Gaurav Agarwal Tips

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 beslow 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) - nota 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 thesalaries 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 acapital 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 ofthe 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 theincreased 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 thecrisis 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 toserve 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 was15-16%, 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 andmarginal 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 badidea

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 andnot 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 beallowed 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 forinhouse restructuring. mandate a low ceiling ona company’s loans outstanding to thebanking system to be eligible fora 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 beconcentrated.

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 ita 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 onproject beneficiaries.

20. what are the main problems ofhandicrafts 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 onproject 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 doto 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 beon 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 forurban local bodies be raised in tune with their population growth vis-à-vis rural bodies. It is like bypassing the state, and the Centre will be directly dealing with the local self-governments (LSGs). The LSGs willget 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, thecommission 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 likeNREGS 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 inindia - 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 ofincentives 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 ofstaff.

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 tosweep 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 onfood 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 - likeissuing 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 behealthy 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 alsohit.

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 basebe expanded?

1. top 1.5% pay 63% tax. cost vs collection tradeoff.

2. better results cancome 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 uselinear 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 RBICDR norms?

1. From April 1 onwards, fresh CDRs will be provisioned at five per cent. Provisioning will be increased in stages to five per centon 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 allPSB 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 theagricultural sector over

the Twelfth Plan period and around 10 per cent in the last two years ofthe 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 90mha 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. Thiswas equal to almost half ofthe 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- agepoints of GDP accounting for nearly two-thirds of the fall of 6.5 percentage points in the domestic.