MINIMUM SUPPORT PRICE
1. Context
Over a thousand farmers gathered at the Delhi-Noida boundary to press for their demands for land allocation and increased compensation for the land acquired by the government
2. What is the Minimum Support Price (MSP)?
- MSP is the minimum price a farmer must pay for their food grains as guaranteed by the government. They are recommended by the Commission for Agricultural Costs and Prices (CACP) and approved by the Cabinet Committee on Economic Affairs.
- The CACP submits its recommendations to the government in the form of Price Policy Reports every year.
- After considering the report and views of the state governments and also keeping in view the overall demand and supply situation in the country, the central government takes the final decision.
- The Food Corporation of India (FCI) is the nodal agency for procurement along with State agencies, at the beginning of the sowing season.
- 7 cereals (paddy, wheat, maize, bajra, jowar, ragi, and barley)
- 5 pulses (chana, tur/arhar, moong, urad, and Masur)
- 7 oilseeds (rapeseed-mustard, groundnut, soya bean, sunflower, sesamum, safflower, and Enigerseed) and
- 4 commercial crops (sugarcane, cotton, copra, and raw jute).
3. How MSP is Calculated?
- MSP, presently, is based on a formula of 1.5 times the production costs.
- The CACP projects three kinds of production costs for every crop, both at state and all-India average levels.
- A2 covers all paid-out costs directly incurred by the farmer — in cash and kind — on seeds, fertilizers, pesticides, hired labour, leased-in land, fuel, irrigation, etc.
- A2+FL includes A2 plus an imputed value of unpaid family labour.
- C2: Estimated land rent and the cost of interest on the money taken for farming are added to A2 and FL.
- Farm unions are demanding that a comprehensive cost calculation (C2) must also include capital assets and the rentals and interest forgone on owned land, as recommended by the National Commission for Farmers.
4. The issue with the calculation of MSP
- To calculate MSP, the government uses A2+FL cost. The criticism of A2+FL is that it doesn’t cover all costs and that a more representative measure, C2, needs to be used.
- For example, in the 2017-18 rabi season, CACP data shows that C2 for wheat was 54% higher than A2+FL.
- The Swaminathan Commission also stated that the MSP should be based on the comprehensive cost of production, which is the C2 method.
5. Key Points about the Farmer's Demand
- After the recent decision to repeal three contentious farm laws, protesting farmer unions are now pressing for their demand of the legalization of the Minimum Support Price (MSP).
- They want a legal guarantee for the MSP, which at present is just an indicative or a desired price.
- Legalising MSPs would put the government under a legal obligation to buy every grain of the crops for which MSPs have been announced.
- At present, the PM has announced the formation of a committee to make MSP more transparent, as well as to change crop patterns and to promote zero-budget agriculture which would reduce the cost of production.
- The entire issue of enforcing MSP legally is a tricky, complicated, and multidimensional one, involving lots of factors.
- Core demand: MSP based on a C2+50% formula should be made a legal entitlement for all agricultural produce. This would mean a 34% increase in the latest MSP for paddy and a 13% increase for wheat. MSP should also be extended to fruit and vegetable farmers who have been excluded from benefits so far.
6. The rationale behind the demand for legislation of MSP
- Farmers receive less than MSP: In most crops grown across much of India, the prices received by farmers, especially during harvest time, are well below the officially declared MSPs. And since MSPs have no statutory backing, they cannot demand these as a matter of right.
- Limited procurement by the Govt: Also, the actual procurement at MSP by the Govt. is confined to only about a third of wheat and rice crops (of which half is bought in Punjab and Haryana alone), and 10%-20% of select pulses and oilseeds. According to the Shanta Kumar Committee’s 2015 report, only 6% of the farm households sell wheat and rice to the government at the MSP rates.
7. Challenges associated with MSP
- Protest by Farmers: Farm unions have been protesting for more than six months on Delhi's outskirts, demanding legislation to guarantee MSP for all farmers for all crops and a repeal of three contentious farm reform laws.
- MSP and Inflation: When announcing the MSP, inflation should be taken into account. But often the price is not increased up to the mark. For example, this time MSP for Maize has not even considered inflation then how it will benefit farmers! Also, frequent increases in the MSPs can lead to inflation too.
- High Input Costs: The input costs have been rising faster than sale prices, squeezing the meagre income of the small farmers and driving them into debt.
- Lack of Mechanism: No mechanism guarantees that every farmer can get at least the MSP as the floor price in the market. So proper mechanisms need to be fixed for all times to come.
- Restriction in Europe: Even after producing surplus grains, every year a huge portion of these grains gets rotten. This is due to the restrictions under WTO norms, that grain stocks with the FCI (being heavily subsidized due to MSP) cannot be exported.
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For Prelims: Minimum Support Price, Rabi Crops, WTO, Commission for Agricultural Costs and Prices (CACP), Cabinet Committee on Economic Affairs, Food Corporation of India
For Mains:
1. Explain the concept of Minimum Support Price (MSP) in India. How is MSP determined, and what is its role in ensuring fair prices for agricultural produce? (250 Words)
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Previous Year Questions
1. Consider the following statements: (UPSC CSE 2020)
1. In the case of all cereals, pulses, and oil seeds, the procurement at Minimum Support Price (MSP) is unlimited in any State/UT of India.
2. In the case of cereals and pulses, the MSP is fixed in any State/UT at a level to which the market price will never rise.
Which of the statements given above is/are correct?
A. 1 only
B. 2 only
C. Both 1 and 2
D. Neither 1 nor 2
Answer: D
2. Which of the following factors/policies were affecting the price of rice in India in the recent past? (UPSC CSE, 2020)
(1) Minimum Support Price (2) Government’s trading (3) Government’s stockpiling (4) Consumer subsidies Select the correct answer using the code given below: (a) 1, 2 and 4 only (b) 1, 3 and 4 only (c) 2 and 3 only (d) 1, 2, 3 and 4 Answer: D
3. In India, which of the following can be considered as public investment in agriculture? (UPSC GS1, 2020)
(1) Fixing Minimum Support Price for agricultural produce of all crops (2) Computerization of Primary Agricultural Credit Societies (3) Social Capital development (4) Free electricity supply to farmers (5) Waiver of agricultural loans by the banking system (6) Setting up of cold storage facilities by the governments. In India, which of the following can be considered as public investment in agriculture? Select the correct answer using the code given below: (a) 1, 2 and 5 only (b) 1, 3, 4 and 5 only (c) 2, 3 and 6 only (d) 1, 2, 3, 4, 5 and 6 Answer: C
4. The Fair and Remunerative Price (FRP) of sugarcane is approved by the (UPSC CSE, 2015)
(a) Cabinet Committee on Economic Affairs (b) Commission for Agricultural Costs and Prices (c) Directorate of Marketing and Inspection, Ministry of Agriculture (d) Agricultural Produce Market Committee Answer: A
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DNA SYSTEMS IN CRIMINAL PROCEDURE (IDENTIFICATION) ACT
1. Context
DNA analysis can create a ‘narrow biologised notion of inheritance’, to use the words of Projit Mukharji, for no reason other than that the molecule can reveal more than what we wish to tell. If this isn’t a problem enough, consider what it means for laws we have, or don’t, to protect our privacy
2. DNA Systems
- DNA, or deoxyribonucleic acid, serves as the fundamental genetic material present in the cells of all individuals.
- It uniquely determines human behaviour and physical characteristics, making each person's DNA distinct except for identical twins.
- In the realm of forensic science, the utilization of DNA evidence has brought about a transformative impact on criminal investigations.
- DNA profiling has proven to be a highly reliable and precise source of evidence, revolutionizing investigative processes worldwide since the 1980s.
- Various countries have progressively incorporated DNA profiling into their investigation systems.
- Many have enacted robust legislation to regulate its use, considering both its positive and negative aspects.
3. DNA evidence in the Criminal Procedure Code
- India, too, has witnessed the increasing utilization of DNA evidence in criminal investigations over the past decade.
- While its primary application has been in cases related to paternity, it is now also more prevalent in instances of rape and murder, with notable cases like the Nirbhaya gang rape and the Arushi Talwar murder trial highlighting its significance.
- DNA technology plays a pivotal role in identifying the origins of biological samples, such as blood, saliva, semen, and skin cells, recovered from crime scenes.
- Nevertheless, India has yet to fully harness the potential of DNA evidence, primarily due to the absence of dedicated legislation.
- Currently, Indian courts allow the collection and utilization of DNA evidence by interpreting various legal provisions.
- For instance, an extended interpretation of Sections 53 and 54 of the Criminal Procedure Code (CrPC) enables DNA tests.
- Section 53 pertains to the examination of the accused by a medical professional, while Section 54 allows for medical examinations upon the request of the arrested person.
- In 2005, an amendment introduced Section 53-A to the CrPC, mandating the examination of individuals accused of rape by a medical practitioner.
- This examination encompasses the analysis of blood, bloodstains, semen, swabs, hair samples, and DNA profiling.
- The court possesses the authority to direct law enforcement to collect blood samples and conduct DNA tests for further investigative purposes.
- However, the absence of dedicated legislation remains a significant obstacle to realizing the full potential of DNA evidence in India.
4. The Need for Legislative Change
The CrPI Act replaced the outdated British-era Identification of Prisoners Act, 1920. The former law was limited in scope, primarily collecting finger and footprint impressions and photographs of convicted persons. In contrast, the new Act incorporates modern techniques to capture and record various body measurements.
5. The Role of the National Crime Records Bureau (NCRB)
- The NCRB, operating under the Union Ministry of Home Affairs (MHA), plays a pivotal role in implementing the CrPI Act.
- It is responsible for storing, processing, sharing, disseminating, and destroying records of measurements obtained.
- Impressions collected at police stations will be stored in a centralized database maintained by the NCRB, accessible to authorized police and prison officials nationwide.
- The NCRB also prescribes specifications for equipment, outlines methods for handling and storing measurements, and specifies information technology systems for data collection.
- Notably, the Act extends the authority for taking measurements to registered medical practitioners and other skilled individuals, and the records are to be stored for 75 years.
6. Current Implementation Status
- While law enforcement agencies have been trained to record finger impressions using the National Automated Fingerprint Identification System (NAFIS), the deployment of iris scanners and devices for DNA and facial recognition systems is pending.
- NAFIS, a separate project under the NCRB, assigns unique ten-digit National Fingerprint Numbers (NFN) to arrested suspects, facilitating a countrywide search for matching fingerprints from crime scenes. NAFIS workstations are operational in several states.
7. Challenges and Concerns
- The introduction of the CrPI Act has raised concerns about fundamental rights, particularly the right to privacy.
- Questions have emerged regarding the protection and handling of DNA samples and facial recognition data.
- Furthermore, there is a need for greater awareness among law enforcement officials about the specific cases where measurements should not be recorded, as stipulated in the rules.
- The Act places the onus of data destruction and disposal on individuals, which could affect those who lack access to legal resources.
- The type of DNA samples that law enforcement agencies can collect has not been clearly defined, and there is uncertainty regarding the scope of DNA sampling in various crimes.
- The NCRB has cautioned against potential misuse of the database and emphasized the need for safeguards to restrict access to designated officials.
- Connectivity issues have also been identified, particularly in smaller states, where securing Internet lease lines remains a challenge.
8. Conclusion
The implementation of the Criminal Procedure (Identification) Act in India faces significant challenges related to data privacy, the definition and scope of DNA sampling, and connectivity issues. While the Act aims to modernize the process of capturing and recording measurements, its effective execution requires careful consideration of these challenges and concerns to protect the rights and privacy of individuals.
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For Prelims: Criminal Procedure (Identification) Act, DNA sampling, National Crime Records Bureau, Standard Operating Procedures, Nirbhaya gang rape, Right to privacy, National Automated Fingerprint Identification System, facial recognition data, Union Ministry of Home Affairs, Identification of Prisoners Act, 1920, Criminal Procedure Code
For Mains:
1. Critically analyze the significance of DNA evidence in criminal investigations and the challenges in its implementation in India. (250 Words)
2. Examine the ethical and legal implications of using DNA evidence in criminal investigations, and discuss safeguards to protect the rights of individuals. (250 Words)
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Previous Year Questions
Prelims
1. Which of the following characterizes International Criminal Court (ICC)? (UGC NET 2020)
(A) The Rome statute established ICC as a 'Court of last resort'
(B) ICC can exercise jurisdiction only when national courts are unwilling or unable to investigate or prosecute
(C) It can not prosecute acts of war crimes
(D) ICC is not located in the Hague
Choose the correct answer from the options given below:
1. (A) and (B) only 2. (B) and (C) only 3. (C) and (D) only 4. (A) and (D) only
Answer: 1
2. Consider the following statements: DNA Barcoding can be a tool to: (UPSC CSE 2022)
1. assess the age of a plant or animal.
2. distinguish among species that look alike.
3. identify undesirable animal or plant materials in processed foods.
Which of the statements given above is/are correct?
A. 1 only B. 3 only C. 1 and 2 D. 2 and 3
Answer: D
3. Consider the following statements: (UPSC CSE 2020) 1. Genetic changes can be introduced in the cells that produce eggs or sperms of a prospective parent.
2. A person’s genome can be edited before birth at the early embryonic stage.
3. Human-induced pluripotent stem cells can be injected into the embryo of a pig.
Which of the statements given above is/are correct? (a) 1 only (b) 2 and 3 only (c) 2 only (d) 1, 2 and 3 Answer: D 4. Right to Privacy is protected as an intrinsic part of Right to Life and Personal Liberty. Which of the following in the Constitution of India correctly and appropriately imply the above statement? (UPSC CSE 2018)
A. Article 14 and the provisions under the 42nd Amendment to the Constitution
B. Article 17 and the Directive Principles of State Policy in Part IV
C. Article 21 and the freedoms guaranteed in Part III
D. Article 24 and the provisions under the 44th Amendment to the Constitution
Answer: C 5. ‘Right to Privacy’ is protected under which Article of the Constitution of India? (UPSC CSE 2021)
A. Article 15 B. Article 19 C. Article 21 D. Article 29
Answer: C
6. The identity platform ‘Aadhaar’ provides open “Application Programming Interfaces (APIs)”. What does it imply? (UPSC CSE 2018)
1. It can be integrated into any electronic device.
2. Online authentication using iris is possible.
Which of the statements given above is/are correct? (a) 1 only (b) 2 only (c) Both 1 and 2 (d) Neither 1 nor 2 Answer: C 7. In addition to fingerprint scanning, which of the following can be used in the biometric identification of a person? (UPSC CSE 2014) 1. Iris scanning
2. Retinal scanning
3. Voice recognition
Select the correct answer using the code given below: (a) 1 only (b) 2 and 3 only (c) 1 and 3 only (d) 1, 2 and 3 Answer: D 8. Consider the following statements: (UPSC CSE 2022) 1. The Constitution of India classifies the ministers into four ranks viz. Cabinet Minister, Minister of State with Independent Charge, Minister of State and Deputy Minister.
2. The total number of ministers in the Union Government, including the Prime Minister, shall not exceed 15 percent of the total number of members in the Lok Sabha.
Which of the statements given above is/are correct? A. 1 only B. 2 only C. Both 1 and 2 D. Neither 1 nor 2 Answer: B 9. The Centre introduced a new bill called the Criminal Procedure (Identification) Bill 2022. This Bill will repeal the Identification of Prisoners Act which was established in _______. (SSC CGL 2022) A. 1930 B. 1950 C. 1945 D. 1920 Answer: D
Mains1. E-governance is not only about utilization of the power of new technology, but also much about critical importance of the ‘use value’ of information. Explain. (2018) 2. Two parallel run schemes of the Government, viz the Adhaar Card and NPR, one as voluntary and the other as compulsory, have led to debates at national levels and also litigations. On merits, discuss whether or not both schemes need run concurrently. Analyse the potential of the schemes to achieve developmental benefits and equitable growth. (2014) |
DISABILITY
1. Context
2. How are disabled identified?
- Until the 2011 census, there were questions on seven kinds of disabilities in the questionnaire.
- This list of disabilities was expanded to 21 when the Rights of People with Disabilities were introduced in 2016.
- Accordingly, the 2019 report included questions to identify people with temporary loss of ability as well as neurological and blood disorders in addition.
- The earlier definition included mental retardation and the permanent inability to move, speak, hear, and see.
- Significantly, the revised definition recognizes deformities and injuries of acid attack victims as disabilities, entitling them to various relief measures.
3. What is the Constitutional framework for the disabled in India?
- Article 41 of the Directive Principles of State Policy (DPSP) states that the State shall make effective provisions for securing the right to work, to education, and to public assistance in cases of unemployment, old age, sickness, and disablement, within the limits of its economic capacity and development.
- The subject of ‘relief of the disabled and unemployable’ is specified in the state list of the Seventh Schedule of the constitution.
4. Who are disabled and in what way?
- Rural men had the highest prevalence of disability in India, according to the NSO report.
- A higher proportion of men were disabled in India compared with women, and disability was more prevalent in rural areas than in urban areas.
- The inability to move without assistance was the most common disability. More men experienced locomotor disability than women.
- These numbers were self-reported. In other words, the respondents were asked if they experienced any difficulty in performing tasks like moving, talking, etc.
5. 2011 Census estimates
- The 2011 census estimated that the number of people with disabilities in India is close to 2.68 crores (or 2.2% of the population)- that is more than the entire population of Australia.
- This number was based on the older definition of disability, yet the proportion of disabled people in the population is not different from the 2019 NSO report, which used the expanded definition of disability.
- However, the 2019 edition of disability statistics reported a slightly higher prevalence than those reported in earlier editions of the survey.
- A 2019 study by the Public Health Foundation of India found that the use of the Annual Health Survey's metrics results in a lower prevalence.
6. Why is it important to get the number of disabled people right?
- Like other disadvantaged groups, the disabled in India are entitled to some benefits, ranging from reservations in educational institutes to concessions on railway tickets.
- To claim these benefits, they have to furnish certificates as proof of disability.
- At the macro level, data on the prevalence and type of disability is useful while making allocations for welfare schemes.
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In the 2021 census, disability will be defined as per the Rights of Persons with Disabilities (Or RPwD) Act of 2016.
- The department (of disability affairs) is also in the process of creating a national database of PwDs, which will contain information on those with certificates issued by competent medical authorities.
7. What are the recent initiatives for the Empowerment of the Disabled?
India
- Unique Disability Identification Portal
- Accessible India campaign
- DeenDayal Disabled Rehabilitation Scheme
- Assistance to Disabled persons for purchase/fitting of Aids and Appliances
- National Fellowship for Students with Disabilities
- Incheon strategy to "Make the Right Real" for persons with Disabilities in Asia and the Pacific.
- United Nations Convention on Rights of Persons with Disability.
- International Day of Persons with Disabilities
- UN Principles for People with Disabilities
For Prelims & Mains
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For Prelims: International Day of Persons with Disabilities, Ministry of Social Justice and Empowerment, 2011 census, Article 41, Directive Principles of State Policy (DPSP), Seventh Schedule of the constitution, NSO report and Rights of Persons with Disabilities (Or RPwD) Act of 2016.
For Mains:
1.How far do you think that the Rights of Persons with Disabilities Act will facilitate inclusivity and empowerment of persons with disabilities in India? Discuss.
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GROSS DOMESTIC PRODUCT (GDP)
There are three primary ways to calculate GDP:
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Production Approach (GDP by Production): This approach calculates GDP by adding up the value-added at each stage of production. It involves summing up the value of all final goods and services produced in an economy.
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Income Approach (GDP by Income): This approach calculates GDP by summing up all the incomes earned in an economy, including wages, rents, interests, and profits. The idea is that all the income generated in an economy must ultimately be spent on purchasing goods and services.
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Expenditure Approach (GDP by Expenditure): This approach calculates GDP by summing up all the expenditures made on final goods and services. It includes consumption by households, investments by businesses, government spending, and net exports (exports minus imports).
3. Measuring GDP
GDP can be measured in three different ways:
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Nominal GDP: This is the raw GDP figure without adjusting for inflation. It reflects the total value of goods and services produced at current prices.
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Real GDP: Real GDP adjusts the nominal GDP for inflation, allowing for a more accurate comparison of economic performance over time. It represents the value of goods and services produced using constant prices from a specific base year.
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GDP per capita: This is the GDP divided by the population of a country. It provides a per-person measure of economic output and can be useful for comparing the relative economic well-being of different countries.
The GDP is a useful measure of economic health, but it has some limitations. For example, it does not take into account the distribution of income in an economy. It also does not take into account the quality of goods and services produced.
Despite its limitations, the GDP is a widely used measure of economic health. It is used by economists, policymakers, and businesses to track the performance of an economy and to make decisions about economic policy
4. Gross Value Added (GVA)
Gross Value Added (GVA) is a closely related concept to Gross Domestic Product (GDP) and is used to measure the economic value generated by various economic activities within a country. GVA represents the value of goods and services produced in an economy minus the value of inputs (such as raw materials and intermediate goods) used in production. It's a way to measure the contribution of each individual sector or industry to the overall economy.
GVA can be calculated using the production approach, similar to one of the methods used to calculate GDP. The formula for calculating GVA is as follows:
GVA = Output Value - Intermediate Consumption
Where:
- Output Value: The total value of goods and services produced by an industry or sector.
- Intermediate Consumption: The value of inputs used in the production process, including raw materials, energy, and other intermediate goods.
Gross Domestic Product (GDP) and Gross National Product (GNP) are both important economic indicators used to measure the size and health of an economy, but they focus on slightly different aspects of economic activity and include different factors. Here are the key differences between GDP and GNP:
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Definition and Scope:
- GDP: GDP measures the total value of all goods and services produced within a country's borders, regardless of whether the production is done by domestic or foreign entities. It only considers economic activities that take place within the country.
- GNP: GNP measures the total value of all goods and services produced by a country's residents, whether they are located within the country's borders or abroad. It takes into account the production of residents, both domestically and internationally.
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Foreign Income and Payments:
- GDP: GDP does not consider the income earned by residents of a country from their economic activities abroad, nor does it account for payments made to foreigners working within the country.
- GNP: GNP includes the income earned by a country's residents from their investments and activities abroad, minus the income earned by foreign residents from their investments within the country.
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Net Factor Income from Abroad:
- GDP: GDP does not account for net factor income from abroad, which is the difference between income earned by domestic residents abroad and income earned by foreign residents domestically.
- GNP: GNP includes net factor income from abroad as part of its calculation.
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Foreign Direct Investment:
- GDP: GDP does not directly consider foreign direct investment (FDI) flowing into or out of a country.
- GNP: GNP considers the impact of FDI on the income of a country's residents, both from investments made within the country and from investments made by residents abroad.
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Measurement Approach:
- GDP: GDP can be calculated using three different approaches: production, income, and expenditure approaches.
- GNP: GNP is primarily calculated using the income approach, as it focuses on the income earned by residents from their economic activities.
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For Prelims: GDP, GVA, FDI, GNP
For Mains: 1.Discuss the recent trends and challenges in India's GDP growth
2.Examine the role of the service sector in India's GDP growth
3.Compare and contrast the growth trajectories of India's GDP and GNP
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Previous Year Questions
1.With reference to Indian economy, consider the following statements: (UPSC CSE, 2015)
1. The rate of growth of Real Gross Domestic Product has steadily increased in the last decade. 2. The Gross Domestic Product at market prices (in rupees) has steadily increased in the last decade. Which of the statements given above is/are correct? (a) 1 only (b) 2 only (c) Both 1 and 2 (d) Neither 1 nor 2 Answer (b)
2.A decrease in tax to GDP ratio of a country indicates which of the following? (UPSC CSE, 2015) 1. Slowing economic growth rate 2. Less equitable distribution of national income Select the correct answer using the code given below: (a) 1 only (b) 2 only (c) Both 1 and 2 (d) Neither 1 nor 2 Answer (a)
Previous year UPSC Mains Question Covering similar theme: Define potential GDP and explain its determinants. What are the factors that have been inhibiting India from realizing its potential GDP? (UPSC CSE GS3, 2020) Explain the difference between computing methodology of India’s Gross Domestic Product (GDP) before the year 2015 and after the year 2015. (UPSC CSE GS3, 2021) |
NON BANKING FINANCIAL COMPANIES (NBFC)
- Non-Banking Financial Companies (NBFCs) are financial institutions that provide banking services but do not hold a banking license.
- They are crucial to the financial system as they cater to the financial needs of sectors where traditional banks may not reach or provide services.
- NBFCs offer various financial services such as loans and advances, acquisition of shares/stocks/bonds/debentures/securities issued by Government or local authority, leasing, hire-purchase, insurance business, chit business, etc.
- They differ from traditional banks because they cannot accept demand deposits and do not form part of the payment and settlement system like banks do.
- However, they play a significant role in providing credit to individuals, small businesses, and the unorganised sector, thereby contributing to financial inclusion and economic growth. Examples of NBFCs include companies engaged in equipment leasing, hire-purchase finance, vehicle finance, and microfinance
3. Classification of NBFCs
NBFCs can be classified into various categories based on their activities, ownership structure, and regulatory requirements.
Here are some common classifications:
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Asset Financing NBFCs: These NBFCs primarily provide financing for the purchase of assets such as vehicles, machinery, equipment, etc.
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Investment and Credit NBFCs: These NBFCs primarily make investments in securities or extend credit facilities.
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Infrastructure Finance Companies (IFCs): These NBFCs focus on financing infrastructure projects such as roads, ports, power, telecommunications, etc.
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Housing Finance Companies (HFCs): These NBFCs specialize in providing finance for housing and related activities.
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Microfinance Institutions (MFIs): These NBFCs provide financial services, including small loans, savings, and insurance, to low-income individuals and microenterprises.
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Non-Deposit Taking NBFCs: These NBFCs do not accept deposits from the public. They rely on other sources of funding such as borrowings from banks, financial institutions, and capital markets.
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Deposit Taking NBFCs: These NBFCs accept deposits from the public and are regulated more closely, similar to banks, to ensure the safety of depositor funds.
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Systemically Important NBFCs (SI-NBFCs): These are NBFCs whose failure could potentially disrupt the financial system. They are subject to additional regulatory requirements to mitigate systemic risks.
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Core Investment Companies (CICs): These NBFCs are primarily engaged in the business of acquisition of shares and securities and hold not less than 90% of its Total Assets in the form of investment in equity shares, preference shares, bonds, debentures, debt, or loans in group companies.
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Infrastructure Debt Funds (IDFs): These NBFCs are set up to facilitate the flow of long-term debt into infrastructure projects.
- The 50-50 criteria of principal business refers to a regulatory guideline set by the Reserve Bank of India (RBI) for determining whether a company's principal business is that of a Non-Banking Financial Company (NBFC).
- According to this criterion, if more than 50% of a company's total assets or gross income comes from financial assets or income derived from financial assets, it is considered to be primarily engaged in the business of an NBFC. In other words, if at least 50% of the company's assets or income is from financial activities, it falls under the purview of NBFC regulations.
- This guideline helps to differentiate between companies engaged primarily in non-financial activities with some incidental financial activities and those whose main business revolves around financial services, thereby ensuring appropriate regulation and supervision of NBFCs by the RBI. It is an important criterion used by regulators to determine the regulatory classification of companies operating in the financial sector
5.RBI rules on Non Banking Financial Companies
- NBFCs need to obtain a Certificate of Registration (CoR) from the RBI to commence or carry on the business of non-banking financial institution.
- RBI imposes prudential regulations on NBFCs to ensure the safety and soundness of their operations. These norms cover aspects such as capital adequacy, income recognition, asset classification, provisioning, liquidity management, and exposure limits.
- NBFCs are required to adhere to a Fair Practices Code (FPC) prescribed by the RBI, which outlines the principles of transparency, fairness, and responsible lending practices.
- NBFCs are mandated to follow KYC norms while onboarding customers, including verification of identity, address, and other relevant information, to prevent money laundering and terrorist financing activities
- NBFCs are required to implement effective AML/CFT measures, including customer due diligence, transaction monitoring, and reporting of suspicious transactions, to mitigate the risks of money laundering and terrorist financing.
- RBI mandates NBFCs to adhere to good corporate governance practices, including the composition of the board of directors, risk management framework, internal controls, and disclosure requirements
- NBFCs are required to have robust risk management systems in place to identify, assess, monitor, and mitigate various risks such as credit risk, market risk, liquidity risk, and operational risk.
- NBFCs need to submit various regulatory returns and reports to the RBI periodically, providing details of their financial performance, capital adequacy, asset quality, and compliance with regulatory requirements.
- RBI conducts regular inspections and supervisory reviews of NBFCs to assess their financial health, compliance with regulations, and adherence to best practices.
- RBI has the authority to issue directions, impose restrictions, and take corrective actions against NBFCs that fail to comply with regulatory requirements or pose risks to the financial system.
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For Prelims: Economy
For Mains: GS-III: Indian Economy and issues relating to planning, mobilisation, of resources, growth, development, and employment.
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Previous Year Questions 1.The RBI acts as a bankers’ bank. This would imply which of the following? (UPSC CSE 2012) 1. Other banks retain their deposits with the RBI. 2. The RBI lends funds to the commercial banks in times of need. 3. The RBI advises the commercial banks on monetary matters. Select the correct answer using the codes given below : (a) 2 and 3 only (b) 1 and 2 only (c) 1 and 3 only (d) 1, 2 and 3 Answer (d)
The central bank, also known as the apex bank, has overarching control over a nation's banking system. It holds the exclusive authority for issuing currency and regulates the money supply within the economy. As outlined in the Reserve Bank of India Act, 1934, the central bank fulfills several key functions:
2.With reference to the Non-banking Financial Companies (NBFCs) in India, consider the following statements: (UPSC CSE 2010)
Which of the statements given above is/are correct? (a) 1 only Answer: (b)
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MONETARY POLICY COMMITTEE (MPC)
Monetary policy refers to the actions and strategies undertaken by a country's central bank to control and regulate the supply of money, credit availability, and interest rates in an economy. Its primary goal is to achieve specific economic objectives, such as price stability, full employment, and sustainable economic growth.
Central banks use various tools to implement monetary policy, including:
Interest Rates: Adjusting the interest rates at which banks lend to each other (known as the federal funds rate in the United States) influences borrowing and spending in the economy.
Open Market Operations: Buying or selling government securities in the open market to regulate the money supply. When a central bank buys securities, it injects money into the system, and when it sells them, it reduces the money supply.
Reserve Requirements: Mandating the amount of reserves banks must hold, affecting their ability to lend money.
By influencing the availability and cost of money, central banks aim to stabilize prices, control inflation, encourage or discourage borrowing and spending, and promote economic growth. However, the effectiveness of monetary policy can be influenced by various factors such as global economic conditions, fiscal policies, and market expectations.
3.What is the primary objective of the monetary policy?
The primary objective of monetary policy typically revolves around maintaining price stability or controlling inflation within an economy. Central banks often set an inflation target, aiming to keep it at a moderate and steady level. Stable prices help in fostering confidence in the economy, encouraging investment, and ensuring that the value of money remains relatively constant over time.
However, while controlling inflation is often the primary goal, central banks might also consider other objectives, such as:
Full Employment: Some central banks have a secondary objective of supporting maximum employment or reducing unemployment rates.
Economic Growth: Encouraging sustainable economic growth by managing interest rates and credit availability to stimulate or cool down economic activity.
Exchange Rate Stability: In some cases, maintaining stable exchange rates might be an important consideration, especially for countries with open economies heavily reliant on international trade.
These additional objectives can vary depending on the economic conditions, priorities of the government, and the central bank's mandate. Nonetheless, ensuring price stability is typically the fundamental goal of most monetary policies, as it forms the basis for a healthy and growing economy.
4. Monetary Policy Committee (MPC)
- In line with the amended RBI Act, 1934, Section 45ZB grants authority to the central government to establish a six-member Monetary Policy Committee (MPC) responsible for determining the policy interest rate aimed at achieving the inflation target.
- The inaugural MPC was formed on September 29, 2016. Section 45ZB stipulates that "the Monetary Policy Committee will ascertain the Policy Rate necessary to meet the inflation target" and that "the decisions made by the Monetary Policy Committee will be obligatory for the Bank."
- According to Section 45ZB, the MPC comprises the RBI Governor as the ex officio chairperson, the Deputy Governor overseeing monetary policy, a Bank official nominated by the Central Board, and three individuals appointed by the central government.
- The individuals chosen by the central government must possess "capabilities, ethical standing, expertise, and experience in economics, banking, finance, or monetary policy" (Section 45ZC)
- The Monetary Policy Committee (MPC) plays a crucial role in managing inflation through its decisions on the policy interest rate.
- When inflation is too high, the MPC might decide to increase the policy interest rate. This action aims to make borrowing more expensive, which can reduce spending and investment in the economy.
- As a result, it could help decrease demand for goods and services, potentially curbing inflation.
- Conversely, when inflation is too low or the economy needs a boost, the MPC might decrease the policy interest rate.
- This move makes borrowing cheaper, encouraging businesses and individuals to spend and invest more, thus stimulating economic activity and potentially raising inflation closer to the target level.
- The MPC's goal is to use the policy interest rate as a tool to steer inflation toward a target set by the government or central bank.
- By monitoring economic indicators and assessing the current and expected inflation levels, the MPC makes informed decisions to maintain price stability within the economy
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For Prelims: Economic and Social Development
For Mains: General Studies III: Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.
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Previous Year Questions
1. Consider the following statements: (UPSC 2021)
1. The Governor of the Reserve Bank of India (RBI) is appointed by the Central Government.
2. Certain provisions in the Constitution of India give the Central Government the right to issue directions to the RBI in the public interest.
3. The Governor of the RBI draws his natural power from the RBI Act.
Which of the above statements is/are correct?
A. 1 and 2 only B. 2 and 3 only C. 1 and 3 only D. 1, 2 and 3
Answer: C
2. Concerning the Indian economy, consider the following: (UPSC 2015)
Which of the above is/are component(s) of Monetary Policy? (a) 1 only (b) 2, 3 and 4 (c) 1 and 2 (d) 1, 3 and 4 Answer: C 3. An increase in Bank Rate generally indicates: (UPSC 2013) (a) Market rate of interest is likely to fall. (b) Central bank is no longer making loans to commercial banks. (c) Central bank is following an easy money policy. (d) Central bank is following a tight money policy. Answer: (d) 4. Which of the following statements is/are correct regarding the Monetary Policy Committee (MPC)? (UPSC 2017) 1. It decides the RBI's benchmark interest rates. 2. It is a 12-member body including the Governor of RBI and is reconstituted every year. 3. It functions under the chairmanship of the Union Finance Minister. Select the correct answer using the code given below: A. 1 only B. 1 and 2 only C. 3 only D. 2 and 3 only Answer: A |
