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1. How do chit funds work? Critically examine the reasons behind chit fund scams in recent
times. Also explain what measures has RBI taken to regulate them.

Chit Funds activity involves contributions by members in installments by way of subscription
to the Chit and by rotation each member of the Chit receives the chit amount. The subscriptions
are specifically excluded from the definition of deposits and cannot be termed as deposits.
While Chit funds may collect subscriptions as above, they are prohibited by RBI from accepting
deposits with effect from August 2009.
Ponzi schemes or Prize Chit schemes are those schemes that collect money from the public on
promises of high returns. As there is no asset creation, money collected from one depositor is
paid as returns to the other. Since there is no other activity generating returns, the scheme
becomes unviable and impossible for the people running the scheme to meet the promised
return or even return the principal amounts collected. The scheme inevitably fails and the
perpetrators disappear with the money.

The reason for chit fund Scam are:
1. Financial illiteracy among masses, majority of victim are less educated, thus do not know
about the risk involved and get lured to chit fund.
2. Absence of alternative investment option.
3. Lure of unrealistic return which becomes basis of marketing for chit funds.
4. Absence of regulatory framework , chit funds are monitored by states, which do not have
proper expertise to monitor chit fund.

Lack of awareness regarding these Ponzi schemes and patronage by few political people give
air to such fraudulent chit funds.
Chit funds in India are governed by various state or central laws like Chit Funds Act 1982,
Chitties Act 1975. Organized chit fund schemes are required to register with the Registrar or
Firms, Societies and Chits. RBI is not directly responsible for regulating Chit Funds but post
Supreme Court directions, it is orienting itself to enlarge the financial services in the rural areas
and also advising in putting a check on such fraudulent chit funds to Government. Promotion
of awareness and financial inclusion is one of the most significant step to put an end to these
Ponzi chit funds.

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2. Discussions on the need for labour reform in India focus on the need to deal with the
inflexibilities resulting from the application of the Factories Act. Do you think this approach
to labour reform is inclusive and broad? Critically examine.
The Factories Act, 1948 provides for stringent size-based regulation of factories in the organized
sector. As per the act, a firm which employs 10 workers or more (with power); and 20 workers
or more (without power) falls in the definition of organized sector.
It applies only to the manufacturing sector. It does not apply to the non-agricultural sectors
outside manufacturing.
It is argued that relaxing the size of organized sector units to 20 workers (with power); and 40
(without power) will result in less severe regulation. It is believed that too much of Indian
manufacturing falls in the organized sector. And severe regulation is putting constraints on the
growth of organized industry and formal employment in India.
However, this argument is not valid for the following reasons.
A small share of employment is there in the organized sector, about 10% of the total as
per the latest NSSO survey.
In the non-agricultural sector, 75% of the employment is in the informal sector, i.e.
outside the organized sector. Trade and construction are important contributors of
employ to the unorganized sector.
Of the total employment in 2004-05 and 2011-12, in absolute terms, there were more who
joined the unorganized sectors workforce than the number who entered the organized
sector between the two years
Therefore, it shows that the Factories Act size-based regulation is not the only problem behind
the slow growth or organized sector. As pointed out recent World Banks reports, it has more to
with the overall business climate in India. This includes regulatory and environmental
clearances; fuel supply; clear policy guidelines; high inflation; recent scams and Supreme Court
rulings in 2G and Coalgate cases; favourable conditions for attracting FDI etc.
Only a complete redressal of the business climate in India can solve the issue of the slow growth
of the organized sector. Tackling mere inflexibility in the Factories Act may not be enough as
the action needs to be more inclusive taking care of the non-agricultural sector as well.


3. Do you think the recommendations of the P J Nayak committee on the governance of
Indian banks, if implemented, would reform public sector banking in India? Critically
comment.

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PJ Nayak Committee objectives, recommendations and flaws
1) To check fit and proper criterion of bank directors
Observation: Most not fit; political involvement in appointment
Recommendation: Overhaul appointment process of directors transfer appointment from
government to Bank Investment Committee
Flaw: Due to lack of control of government accountability might reduce. Trade off is thus
between efficiency and accountability.
2) To check the regulatory hurdles faced by PSBs
Observation: Dual regulation of RBI and FM; Following RTI, CVC and other institutional
hurdles reduces efficiency
Recommendation: Privatize the bank; all orders of government to be applicable for both private
and public banks
Flaw: Post 2008 crisis, world over there has been a call on increasing the regulation rather than
decreasing it. Privatization does not guarantee ethical and efficient working.
3) Assess quality of bank assets and measures to improve them
Observation: Assets are risky
Recommendations: Banks must be privatized and allowed to go for market funding
Flaw: At a time when banks have risky assets amount of funds they can raise from equity
market is limited
Clearly, the committee undermines the importance of PSBs and hopes that privatization of
banks will solve the issue. This is the biggest flaw in the report.
Privatization will only make them distant from the large section of unbanked and poor
population of India. At a time when financial inclusion is the goal, privatization is not an apt
solution.


4. The two dimensions along which India fares worst are generation of employment and
protection of the environment while growing its GDP. Do you agree with the statement?
Explain why. Also shed light on how can India perform better in this regard.
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Mere economic growth and higher GDP cannot be correlated to the overall growth of any the
country. We were proud to be a part of high GDP growth country few years back and one of the
fastest growing economies along with China.

But in terms of social equity, employment generation and environmental concerns Indias
performance is dismal. We are not doing well on any of the three goals we have set ourselves:
faster growth, more inclusive growth, more sustainable growth. We are nowhere near to
achieve Millennium Development Goal (MDG) by 2015.

According to a recent framework developed by Boston Consulting Group (BCG) named
Sustainable Economic Development Assessment (SEDA) which is an instrument to assess the
effectiveness of countries in converting GDP growth to well-being of citizens.
It considers performance along 10 dimensions as indicators of overall well-being. These are:
GDP per capita, economic stability, infrastructure, employment, education, health, income
inequality, governance, civil society and impact on the environment.
In the ranking India seems to be doing worse than its peers like BRICS countries, Indonesia and
neighbours like Pakistan, Bangladesh, Sri Lanka and Nepal.

While carrying out large projects India ignores their impact on environment grossly and
consequently ranks very high in terms of most polluted nations of the world. India is turning
out to be the largest demography where by 2020 highest population will be in the working age
and ironically it doesnt have the good infrastructure base to generate ample employment
opportunities.
The manufacturing sector of the country is doing very poorly and not able to generate
employment at large. Many PSU units are either sick or performing well below the threshold
limit.

The need of the hour is to give ample push to the manufacturing sector by changing the whole
structure which can cater the growing employment needs. The big corporations be strictly
regulated to contribute more towards Corporate Social Responsibility and develop policies to
sustainable growth without impacting environment.
The second requirement is the development of a sustainability policy that is implemented in a
participatory manner. Then only we can inch closer towards achieving MDG in near future.

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5. Do you think establishing a separate fund such as National Investment Fund would help
the infrastructure sector grow? If yes, examine how it should be governed and from where
funds can be mobilized?
Among the different factors responsible for the dismal performance of the economy, the lack of
the effective infrastructure has constrained the growth of the sectors of the economy, primarily
manufacturing. Poor road/rail connectivity of hinterland to ports, insufficient logistic and
storage facilities, dismal condition of roads, etc. are some of the identification of infrastructure
deficit in India.

The dearth of planning, funds and the effective governance have impeded the growth of the
infrastructure. Recognizing this, NIF was envisaged to cater to the needs and overcome the
impediments.
Though PPP model emerged as the strategy to address infrastructure challenges, this model is
under strain due to financial crunch. Infrastructure projects have long gestation period and high
risks involved due to unclear govt. policy on environment, judicial activism and policy
paralysis. Financial institutions in India have not been able to provide long term finance to the
infrastructure sector on a sustained basis.
About NIF
NIF (which was initially created to fund proceeds of the disinvestment of Public Sector Units for
social sector schemes) was a fund in which proceeds of disinvestment would finance
infrastructure.
Though the NIF may be able to cater to the financial needs, yet it would be important to expand
its role for an effective management of the infrastructural projects.
How it should govern
The ambit of the commission should be expanded to undertake the planning, monitoring and
conflict resolutions functions.. The existence of an effective legal framework would help in
reducing the delays. .
The effective governance is essential for maintaining the productivity and efficiency of the
system For such a fund to operate successfully. Government should come up with a clean
policy and a time linked framework so that auction/disinvestment process do not run into
troubled waters. Government should identify priority areas in the infrastructure sector and
allocate fund accordingly.
Such a fund should also include proceeds obtained from the auction of natural resources
like land, spectrum.
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Infra- Debt Bonds can be raised in market.
Rest can be managed through PPP models.
The development of the infrastructure is an essential component of the growth of the economy.
In addition to facilitating the economy, the increased infrastructure would also lead to the social
gains. Thus, the setup of the NIC with an effective and comprehensive framework may turn out
to be a necessary for the ills in the infrastructure industry.


6. What is plan and non-plan expenditure in the budget? Why some committees and
commissions have recommended the government to remove this distinction? Examine.

The governments expenditure is divided under two broad headsplan and non-plan.
The plan expenditure of the government is normally associated with productive expenditure,
which helps increase the productive capacity of the economy. It is spent on government
programmes and flagship schemes
Non-plan expenditure, on the other hand, includes expenses on heads such as interest payment
on government debt, subsidies, defence, pensions and other establishment costs of the
government. A large part of this is obligatory in nature.
Various committees and commissions have recommended the government to remove this
distinction as it has become dysfunctional and an obstacle in outcome-based budgeting. It had
led to excessive focus on so-called Plan expenditures, with a corresponding neglect of items
such as maintenance, which is classified as non-Plan.
Once the distinction is removed, the Planning Commission, as suggested by the Rangarajan
panel, might look at guiding the overall development priorities, setting of outcome targets and
review of performance of departments. Budgetary allocations, Plan and non-Plan, will be
handled by the finance ministry
Also, In order to increase the growth prospects of the economy it is important for government
to rationalize expenditure on heads such as subsidies in the non-plan segment. This will help it
contain the deficit and allow it to spend on activities that create assets and contribute to
development in the long run.

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7. The Nachiket Mor report is a truly visionary document that should help the Reserve Bank
and the government to initiate specific moves towards complete financial inclusion.
Comment.
Nachiket Mor Committee report on financial inclusion chalks out an ambitious and aggressive
strategy to link each and every adult citizen of India to the banking network.
The committee envisions making a Bank Account for all the residents above 18 yrs. of age. It
also says about the easy access with the idea of having everybody connected to internet banking
and every bank having core banking facility so that anyone can access his account from
anywhere. It has also envisioned the idea of everyone having access to financial products like
cheap credit, deposits, investment products and insurance and risk management products. For
farmers the panels have suggested that the banks must be allowed to charge freely on loans and
any subsidy must be given by the government directly to the farmer instead of through a
blanket interest subvention scheme.
More committee relies heavily on two assumptions for implementation of plans:
1. Viability of vertical Differentiated banks.
2. The implementation is UIDAI. The committee wishes to have every Aadhar card number to
have a bank account as there is no point in replicating the process of identification and
background check by banks again.
Establishing niche banks were amongst the recommendations of the panel. Recognizing its
importance, the RBI allowed the setting up of small and payments banks recently to achieve
financial inclusion.
Though the vision stated in document seems far-fetched in todays scenario, it will definitely
give a road map on which RBI can work as is evident from the recent actions of the RBI.


8. Why has RBI come out with Payment Bank option? What are its objectives and allowed
functions? Explain.
The RBIs payment bank concept is based on the suggestion given by the Mor committee for
financial inclusion. The RBI will provide differential license to open payment bank to the
NBFCs and other corporates with the good past record and a paid up capital of at least 100
crores.
The payment banks will be allowed to perform money transactions (remittances) and open
saving account but without giving loans. This will be helpful to the migrant work force which
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has to frequently transfer money. The payment banks can also be used as banking
correspondence.
Thus it will be helpful in the creation of a mechanism which will allow the banking to percolate
to the 60% of the population who have no access to the formal banking sector.
In the purview of scams like Sharda and Sahara, where people are duped by the unscrupulous
financial institutions, a move towards institutionalizing small transactions is a commendable
step. Further if the initiative is able to bring the millions of the poor under the formal banking
institution, it will be give a huge impetus to the reforms like direct cash transfers and may
become a game changer in the public delivery system existing in the country.