GINI Coefficient, The Lorenz Curve

 

GINI Coefficient:

• It is the statistical measure used to determine the income distribution among the country’s population.

• It expresses economic inequality amongst the population.

• The GINI coefficient ranges from 0 to 1

• GINI coefficient 0 represents perfect equality and 1 represents perfect inequality.

• Higher index indicates greater inequality, with high income individuals receiving much larger percentages of the total income of the population.

      

Understanding The Lorenz Curve:

• The Gini index is calculated as the ratio of the area between the perfect equality line and the Lorenz curve (A) divided by the total area under the perfect equality line (A + B).
• Lorenz Curve plots cumulative % of population against cumulative % of income.

Interpretation of the curve:

If A=0;

G=0/0+B

   =0 ie perfect equality 

If B=0 ;

G=A/A+0

   =1 ie perfect inequality

Further extrapolation of Lorenz Curve:

For understanding:

• If G.C <.5------------lower inequality 

Ex. East Asian Countries, Scandinavian Countries

• If G.C. >.5 -----------Higher Inequality

Ex. Latin American countries, Mexico,USA.

World inequality Report 2022:

• The top 1% of the population hold more than one-fifth of the total national income in 2021 and the bottom half just 13%.
• LPG Reforms adopted by India in 1991 have benefitted mostly the Top 1 % of the population.

Link between Economic Growth and income inequality :

Period 1951-81----------------

Period of Lower GDP growth rate

&

Lower income inequality

 Post 1981---------------------

Higher GDP Growth

&

 Higher Income Inequality

&

Lower Poverty                                               

 

MIDDLE INCOME TRAP

 

MIDDLE INCOME TRAP:

In 2006, economists Indermit Gill and Homi Kharas at the World Bank coined the term “middle-income trap”. 

Meaning of Middle Income Trap:

• Low-income countries with cheap labour and easy access to ready-made imported technology grow fast and start becoming wealthier. 

                                                                         But 

• As these Low income countries attain status of a middle-income country, they tend to slow down as they lose some of their advantages.
• This slowing down of  Low income country Economy is referred to as Middle Income Trap.

Why Middle Income Trap :

• As the country moves from Low income to middle income, the labour become costlier 
• These countries  loose support from foreign countries as they are coming out of the tag of low income group country. 

Middle Income Trap is characterised by low productivity and entrenched inequality. 

Ex. Mexico and Brazil are classic examples of such countries.  South Korea, has escaped the trap. while China is at the cusp.

National bank for financing infrastructure and development (NBFID)

 

                               

National bank for financing infrastructure and development (NBFID): 

• National bank for financing infrastructure and development (NBFID) was set up in 2021, as a Development Financial Institution (DFI) corporate body with authorised share capital of one lakh crore rupees. 
• NBFID is the 5th All India Financial Institute (AIFI) 
• NBFID is regulated by RBI.
• At present, GOI owns 100 % ownership in the NBFID.

Functions of NBFID:

• Extending loans and advances for infrastructure projects specially to attain the objectives of National Infrastructure Pipeline (NIP).
• Taking over or refinancing existing loans.
• Attracting investment from private sector investors and institutional investors for infrastructure projects.
• Organising and facilitating foreign participation in infrastructure projects.
• Facilitating negotiations with various government authorities for dispute resolution in the field of infrastructure financing.
• Providing consultancy services in infrastructure financing. It may raise money in the form of loans or otherwise both in Indian rupees and foreign currencies.
• It can borrow funds from GOI, RBI, Scheduled Commercial Banks, mutual Funds, International Institutions like World Bank and Asian Development bank etc.
  
  

PREFERENTIAL SHARES

 

PREFERENTIAL SHARES:

• A Preference share is hybrid instrument combining the features of both Equity and a Debt instrument.
• These shares are issued to preferential shareholders or stakeholders with certain exclusive features.

Features of Preference share:

• Preference in the Preferential share signifies that the Preferential shareholders are given preference over equity shareholders. 
• Preferential shareholders have claim on dividend and are given preference over common equity shares in case of liquidation of the company. 
• Preferential shares do not represent ownership / voting rights in a company.
• These shares are not traded in the market. 
• Preferred and common stock will trade at different prices due to their structural differences.
• Preferred stocks aren't as volatile and resemble a fixed income security.
• Generally, the preference shares are not offered to general public but to the promoters or to the Institutions. 

Why Companies prefer Preferential share Route:

If companies want to raise capital without increasing voting rights or foreign investment without raising FDI in management.

Companies can issue four main types of preference shares:

1. Convertible Preferential shares
2. Non-convertible Preferential shares.
3. Cumulative Preferential shares
4. Non -Cumulative Preferential shares

Convertible Preferential shares:

     Those Preferential shares which can be converted into ordinary shares after a fixed period of time.

     Non -Convertible Preferential Shares:

     Those Preferential shares which can not be converted into ordinary shares.

        CUMULATIVE PREFERENCE SHARES:

   Preference shares having the characteristics of payment of profits being cumulated in case dividend is not paid by the company for a particular period.

Non -Cumulative Preferential shares:

   Preference shares when the payment of dividend is not being cumulated in case dividend is not paid by the company for a particular period.

BANK BOARD BUREAU, Financial Services Institutions Bureau

 

BANK BOARD BUREAU (BBB)— 

• As part of a seven-pronged revamp plan for PSBs - Indradhanush, Bank Board Bureau (BBB) was set up  in 2016 to monitor key performance indicators of Public Sector Banks. 
• It replaced existing system Appointments Board in which appointments for top level jobs at PSBs were made by an appointments committee led by the RBI Governor. 
• BBB was supposed to give recommendations for appointment of full-time Directors as well as non-Executive Chairman of PSBs, 
• BBB was established to give advice to PSBs in developing differentiated strategies for raising funds through innovative financial methods and instruments and to deal with issues of stressed assets,
• It was supposed to guide banks on Mergers and Consolidations.

                                                                      vs 

Financial Services Institutions Bureau (FSIB): 

• The BBB was declared an incompetent authority in 2022 by the Delhi High Court, when a General Manager at state-owned National Insurance Company challenged the appointment of a person junior to him for Director’s position by the BBB.
• FSIB replaced BBB as Delhi High Court invalidated the appointment done by BBB in 2021.
• FSIB is an autonomous Government body set up under the Department of Financial Services entrusted with making recommendations for the appointment of full-time directors and non-executive chairman of state-run financial services institutions like Public Sector Bank, Public financial institution and Public Sector Insurers. 
• FSIB would also issue guidelines for selecting general managers and directors of public sector general insurance companies.

 

External debt vs Government of India ‘s external debt, Debt Service Coverage Ratio, Debt service Ratio

 

India’s Total External debt vs Government of India ‘s External Debt :

India’s total external debt is owned by the GOI, states as well as private entities. 

                                            while 

GOI total debt is owned by centre exclusively. 

If we compare the numbers as on March 2024:

Country’s total debt is around Rs 53 Trillion while GOI total External debt is around 5.74 Trillion Rs while as on Sep 2023 , 

The debtor sectors include :

• General government central bank, 
• Deposit-taking corporations (except the central bank), 
• Other sectors (including other financial corporations, 
• Non-financial corporations, and
• Households and non-profit institutions serving households (NPISHs).

The Debt Service Coverage Ratio (DSCR) : 

• DSCR measures a borrower's ability to pay off their debt obligations. 
• It is calculated by dividing a borrower's net operating income by their total debt service. 
• A high DSCR is when either the income is high or total debt service is low  indicating the lower risk of  defualt by the borrower on the payment of their loans.
• Low DSCR is when either the income is low or total debt service is high  indicating the higher  risk of  the borrower to default on the payment of their loans suggests that the borrower may struggle to make their payments on time. 

Debt service ratio (DSR):  

• Ratio of its debt service payments (principal + interest) to its export earnings. 
• Debt service is measured by proportion of gross debt service payments (principal + interest) to external current receipts (exports) indicating the extent of preventing the usage of FOREX reserves for the repayment purposes of principal and interest.

   Debt service ratios may rise because of:               

•         Lower price of commodities which are main exports of a country. oil exports for Venezuala.
•        Higher Borrowing
•      A fall in exports
•         Higher interest rates increasing cost of debt repayments
•         Devaluation increasing cost of external repayments.
•         DSCR is opposite of DSR.

ARM LENGTH PRICE (ALP), Advance Pricing Agreement (APA), Safe Harbor

 

ARM LENGTH PRICE (ALP) PRINCIPLE:  

• ARM LENGTH PRICE (ALP) is the price at which two independent unrelated business entities execute business/economic transaction in natural/uncontrolled conditions usually corresponding to fair market price. 
• Fair Price means if the transaction is taking place as if sub.A was having transaction at same rate as if it was having with any another MNC Let it be MNC-Y. 
• The price at which such transaction takes place  is ALP.

              

In the image, sub.A and sub.B are subsidiaries of MNC X. If there is any economic transactions between sub.A and sub.B at fair price or market price ,then it is ARM LENGTH PRICE.

Advance Pricing Agreement (APA):

• Advance Pricing Agreement (APA) is an agreement between the government authorities and the MNC which determines in advance the most appropriate Transfer Pricing (TP) methodology or the arm's length price (ALP) for any  inter-subsidiary international transactions for a future period of time. 
• In case of India, this time period is five years as per the Indian Advance Pricing Agreement  regulations. 
• The main objective of the Advance Pricing Agreement (APA) is to provide tax certainty by determining an advance set of criteria applied to transfer pricing 
• Advance Pricing Agreement (APA) reduce disputes and enhances the tax revenue.

Safe Harbor wrt Income Tax: 

• Safe Harbour provide for methodologies adopted by companies in which a certain category of taxpayers can follow a simple set of rules under which transfer prices when applicable are automatically accepted by the revenue authorities.
•  A 'safe harbour', in a Transfer Pricing regime, relieves eligible taxpayers from certain complicated obligations which are otherwise imposed by a jurisdiction's general Transfer Pricing rules.

SAFE HARBOR Provisions wrt Information Technology  Act  : 

• The safe harbour provision has been given under Section 79 of the IT Act 2000. 
• It states that "an intermediary shall not be liable for any third-party information, data, or communication link made available or hosted by him". 
• Ex. Facebook will not be liable for any legal charges if any individual post any illegal comment on it .

Traditional vs Socialist vs Capitalist vs Anarcho Capitalism vs Mixed Economy, Formal vs Informal Economy

 

Traditional Economy: 

• A traditional economy is an original and primitive economic system. 
• The traditions, customs, and belief system of the economy define the nature of   the goods and the services to be produced in an economy, as well as the rules and manner of their distribution. 
• Example: Tribal Communities.

CAPITALIST ECONOMY:

• The purchasing power /desire /demand /wants rather than the basic needs of the people decides what goods are to be  produced and  distributed among people .
• As the control is in the hands of industrialist ,then methods of production will always be selected in the manner in which it is more and more profitable to the businessmen. 
• The produced goods and services are distributed as per the demand /purchasing power of the people.
• Most of the countries in today’s world are moving towards Capitalist mode of Economies.
• Ex. Cheaper housing  for the poor is the basic need of the masses but this demand don’t create demand in the market sense because the poor do not have the purchasing power to support the demand. 

SOCIALIST ECONOMY:

• In a socialist society , the government which decides what goods are to be produced. 
• The decision is  in accordance with the needs rather than the demands  of the society. 
• It is assumed that the government knows what is good for the people of the country and so it takes care of the needs of the people and the desires of individual consumers are not given much importance.
• Ideally, a socialist society has no private property since everything is owned by the state. 
• The methods used for production are labour intensive creating more and more of the jobs.
• In principle, distribution under socialism is supposed to be based on what people need and not on what they can afford to purchase. 
• Example: The then USSR and China of 1990,s and Cuba.

MIXED ECONOMY:

• In the mixed Economy, both the government and the market together answer the three questions of what to produce, how to produce and how to distribute what is produced.
•  In a mixed economy, the market will provide whatever goods and services it can produce well and it is concerned about the demand /desires/purchasing power  of the society. 
• On the other hand, the government will provide essential goods and services which the market fails to do. 
• India is the classic case of mixed Economy.

Anarcho Capitalism : 

• A radical concept of Political state which advocates for demolition of state and talks of police and legal services to be provided by  the private sector .
• Javier Milei ,the rpesident of Argentina is of this ideology and considered to be the ultra right.

INFORMAL ECONOMY: 

• The informal sector, informal economy, or grey economy is the part of an economy that is not part of the formal system ie it is neither taxed, nor accounted in government records. 
• Unlike the formal economy, activities of the informal economy are not included in Gross Domestic Product (GDP).
• Ex. any nearby shop from which you make purchases without any bill.

FORMAL ECONOMY:

• All the activities of an economy which pay taxes to the government and are accounted in the government records. 
• This economy constitutes a part of Gross Domestic Product (GDP). 
• Example: All the purchases from any mall in which you receive the bill.

Output vs Outcome, OUTCOME BASED BUDGETING

Output vs Outcome:

Outputs are tangible results of an activity which are short term, immediate and quantifiable

while

Outcomes are long term results having a long-lasting impact, qualitative and more focussed on qualitative aspect rather of merely quantitative aspect.

To understand:

01.Total sanitation campaign came into force in 1999 and on records there were toilets constructed in rural areas throughout the country but still people defecated in open.

Construction of toilets in numbers is Output while habit of using toilet is outcome.

Conclusively in case of TSC, output was there but outcome was not there.

02.Sarve Shiksha Abhiyan (SSA) is operational since 2002 and target was to educate all children between 6-14 age by 2010.

But ASER report-2023 published by NGO PRATHAM observed that over 50 % of the children in the age group of 14-18 years are not able to do elementary calculations.

So, bringing children to school is output but learning abilities is outcome, and ASER report clearly highlights that aspect.

Outcome Based Budgeting (OBB):

In view of such examples, outcome budgeting becomes of significance. In terms of Outcome Budgeting, Outcomes refer to the ultimate products and results of various government initiatives and interventions, These are represented in terms of qualitative targets and achievements, enhancing the comprehensiveness of the technique.

• outcome-based budgeting is one of the prominent budgeting methods currently practiced in India.
• OBB involves outlining and estimating the results of each program or scheme that has been developed.
• In OBB, program outcomes are evaluated not merely in monetary terms but also through physical achievements expressed in actual figures, such as learning abilities of students.
• Additionally, outcomes are conveyed in terms of qualitative targets and accomplishments to enhance the overall technique's comprehensiveness.
• This method assesses the developmental outcomes of all government programs and determines whether funds have been utilized for their intended purposes, including the effectiveness of financial expenditure.
• The outcome budget contributes to improved service delivery, informed decision-making, program performance evaluation, communication of program objectives, enhanced program effectiveness, cost-effective budgeting, accountability establishment, and better management of schemes.
• Outcome budgeting shifts the focus of government programs from being oriented around expenditures to being focused on results.
• In India, the Performance Budget was integrated with the Outcome Budget in 2007-08, resulting in a single document known as the Outcome Budget.

As on date in India, All ministries are required to prepare outcome budgets and presents it to Finance Ministry to ensure that budgeting is directed towards achieving specific targets.