and Budget Management Act, 2003.

The FRBM Act is a law enacted by the Government of India in 2003 to ensure fiscal discipline. It is considered as one of the major legal steps taken in the direction of fiscal consolidation in India.

The main objectives of the act were:

• to introduce transparent fiscal management systems in the country.
• to introduce a more equitable and manageable distribution of the country’s debts over the years.
• to aim for fiscal stability for India in the long run

The FRBM act also provided for certain documents to be tabled in the Parliament of India, along with Budget, annually with regards to the country’s fiscal policy. This included the: 

1. Medium-term Fiscal Policy Statement,
2. Fiscal Policy Strategy Statement,
3. Macro-economic Framework Statement, and
4. Medium-term Expenditure Framework Statement

• Revenue Deficit Target – revenue deficit should be completely eliminated by March 31, 2009. The minimum annual reduction target was 0.5% of GDP.
• Fiscal Deficit Target – fiscal deficit should be reduced to 3% of GDP by March 31, 2009. The minimum annual reduction target was 0.3% of GDP.
• Contingent Liabilities – The Central Government shall not give incremental guarantees aggregating an amount exceeding 0.5 per cent of GDP in any financial year beginning 2004-05.
• Additional Liabilities –  Additional liabilities (including external debt at current exchange rate) should be reduced to 9% of the GDP by 2004-05. The minimum annual reduction target in each subsequent year to be 1% of GDP.
• RBI purchase of government bonds – to cease from 1 April 2006. This indicates the government not to borrow directly from the RBI.

The rules for implementing the Act were notified in July 2004. The rules were amended in 2008, 2015, 2018, and most recently to the setting of a target of 3.1% for March 2023

N.K. Singh Committee

In May 2016, the government set up a committee under NK Singh to review the FRBM Act. The Committee suggested using debt as the primary target for fiscal policy.

The targets set by NK Singh:

• Debt to GDP ratio: The review committee advocated for a Debt to GDP ratio of 60% to be targeted with a 40% limit for the centre and 20% limit for the states.
• Revenue Deficit Target – revenue deficit should be reduced to 0.8% of GDP by March 31, 2023. The minimum annual reduction target was 0.5% of GDP.
• Fiscal Deficit Target – fiscal deficit should be reduced to 2.5% of GDP by March 31, 2023. The minimum annual reduction target was 0.3% of GDP.

Escape Clause:

In 2018, the FRBM Act was further amended. The clause allows the government to relax the fiscal deficit target for up to 50 basis points or 0.5 per cent. Under FRBM, if the escape clause is triggered to allow for a breach of fiscal deficit target, the RBI is then allowed to participate directly in the primary auction of government bonds, thus formalising deficit financing.

Under Section 4(2) of the Act, the Centre can exceed the annual fiscal deficit target citing certain grounds:

• National security, war
• National calamity
• Collapse of agriculture
• Structural reforms
• Decline in real output growth of a quarter by at least three percentage points below the average of the previous four quarters.

Fiscal Consolidation at State level:

To ensure that the States too are financially prudent, the 12th Finance Commission’s recommendations in 2004 linked debt relief to States with their enactment of similar laws.

The States have since enacted their own respective Financial Responsibility Legislation, which sets the same 3% of Gross State Domestic Product (GSDP) cap on their annual budget deficits.

3. Recession and high price

Subject: Economy

Section: Inflation

If oil prices remain high like they are, then there are fears that the world might enter a recession in two years, a top source said.

Concept:

Periods of high oil prices frequently lead to periods of recession shortly after. There are main reasons for this.

• Strong correlation between oil prices and cost push inflation-Higher oil prices cause a rise in the price of petrol, (gasoline) energy, and the cost of transporting all goods. Further, used as an input in production of various goods might increase cost of production and transportation.
• Lower disposable income for consumers-If oil prices are rising, consumers will face rising living costs and their disposable income will not go as far leading them to cut back on some purchases. With rising oil prices we get both higher prices and less demand, a situation which can lead to ‘stagflation‘

• Upward pressure on interest rates-When inflation spikes due to cost-push inflation, it puts pressure on Central Banks to raise interest rates. Higher interest rates will slow down economic activity because higher rates increase the cost of borrowing and discourage spending and investment on credit.
• Uncertainty Often oil prices rise in response to some major event, say- Russia-Ukraine crisis 2022. Therefore, in addition to higher oil prices, businesses are responding to the greater political uncertainty and negative effects to trade.
• Reduction in marginal efficiency of capital– The marginal efficiency of capital displays the expected rate of return on investment, at a particular given time. Given, reduced consumption demand and inflation will cause reduction in marginal efficiency of capital and thus, the investment demand will decrease causing the growth to slow down.

4. Supreme Court frees Perarivalan in former Prime Minister Rajiv Gandhi assassination case

Subject: Polity

Section: President

Content:

• The Supreme Court held that the Tamil Nadu Council of Ministers’ advice on September 9, 2018 to pardon Perarivalan was binding on the Governor under Article 161 (Governor’s power of clemency) of the Constitution.
• The Governor had no business forwarding the pardon plea to the President after sitting on it for years together.
• Thus, SC invoked its extraordinary powers to do complete justice under Article 142 of the Constitution.
• After all, the court said, a Governor’s non-exercise of power under Article 161 of the Constitution was not immune from judicial review.
• Also, the Court dismissed the Centre’s argument that the President exclusively, and not the Governor, had the power to grant pardon in a case under Section 302 (murder) of the Indian Penal Code.
• The court had said that such a contention would render Article 161 a “dead-letter” and create an extraordinary situation whereby pardons granted by Governors in murder cases for the past 70 years would be rendered invalid.
• The Indian Judiciary and the constitution of India believe that every citizen of India must get “complete justice”. The Constitution of India under Article 142 grants the power to the Supreme Court for passing any decree to do “complete justice”
• In the exercise of its authority, the Supreme Court may issue any order required to provide complete justice in the case at hand. Even legislation will not be able to limit the court’s power. In the matter of Chandrakant Patil & or s. v. State Through CBI (1998), The Supreme Court of India ruled that exercising Article 142 is only subject to two conditions.

1. It can only be used if the court is otherwise exercising its jurisdiction,
2. The case or dispute pending before the Supreme Court must require the court’s order for complete justice to be served.

5. Re-imagining museums: Upgradation and Modernisation

Subject: History

Section: Art and Culture

• Progress made in re-imagining our museums and cultural spaces in recent times in India.
  • First, there has been a shift from a museum-centric approach to a cultural spaces approach.
  • Second, the museums have been built for specific purposes rather than relying on general purpose museums.
  • And finally, the museums have been looked at with a whole-of-government approach to ensure that museums provide a wholesome experience.
• Cultural Spaces Approach:
  • This approach involves integration of one’s culture into the lives of the citizens rather than to position them in museums.
  • And since India is one of the few continuously inhabited civilisational states that continues to thrive. Therefore, its art, culture and heritage are not just available for viewing in museums but can be witnessed in our day-to-day activities.
  • As a result whenever stolen heritage is retrieved from other countries, there is an attempt to restore it to the place it was taken from rather than to have it languish in the warehouse of a museum.
• Specific Purpose Museums:
  • Such museums have unique content and a definite purpose and also ensures that rich material is on display and the overall experience is wholesome.
  • Examples: Birsa Munda museum in Ranchi, Pradhan Mantri Sangrahalaya, the arms and armour museum at the Red Fort, a gallery on Gautama Buddha in Delhi, the museum on Jammu and Kashmir and the Statue of Unity also contain a museum that chronicles the various facets of Patel in great detail.
• Whole-of-government approach:
  • The museums are not just under the control of the Ministry of Culture, other government departments and ministries also play an important role in managing these museums.
  • Such an approach also provides a wholesome experience to all stakeholders.
  • The 25 science cities, centers and museums under the National Council of Science Museums, an autonomous body under the Ministry of Culture, are backed with a MoU with the Council of Scientific and Industrial Research.
  • The use of digital technology to enhance user experience is not limited to the use of Artificial Intelligence, Augmented Reality and Virtual Reality, but to widen public access through modernisation and digitisation of collections and exhibitions.
  • Breaking down silos to forge a whole-of-government approach in such a specialized domain requires new skills and perspectives and these are being developed.
  • The new Indian Institute of Heritage that is being set up as a world class university aims to address these challenges.

6. India’s vulnerability to drought

Subject: Geography

Section: Physical geography

• Drought in Numbers, 2022 report presented by the United Nations Convention to Combat Desertification (UNCCD) has revealed that many parts of India fall under the list of regions that are vulnerable to drought globally.

About Drought in numbers report:

• The report is a collection of data on the effects of droughts on our ecosystem and how they can be mitigated through efficient planning for the future

Other Key findings of the report

• India’s GDP reduced by 2 to 5% between 1998 and 2017 due to severe droughts
• Economic losses of approximately $124 billion occurred globally due to drought.
• Drought conditions can force up to 216 million people to migrate by 2050.(World Bank)
• Weather, climate and water hazards have accounted for 50% of all disasters and 45% of all reported deaths since 1970 (WMO)
• More than a billion people around the world were affected by drought in 2000-19, making it the second-worst disaster after flooding.
• globally, approximately 55 million people are directly affected by droughts annually as per WHO findings
• Women and girls in emerging and developing countries suffer more in terms of education levels, nutrition, health, sanitation, and safety as a result of droughts
• If global warming reaches 3°C by 2100, drought losses could be five times higher than today’s levels. 
• The largest increase in drought losses is projected in the Mediterranean and the Atlantic regions of Europe.
• Australia’s megadrought in 2019-2020 contributed to `megafires’ resulting in one of the most extensive losses of habitat for threatened species.
• 84% of all terrestrial ecosystems are threatened by changing and intensifying wildfires.

About Drought:

• Drought is a temporary reduction in water or moisture availability below the normal or expected amount for a specific period.
• Meteorological drought is classified based on rainfall deficiency w.r.t. long term average – 25% or less is normal, 26-50% is moderate and more than 50% is severe.
• Hydrological drought is best defined as deficiencies in surface and sub-surface water supplies leading to a lack of water for normal and specific needs. Such conditions arise even in times of average (or above average) precipitation when increased usage of water diminishes the reserves.
• Agricultural drought is identified by 4 consecutive weeks of meteorological drought, weekly rainfall is 50 mm from 15/5/ to 15/10, 6 such consecutive weeks rest of the year and crop planted is 80% in kharif season.
• In India, around 68% of the country is prone to drought in varying degrees.
• IMD is the designated agency for providing drought early warning and forecasting.

About UNCCD COP 15

• The UNCCD, together with the UN Framework Convention on Climate Change (UNFCCC) and the Convention on Biological Diversity, is one of three Rio Conventions (CBD).
• The UNCCD was adopted on 17 June 1994, and entered into force on 26 December 1996.
• It is the only legally enforceable international agreement that connects the environment, development, and sustainable land management.
• It is the only convention that sprang directly from the Rio Conference’s Agenda 21.
• The International Year of Deserts and Desertification was designated in 2006 to promote the Convention.
• UNCCD COP 15 Agenda: Drought, land restoration, and related enablers such as land rights, gender equality and youth empowerment are among the top items on the Conference agenda.

7. Futures and Options

Subject: Economy

Section: Capital Market

Content:

Options

• An option gives the buyer the right, but not the obligation, to buy (or sell) an asset at a specific price at any time during the life of the contract.
• They tend to be fairly complex, options contracts tend to be risky. Both call and put options generally come with the same degree of risk. When an investor buys a stock option, the only financial liability is the cost of the premium at the time the contract is purchased.
• Options are based on the value of an underlying security such as a stock. As noted above, an options contract gives an investor the opportunity, but not the obligation, to buy or sell the asset at a specific price while the contract is still in effect. Investors don’t have to buy or sell the asset if they decide not to do so.
• They are preferred by

Futures

• A futures contract gives the buyer the obligation to purchase a specific asset, and the seller to sell and deliver that asset at a specific future date unless the holder’s position is closed prior to expiration.
• Options may be risky, but futures are riskier for the individual investor. Futures contracts involve maximum liability to both the buyer and the seller
• A futures contract requires a buyer to purchase shares—and a seller to sell them—on a specific future date, unless the holder’s position is closed before the expiration date.
• Futures contracts tend to be for large amounts of money. The obligation to sell or buy at a given price makes futures riskier by their nature.
• They are preferred by speculators.