IAS Topper(Gaurav Agarwal) Tips for Interview on Basic Economics
Economics
1. direct cash transfer... benefits
vs limitations
Benefits
1.
obvious - cut intermediary
chain. less corruption, public
money
well spent.
2.
reduce economic inefficiency. targeted subsidies create distortion between product choices.
This
gives
freedom
to hh to spend it as it likes.
3. overhaul systems - like electricity - no need to give coal mines for free. can develop a highly
competitive supply chain. this
would also increase renewable energy.
Limitations
1.
women and child rights
may suffer.
2. network density of banks, post offices less than FPS. literacy an issue in dealing there. so
financial
inclusion is a pre condition.
3.
volatility in prices of food - but cash subsidy will
be
slow to change.
4. inflation is NOT a limitation.
2. food security bill
implementations issues
Implementation issues
in food security bill
1. identifying
67%
population (75% rural,
50%
urban). socio
economic caste
census not completed so far. 5 kg @ Rs. 2 for wheat and Rs. 3 for rice. identification to be left to states.
2.
large investment needed to create infra first.
3.
contradiction with directs
benefits
transfer.
4.
states
with universal
or quasi
universal PDS suffer. Poor
states also suffer
in theory.
5.
last mile management left to local
authority and not local
government.
6.
govt has agreed to maintain existing state food grain quotas and also antodaya (35 kg pm @
Rs. 2 for
wheat and Rs. 3 for
rice) -
not
a limitation.
3. super tax on rich - justified? on related note... justification for a capital gains tax and plugging
mauritius
tax
treaty?
Super tax
1.
fundamentals of taxation -
ability
to pay - justified.
2. argument given - reduce incentives to invest. flawed - most of the income is in form of capital
gains which won't be taxed anyways. this
will only tax
the
salaries they draw.
3. argument given - reduce incentives to work harder - why is it any different from any general
tax increase..
4. In india only a small proportion of rich declare their true income. so unfair on them. but proper solution is to get remaining to declare true income.
Capital
gains tax
1. fundamentals of taxation - vertical and horizontal equity. if we exempt capital gains, both equity
sacrificed.
2. argument - reduce incentives to invest, capital flight, india is a capital scarce country. But US
is a
capital rich country, why do they need to exempt capital. its not that all the capital will fly
away. investment decision
involves both profit and cost considerations. profits will be reduced
to the extent of capital gains
tax. so only
investment at the margin will not happen. we can
simultaneously
bring structural reforms to increase the profitability
of
the economy.
3. argument - capital at margin goes away - many considerations - for example elasticity of this capital at
margin...
have to see what that capital was
doing in the first place, how many
jobs it was generating - the tax proceeds can be used to create more jobs than lost...
considerations of inclusive growth.
4.
why should speculation in stock
markets be exempted... what significant gains
does
it bring?
5.
argument - double taxation.
6. argument - horizontal inequity.
Mauritius treaty
1. additional argument given - finance CAD... but for short term flows we need to keep fx reserves... those fx reserves
can't be used to finance imports. so no use.
2. distortion with domestic
investors.
5. coal price pooling - good or bad...
1. it will lower the marginal cost for new plants and thus will encourage new investments. earlier marginal rate was import price, now
the pooled price.
2. it will save investments already made. but will increase costs to those who were already getting cheap coal
from CIL.
Not long term solution
1. as imported coal goes up, pooled
price will increase.
so
need
to
increase domestic production.
Should we free up domestic
coal
prices?
1.
yes - efficiency reasons
- more production of coal.
2. But will this not increase the cost of electricity?
power producers must be allowed to pass on
the
increased cost. the discoms should buy power at a higher cost and
if the government wishes
to subsidise a section, it must pay discoms directly
or use direct benefits transfer. the
additional money can be obtained through auction of coal mines. this system is more efficient
and transparent at all levels.
3.
yes - if we heavily subsidise coal
power, how will we ever develop renewable resources?
4. no - players with existing captive mines
will have windfall gains.
6. is 5.5 the new
secular
hindu rate of growth?
1. post crisis GFCF has fallen 4-5% from pre crisis level. pre crisis growth was 15-16%, now
only 5-6%. this clearly shows that producers don't have
confidence in the recovery and the
growth in 2 years after
the
crisis was merely a restocking growth.
2. no - do we think that for next 10 years external environment will remain so subdued? external environment has a big role to play in this fall. there was global recovery for 2 years and then
2012 was
again a difficult year
globally. even china recorded just 8%
growth this year.
3.
structural issues had always been there and yet growth was high pre crisis.
4. no - reforms are underway. land acquisition, subsidy reforms, governance reforms, human
capital development.
5.
no - fiscal consolidation is underway. IMF research shows crowding out effects more pronounced in india.
Importance of exports
1.
The consumption is projected to decrease as a proportion of GDP and savings to increase.
This savings
has
to
serve exports. So marginal growth export led.
7. reasons behind falling growth rate.
1. shaken investor confidence - post crisis GFCF has fallen 4-5% from pre crisis level. pre crisis growth
was
15-16%, now only 5-6%. this clearly shows that producers don't have confidence
in the recovery and the growth in 2 years
after the crisis
was merely a restocking growth.
2.
global
factors
- importance of global
factors because of importance of exports.
3. importance of structural reasons - but they have been there all the time and yet pre crisis
growth was high. But obviously structural reforms
will be able to pull up growth level.
4.
higher
fiscal deficit - crowding out.
8. reasons behind high inflation
1.
currency depreciation.
2.
higher
fiscal deficit.
3. higher incomes - so naturally any index which has higher weightage of food will show higher inflation.
So is
NREGA bad as
it causes food inflation?
1. If we take only a very narrow outlook, then can't deny. But need a proper perspective to
evaluate it.
2. food inflation - what is the use of keeping food prices low if you let 40% of the population
starve? N
Korea example. what gives us this special
right? don't they have a right to eat?
3. talk about productivity enhancement potential
- small
and
marginal
farmers.
9. reasons behind high CAD
1.
slowdown in exports. happening everywhere - decoupling doesn't hold.
2.
oil
- prices in $ have gone up + car
argument.
3. gold - marginal investment demand - bull market in gold + domestic inflation + bad time in
financial
markets.
10. steps
taken to curtail gold import and are these steps
really
going to curtail the imports?
1. duty hikes + RBI working group proposals (gold banks + gold deposit schemes + bullion
corporation of india - refinance gold loans and pooling) + spreading financial litera cy and
products.
2. duty hike have the potential of increasing smuggling. utilising domestic idle gold domestically
is a good idea. in the long term
we need to check
inflation and spread financial
products.
11. why
has
rupee depreciation not improved CAD
1. high import content of our exports - petroleum products ($60 bio) + gems and jewelry ($45
bio).
2.
sticky
INR prices of imports - oil
+ fertilisers. inelastic demand.
3. investment demand in gold ($60 bio + $30 bio)
- fueled as INR prices go up.
12. reasons for falling NREGA performance in rajasthan
13. Cabinet committee on investments - good or
bad
idea
1. overall needed - agency based system, outcome oriented. usually system is procedure based with a
myopic view about outcomes. and consensus is either not reached or
is severely sub optimal. but care should
be taken that environment and tribal concerns are not bulldozed
away.
2. better way is governance reforms - reduce discretionary powers, arbitrariness. strengthen outcome based system
and
not procedure based - give performance based incentives.
14. taking away powers of gram
sabhas
in linear projects - good or bad idea
1.
unfortunate, but necessary - land is not fungible. but rehab shouldn't be neglected - make
rehab a mandatory requirement before acquisition.
15. biggest advantages for
india in coming decades.
1. human capital development. higher education
- elite
system to mass system. primary
-
universal enrollment.
2.
demographic
dividend + hidden demographic
pool.
3. pressures
build up for improved governance and incentive structures.
Biggest challenges to development
1.
inequality
- non inclusive growth - no human capital
development.
2. crony capitalism - people will lose faith in governance, government will lose credibility, any
reform
becomes impossible.
16. should corporate houses
be
allowed to start banks?
Yes
1. large industrial houses are already involved in the NBFCs, why make a fuss about bank
licences?
2.
increased competition - PSB privatisation unlikely
3. strong moral hazard, 1969 rationale, but it can be checked through more effective regulation and monitoring. check in
house transactions, stricter CDR norms
for
inhouse restructuring. mandate a low ceiling
on
a company’s loans outstanding to
the
banking system to be eligible
for
a bank licence.
17. should stock
exchanges be listed?
1. yes - more transparency, need capital to grow. but should not list on itself, holding should not
be
concentrated.
2. no - sharp fall in stock exchange's stock's price will adversely impact whole market. but if it is happening because of say a fraud, then it would have anyways
impacted the market
trading
when
people come to know about the
fraud
+
proper way
is better
regulation. and if happening due to competition, economic reasons, then trading
will simply shift to more
efficient exchanges.
18. aadhar
card - is it
a good idea.
1. yes - gives identity. through it we can implement direct benefits transfer which can be used to reform food, electricity, fertilisers
sector.
2.
can track
medical
history.
3.
useful
for
migrants.
4. wee out ghost beneficiaries.
Concerns
1.
privacy. need to protect data from private players as
well as unauthorized use by state.
2. parliamentary committee has raised financial issues, duplication issues, technology issues.
19. what are the main problems of industry
these days
1.
land acquisition and government clearances and control.
2. crony capitalism - brings uncertainties in government policies, benefits some - hurts others,
promotes inefficiency.
3. poor infrastructure.
How can we resolve land acquisition issues
1. Biggest issue - people are not paid enuf. we expect to pay them nothing or a pittance and
leave peacefully? guiding principle should be that after rehab, people are not worse off +
rehab has
to precede acquisition.
won't that increase project costs, reduce investment and hurt economy?
1. where is investment taking place in the current system? projects are held up for 10 years...
proper rehab will only smoothen process, bring certainty and make investments easier.
2. if we pay proper rate for other resources, why not land? should an steel plant investor say he
should get iron ore for
free?
3.
human rights.
4. practical
solution -
rehabilitation cess
on
project beneficiaries.
20. what are the main problems
of
handicrafts industry
in jaipur
these days?
1.
slowdown.
2.
marketing issues - inefficient supply
chain - leaves
little with the artisan to invest.
3. dwindling skilled labor - as profession no longer remunerative, so people migrating to other
sectors.
Steps taken
1.
diversification of markets.
2.
create efficient supply chains. more bargaining power
to producers
- SHG model.
3. cluster development for infra and technology.
21. How to build trust among people on rehabilitation and nuclear issues? (also find nuclear power world stats)
1.
make people at least not worse off after rehab + rehab should precede acquisition.
2. levy rehab cess
on
project beneficiaries.
Nuclear
issues
1. need more transparency. if govt scientist comes and says its safe, whats his credibility? need eminent and independent experts.
22. NSDC
architecture
23. What did 13th FC
do
to strengthen the PRIs.
1.
It also called for a 2.5%
share of the divisible pool
for local bodies
in the form of grants, as
the
Constitution does not allow
the
sharing
of tax
revenues
with
them. While
1.5%
will
be
constant, 1% will
be
on the basis of performance.
2. The commission has recommended that local self-government bodies be given a direct share in Union tax revenues, bypassing the state governments, and that the cut
for
urban local bodies be raised in
tune with their population
growth vis-Ã -vis rural bodies. It is like bypassing the state, and the Centre will be directly dealing with the local self-governments (LSGs). The
LSGs
will
get their grants on the basis of their performance and their share from the tax revenues and states will not have much powers on them.
3. The commission’s recommendations also seek to balance the share of urban bodies in total revenue. While revenue
is currently divided between rural and urban
bodies in the ratio
4:1,
the
commission has suggested raising the latter’s share to match their share of the population
according to the 2001 census.
Fiscal
capacity
distance criteria
1. We want to measure tax capacity. earlier income distance was used i.e. distance from state
with highest per capita income. But this assumes uniform tax / income rate. 13th FC changed
this - said uniform rates not realistic. special category states need to have different rates.
(distance from harayana used - goa first).
24. lobbying - good or bad.
1.
essential in democracy - freedom of speech. but rules
should be there to make it transparent.
2. Lobbying
in
the United
States describes paid activity
in
which special
interests
hire
well-connected professional
advocates, often lawyers, to argue for specific legislation
in decision-making bodies
25. Is auction always the best way to allocate resources?
1. a very good way though not optimum in all cases. there is no problem if any action is taken in
a non corrupt way. we should have rule based transparent systems.
26. Doesn't the exposure of these scams hurt industrial
growth?
1.
hurts
- litigation, policy uncertainties, governance credibility. but alternative is worse.
2. proper way
is to have transparent, rule based systems.
27. should there be a tax on diesel
cars?
1.
yes - misuse of subsidy, environmental
concerns.
2. no - now
is not the time because of slow growth.
28. Should STT be abolished? Why? Tobin tax?
Rationale
1.
no - tax deduction at source. earlier people used to avoid capital
gains tax.
2.
yes - reduces
overall market liquidity and some impact on employment. creates
inefficiencies.
3. no -
FIIs at least pay some tax.
Tobin tax
1. originally a transaction tax proposed
on currency
spot
trades
when bretton
woods was
dismantled. to discourage speculation by short term trading.
29. are u suggesting welfare programs like
NREGS to be scrapped to bring down inflation?
1. No. that would be taking a very narrow view. NREGS has increased incomes, naturally
demand for food higher and any index which has a higher weightage of food will show higher
inflation. But shouldn't they eat? whats
the point in keeping prices low
when 40%
starve?
2. talk about productivity enhancement potential, small and marginal
farmers, other benefits.
30. food production
is
increasing
every year. But there
is very high food inflation
prevalent
throughout the country why?
1.
not rising enuf -
demand going up more. rising incomes.
2. protein items like pulses, horticulture and fisheries - supply not going up much. yields are
stagnated. supply chains
inefficient and farmers have little incentives
and high risks.
31. Why
are business
ethics
important?
1.
business ethics act as a first level
check in ensuring corrupt things don't happen. not sufficient
- but important.
2. people are not taught business ethics. many times they don't realise what they are doing is
wrong and thus contribute towards the wrong. give example of convertible bonds.
32. foodgrain procurement pricing policy in
india - different aspects
1. can be instrumental in solving many agro issues. for that it needs to be made effective for other
crops.
2. guiding principle should be to shape cropping pattern as per the water and geographic conditions
as well as
changing demand patterns.
3. at the same time basic
level
of
incentives should be maintained.
33. NREGA different aspects.
generating employment -
1000 cr man days, 10 cr
families.
generated a structural break in rural wages.
reduced push migration. strengthened PRIs.
social
justice - SC/ST, women.
gives support when most needed - adverse weather
conditions. productivity
- s&m farmers, enterprises.
poor asset creation though - planning, lack
of
staff.
poor completion rates - reassess fund allocation for works when wages revised, reclassify works.
delayed wage payments - MIS, administrative delays in fund sanction, lack of staff.
34. Should CRR be done away with?
1. convenient tool for policy operation. the real issue is paying interest on it - to which i see no
objection. simply
will have to conduct extra OMOs
to
sweep up the interest payment.
2. other tool could be simply using interest rates. but transmission mechanism has to be strong there. So OMO can be used alongside.
35. Should RBI look at CPI or
WPI while deciding monetary
policy?
1. case for CPI - this is what anchors inflationary expectations since this is price actually paid.
captures economy more meaningfully
than WPI. CPI gets reflected in wage settings.
2. case for
WPI - core inflation
argument.
but
then
in
a
country
where half the
personal consumption is
on
food and fuel, tough to ignore this
component.
3. in current settings, a mix
has
to be used. track WPI but with certain limits for CPI.
36. should banks be privatised?
1. present
structure
of government ownership will soon become a big
constraint for
their growth.
2.
but financial
crisis tells us that government ownership is such a big cushion.
3. alternative ways could be explored -
like
issuing non voting shares + better regulation.
37. Is growth bottoming out?
1.
Not in terms of data. IIP, WPI, trade. even global
growth doesn't show
turning signs.
2. but policy
actions have reversed which is a brighter side.
38. can an undervalued currency
help in long term?
1. no - as per economic
theory.
but
give
the limitation
in
the theory
-
assumption of
no sterilisation.
Should one have very large fx
reserves?
1. savings - sacrificing present consumption for a claim on future. good for certain basic things
like macroeconomic stability. but after a point, it may reduce welfare. if we cut down too much
on our food today we
may not
be
healthy enough to work tomorrow. similarly if we don't burn
that drop of oil today, our
economy
may not grow
enough for
tomorrow.
39. why has low
growth failed to pull
down inflation?
1. let us analyse why inflation is going up - 1. food inflation - divergence between CPI and WPI, rising incomes is a cause + supply side reasons. 2. highlight manufacturing and core inflation already
low.
2.
global
rally
in energy and commodity prices
- supply side shock.
3. weakening currency - highlight pro cyclical nature of INR - dependence on FII inflows. when growth low, our currency
will weaken and thus higher
inflation.
4. infrastructure constraints lower production and increase prices.
40. why has low
growth failed to pull
down CAD
1.
conventional
theory.
2.
But low
growth a global phenomenon - so exports
also
hit.
3.
then imports - highlight the case of oil and gold.
41. In low
growth won't reducing fiscal deficit hurt even further?
1.
crowding out argument - evidence of pre crisis.
2. need to ensure that cuts are not from capital expenditure. cuts
are from revenue expenditure.
42. won't a cut in the plan expenditure hurt supply capacity of economy and reduce growth even further?
1. yes. so need cut in revenue expenditure or enhanced tax
collections.
43. Should tax
base
be expanded?
1.
top 1.5%
pay
63%
tax. cost vs collection tradeoff.
2. better results
can
come if we dedicate energies towards closing loopholes at top.
44. Is the economy
turning around?
1. FM insists CSO estimates are wrong because he promised in HK that economy is turning around. So he says CSO
fails to see the green shoots
in the economy. CSO advance estimates
use
linear extrapolation for
last 4 months.
2. But IIP indicates green shoots are absent. December and November showed negative on a
seasonally adjusted basis. April
- December growth is 0.7% only.
3. But in terms of policy
actions, it is turning.
44. What are the new
RBI
CDR norms?
1. From April 1 onwards, fresh CDRs will be provisioned at five per cent. Provisioning will be increased in stages to five per
cent
on the existing stock of CDRs, which are currently
provisioned at 2.75 per
cent.
2. Promoters must now commit to bring in the higher of two per cent of outstanding debt and 15 per cent of what the banks are foregoing.
3. Further, lenders may only convert a maximum 10 per cent of debt into equity — a clause that
would have blocked deals like Kingfisher Airlines, where lenders collectively converted over
20 per cent of debt into equity.
4. The RBI
has
also plugged
loopholes in the
reclassification of
CDRs
to
“standard”,
or non-NPA, describing this as
the
“end of regulatory forbearance”. The existing guidelines allow a restructured NPA to be reclassified standard if the borrower pays some part of outstanding
interest. Under the new guidelines, the entire restructured interest due will have to be paid for
a year
before reclassification.
5. The tightened definition implies that a large percentage of restructured loans will remain NPAs, which are provisioned at 15 per cent. Around 10 per cent of
all
PSB assets are in
CDRs.
Private sector banks are better
off, with lower CDR exposure at 1.5 per
cent of assets.
Q8: What is
a stock
exchange? How does
it work?
Current Macroeconomic
Issues
Targets of 12th Plan
Taking account of all these factors, the Twelfth Plan should work towards bringing GDP growth back to an inclusive 9 per cent in the last two years of the Plan, which will yield an average about
8.2 per cent in the Plan period. These are a growth rate of 4 per cent for
the
agricultural sector
over
the Twelfth Plan period and around 10 per cent in the last two years
of
the Plan.
Growth: 8.2%, mining and quarrying @ 7.2% up from 3% in 11 plan. manufacturing avg of 8% up from 6.9%
in 11th
poverty: 2% p.a. mean schooling years from 5 to 7. eliminate gender and social gap in school enrollment.
increase gross
irrigated area from
90
mha to 103 mha. reduce AT&C losses to 20%
16. Connect all
villages
with all-weather roads by
the
18. Complete Eastern and Western Dedicated Freight Corridors
by the end of Twelfth Five
19. Increase rural
tele-density to 70 per cent by
the
50 per cent of gram
panchayats achieve the Nirmal
2. Clean 80 per
cent of critically polluted stretches in rivers by 2017 and 100 per cent by 2020.
green cover by 1 mha.
IMR
28, MMR 100
Skill development - 50 mm. special efforts are needed to ensure that employers and enterprises play an integral
role
88 GW capacity, 30 GW
renewable
reduce emission density
by 20% 2020 vs 2005.
provide banking to 90% of households.
direct benefits transfer.
But it is reasonable to plan for merchandise exports growing at an average annual rate of 17 per cent in 12th Plan compared to 20 of 11th Plan
CAD 2.9%. Investment in valuables has increased from 1-1.4% pre crisis to 2.5% now. This needs to be brought back to 1.5% level.
Plan size: 7% of GDP, Plan size of states: 5.5% of GDP
GFCF: 35% up from 32% Most of increase in GFCF has to come from private sector. This is
possible if fiscal
deficit is
kept under check to prevent crowding out.
To move from GFCF to gross capital forma- tion we need
to add increase in inventory and
invest-
ment in valuables
Investment in Infra: 9%, 11th Plan raised it from 6%
to 7%.
Savings and Investment Scenario
One was the big improvement in government finances and the other was the improvement in the level of
retained earnings
of the
private cor- porate
sector. Between 2001–02
and
2007–08,
the savings of government administration improved from minus 6.0 per cent of GDP to plus 0.5 per cent of GDP—an improvement of 6.5
percentage points.
This
was equal to
almost half
of
the 13.4 percent- age point improvement in the overall
savings rate. The retained earnings of the private
corporate
sec-
tor improved
from 3.4–9.4 per cent of
GDP—an
increase of
about 6.0 percentage points.
Gross financial savings by house- holds improved by 2.3 percentage points, but then so did the sector’s
liabilities
The decline in domestic savings rates after the crisis of 2008 reflects deterioration in precisely the
two elements,
which had accounted for the
increase
earlier.
this reduced
the savings of
the public sector by as much as 4.3 percent-
age
points of GDP accounting for nearly two-thirds of the fall of 6.5 percentage points
in the domestic.
private sector savings
declined by 1.5%.
In the 12th plan bulk
of
the savings gain coming from
public
sector. from 0.7 to 4.3.
second largest is from
domestic
financial savings.