UPSC Essentials | Mains answer practice — GS 3 : Questions on Digital Bharat Nidhi and G-Secs (Week 60)

QUESTION 2

What are the risks involved in holding G-Secs? Highlight the techniques for mitigating such risks.

General points on the structure of the answers

Introduction

— The introduction of the answer is essential and should be restricted to 3-5 lines. Remember, a one-liner is not a standard introduction.

— It may consist of basic information by giving some definitions from the trusted source and authentic facts.

Body

— It is the central part of the answer and one should understand the demand of the question to provide rich content.

— The answer must be preferably written as a mix of points and short paragraphs rather than using long paragraphs or just points.

— Using facts from authentic government sources makes your answer more comprehensive. Analysis is important based on the demand of the question, but do not over analyse.

QUESTION 1: Discuss how Digital Bharat Nidhi (DBN) would work at improving rural telecom connectivity.

Note: This is not a model answer. It only provides you with thought process which you may incorporate into the answers.

Introduction:

— The Department of Telecommunications (DoT) has announced draft rules to put the Digital Bharat Nidhi into action, in a new endeavour by the central government to improve telecom access in rural areas.

— Digital Bharat Nidhi (DBN) would replace the previous Universal Service Obligation Fund (USOF), which is a pool of funds created by a 5% Universal Service Levy levied on all telecom fund operators’ Adjusted Gross Revenue (AGR).

— The idea is that this money will be used to subsidise the construction of telecom networks in remote and rural areas, where private enterprises may otherwise be hesitant to offer their services since these are not profitable markets.

Body:

You may incorporate some of the following points in the body of your answer:

How will the Digital Bharat Nidhi work?

— According to the Telecom Act, contributions paid by telecom firms to the Digital Bharat Nidhi shall first be deposited to the Consolidated Fund of India (CFI).

— The CFI gets all of the government’s revenues, including loan proceeds and loan repayments. This fund is also used by the government to pay for expenses.

— The Centre will periodically deposit the collected funds with the DBN.

— The DBN funds will be used to support universal service by promoting access to and delivery of telecommunication services in underserved rural, remote, and urban areas; to fund research and development of telecommunication services, technologies, and products; to support pilot projects, consultancy assistance, and advisory support for improving connectivity; and to introduce new telecommunication services, technologies, and products.

— According to the DoT’s draft guidelines for how the DBN would be operationalised, the Centre will choose an “administrator” who will select “DBN implementers” through “bidding” or the solicitation of applications from eligible persons.

— The administrator will establish the funding modalities for DBN implementers on an individual basis, including but not limited to full funding, partial funding, co-funding, market risk mitigation, and risk capital.

— According to the draft guidelines, the DBN will fund programmes and projects that provide targeted access to telecommunications services to underserved groups of society such as women, people with disabilities, and the economically and socially disadvantaged.

Conclusion:

— The schemes and projects to achieve the objectives of the DBN shall meet criteria such as the introduction of next-generation telecommunication technologies in underserved rural, remote, and urban areas; improving affordability of telecommunication services in such areas; promoting innovation, research and development, promotion and commercialisation of indigenous technology development and associated intellectual property, including the creation of regulatory sandboxes; developing and establishing relevant standards to meet national requirements, as well as their standardisation in international standardising bodies; and supporting start-ups in the telecommunications sector, including telecom equipment manufacture, among other things.

(Source: What is Digital Bharat Nidhi, govt’s fresh attempt at improving rural telecom connectivity? by Soumyarendra Barik)

Points to Ponder

What is the Universal Service Obligation Fund?

Consolidated Fund of India

Related Previous Year Question

How can the ‘Digital India’ programme help farmers to improve farm productivity and income? What steps has the Government taken in this regard? (2015)

QUESTION 2: What are the risks involved in holding G-Secs? Highlight the techniques for mitigating such risks.

Note: This is not a model answer. It only provides you with thought process which you may incorporate into the answers.

Introduction:

— G-secs, or government securities or government bonds, are instruments that governments use to borrow money.

— Government Securities (G-Secs) are commonly referred to as risk-free products because sovereigns rarely default on payments.

— However, as with any financial product, holding G-Secs carries risks. Hence, it is critical to identify and understand such risks, as well as to implement suitable risk mitigation strategies.

Body:

You may incorporate some of the following points in the body of your answer:

Risk associated with the G-Secs

— According to the website of RBI, there are the following major risks associated with holding G-Secs:

Market risk

— This risk derives from the adverse fluctuation of securities prices due to changes in interest rates.

— This will result in valuation losses when marking to market or a loss if the securities are sold at an adverse price.

— Small investors might limit market risk by holding bonds to maturity and realising the yield at which the instruments were purchased.

Reinvestment risk

— A G-Sec’s cash flows include a half-yearly coupon and principal payments at maturity. These cash flows must be reinvested whenever they are paid.

— As a result, there is a risk that the investor may be unable to reinvest these proceeds at the yield available at the time of investment due to a reduction in interest rates at the time of cash flow reception by investors.

Liquidity risk

— Liquidity in G-Secs is defined as the ease with which securities can be purchased and sold, i.e. the availability of buy-sell quotes with small spreads. Liquidity risk refers to an investor’s inability to liquidate (sell) his holdings due to a lack of buyers for the security, i.e., no trading activity in that particular security, or circumstances that result in a distressed sale (selling at a much lower price than its holding cost), resulting in a loss to the seller.

— When a liquid bond with a set maturity is purchased, the tenor is often lowered owing to time decay. For example, a 10-year security will become an 8-year security after two years, potentially rendering it illiquid. The bonds also become illiquid when there are no frequent reissuances by the issuer (RBI) in those bonds.

Risk Mitigation

— Holding securities until maturity could be an effective method for avoiding market risk.

— To manage portfolio risk, consider rebalancing the portfolio by selling short-term securities and buying new securities with a longer tenor. However, rebalancing incurs transaction and other fees and should be utilised with caution.

— Market and reinvestment risk can also be addressed via Asset Liability Management (ALM), which involves matching cash flows with obligations. ALM could also be carried out by matching the duration of assets and liabilities.

— Advanced risk management approaches make use of derivatives such as Interest Rate Swaps (IRS), which can alter the nature of cash flows.

Conclusion:

— G-secs are the safest investments in any economy, and the G-sec yield is the lowest risk-free interest rate in any economy.

— G-sec yields change over time; often several times during a single day. This happens because of the manner in which G-secs are structured.

(Source: Explained: What are G-Sec yields, and how and why do they go up and down? by Udit Misra, rbi.gov.in)

Points to Ponder

How G-Sec yield is calculated?

Related Previous Year Questions

Do you agree that the Indian economy has recently experienced V-shaped recovery? Give reasons in support of your answer. (2021)

Explain the meaning of investment in an economy in terms of capital formation. Discuss the factors to be considered while designing a concession agreement between a public entity and private entity. (2020)

Previous Mains Answer Practice

UPSC Essentials: Mains answer practice — GS 1 (Week 59)

UPSC Essentials: Mains answer practice — GS 1 (Week 58)

UPSC Essentials: Mains answer practice — GS 2 (Week 58)

UPSC Essentials: Mains answer practice — GS 2 (Week 59)

UPSC Essentials: Mains answer practice — GS 3 (Week 59)

UPSC Essentials: Mains answer practice — GS 3 (Week 58)

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