Indian Statistical Service Indian Economic Service (ISS IES) 2021 General Studies-2, Question-3

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(a) What is Non-filers Monitoring System? Explain how it can increase tax compliance.

Answer- The Non-filers Monitoring System (NMS) is a system introduced by the tax authorities to identify and track individuals who are required to file tax returns but have not done so. The NMS uses various sources of data, such as bank transactions, property, and vehicle registration, and utility bills to identify individuals who have not filed their tax returns. Once identified, the system sends out automated notices to remind the non-filers of their obligation to file a tax return.

The NMS can increase tax compliance in several ways:

1. It increases the visibility of non-filers: The NMS helps tax authorities to identify non-filers who may have otherwise gone unnoticed. This increases the visibility of non-filers and makes it more difficult for them to evade taxes.

2. It creates a sense of urgency: The automated notices sent by the NMS create a sense of urgency among non-filers. The notices remind them of their obligation to file tax returns and the potential penalties for non-compliance.

3. It simplifies the compliance process: The NMS simplifies the compliance process for taxpayers. The system automatically populates tax forms with data from various sources, making it easier for taxpayers to file their tax returns.

4. It reduces the burden on tax authorities: The NMS reduces the burden on tax authorities by automating the process of identifying and tracking non-filers. This frees up resources that can be used for other tax-related activities.

Overall, the NMS can help to increase tax compliance by identifying non-filers, creating a sense of urgency, simplifying the compliance process, and reducing the burden on tax authorities.

(b) Explain the difference between subsidies, cash-in-lieu of subsidies, and freebies. Discuss their rationality in eradicating poverty.

Answer- Subsidies, cash-in-lieu of subsidies, and freebies are all measures taken by governments to provide support to those who are economically disadvantaged. While they share some similarities, they differ in their implementation and their impact on poverty eradication.

Subsidies are payments made by the government to individuals or businesses to encourage certain activities or to support the production of certain goods or services. These payments may be in the form of direct payments, tax breaks, or other incentives. For example, a government may provide subsidies to farmers to encourage them to grow certain crops or to companies to invest in renewable energy production. Subsidies can be used as a way to support low-income households by providing them with access to basic goods and services, such as food, healthcare, and housing.

Cash-in-lieu of subsidies is a form of payment made by the government to individuals or businesses instead of providing direct subsidies. The payment is meant to offset the cost of the goods or services being provided, rather than to incentivize their production. For example, a government may provide cash-in-lieu of subsidies to low-income households to help them pay for housing or to purchase food.

Freebies are goods or services provided by the government to individuals for free. These can include things like free healthcare, education, or public transportation. Freebies are typically used as a way to improve access to basic goods and services for low-income households.

In terms of their effectiveness in eradicating poverty, subsidies, cash-in-lieu of subsidies, and freebies all have their strengths and weaknesses. Subsidies and cash-in-lieu of subsidies can help to make basic goods and services more affordable for low-income households, but they can also be expensive to administer and can be subject to abuse. Freebies can provide immediate relief to low-income households, but they can also be difficult to sustain over the long term.

Overall, the rationality of these measures in eradicating poverty depends on the specific context in which they are implemented. Governments must carefully consider the costs and benefits of each approach and tailor their policies to the needs of their populations. In general, a combination of targeted subsidies, cash-in-lieu of subsidies, and freebies may be most effective in alleviating poverty and improving the lives of those in need.

(c) Distinguish between Repo Rate and Reverse Repo Rate. Explain their relevance in the present context of inflation.

Answer- Repo rate and reverse repo rate are two important policy tools used by the central banks to manage the liquidity in the market and control inflation. Here's how they differ and their relevance in the present context of inflation:

1. Repo Rate: Repo rate is the rate at which the central bank lends money to commercial banks against government securities. In other words, when commercial banks face a shortage of funds, they can borrow from the central bank by pledging government securities as collateral. The repo rate determines the cost of borrowing for commercial banks and hence affects the interest rates in the economy. An increase in the repo rate leads to a decrease in the money supply in the market, which, in turn, reduces inflation. On the other hand, a decrease in the repo rate leads to an increase in the money supply in the market, which stimulates economic growth.

2. Reverse Repo Rate: Reverse repo rate is the rate at which the central bank borrows money from commercial banks by selling government securities. In other words, when the central bank wants to suck out excess liquidity from the market, it borrows money from commercial banks at the reverse repo rate, which reduces the money supply in the market. An increase in the reverse repo rate leads to an increase in the interest rates in the economy, which, in turn, reduces inflation. On the other hand, a decrease in the reverse repo rate leads to a decrease in the interest rates in the economy, which stimulates economic growth.

In the present context of inflation, both the repo rate and reverse repo rate are relevant. If inflation is high, the central bank may increase the repo rate to reduce the money supply in the market and hence reduce inflation. Similarly, the central bank may increase the reverse repo rate to suck out excess liquidity from the market and hence reduce inflation. However, if inflation is low, the central bank may decrease the repo rate to stimulate economic growth, and it may decrease the reverse repo rate to increase liquidity in the market.

(d) What is the Replacement Fertility Rate (RFR)? Does a decline in RFR impact demographic dividends?

Answer- The Replacement Fertility Rate (RFR) is the rate at which women must have children on average to replace the population, assuming no migration. This rate is typically around 2.1 children per woman in developed countries, as this is the number needed to replace both parents and account for some children who may not survive to reproductive age.

A decline in the RFR can impact the demographic dividend, which is the economic growth potential that results from changes in a country's age structure. The demographic dividend occurs when a larger portion of a country's population is of working age, allowing for increased productivity and economic growth.

When the RFR declines, the size of the younger population decreases relative to the older population, which can lead to a shift in the age structure of the population. This can result in a smaller working-age population and a larger elderly population, which can reduce the potential for economic growth and the demographic dividend.

In summary, a decline in the RFR can impact the demographic dividend by changing the age structure of the population, which can affect the size and productivity of the working-age population.

(e) Explain the concept of venture capital. Discuss the reasons for venture capitalists favoring software start-ups compared to MSME start-ups.

Answer- Venture capital (VC) refers to the provision of funding and support to high-potential, early-stage companies with promising growth prospects in exchange for equity ownership. Venture capitalists are professional investors who manage a pool of funds from institutional investors, high-net-worth individuals, and family offices to invest in these companies.

Venture capitalists typically look for companies with unique and innovative business models, disruptive technologies, and scalable products or services. They invest in these companies with the expectation of achieving a high return on investment within a relatively short period, usually between three to seven years.

There are several reasons why venture capitalists favor software start-ups compared to micro, small, and medium-sized enterprises (MSME) start-ups:

1. Scalability: Software start-ups have the potential to scale rapidly and achieve exponential growth due to their ability to leverage technology and reach a global customer base. In contrast, MSMEs often face challenges in scaling their operations due to limited resources and geographical constraints.

2. Innovation: Software start-ups often focus on developing disruptive technologies that have the potential to transform entire industries. These innovations can generate significant returns for venture capitalists. MSMEs, on the other hand, are often focused on traditional business models and may have limited potential for innovation.

3. Exit opportunities: Venture capitalists typically invest with the intention of exiting their investment within a few years. Software start-ups often have more attractive exit opportunities, such as acquisition by larger technology companies or an initial public offering (IPO), compared to MSMEs.

4. Risk tolerance: Venture capitalists are willing to take on higher levels of risk in exchange for the potential for higher returns. Software start-ups often have higher risk profiles due to the uncertain nature of technological innovation, but also offer higher potential returns.

Overall, venture capitalists favor software start-ups due to their potential for scalability, innovation, attractive exit opportunities, and higher risk tolerance compared to MSMEs. However, this does not mean that MSMEs are not attractive investment opportunities, and there are venture capitalists who focus specifically on investing in these types of companies.

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