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CURRENT AFFAIRS HANDOUT (ECONOMICS- Lecture No. 1) by Jayant Parikshit

Question-1: Which of the following are the cause of rising prices in India esp. during covid-wave 2?

1. Higher global inflation 2. Rising commodity prices 3. Local lockdowns 4. A weaker rupee

Choose the correct option: a. Only1 b. Both 1&2 c. 1,2&3 d. 1,2,3 & 4

Question-2: In the context of Covid Second-Wave in India, a fall in the loan repayment for MFIs indicates:

1. Rural Distress 2. Urban Distress 3. Both Rural & Urban Distress

Choose the correct Option: a. Only1 b. Only2 c. Only3

Question-3: Which of the following is/are major drivers of growing blue & grey collared jobs in India in 2021 so far:

1. e-commerce 2. Edu-Tech 3. Logistics 4. Healthcare

Choose the correct option: a. Only1 b. 1,3&4 c. 1,2,3&4 d. None of these

MCQ For Self Practice:

Question-4: RBI undertook monetary easing in 2020-21 due to Covid pandemic. Which of the following were the components of that easing:

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1. Liquidity infusion 2. Accommodative stance 3. Rate cuts

Choose the correct answer:

a. Only1 b. Only3 c. Both 1&3 d. 1,2,&3

ANSWER/EXPLANATION: Q-1: d Q-2: a Q-3: c

1. Blue-collar worker : hard manual labor, typically agriculture, manufacturing, construction, mining, or maintenance.

2. White-collar workers: suit-and-tie workers who work at a desk and, stereotypically, and avoid physical labour.

3. Grey collar employees: § They hold a position between the white collar and the blue collar. § They work in logistic companies, hotels, hospitals, cab and security services,

receptions, sales and BPOs, IT workers, construction supervisors, and skilled technicians.

§ Unlike blue-collar employees who are trained on the job and perform physical intensive work, these employees come with a specific skill set and require more specialized knowledge in their domain of work.

§ India has blue & grey collared = 250mn

FINANCIAL ACTION TASK FORCE (FATF) Introduction:

The Financial Action Task Force (FATF) is the global money laundering and terrorist financing watchdog. They also keep an eye over weapons of mass destruction.

Background:

§ The Financial Action Task Force (FATF) was established in July 1989 by a Group of Seven (G-7) Summit in Paris, initially to examine and develop measures to combat money laundering.

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§ In October 2001, the FATF expanded its mandate to incorporate efforts to combat terrorist financing, in addition to money laundering.

§ In April 2012, it added efforts to counter the financing of proliferation of weapons of mass destruction.

§ The FATF's decision making body, the FATF Plenary, meets three times per year.

Members:

§ The 39 Members of the FATF § The FATF currently comprises 37 member jurisdictions and 2 regional organisations,

representing most major financial centres in all parts of the globe.

India& FATF

§ India became an Observer at FATF in 2006. Since then, it had been working towards full-fledged membership.

§ On June 25, 2010 India was taken in as the 34th country member of FATF.

FATF LISTS: 1. Grey List:

§ Countries on the FATF grey list represent a much higher risk of money laundering and terrorism financing but have formally committed to working with the FATF to develop action plans that will address their deficiencies.

§ The countries on the grey list are subject to increased monitoring by the FATF, which either assesses them directly or uses FATF-style regional bodies (FSRBs) to report on the progress they are making.

2. Black List:

§ The blacklist sets out the countries that are considered deficient in their anti-money laundering and counter-financing of terrorism regulatory regimes.

§ It is extremely likely that blacklisted countries will be subject to economic sanctions and other prohibitive measures by FATF member states and other international organizations.

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Consequences of being in the FATF grey list:

1. Economic sanctions from IMF, World Bank, ADB

2. Problem in getting loans from IMF, World Bank, ADB and other countries

3. Reduction in international trade

4. International boycott

PAKISTAN & FATF GREY LIST:

§ It was in the same category from 2012 to 2015 too. § Pakistan was again put on the grey list by the Paris-based FATF in June 2018, and the

country has been struggling to come out of it. § Pakistan is still to fully comply with three of the 27-point action plan it had been

presented with in June 2018 when it was put on the “greylist”. § The three points on which the FATF has sought urgent action by Pakistan pertain to

effective steps — in terms of financial sanctions and penalties — against the terror funding infrastructure and the entities involved.

§ In Pakistan's case, the international watch-dog has taken cognisance of the inaction against several banned organisations involved in raising funds for terror activities and those linked to global terrorists like Jaish-e-Mohammed chief Masood Azhar and Lashkar-e-Taiba’s Hafiz Saeed and its operations chief Zaki-Ur Rahman Lakhvi.

BLACK MONEY

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2019:

§ Funds parked by Indian individuals and enterprises in Swiss banks, including through India-based branches, fell by 5.8 per cent in 2019 to 899 million Swiss francs (Rs 6,625 crore). These are official figures reported by banks to the SNB and do not indicate the quantum of the much-debated alleged black money held by Indians in Switzerland.

§ Among the top-ranked jurisdictions, the UK is followed by the US, West Indies,

France and Hong Kong in the top five. The top-five countries alone account for more than 50 per cent of the aggregate foreign funds parked with the Swiss banks, while the top-10 account for nearly two-thirds.

§ The top-15 countries account for nearly 75 per cent of all foreign money in Swiss

banks, while the contribution of the top-30 is almost 90 per cent. § The top-10 countries also include Germany, Luxembourg, Bahamas, Singapore and

Cayman Islands.

§ Among the five-nation BRICS block of emerging economies, India is ranked the lowest while Russia is ranked the highest at the 20th place, followed by China at 22nd (same as 2018-end), South Africa at 56th (up two places) and Brazil at 62nd (up from 65th last year) in terms of money parked by their citizens and enterprises at the end of 2019.

2021 NEWS: § Funds of Indians in Swiss Banks have risen to over Rs 20,700 crore (CHF 2.55 billion) at

the end of 2020 from Rs 6,625 crore (CHF 899 million) at the end of 2019, reversing a 2 year declining trend. It has also been stated that this is also the highest figure of deposits in the last 13 years.

Note:

§ The figures reported are official figures reported by banks to Swiss National Bank (SNB) and do not indicate the quantum of much debated alleged black money held by Indians in Switzerland. Further, these statistics do not include the money that Indians, NRIs or others might have in Swiss banks in the names of third–country entities.

GoI Stand:

§ The customer deposits have actually fallen from the end of 2019. The funds held through fiduciaries has also more than halved from end of 2019. The biggest increase is in “Other amounts due from customers”. These are in form of bonds, securities and various other financial instruments.

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§ It is pertinent to point out that India and Switzerland are signatories to the Multilateral Convention on Mutual Administrative Assistance in Tax Matters (MAAC) and both countries have also signed the Multilateral Competent Authority Agreement (MCAA) pursuant to which, the Automatic Exchange of Information (AEOI) is activated between the two countries for sharing of financial account information annually for calendar year 2018 onwards.

§ Further, the following factors could potentially explain the increase in deposits:

a. Increase in the deposits held by Indian companies in Switzerland owing to increased business transactions

b. Increase in deposits owing to the business of Swiss Bank branches located in India c. Increase in Inter- bank transactions between Swiss and Indian Banks d. A capital increase for a subsidiary of a Swiss Company in India and e. Increase in the liabilities connected with the outstanding derivative financial

instruments

FISCAL DEFICIT IN INDIA § India recorded a fiscal deficit of 9.2% of GDP in 2020-21, narrower than the revised

estimate of 9.5%, as per data from the Controller General of Accounts (CGA). Note that the Budget 2020-21, presented before the COVID-19 lockdowns, had set a fiscal deficit target of 3.5% of GDP. The government has set a target to reduce the fiscal deficit this year to 6.8%.

§ The higher-than-estimated expenditure in 2020-21 was actually driven by higher revenue expenditure of ₹75,000 crore. The spurt in revenue spending to the release of food subsidies, but higher-than-anticipated tax revenues helped curtail the deficit.

§ Interestingly, capex was cut by ₹14,000 crore.

INFLATION AND ITS IMPACT

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§ Inflation is called a necessary evil--no one likes it but it is needed for economic

growth. Too much inflation can create major problems for policy makers. § Both wholesale and retail inflation (along with Core inflation) continued to increase

month-on-month from Jan till June 2021, though the rise in the former has been much sharper. What’s more, there are chances it may rise further.

§ So, what’s causing this rise in inflation? How will it impact the Indian economy and stock markets and what can be done to control it?

What is causing inflation in India?

§ The high rate of inflation in May -June 2021 is primarily due to rise in prices of crude petroleum, mineral oils viz. petrol, diesel, naphtha, furnace oil etc. and manufactured products when compared with the corresponding month of the previous year.

§ Core WPI inflation also rose to a double-digit level of 13.3% in June 2021. § The continued rise in global crude oil prices, a weaker rupee and the upward revision

in domestic fuel prices are major contributors to inflation.

Jayant Parikshit (Vajiram & Ravi) 13

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Imported Inflation: § The sharp rise in commodity prices across the world is a major reason behind the

inflation spike in India. This is increasing the import cost for some of the crucial consumables, pushing inflation higher.

§ When inflation in India rises because of the higher prices of imported items, it is called imported inflation for India.

Cause of retail (CPI) Inflation:

§ The food inflation component for retail inflation rose significantly. Some of the items that pushed retail inflation were fuel, transport and communication, edible oil and pulses.

Cause of wholesale (WPI) Inflation:

§ In WPI inflation, among the three major components namely primary articles, fuel and power, and manufacturing that contributed to the rise in inflation, the key driver was fuel and power, followed by the manufacturing and primary article.

§ Since for a large number of commodities, their global prices are high, the same is now

getting reflected in their domestic prices. For example, petrol, diesel and LPG witnessed an inflation of 62.3 per cent, 66.3 per cent and 60.9 per cent in May 2021.

What does this mean for the economy and RBI?

§ RBI views Indian inflation as majorly supply side led in recent months. Reason being that due to lockdown, and supply chain issues goods are not yet reaching the market.

§ RBI feels that inflation in developed economics like US are mostly demand led inflation. Reason being that most people are vaccinated in US and factories are opening up So, they are demanding more goods and services leading to inflation.

§ So, as per RBI had India also been suffering from inflation mostly due to demand side, then we would have to worry. But, supply side inflation can be fixed with easing of lockdown and restoration of supply channels.

Why is RBI reluctant to take bold steps to immediately control current inflation?

§ To control inflation, RBI needs to increase interest rates and absorb rupee from the economy. If interest rate would increase, investment might go down and GDP may be impacted negatively.

§ But RBI wants to maintain GDP. So, it is reluctant to take immediate bold step to control inflation.