Insights Static Quiz -233, 2019–Economy

Solution: b)

Inflation Indexed Bond (IIB) is a bond issued by the Sovereign, which provides the investor a constant return irrespective of the level of inflation in the economy. The main objective of Inflation Indexed Bonds is to provide a hedge and to safeguard the investor against macroeconomic risks in an economy.

There are no special tax concessions for these bonds. IIBs are treated as government securities (G-Sec) and therefore, would be eligible for short-sale and repo transactions and gets SLR status (i.e., they are eligible to be kept as part of Statutory Liquidity Ratio requirements of banks).

Solution: c)

Peer to peer (P2P) lending is a form of crowdfunding used to raise unsecured loans which are re-paid with interest. Crowdfunding refers to financing of projects with small amounts of money raised from a large number of people, with a portal serving as an intermediary. It utilises an online platform which serves as a link between borrowers and lenders.

RBI vide a Notification on 24th August, 2017, enabled P2P entities as Non-Banking Financial Company (NBFC). However, an existing NBFC will not be able to operate as an NBFC-P2P.

Minimum networth requirement for these platforms is kept at Rs. 2 Cr. The borrower can either be an individual or a legal person (say a body of individuals, a HUF, a firm, a society or any artificial body, whether incorporated or not) requiring a loan.

The interest rate is not to be fixed by the platform. The interest rate for each and every loan is to be fixed separately over the electronic platform by way of a mutual agreement between the borrower and lender. Fund transfer between participants on the P2P lending platform will happen through escrow account mechanisms. All fund transfers shall be through and from bank accounts, and cash transactions are strictly prohibited.

Solution: b)

The Statutory Liquidity Ratio (SLR) is a prudential measure under which (as per the Banking Regulations Act 1949) all Scheduled Commercial Banks in India must maintain an amount in one of the following forms as a percentage of their total Demand and Time Liabilities (DTL) / Net DTL (NDTL);

[i] Cash.
[ii] Gold; or
[iii] Investments in un-encumbered Instruments that include;

(a) Treasury-Bills of the Government of India.
(b) Dated securities including those issued by the Government of India from time to time under the market borrowings programme and the Market Stabilization Scheme (MSS).
(c) State Development Loans (SDLs) issued by State Governments under their market borrowings programme.
(d) Other instruments as notified by the RBI.

If a bank fails to meet its SLR obligation, a penalty in the form of a penal interest payable is imposed.

SLR is also a tool for controlling liquidity in the domestic market via manipulating bank credit. A rise in SLR locks up increasing portion of a bank’s assets in the above three categories and may squeeze out bank credit.

In the wake of the global financial crisis, the SLR was reduced from 25 percent to 24 percent in November, 2008. As of April 2016 the SLR stands at 21.25 percent.

Solution: b)

There is a strong connection between the government’s tax revenue earnings and economic growth. The simple fact is that as the economy achieves faster growth, the tax revenue of the government also goes up.

Tax buoyancy explains this relationship between the changes in government’s tax revenue growth and the changes in GDP. It refers to the responsiveness of tax revenue growth to changes in GDP. When a tax is buoyant, its revenue increases without increasing the tax rate.

Solution: b)

Fiscal deficit (FD) is the difference between revenue receipts plus non-debt capital receipts on the one side and total expenditure including loans, net of repayments, on the other. It measures the gap between the government consumption expenditure including loan repayments and the anticipated income from tax and non-tax revenues.

It also indicates the borrowing requirements of the government from all sources. The bigger the gap the more the government will have to borrow or resort to printing money to make both ends meet. Indiscriminate borrowings will push the economy into debt trap, while too much deficit financing may be inflationary.

Increasing Foreign Direct Investment (FDI) tend to bring more revenue to the government there by reducing FD.

Austerity measures are reductions in government spending, increases in tax revenues, or both which can reduce FD.

Providing budgetary support to public sector enterprises and Waiving off farm loans increase government expenditure thus increasing FD.