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Approach Answer: General Studies Mains Mock Test 11 624 (2015)

All the questions are compulsory and carry 12.5 marks each. NOT MORE THAN 200 WORDS.
1.

How has the process of liberalisation, which has otherwise led to high economic growth, affected the
employment rate and the nature of employment in India?

Approach:

Briefly describe how the liberalisation has led to high economic growth in India.
Analyse the effect of liberalisation on the employment rate and the nature of employment in India
both in organised and unorganised sectors.
Bring out both positive and negative effects.

Answer:
The process of liberalization, which began in 1990s is seen as a milestone in the economic history of
India. Since the liberalization, the economic condition gradually started improving and today India is one
of the fastest growing economies in the world with an average yearly growth rate of around 6-7 per cent.
Theoretically, acceleration in GDP growth of a labour-abundant country characterised by the market
regime should push employment growth rate as well. However the impact of liberalisation on growth of
employment in India is not as per the expectations.
A comparative analysis of GDP growth rate and employment growth rate is given below:

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Even though the Pradhan Mantri Jan-Dhan Yojana is an accelerated effort towards financial inclusion,
mere opening of bank accounts will not transform into financial inclusion in India. Analyse.

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It is clear from the above table that even though the liberalisation process has resulted in higher
economic growth, the growth in employment rate has declined.
Even during the high economic growth phase of 2005-12, employment growth rate was just 0.4%
with the addition of just 13 million jobs. There has been continuous decline in employment elasticity
as well. It declined sharply from 0.3 during 2000-05 to 0.05 during 2005-12.
Most of the new jobs were located in the informal sector with low earnings and no social protection
resulting in casualization of jobs.
In the economy as a whole, the worker-population ratio declined in the 1990s for men and women in
rural and urban areas in most age groups in the range 5-59.
Amongst the young school participation has increased as child and youth labour have declined.
There is an across the-board improvement in the growth rate of labour productivity and wages and it
is estimated that average per capita earnings per annum increased.
However the liberalization process has mainly benefited the top 10 per cent of wage earners who
now make 12 times more than the bottom 10 per cent, up from a ratio of six in the 1990s.
As per the NSSO data, only 18% of working people have regular wage salary employment. Roughly
30% are casual labourers, dependent on daily or periodic renewal of job opportunities. The
remaining 52% are self-employed. Most of them are in agriculture, working as helpers in family
owned businesses without salary.
Employment share of public sector has gradually reduced as the public sector withdrew from many
areas. A healthy growth rate in employment has been registered in the private sector.
The liberalisation and globalisation process brought in more technological upgrades in manufacturing
sector which increased the mechanisation and reduced the employment.
In case of service sector, the employment growth has not matched the growth in GDP contribution.
The sector presently contributes nearly 55% of total GDP but has employed a mere 27%. The
problem of skill development enabling labour migration to services remains inadequately addressed.
The conditions of employment in unorganised sector have not improved. The middlemen and
employer continue to enjoy the benefits derived from their labour.
In the Index of Economic Freedom World Rankings for 2013, India was ranked 119th among 177
countries, putting India in the category of mostly unfree countries. The report clearly states that
although there is improvement in labour freedom, it is offset by declining scores in other areas.
Further, the report states that corruption is endemic throughout the economy and is becoming more
serious.

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Briefly explain the objectives of Prime Ministers Jan Dhan Yojana towards financial inclusion.
Explain the issues to be dealt in addition to opening of bank accounts in order to achieve financial
inclusion in India.
Conclude positively with a way forward.

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Approach:

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Answer:

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Financial inclusion denotes delivery of various financial services at an affordable cost to the vast sections
of the disadvantaged and low-income groups. The objective of financial inclusion is to extend the scope
of activities of the organized financial system to include within its ambit people with low incomes.
The Pradhan Mantri Jan-Dhan Yojana (JDY) was launched in August 2014 as an ambitious financial
inclusion scheme. The yojana envisages universal access to banking facilities with at least one basic
banking account for every household, access to credit, insurance and pension facility.

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It is estimated that nearly 14.7 crore accounts were opened till 31 March 2015. Even though the
programme is an accelerated effort towards financial inclusion in India, mere opening of bank accounts
will not transform into financial inclusion.
In addition to opening of bank accounts, there is a need to address various other issues in order to
achieve financial inclusion:

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According to the World Banks Global Financial Development Report (2014) only 11% of those who
had a bank account had savings and only 8% took loans. Equally alarming are the number of bank
accounts that are opened and lie dormant.
As per the RBI data almost 75% of savings accounts lie dormant. These figures get more dismal if we
look at the accounts opened by business correspondents (BCs).
While it is true that bank accounts can be used to link different wage employment schemes such as
MgNREGA, it does not ensure affordable credit from formal sources for the rural poor who continue
to rely on informal sources of finance at high interest rates for their credit needs.
The poorer and more disadvantaged group of households in agriculture and allied activities form just
a mere 1% of the savings in formal institutions.
The banks are faced with high operating cost in extending the financial services to the remote areas.
High maintenance cost of these accounts as well as small ticket size of the transactions is also adding
to the problem.
The current service delivery model of using BCs and mobile money to increase outreach faces a
formidable trust barrier. The Inter Media India FII Tracker Survey (2013) report suggest that just 3%
of households fully trust BCs with their financial transactions and only 1% of households trust the
use of mobile money. This defeat the very purpose of making financial services more accessible and
affordable for the poor.
There is a need for banks to mitigate the supply side processes that prevent poor and disadvantaged
social groups from gaining access to the financial system. Despite the risk, financing of first time
entrepreneurs is a must for financial inclusion and growth.
Low level of financial literacy is another major issue. Reaching out to the illiterate people or people
who can handle only the regional languages is also difficult without developing a suitable
communication mode.

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There is a need to compute a more multidimensional index of financial inclusion to include both financial
deepening indicators such as the number of bank accounts as well as financial habit indicators such as
the number of bank accounts that are actually used.

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Both access and use will be necessary to smooth consumption and reduce risks for the poor. The mere
chasing of numerical targets of financial access becomes meaningless unless deeper issues that address
financial capability and trust in service delivery are tackled simultaneously.

Successive Finance Commissions have tried to balance the twin issues of fiscal discipline and regional
disparities. Yet, they have been criticized by both the rich and poor states for neglecting their needs.
Discuss. How far has the 14th Finance Commission been able to address this issue?

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Approach:

Briefly discuss the methodology of vertical and horizontal resource allocation used by Finance
Commissions.
Bring out the criticism by the states of the resource allocation.
Mention the recommendations of the 14th Finance Commission in this regard.
Discuss to what extent FC has been successful in addressing this issue.

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Answer:
Finance Commission is the balancing wheel of the fiscal federalism in India. Most commissions have
allocated the resources between the states on more or less the following criteria: Population, Area, Fiscal
Capacity Distance (Difference in the per capita income etc.), Fiscal Discipline and Tax Effort. The first
three can be categorized as equity criteria (82.5 percent weight) while the last two as efficiency criteria
(17.5 percent weight).
States performing well feel that they are being punished for showing higher growth and fiscal discipline
and their revenue is being diverted to poorer states lacking fiscal discipline and policy vision for
development. While poorer states demand more as they are not able to get private sector investment
because of backwardness and are stuck in a vicious. States also complain about lesser share to states
from the central tax pool and devolution of funds by states to local bodies.
14th FC has recommended some major changes having centre-state and interstate fiscal ramifications,
which have been accepted by the government. Prominent amongst them are:

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Change in the criteria for horizontal resource allocation. 7.5%: Forest cover, 17.5%: Population,
15%: Area, 10%: Demographic change, 50%: Income distance. Thus, financial efficiency has been
omitted. Because of forest cover criteria poor states in plains having minimal forest cover are
going to lose their percent share. Meanwhile, 19 states stand to gain from the new arrangement,
which include north-eastern states and tribal states. Thus, it has positively benefited
underdeveloped hilly and tribal states but negatively impacted poor states in the plains.
42% share to states in the divisible tax pool. With greater devolution all the states will have
greater fiscal resources at their disposal that can be used in their development programme.
Moreover, it will ease the implementation of tax reform of GST Bill where the states fear a loss of
revenue.
The Commission has recommended devolution of higher resources to the local bodies directly by
the center. Separate allocation of funds to local bodies will unburden state governments which
can use its resources elsewhere.
It has identified 30 centrally sponsored schemes (CCS) for transfer to the states. However, due to
importance of the schemes and legal obligations, only 8 CCS would be delinked from support
from the centre. With CSS being transferred to the states, states will have greater flexibility in
operating these schemes and grudge of states regarding unilateral action by centre is going to be
resolved.

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These recommendations have lot of positives regarding hilly and tribal states, local bodies and autonomy
of states. However, the developmental disparity and fiscal discipline issues still remain unresolved. With
greater dependence on central taxes, fluctuation in tax revenue of centre will impact the fiscal health of
states. With fiscal discipline becoming unimportant in funds allocation, the better performing states will
tend to lose while poor performers will not be penalized. The criterion of forest cover should be
implemented with greater flexibility for populous and poor states of the plains have little chance to
improve upon these criteria and will continue to lose. Such improvisation needs to be made in the
implementation of recommendations to create a balance between the fiscal discipline and
developmental disparity.

Discuss the importance of unorganised sector in the Indian economy. Examine the measures taken by
the government to overcome the challenges faced by the unorganized sector in the country.

Approach:
The answer should start with a general definition of unorganised sector. Statistical references are
required to highlight its importance- contribution to employment, GDP, exports and downstream
industries. Second part should begin with the challenges faced. The government initiatives mentioned

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must be specific and in consonance with the challenges mentioned. Examining requires evaluation of the
potential of these initiatives against requirements. The answer should conclude with further steps
required. The answer has been kept long for greater understanding; the student should exercise
discretion in selecting for answer writing.
Answer:
Unorganised sector constitutes a pivotal part of the Indian economy. Various estimates (National Account
Statistics, National Commission for Employment in Unorganised Sector, National Economic Census, etc.)
suggest that about 90 per cent of workforce outside agriculture and 50 per cent of GDP are accounted
for by this sector. Contribution to exports is also estimated around 40 per cent. According to NSSO, there
are about 57.7 million non-corporate business units outside construction sector, mostly unregistered and
self-employment units.
A majority of these operate in the rural areas, where the government finds it difficult to provide nonfarm jobs. Also, a high proportion of socially and economically underprivileged sections of the society are
concentrated in the informal economic activities. NSSO survey says that two-thirds of enterprises in this
sector are owned by SCs, STs and OBCs.
The high growth witnessed in Indian economy in past two decades has been accompanied by increasing
informalisation. There are now greater interlinkages between formal and informal economic activities.
From providing finished goods for assembly line productions to e-waste collection and reprocessing, the
unorganised sector is now deeply intertwined with the formal economy.

Access to finance- with most of the 57.7 million units unregistered, banks, perhaps rightly, do not
finance them. Lack of institutional credit means exploitation by usurious moneylenders.
Access to technology partly because of limited finance and partly due to inertia. This hampers
productivity and renders the enterprise uncompetitive.
Lack of skilled workforce
Managerial competence
Vulnerability of informal labour
Market uncertainty

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However, there are major hurdles that this sector faces. Apart from definitional problems, there are
following challenges:

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Apart from these, lack of proper infrastructure poses greater difficulty due to the inability of unorganised
sector to access costly means of transport and logistics.

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Setting of MUDRA bank with a corpus of 20,000 Cr. and a credit guarantee fund of 3,000 Cr. It will
refinance the last mile financers - micro-finance institutions - which provide credit to the sector.
However this model carries a financial risk. Also, it requires millions of these private financial
intermediaries to be registered and integrated into the new architecture.
Skill India initiative for skilling of new entrants and existing labour force. However, the program is
still falling way short of desired target of 50 million skilled workers each year.
Social sector schemes such as Atal Pension Yojana aim to provide pension cover to workers in
unorganised sector. This will require mobilisation of almost 10cr. beneficiaries into the network.
Setting up of venture capital and technology upgradation fund and establishing a network of
technology centres around the country. Also, technology upgradation is being encouraged
through tax rebates.

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Various commissions such as NCEUS (National Commission for Employment in Unorganised Sector) have
deliberated on the definitional aspects as well as other challenges faced by the sector. However, lack of
proper data for this hugely diverse sector makes the diagnosis difficult and prescription even harder to
implement. Recognising the importance of this sector, the government has tried to address these
challenges. Some of the initiatives have been examined below:

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Dedicated e-commerce portal with the help of National Small Scale Corporation has been
launched to provide wider market coverage.

The government programs are ambitious in nature but their success depends upon implementation and
not just on targets. As such, it requires scaling up of execution. Jan Dhan accounts and AADHAR ids would
be instrumental in achieving the above targets. In future, skill development programs can be offered not
only for labours but also for entrepreneurs in a structural way such as at ITIs. Also, government would
have to invest in R&D for this sector, including analysing changing consumer tastes and marketing of
products.
Only recently has the potential of this sector been recognised and documented. For achieving a doubledigit growth of Indian economy, it is imperative that the unorganised sectors needs are met in a
sustainable manner and it moves gradually towards the formal economy.

5.

"Labour reforms are often cited as the key to unlock the potential of Indian economy." In this context
discuss the importance of labour reforms in India. Enumerate the measures taken by the government
recently in this regard.

Approach:
Briefly elaborate the statement.
Discuss the need of labour reforms in India, the present issues and the benefits arising out of labour
reforms.
Bring out the various measures taken by the government recently with regard to labour reforms in
India.

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The real development of any country depends on the productive activities of labour force. With one of
the largest labour force in the world, India has a great potential for growth and development. However
due to many inherent issues and challenges, India has failed to reap the true potential of its labour force.

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Indias labour force was estimated to be about 490 million, or 40 % of the population, but 93 %
of this force was in the unorganised sector. These workers are most likely to be not covered by
most labour laws.
The primary policy challenge is to increase the employability of our labour force. And to shift
labour from agricultural to non-agricultural jobs (where there is a projected need for 120 million
skilled hands), along with social security measures.
The law on minimum wages and its implementation urgently needs reforms. There is no
definition of minimum wages in the law. The penalties prescribed for violations of this law are
absurdly low. Minimum wage boards are not re-constituted in time and minimum wages are
revised after a considerable time lag.
Labour flexibility measures, especially in respect of hire and fire and contract labour, have caused
industrial unrest and violence at many locations.
The Trade Unions Act, 1926, merely provides for voluntary registration of trade unions and not
for recognition of trade unions, which is more relevant for collective bargaining.
The introduction of self-certification in some states and sectors, relaxation in inspections in
several states, high person-power deficits and multiple tasks of inspectorates in the labour
department have weakened the inspection regime. Labour inspections and conviction rates have
significantly declined in the post-reform period.
Due to the inadequate number of judicial bodies and judicial officers, there are delays in
dispensation of justice. These are costly not only for the workers but also for the employers.

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The need of labour reforms in India can be explained as:

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From the perspective of market, India has a multitude of restrictive labour laws and these have been
found to adversely affect economic performance of manufacturing firms.

The Industrial Disputes Act (IDA) requires firms employing more than 100 workers to seek
permission from their respective state governments in order to retrench or lay off workers.
Restrictive labour regulations make labour adjustments by firms very difficult and lead to
rigidities in the Indian labour market. Since these laws apply to registered firms above a certain
threshold of employment size they encourage firms to stay informal and small.
The industrial relations is a concurrent subject and the state governments have been able to
make their own amendments to the IDA. Also the implementation of labour laws lies with the
states. This has resulted in variation in labour-market rigidity across states.
Restrictive regulations raise effective labour costs and constrain the scale of production as the
laws apply to firms above a certain threshold level of employment. This prevents firms from
reaping economies of scale and being competitive in the world market.
These laws also discourage firms from employing a large number of permanent workers, and
hence they tend to employ more casual or contract workers, who have limited incentive to learn
on the job and acquire firm-specific skills.

Some of the important measures taken by the government recently with regard to labour reforms in
India are:
Pandit Deendayal Upadhyay Shramev Jayate Karyakram: The programme seeks to improve
employability, skill development and other conveniences for labour. The five components of the
programme are:
A dedicated Shram Suvidha Portal
An all-new Random Inspection Scheme
Universal Account Number
Apprentice Protsahan Yojana
Revamped Rashtriya Swasthya Bima Yojana
The recently passed Apprentices (Amendment) Bill, 2014 makes various changes to the
Apprentices Act 1961 to make apprenticeship more responsive to youth and industry. The bill
seeks to provide apprenticeship training to non- engineering graduates and diploma holders, and
new trades, including IT-enabled services, would be included in the scheme, allowing more
employers to participate in training and employment of such workers.
The Factories (Amendment) Bill, 2014 aims to bring several changes in provisions of overtime,
better working conditions, overnight work for women, adequate safeguard and transport
facilities.
The labour ministry has recently proposed changes to the Industrial Disputes Act, 1947, for
easier retrenchment of workers in the National Investment and Manufacturing Zones (NIMZs).

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MUDRA bank has been termed as a game changer for micro finance sector in the country. What are
the objectives of MUDRA Bank? Is there a need of such an institution when there already are multiple
schemes and institutions operating for the same purpose?

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Even though many reforms have been made with respect to welfare of labour, very few measures have
been taken to liberalise the labour laws in India. The pending second generation labour reforms should
ensure reforms in both the aspects i.e. benefiting labour as well as the investors.

Approach:

Describe the MUDRA Yojna briefly.

Bring out the argument whether such a scheme is needed or not.
Mention past and present schemes for the sector and their impact.
Give relevant facts/examples to support your view point.

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Answer:
With an initial corpus of Rs 20000 crores and a credit guarantee corpus of Rs 3000 crores Government
recently launched MUDRA (Micro Units Development Refinance Agency) to infuse finance into MSME
sector of the country. Formal sector generates about 29.6 million while 57.8 million small and micro
enterprises provide 128 million jobs. Almost 2/3rd of them belong to the SCs, STs and OBCs. More than
half of them operate from rural areas, where financial outreach of formal channels is limited and
delivering economic growth difficult. A focused approach of finance availability through MUDRA has
immense potential in development of MSME sector that will bring inclusive growth.
Following are the objectives of the MUDRA:

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Almost 90% of MSMEs depend upon the informal sector for financing where money lenders
charge very high interest. Even the MFIs lend at a rate of about 25% to these enterprises because
banks lend them at around 14%. MUDRA will partner state and regional level coordinators to
enable them to provide refinance to last mile financiers of micro businesses and cut borrowing
costs for the cash-starved domestic small businesses.
It will create a framework that regulates and provides refinancing capital flows to micro-finance
institutions that are in turn in the business of lending to micro/small business entities engaged in
manufacturing, trading and services activities.
MFIs do not meet the funding requirements of small entrepreneurs who want more
than Rs.50,000 and up to a few lakhs. Commercial banks, too, are reluctant to give them loans.
This lacuna will be addressed by the MUDRA bank.
It will help in bringing transparency, accountability and technology to the sector.
NABARD and SIDBI also refinance MSMEs. However, MUDRA will have sole focus on the Micro
and Small businesses.

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There already exist financing schemes like Credit Guarantee Fund Trust for Micro and Small
Enterprises (CGTMSE), Portfolio Risk Fund (PRF) etc and many others apart from the technical
and managerial support. Hence, it is not only lack of finance but also the multiplicity of schemes,
poor implementation, problems like corruption and complex processes and lack of awareness
which is impeding the growth of sector.
A redrawing of the functions of NABARD and SIDBI, which have not performed up to the mark, in
the light of creation of MUDRA should be done.
Regulatory and credit functions of the MUDRA should be separated to avoid conflict of interest.
Small banks also have immense potential for the sector and can be used to supplement MUDRA.
Introduction of electronic transfer facility for the sector.

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However, the following issues should be addressed to make MUDRA a success:

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Despite one of the longest coastlines in the world, Indias port facilities and shipping industry are beset
by numerous problems. Explain. Discuss some of the corrective measures taken by the government to
overcome these problems.

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While the global trend is discourage shadow banking and use the main-line banking system to meet the
financing needs of all segments we are creating one more refinancing agency. Hence, a thorough redress
of these issues should be done to ensure credit flow to SMEs also called as missing middle and prevent
MUDRA from being another lost opportunity.

Approach:
The question is mainly focused on the problems of port infrastructure in India. So the answer should
delve into the importance of the port infrastructure in current globalised world. The answer should focus
on reasons for sub-optimal/inefficient port infrastructure. The second part asks the recent measures
taken by the government to improve the port infrastructure.

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Answer:
India's 7,500-km coastline with 13 major ports and its strategic location on world trade routes gives it a
natural advantage to control and direct shipments. Yet, India has not managed to get a dominant grip on
shipping, even in its own continent.
Challenges to the shipping industry:

Rigid laws and a detached financial impetus.

The unfriendly taxation structure, wherein the domestic shipping operators need to pay high
taxes.
The turnaround time at ports in India is one of the biggest handicaps.
Inadequate infrastructure and the inability of the Indian ports to meet the rising demand in
container traffic. This takes us to the next major problem of ineffective port facilities.

Though, the Indian Ports are the gateways to international trade, as they handle over 90% of foreign
trade by volume. However, the existing port infrastructure is insufficient to handle trade flows effectively.
Challenges to the port facilities:

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The current capacity at major ports is overstretched, as 13 major Indian ports handle 56.7
percent of the all-India port throughput.
The handling capacity of ports in India has remained limited, while the demand has been rising,
resulting in port congestion.
Several major ports lack sufficient draft for large crude tankers. Large vessels are berthed at
Colombo, Singapore, or Dubai, and cargo is shipped to India later in smaller vessels, thereby
escalating the freight cost.
Weak hinterland connectivity reduces accessibility.
Labor and equipment productivity levels are still very low due to the outdated equipment, poor
training, low equipment handling levels by labor etc.

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Sagar Mala project: It seeks to create a string of ports around India's coastline to safeguard
maritime interests. It would give a boost to the shipping industry by evolving a model of port led
development. It also aims to integrate the development of the ports, the industrial clusters and
hinterland, and efficient evacuation system through rail, road, inland and coastal waterways
resulting ports becoming the drivers of economic activity in the coastal areas.
The government also signed a memorandum of understanding with Iran to develop the Chabahar
port.
The government prioritized the expansion and modernization of ports as part of its five-year plan
initiatives in 2007. It has been instrumental in redefining the role of ports from mere trade
gateways to integral parts of the global and logistics chain.
Several projects are underway for the deepening of drafts at major ports as a part of the national
maritime development program. For example, the Sethusamudram Shipping Canal Project.
The Port sector has been thrown open to private sector participation for the provision of port
facilities at various major ports.

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Some of the initiatives are:

The commissioning of power projects based on imported coal and the setting up of steel projects and
offshore exploration and production projects are likely to drive the Indian ports sector in the near future.

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8.

"Make in India initiative is a big step in the direction towards making India an investment hub for
manufacturing but what we need is Make for India and not Make in India". Critically analyse.

Approach:

Briefly introduce the programme Make in India.

Bring out the arguments in favour of the programme explaining the need of it and the critical
outcomes.
Now explain that just make in India is not sufficient and there is also a need for Make for India
i.e. manufacturing and innovating for the needs of India.

Answer:
Make In India is a new national program designed to transform India into a global manufacturing hub.
It contains a raft of proposals designed to urge companies local and foreign to invest in India and
make the country a manufacturing powerhouse.
The initiative is considered as a big step in the direction towards making India an investment hub for
manufacturing.

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With nearly 50% of population depending on agriculture activities and near 60% share of GDP is
contributed by service sector, there is an urgent need to revive the manufacturing sector in India
in order to grow sustainably.
Prime Minister Modi while inaugurating the programme highlighted that in addition to benefiting
investors the programme will further boost the demand, spur development and hence create
more jobs.
With a large engineering workforce and links with the English language, India has natural
advantages in providing knowledge workers to global corporations.
The Special Economic Zones along with the recently eased government policies have provided for
setting up export-oriented captives in India.
There is a large need for technological upgradation in manufacturing sector in India. The foreign
investor will bring with them the latest technology and new ideas in manufacturing.
Indian exports have grown on the back of product and geographic diversification. For our exports
to grow further, manufacturing (which accounts for 60% of the export basket) will have to
become more competitive.

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In most cases, the knowledge workers seem to be pursuing problems of their employers in
western countries. The output of their work often tends to be irrelevant in India.
The value created is shared by a few producers in India and a lot of consumers in western
countries. The Make in India campaign is trying to extend this trend into manufacturing from
services.
Whereas the government policies in attracting more FDI and in encouraging the Indian
outsourcing industry have been a success, the track record in encouraging companies to innovate
and make in India and for India has been poor.
There is an urgent need to create an integrated domestic market which can move goods across
state borders without being subjected to harassment. The implementation of GST will help in
such a move. However, a completely export-oriented manufacturing policy sidesteps this issue
since the goods produced will mostly go out.
Another key issue in India is a broken credit system that makes it difficult for new businesses to
raise debt. The Make in India initiative will even further tilt the balance in favour of large

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However in order to revive and develop the domestic manufacturing sector just the programme of
Make In India is not sufficient. It should be complemented with Make for India i.e. manufacturing
and innovating for the needs of India.

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Vision IAS

domestic firms that hog all credit and can also tap international markets or foreign firms that
have better access to capital in their home country.
Hence, the 'Make in India' manufacturing initiative should not be read too narrowly as merely seeking to
mimic the export-led growth strategy followed by China. The approach should be more open making the
Indian manufacturing more competitive.

9.

Despite being an efficient and cheap means of transport, railway has consistently lost its share of
freight to road transport. Enumerate the reasons for the same. How far can the high speed freight
corridor help in addressing this issue?

Approach:
Enumeration of factors, behind the declining share of railways, like price differentials, investment in
roads as compared to railways, last mile connectivity, etc. is required. In the second part the benefits of
Dedicated Freight Corridor (DFC) should be linked to regaining the share of railways in freight- the gap
between existing capacity and requirements can be utilised to highlight the same. The candidate must
not fall for undermining roadways for railways. An integrated approach, mentioning the
complementarities of the two should form the conclusion.
Answer:

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The Indian railways market share in freight movement, which was once 90 percent has now come down
to nearly 30 percent. With most of the freight traffic being lost to roads, this has affected railways
finances and its ability to invest in infrastructure.

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The major reasons for declining share are:

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Lack of capacity. Most of the freight traffic is carried between metro cities. The railway lines in
these routes are already over-utilised, leading to shift of freight to roads.
Lack of investment in infrastructure. The major source of revenue for railways is budgetary
allocation generated through cross-subsidisation of passenger traffic. Lack of investment from
other sources like bonds and private institutions has compromised the ability of railways to
invest further. On the other hand, private participation through PPP mode has been an important
factor to develop Highways along major production centres.
Service Delivery - Effective Freight rates, Speed and Frequency. Even though railways costs are
cheaper on per kilometre basis, the additional costs incurred due to slow movement and delays
add to overall costs. The average speed of a goods train has come down to about 25Km/hr. The
road sector on the other hand is competitive and offers better services and service quality.
Last mile connectivity provided by roads is not possible for railways which are linear and pointto-point.
According to a study by RITES, Indian railways discontinued the small and wagonload traffic in
1980s in order to concentrate on end-to-end transport of single commodity trainloads. While
this resulted in significant growth of freight traffic by rail, the share of road transport in total
freight traffic started increasing at a faster rate. This is reflected in steep drop of railway share in
90s.

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Assuming an economic growth of 7-9 percent, freight traffic is expected to grow 6-7 times and passenger
traffic about 15-16 times over the next two decades (according to Report of National Transport
Development Policy Committee, 2014). As such, investments in High speed freight corridors are
necessary to realise this potential. Currently, the government is developing two dedicated freight
corridors (DFC) the Eastern and Western DFC. Overall the government plans to develop six high
capacity, high-speed corridors along the Golden Quadrilateral and its diagonals. It can address some of
the above constraints in the following manner:

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It requires huge investment in capacity building - it has been estimated that with the
establishment of DFC, 55-70 percent of the existing freight traffic of the Indian Railways will
move to it.
This decongestion will lead to easier and speedier movement of goods and passengers. The
creation of additional capacity is expected to guarantee efficient, reliable, safe and economical

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Vision IAS

options for carriage of goods to its customers, helping the railways to regain some of its lost
share.
Also, the DFC will provide non-discriminatory access to qualified private operators, unlike
CONCOR (Container Corporation of India), which was accused of discrimination such as
prohibition of transport of ores and minerals by private operators.
Simultaneously, new passenger trains can then be added to the Indian Railways network
without affecting movement of goods.

Overall, the road and rail network must complement each other. The high speed freight corridors will
only be linear projects running through proposed industrial regions and connecting major production
and consumption centres to ports. They will be serviced by feeder roads, railways and waterways, which
will provide hinterland connectivity. Seamless integration of modes of transport at network hubs will be
a challenge to ensure fast movement. Therefore, an integrated development of all means of transport is
necessary to realise the potential economic growth.

10.

"Recently decline in fiscal deficit has mainly come through reduction in expenditure rather than by the
way of realization of higher revenue". Comment. Discuss the challenges in revenue mobilization in
India and measures required to address this issue.

Approach:

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The question is mainly centered on the challenges to the revenue mobilization and how to resolve them.
Therefore, the answer should begin with the little elaboration of the given statement and then explaining
the challenges. The answer should end with some suggestions.

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When government's total expenditures exceed the revenue that it generates (excluding money from
borrowings) - it is called as fiscal deficit. In the face of burgeoning deficit, threatening the fiscal stability,
the parliament enacted FRBM Act, 2003 to enforce rule based fiscal management. However, in the wake
of financial crisis the strict regulations under FRBM Act were diluted. Thus, once again fiscal deficit
increased to alarming level.

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Fiscal consolidation is a reduction in the underlying fiscal deficit by shoring up revenues and pruning
expenditures. To control the deficit, the government has undertaken fiscal consolidation measures. As a
result, the fiscal deficit has come down from 4.1 of the GDP in 2014-15 to 3.9 per cent in 2015-16.
However, it is alleged that fiscal policy is contractionary, focusing only on reducing expenditure,
especially on social welfare measures.

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In this context, following are the challenges to revenue mobilization:

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1) Tax Revenue
a) A narrow tax base. Tax payments tend to be concentrated only among a few taxpayers. For
example, only 3 percent of the population in India pays the personal income tax.
b) Inefficient tax administrations.
c) Structural factors. Higher shares of agriculture and service sectors in GDP are negatively
correlated with revenue to GDP ratios.
d) Non implementation of some of the key tax reform measures, like GST and DTC.
2) Non-Tax Revenue
a) Non profitability of public sector, thereby requiring budgetary support.
b) Low revenues from disinvestment measures, due to pessimistic market conditions.

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Thus, a second generation of tax reforms is needed given substantial benefits that the additional
revenues can bring to the severely resource-constrained exchequer, and the moderate success of their
past reforms. Accordingly, reform efforts should be focused in the following areas:

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Broadening the tax base and simplifying tax structures. In this context, the speedy
implementation of GST and DTC initiates are worth pursuing.
Strengthening tax administration and improving compliance. The institutional arrangements for
tax administration should be granted more independence, insulated from political influences,
and provided adequate financial and technical resources to enhance their data collection and
assessment capacity.
Improving overall market sentiment by way of reforms in labor and financial market, leading to
improved economic growth.
Balancing the commercial and service aspects of the public sector so that they become viable
commercial entities along with service orientation wherever necessary.

What are Offshore Rupee Bonds? Giving examples, discuss their benefits with regards to mobilisation
of resources for domestic sector. Also, comment on their role in internationalisation of Indian Rupee.

Approach:

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The definition should clearly explain the meaning of all the three terms Offshore, Rupee and bonds.
Giving examples of IFC (Masala bonds), or Railway finance corp. bonds, benefits such as alternate and
cheaper source of finance, increasing foreign investor base, hedging, etc. can be provided.
Internationalisation through greater offshore trading should be mentioned. The role of retaining investor
confidence must be emphasised.

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Offshore Rupee Bonds (ORBs) are debt instruments offered in capital markets outside India and are
denominated in Indian rupees (meaning that the principal amount is linked to exchange rate of rupee).
They are offered and settled in dollars to raise Indian rupees from international investors. The issuer
converts bond proceeds from dollars into rupees in the domestic (Indian) market and uses them to
finance its requirements in India. As such, the currency risk in these bonds resides with the investor. The
investor base in these bonds is much wider than the FIIs, which invest in the Indian markets.

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ORBs have been issued in past by the International Finance Corporation (IFC) with a maturity upto seven
years. The latest issue is called Masala Bonds which have a maturity of 10 years and are the first ORBs
to be listed on London Stock Exchange. They are named so because masala is a globally recognised term
that invokes culture and cuisine of India. Similar bonds are proposed to be offered by Indian Railway
Finance Corporation and Asian Development bank. Reserve Bank of India has also allowed Indian
corporates to issue ORBs. There are several benefits of ORBs, such as

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Bringing liquidity and depth to offshore rupee market

Crowding in foreign investors to invest in rupee bonds and fund domestic investment
Paving the way for an alternative source of funding for Indian Companies
As currency risk is borne by the investor, the cost of borrowing as compared to External
Commercial Borrowings (ECBs) comes down for the investor as there is no need for hedging.
The cost of borrowing has also been lesser than government bonds in domestic markets.

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It has been estimated that domestic corporates are likely to raise $30 billion in ECBs this fiscal year,
while their Offshore Bond issues are likely to be $6 billion. In the next fiscal year, the bond issuances are
likely to be $12 billion, but the quantum of ECBs will remain stagnant at $30 billion. However, the cost of
funds for Indian companies will significantly depend on their ratings, which will be lesser than AAA rated
Masala bond.

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Internationalisation of the currency has two essential features:

A state where exporters from other countries (such as Oil companies in Saudi Arabia) agree to
take payments in rupees, and
Where currency risks in international borrowings are borne by lenders rather than borrowers in
India.

At the heart of internationalisation lies stability and confidence in the currency which makes it
acceptable for cross-border transactions. Internationalisation is desired because countries that can
borrow in their own currency are less susceptible to international crises. Please note that
internationalisation is different from capital account convertibility, which means that domestic and
foreign assets can be freely exchanged.

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Unlike many other countries, small enterprises in India remain small and even shrink. Bring out the
factors responsible for such a trend in India. What steps have been taken by the government in this
regard?

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ORBs are a significant step towards internationalisation of rupee - they are international borrowings with
currency risk at lenders' side. The Masala bonds were well received by foreign investors, notwithstanding
the fact that rupee is still not fully convertible. ORBs are launch pad to sell strength of rupee to overseas
investors as listing on foreign bourses will provide visibility and set benchmarks for yields in future
issuances. Views on rupee will now be partially formed offshore, albeit in a very small way as ORBs will
be subject to caps on external commercial borrowings. They could also increase demands for similar
products as liquidity of these bonds rises. This also shows the confidence of international investors in
Indian economy and rupee. This will require the government and the central bank to impart stability and
confidence in the rupee internationally. Critical elements such as fiscal policy, current account balances
and inflation have to be benchmarked to best standards to retain investor confidence in rupee. Putting
these elements on a firm footing will be essential requirement for rupee internationalisation.

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Explain the scenario regarding small enterprises in India.

Make a comparison with other countries.
Bring out the factors responsible for such a trend.
Mention some reform measures taken by the government.

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According to study done by Hseih and Klenow (2011), surviving small firms in USA grow spectacularly; in
Mexico grow moderately while in India they shrink. Within the MSME the medium firms are almost of
negligible percentage with almost 95% micro, 4.8% small and 0.2% medium. This is strange considering
the long-time sector has been supported by the government notwithstanding the fact that a separate
ministry was established in 1954. It indicates the too many firms in India remain small, unregistered,
informal and shrink rather than increase in size and operation.

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Following factors can be the cause of this phenomenon:

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To avoid regulations and taxes firms try to remain small-they hire temporary workers due to strict
labor laws and dont have much incentive to invest in skill up gradation; they dont make capital
investments and technology up gradation so that to avoid tax net- all these factors results in low
productivity. Moreover, small scale of operation adds to their disadvantage. As a result they have
little incentive to grow. Hence, they either stay small or further shrink.

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Vision IAS

Indias low rank on ease of doing business (132/173) indicates that continuing business in India is
an arduous task. Many processes especially at state level are too cumbersome and delaying.
Thus it is distinctly demotivating to expand business.
An easy exit from loss making business releases the capital, which can be invested elsewhere to
expand business. A complex process of exit in India acts as a disincentive.
As soon as the business migrates from micro and small to medium and large, almost all the
governmental perks are lost.
Most government schemes like PMEGY or Deendayal Upadhyay Antodaya Yojana focus on
incentivizing starting of a business but dont incentivize operation and up scaling of business.
Lack of financial access to small firms. Further, getting loans from a bank for a startup is easier
than for operational expenditure.

Unfortunately, successive governments have failed to address this issue. While most of the schemes
continue to promote micro and small enterprises little has been done to support the upscaling of small
firms. However, some reforms taken by the government have considerable potential to arrest this trend.
Some of them are as follows:

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Make in India: It is expected to bring capital investment in the manufacturing sector in which
most of the small firms operate.
Shramev Jayate: Labor reforms and self-certification will help in reducing the bureaucratic hassle
and exploitation of small firms. Apprenticeship programme under the scheme is expected to
provide low paying small firms with technically skilled manpower.
MUDRA: Will help in providing finance to small enterprises through MFIs etc.
Credit Linked Capital Subsidy Scheme (CLCSS) for technology upgradation of micro and small
enterprises.
Micro and Small Enterprises Cluster Development Programme to develop a cluster of small
enterprises producing similar types of services and goods.
National Skill Development Mission will also benefit the small enterprises in improving their
productivity.

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How is the newly proposed GST different from the present tax system for goods and services? Examine
the benefits that can accrue to the Indian economy with its introduction. Discuss the various issues in
the implementation of GST in India.

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However, government needs to give this trend separate focus and try to bring in reforms specially for
upscaling of firms in the problem areas of labor laws, tax exemption, technology support, capital
availability, and FDI etc. A movement from small to medium and large enterprise will improve the
productivity of firms and also arrest the casualisation of workforce and better use of demographic
dividend.

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Briefly introduce the newly proposed Goods and Service Tax (GST).
Explain the difference between the provisions of the proposed GST and the present tax system for
goods and services.
Write about the benefits from the new system of GST.
Discuss various issues which may arise during the implementation of GST.

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Answer:
Goods and Services Tax (GST) is the proposed unified indirect tax subsuming the large number of central
and state taxes on Goods and Services.
GST differs from the present tax system for goods and services in the following ways:

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The indirect tax system is currently mired in multi-layered taxes levied by the Centre and state
governments at different stages of the supply chain such as excise duty, octroi, central sales tax
(CST) and value-added tax (VAT), among others. In GST, all these will be subsumed under a single
regime.
Through GST, the centre and states will tax goods and services in identical rates and the proceeds
will be shared on the basis of fixed formula. This will dramatically improve the tax administration.
GST will have three components: Central GST; state GST and integrated GST. CGST and IGST will
be levied by the Centre while SGST will be levied by states. IGST would be levied on inter-state
supply of goods or services. This tax will be levied by the Centre and the requisite payments will
be made to the state in which the goods or services are consumed. Import of goods or services
would be treated as inter-state supplies and would be subject to IGST.

The benefits of the new GST that can accrue to the Indian economy with its introduction are:

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As per the estimates by the National Council of Applied Economic Research the implementation
of GST can enhance Indias GDP by 0.9-1.7% as the current system of multiple taxes was leading
to distortion in allocation of resources as well as production inefficiencies.
GST will remove the cascading effect since currently both state VAT and CENVAT are levied on
goods at point of sale and production stages respectively. GST will be destination based i.e. the
tax will be levied on the basis of the place of consumption not production.
Businesses that produce their products in one state and sell in another end up paying a number
of taxes, which in turn increase the cost of the final product for the consumer. GST will eliminate
this and reduce the end cost of a product.
The present indirect system of taxes suffers from many infirmities, mainly exemptions. Through a
uniform and transparent tax structure, GST aims to improve tax compliances.
GST aims to stitch together a common market by dismantling fiscal barriers between states. It is
a single national uniform tax levied across India on all goods and services.
Under the GST structure, every company gets a deduction on the taxes already paid by its
suppliers. That results in every buyer ensuring that his supplier has paid his part to claim his
deductions.
With the increase of international trade in services, the GST has become a preferred global
standard. All OECD countries, except the US, follow this taxation structure.

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States had expressed concerns over revenue sharing between them and the Centre, and have
said that there would be significant loss in tax collection. Also, states had requested power to tax
petroleum and liquor products.
GST faces political hurdles as it could rob state governments of discretionary fiscal power.
In order to implement GST, there is a requirement of a robust country-wide IT network and
infrastructure to make the implementation seamless.
Certain products such as alcohol, tobacco and petroleum products are excluded from GST. On
these products the present high structure of taxes will continue and the situation gets further
compounded due to break in GST credit chain at either end of the supply chain. The resulting
cascading burden appears to be substantial and is surely going to impact the economy.
Since the constitutional amendment bill introducing GST is still pending in the parliament, there
is very less time for implementation before the scheduled date with many tasks to be performed
in the interim. These include framing of laws and rules and getting the administration ready for
radical changes that this reform proposes.
All the states may not be ready for the implementation of GST before the deadline. There is a
need for nation-wide implementation of GST at the same time. A partial implementation of GST
may in a way defeat the entire purpose.
Not much has been done to promote the understanding and awareness of the reform among the
consumers.

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Some of the important issues in the implementation of GST are:

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14.

A new way of measuring GDP created the world's fastest-growing major economy overnight. In the
context of India analyse the benefits and concerns raised by the new methodology adopted to
calculate GDP figures by the Central Statistical Organisation.

Approach:
The question requires and understanding of how GDP is calculated and what the new changes amount
to. Answer should be structured as follows:

As introduction briefly enumerate the salient features of changes made.

Discuss the key benefits as argued by the government sources and Media debates
Concerns should be linked to the extent to which the new data reflects reality, include concerns
raised by the RBI and other economic observers

Answer:
GDP is the total value of goods and services produced within the country during a year. The calculation so
far was based on factor or basic cost, the new method:

Takes into account market prices paid by consumers.

Introduces the concept of Gross Value Added (GVA) at the aggregate and various sectoral levels.
Changes base year 2004-05 to 2011-12.

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It is in line with international practice which involves calculation at market costs.

The move is expected to better capture the changing structure of the Indian economy. e.g New
GDP series will be based on data from MCA21, bringing in more companies from the unlisted and
informal sectors as compared to the Annual Survey of Industries used till now.
The base year change ensures that the products and services included in the GDP calculation do
remain contemporary and reflect the present state of the economy e.g. the latest change in base
year has included the recycling industry which didnt figure in the earlier GDP computations.
Global investors use growth prospect numbers to allocate their investment allocations between
countries - GDP is a key metric here. So news that Indias GDP growth has averaged 6 per cent for
the last three years and not 4.6 per cent as thought earlier, may help investors view India in a
more favourable light.

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According to the arguments put forward these changes would have the following benefits:

The revision has bumped up Indias growth numbers sharply and put them at odds with other
leading indicators of industrial activity, such as the Index of Industrial Production (IIP), which still
shows weakness.
While the new GDP shows 5.3 per cent growth in manufacturing in 2013-14, the actual
performance of NSE-listed companies in the manufacturing space shows that earnings have been
declining in the last two years (by 4 per cent in 2013-14).

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The revised methodology, however, poses several concerns as well:

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Overall the changes put the Indian economy in a better light than was thought previously. The concerns
on the other hand relate to the disparity in other figures that do not corroborate the positive story
brought about by new changes. The need is to disseminate information in a better way and bring the
major indicators in tune with each other.

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15.

In recent years, savings rate in the Indian economy has witnessed a consistent decline. What are the
factors responsible for this trend? How has the composition of savings changed in the last few years?
Suggest measures to improve and better channelize household savings.

Approach:
Gross Domestic Savings, investment, Gross Capital formation are invariably linked with growth. Answer
should be structured as follows:

Introduce by mentioning the peak in savings in 2008 followed by a down turn.

Enumerate the causes attributed for the declining trend in savings.
Composition of Savings in terms of the share of Household saving, Public or government savings
and Corporate savings should be highlighted
Measures to better channelize household savings should be in the context of decline in financial
savings and a rise in physical savings such as land and gold in recent years.

Answer:

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Slowdown in overall economic growth

Diminishing returns on Savings for the Household sector due to factors such as inflation.
Decreasing productivity and profit in the Corporate sector.

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High Saving rates have been linked with high growth. The composition of domestic savings in India
includes three sources i.e. households, the private corporate sector, and the public sector. National
savings rate in India had hit an all-time high of 36.9 per cent in FY08, but has been consistently declining
ever since. According to the Economic Survey 2014-15 the gross domestic saving, has declined from 33.9
per cent of the GDP in 2011-12 to 31.8 per cent in 2012-13 and further to 30.6 per cent in 2013-14.
Factors that can be attributed for this trend are:

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Household savings remain the largest contributor but its share has been declining. From 25.9 %
of GDP in 2009 to 17.8% in 2013-14.
The corporate sector as part of the Domestic savings has seen and upward trend and constitutes
the second largest share after the household sector.
The share of Public sector savings has seen a consistent decline over the years From 5% of the
GDP in 2008- it came down to 1.6% in 2013-14.

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As far as the changes in the composition of saving in the last few years is concerned the following can be
observed:

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Curbing inflation
Expanding financial inclusion
Offering new products such as inflation indexed bonds.
Improving saver access to financial products.

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A sharp decline in the household savings and a decline in financial savings (bank deposits insurance,
shares etc) vis--vis physical savings (Real Estate, Gold etc.) has been identified as key areas of concerns.
Following Suggestion can be made to better channelize household savings in India:

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Vision IAS

16.

Increase in the cap for FDI in Insurance sector to 49% was long due. How is it going to benefit the
insurance sector in India? What are main reasons for the opposition to this move?

Approach:
The Answer should be structured as follows:

Enumerate the projected benefits of increasing FDI cap in the insurance sector
Provide arguments that have been put forward in opposition to the increase in FDI in the sector
Conclude by underlining the need for investment for better economic growth along with an
efficient regulatory mechanism as safeguard.

Answer:
The bill raising FDI in insurance sector from 26% to 49 %, pending since 2008, was passed recently. While
there is opposition for the move from certain segments, overall it is argued that following benefits will
accrue from it:

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Of the estimated Rs 44,500 crore required in the insurance sector through the next five years, Rs
21,805 crore is expected to be through FDI flow.
With FDI cap being raised up to 49 per cent now, the life insurance cover will nearly double to 6
per cent of population in the next five years and to more than 10 per cent by 2025
Opening up of insurance and pension sector helps Indian government and companies to access
long-term funding for infrastructure projects.
Raising the FDI cap would result in increase in employment in the sector.

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Private insurance companies have been found to be delinquent all across the world. E.g. the
case of AIG in the United States
The move amounts to hand over an industry of national interest and the savings of Indian
households to foreign control.
Indian investors will not be well-served by the foreign entities.

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Availability of better and wide range of insurance products to customers at larger competitive prices is
another benefit expected from the hike in FDI cap. Despite the above mentioned benefits the move has
been opposed, as seen in a long delay in its passage, on the following grounds:

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"Dedicated freight corridors have a huge potential to revive the manufacturing sector in the country"
Explain. What are the various issues which have slowed down the implementation of these projects?

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Most of the arguments against FDI in insurance are based on the fear of involvement of private foreign
players in a sensitive sector. However, the answer lies in better regulation through agencies such as IRDA
to safeguard interest of multitude of small investors.

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Approach:

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One can briefly list out the major DFC projects (envisaged and under construction). Thereafter, the
answer should focus on importance of DFCs for manufacturing sector, a general discussion or benefits to
economy at large will not fetch marks. Second part of the answer has to focus on reasons responsible for
slowing down the implementation of DFC projects.
Answer:
Under the Dedicated Freight Corridor (DFC) Project, freight rail lines will be constructed along the
Western Corridor between Delhi and Mumbai and the Eastern Corridor between Ludhiana, Delhi and
Sonnagar.

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How can DFCs help in reviving the manufacturing sector:

Dedicated Freight Corridors are proposed to adopt world class and state-of-the-art technology.
Significant improvement is proposed to be made in the existing carrying capacity by modifying
basic design features. Both these improvements will allow longer and heavier trains to ply on the
Dedicated Freight Corridors. This will provide infrastructure to allow heavy loaded trains to
move.
Its completion will have a major impact on improving transportation infrastructure which will
enhance attractiveness of India as an investment destination including the manufacturing sector
The time taken would be considerably, thereby reducing the shipping time.
It would also introduce time tabled freight services and guaranteed transit time
Once completed, the dedicated freight corridors will enable Indian Railways to improve its
customer orientation and meet market needs more effectively thereby affecting the entire
business ecosystem.
Unlike the existing rail network, which runs on a combination of diesel and electrical
locomotives, the proposed DFC corridor will operate entirely through electric locomotives,
thereby lowering the transportation costs for the manufacturing sector which are considerably
higher when compared to developed countries of the world.

Issues slowing the implementation of projects

Land Acquisition: Like any other infrastructure projects, there are stretches of land that have
been difficult to acquire for the government. For example, the western corridor of DFC was to
pass through Panvel and then proceed towards Jawaharlal Nehru Port Trust (JNPT). But acquiring
land for DFC has been difficult at Panvel where several other projects are also converging like
proposed CST-Panvel fast corridor, upcoming airport at Navi Mumbai, suburban sections on the
Virar- Vasai-Diva-Panvel line and finally, construction of the Panvel Coaching complex.
Management change: Frequent management changes and availability of adequate resources at
the mid level have been a bane for DFC till date. The company continues to suffer lack of
institutional strength as a result of non-availability of adequate resources at the middle level.
Not enough bidders: Given the conditions set by the Japanese government (which is giving soft
loans) and which stipulates involvement of a Japanese partner, the total number of bidders has
been low for the Western corridor.
Cancelled Tenders: Cancellation of a tender and iterating the process again have a ripple effect
on the overall advancement of the project.

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How is the EPC model of investment in infrastructure different from the BOT model? What are reasons
behind a favorable push for the EPC model over PPP in road sector in recent years?

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Approach:

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The answer should be divided into two parts, out of which the first one should focus on explaining the
meaning of EPC model. Some of similarities and differences with the traditional BOT model should be
discussed. The second part should clearly bring out the problems in the BOT model and how EPC
overcomes these problems in its unique way and is better over the BOT model.
Answer:

EPC Model of investment in Infrastructure Sector

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EPC stands for engineering, procurement and construction. It is a common form of contract
arrangement in the infrastructure sector and sometimes cited as a variation of PPP. In this model
the project is awarded to the private players through a bidding process.

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Unlike the BOT model, the government funds the entire project under EPC and a developer
undertakes the necessary construction work. A type of arrangement in which the private sector
builds an infrastructure project, operates it and eventually transfers ownership of the project to
the government. In many instances, the government becomes the firm's only customer and
promises to purchase at least a predetermined amount of the project's output
The winner of the bid enters into a contract with the government which includes the fixed rate of
project execution with timelines and may also include penalties for time overrun.

Why is EPC being preferred over the PPP?

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"Unshackling the banks from government control and finance ministrys interference is the only way
forward to ensure the long-term revival of nationalised banks." Critically evaluate P J Nayak
committees recommendations to dismantle the governments stakes in nationalized banks.

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Lack of financial viability, delay in project clearances and approval and the slowdown in the
economy has prevented private players from taking up large infrastructure projects on a PPP
basis.
There are no private equity funds which are willing to come in at this moment to take up these
projects.
Also, the possibility of unnecessary litigations has also discouraged the private sector to enter
into PPP contracts with the government.
This results in most of the private players not taking part in the bidding process under PPP mode.
Whereas in the EPC mode entire investment is made by the government and a private player is
the contractor for construction.
During 2013-14, the Surface Transport ministry could not award even a single project through
PPP mode, while 2,500 km were awarded under the engineering-procurement-construction
(EPC) mode.
Additionally, an EPC project can be completed at a predetermined cost and schedule and the
contract also incorporates the level of performance guaranteed by the private player unlike the
PPP contract.

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Answer can begin by giving a brief account of the PJ Nayak committee's recommendations with regards
to diluting of government stake in PSBs. Thereafter students can give arguments for and against this kind
of a move and conclude suitably with a balanced stand on the issue.

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PJ Nayak Committee on the governance of Indian banks has made several important recommendations
for the ownership of public sector banks so as to rid them of the deficiencies that lie at the root of their
deteriorating performance. The key recommendation is that the government should transfer its holdings
in these banks to a bank investment company (BIC) and bring down these holdings to under 50 per cent.
The BIC will act like a passive wealth fund for government holdings with the sole aim of maximizing the
government's returns.
Views for the move

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Its most significant recommendations could put the entire public sector banking system on to a
new, sustainable performance and risk management trajectory.
Excessive and misdirected government control is at the heart of the problem. Consequently,
reducing the government equity stake to minority levels and then empowering boards and
managements to function within the performance and accountability frameworks of typical

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corporate organisations is the best way for these banks to get themselves out of the three-way
trap.
Corporate governance in public sector banks is weak, with most of the so-called independent
directors appointed at government whims and fancy and are, therefore, not particularly qualified
for their roles. However, the committee has conceded that theoretically at least, the board of
directors of any PSB should be expected to represent a healthy balance of diverse interests and
regions.
Government interference has meant that policy objectives rather than commercial
considerations dictate a PSBs working. A less charitable way of saying is that it is because of
government pressure that several PSBs have lent to unbankable companies. Not all the
worryingly high non-performing assets that banks are saddled with are due to government
interference but if banks had decided on purely commercial considerations, they would most
certainly had been better off.
There has been a lack of transparency in appointing top managers of PSBs. Most of them are not
able to stand up to government interference and this has largely contributed to weak
governance.
PSBs lag behind private banks with respect to a wide range of parameters such as profitability
and asset quality. This move can help address all of the above.

Views against the move

There is no reason to suppose that simply by creating an extra layer - that is, the BIC - bank
managements will become more professional and be left alone to do their own thing. If a phone
call comes to a bank's chairman and managing director, or CMD, today, it can continue to do so
even though he is not appointed by the finance ministry but by the BIC or a BIC-appointed board.
Crucially, the BIC board will be appointed by the finance ministry.
On the other hand, under the system proposed, there is the risk of even less accountability, given
that bank officials will not need to fear the government vigilance system being on their back.
Nationalisation of banks has served an indisputable developmental purpose. It has vastly
expanded the public's access to banking, financed small industries and transformed the nation's
savings rate. The government has also used SBI to raise foreign exchange from international
markets during the balance of payments pressure points.
Over and above, after the global financial crisis of 2008, in which private developed-country
banks that were too big to fail had to be bailed out, there is a case for treating the financial
sector differently from the rest of the economy. The financial sector is too important to be left
entirely in the hands of private sector.

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"Smart grids would make it possible to ensure a stable, reliable, safe and affordable power supply in
the country". In light of this statement elaborate the role that can be played by smart grids in solving
Indias energy problems.

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Many of the suggestions are radical and the document is considered as a guide for future reforms but
needs to be looked into before implementation.

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Approach:
This question demands one to list the advantages of Smart Grids as a concept, there is no need to get
into technicalities of the Smart Grid in this question. Students should also talk about how Smart Grids
can help bringing in more efficiency and solves energy problems of a developing country as India.
Answer:
Smart grids are sophisticated, digitally enhanced power systems where the use of modern
communications and control technologies allows much greater robustness, efficiency and flexibility than
todays power systems.

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India generates about 229GW of electricity making it one of the 5th largest electricity producer in the
world. Much of the generated electricity is wasted during the transmission and this account to 40
percent of loss every year. Presently our electricity system is facing a number of challenges. These are
shortage of power, power theft, and inaccessibility of electricity in rural areas, huge losses in the grid,
poor reliability and inefficient power consumption.
In order to tackle above problems including production waste and to support the demand of electricity
Government has initiated a project by the name of Smart Grid. Smart Grid envisages providing choices to
each and every customer for deciding the timing and amount of power consumption based upon the
price of the power at a particular moment of time.
Affordability

Apart from providing choices to the consumer and motivating them to participate in the
operations of the grid, causing energy efficiency and accommodating all generation and storage
options. Power utilities around the world are adopting smart grid technologies to make the
power infrastructure robust, self-healing, adaptive, interactive and cost effective.
It will save around 15-20% of electricity in the country. Lower operating and maintenance costs
thereby meaning lower peak demand
By reducing the peak demand, a Smart Grid can reduce the need for additional transmission
lines.

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A smart grid will have high quality of power and reduces the occurrence of distortions of power
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Give further impetus to renewable energy sources because of the functioning of smart grid.
Improved opportunity to optimize energy-consumption behaviour resulting in a positive
environmental impact.
Would result in reduction in carbon emissions.

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Higher customer satisfaction.

Improved level of service with fewer inconveniences
Reduced out-of-pocket costs resulting from loss of power
Virtual elimination of blackouts
Improved infrastructure boosts economic development

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Reliability

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