POLITY AND GOVERNANCE

1. SPECIAL CATEGORY STATUS

TAGS: PRELIMS- GS-II- POLITY

THE CONTEXT: Recently, the Union Finance Minister announced that the Centre will not consider the demands for “special category status “ for any states.

THE EXPLANATION:

About Special Category Status :

• It is a classification given by the Centre to assist development of states that face geographical and socio-economic disadvantages.
• Under this, the Central government extends financial assistance to states that are at a comparative disadvantage against others.
• There is no provision of SCS in the Constitution of India.
• The concept emerged in 1969 with the approval of the Gadgil formula in the Fifth Finance Commission in 1969.

The parameters required for Special Category Status:

• Must be economically backward with poor infrastructure.
• The states must be located in hilly and challenging terrain.
• They should have low population density and significant tribal population.
• Should be strategically situated along the borders of neighboring countries.
• First SCS was accorded in 1969 to Jammu and Kashmir, Assam and Nagaland.
• The 14th Finance Commission has done away with the ‘special category status’ for states, except for the North-eastern and three hill states.
• Presently, eleven states have the Special Category Status in the country including Assam, Nagaland, Himachal Pradesh, Manipur, Meghalaya, Sikkim, Tripura, Arunachal Pradesh, Mizoram, Uttarakhand, and Telangana.

Benefits to States with SCS:

• The Centre pays 90% of the funds required in a centrally-sponsored scheme to special category status states as against 60% or 75% in case of other states, while the remaining funds are provided by the state governments.
• Preferential treatment in getting central funds.
• 30 percent of the Centre’s gross budget also goes to special category states.
• Unspent money does not lapse and is carried forward.
• Significant concessions are provided to these states in excise and customs duties, income tax and corporate tax.
• These states can avail the benefit of debt-swapping and debt relief schemes.

ECONOMIC DEVELOPMENTS

2. INVESTOR EDUCATION AND PROTECTION FUND AUTHORITY (IEPFA)

TAGS: PRELIMS- GS-I

THE CONTEXT: The IEPFA is seeking applications from young students and scholars for its short-term internship programme which began recently.

THE EXPLANATION:

About IEPFA:

• IEPF is a statutory body under the Ministry of Corporate Affairs, established under the Companies Act 2013.
• It administers the Investor Education and Protection Fund.
• IEPF Authority has undertaken a proactive approach to achieve its mandate of promoting investor education, awareness and protection.
• Its objective is to promote Investor Education, Awareness, and Protection.
• The Amounts credited to IEPF are maintained under the Consolidated Fund of India (Article 266 of the Constitution).

Composition:

• Secretary Ministry of Corporate Affairs is the Chairperson of the Authority.
• The Joint Secretary Ministry of Corporate Affairs is the Chief Executive Officer of the Authority.
• The Authority is entrusted with the responsibility of administration of the Investor Education Protection Fund (IEPF), make refunds of shares, unclaimed dividends, matured deposits/debentures etc. to investors and to promote awareness among investors.
• The Authority has taken a 360 degree approach to sensitize stakeholders to include household investors, housewives, professionals, etc. across the country in rural and urban areas through direct investor awareness programmes, media campaign and engaging with other stakeholders with the common goal.
• In the urban and semi-urban areas the Authority organizes investor awareness programmes in association with the Institute of charted Accountants of India, Institute of Cost Accountants of India and Institute of Company Secretaries of India.
• In the rural areas the programmes are organised in collaboration with CSC e-governance Services Private Limited through the Common Service Centre (CSC’s) located in villages.
• Multilingual Information, Education and Communication booklets and films have been developed for creating awareness.
• A Joint Awareness campaign has been launched in association with Reserve Bank of India, Securities and Exchange Board of India & Department of Consumer Affairs.

The IEPF is to be utilized for :

• The refund of unclaimed dividends , matured deposits, debentures , application money due for refund and interest thereon.
• Promotion of investor’s education, awareness and protection.
• Distribution of any disgorged amount among eligible and identifiable applicants for shares or debentures , shareholders, debenture-holders or depositors who have suffered loss due to wrong actions by any one person , in accordance with the ordered made by the court which had ordered disgorgement.

3. SPECIAL RUPEE VOSTRO ACCOUNTS

TAGS: PRELIMS- GS-III-ECONOMY

THE CONTEXT: Recently, government of India informed that Russian banks have opened Special Rupee Vostro Accounts (SRVA) with partner banks in India.

THE EXPLANATION:

About Special Rupee Vostro Accounts (SRVA):

• The SRVA is an additional arrangement to the existing system that uses freely convertible currencies.
• It works as a complimentary system to facilitate transactions that cannot be executed through the existing banking setup.
  About Vostro Accounts:
• A Vostro account is an account that domestic banks hold for foreign banks in the former’s domestic currency.
• In this, a foreign bank acts as an agent providing financial services on behalf of a domestic bank.
• It enables domestic banks to provide international banking services to their clients who have global banking needs.
• Domestic banks use Vostro accounts to facilitate transfers, conduct business transactions, accept deposits, and gather documents on behalf of the foreign bank.

Significance:

• The system could reduce the “net demand for foreign exchange, the U.S. dollar in particular, for the settlement of trade flows”
• It will reduce the dependence on foreign currencies.
• It can make the country less vulnerable to external shocks.
• Ensure timely payments.
• This helps domestic banks to gain wider access to foreign financial markets and serve international clients without having to be physically present abroad.
• Vostro accounts are not restricted to banks, they can be used by other entities such as insurance companies and business entities to keep funds with another entity.
• When Vostro accounts are used by corresponding banks, the domestic bank can execute transfers, deposits, and withdrawals on behalf of the corresponding bank.

Functioning :

• The framework entails three important components, namely, invoicing, exchange rate and settlement.
• Invoicing entails that all exports and imports must be denominated and invoiced in INR.
• The exchange rate between the currencies of the trading partner countries would be market-determined.
• The final settlement also takes place in Indian National Rupee (INR).
• Domestic importers are required to make payment in INR into the SRVA account of the correspondent bank against the invoices.
• Domestic exporters are to be paid the export proceeds in INR from the balances in the designated account of the correspondent bank of the partner country.

Legal framework:

• All reporting of cross-border transactions are to be done in accordance with the extant guidelines under the Foreign Exchange Management Act (FEMA), 1999.

Eligibility criteria of banks:

• Banks from partner countries are required to approach an authorised domestic dealer bank for opening the SRVA.
• The domestic bank would then seek approval from the apex banking regulator providing details of the arrangement.
• Domestic banks should ensure that the correspondent bank is not from a country mentioned in the updated Financial Action Task Force (FATF) Public Statement on High Risk & Non-Co-operative jurisdictions.
• Authorised banks can open multiple SRV accounts for different banks from the same country.
• Balances in the account can be repatriated in freely convertible currency and/or currency of the beneficiary partner country depending on the underlying transaction, that is, for which the account was credited.

There are 3 types of accounts : Vostro, Nostro and Loro Accounts

1. Vostro accounts -are maintained in the domestic currency.
2. Nostro accounts- are maintained in foreign currency.
3. A Loro account -is a current account that is maintained by one domestic bank for another domestic bank in the form of a third-party account, unlike nostro and vostro which is bilateral correspondence.

The Foreign Exchange Management Act, 1999 (FEMA):

• It is a civil law dealing with foreign exchange market in India.
• Under it the Central Government can regulate the flow of payments to and from a person situated outside the country.
• Financial transactions concerning foreign securities or exchange cannot be carried out without the approval of FEMA.
• The Act empowers RBI to place restrictions on transactions from capital Account even if it is carried out via an authorized individual.

SCIENCE AND TECHNOLOGY

4. GLOBAL ASSESSMENT OF SOIL CARBON IN GRASSLANDS

TAGS: PRELIMS- GS-III- ENVIRONMENT

THE CONTEXT: Recently, the FAO(Food and Agricultural Organization) published its first Global Assessment of Soil Carbon in Grasslands.

THE EXPLANATION:

• The study found that if the SOC content in the 0–30 cm depth layer of available grasslands increased by 0.3 percent after 20 years of the application of management practices that enhance soil organic carbon sequestration, 0.3 tonnes C/ha per year could be sequestered.
• Grasslands contain approximately 20 percent of the world’s SOC
• Grasslands have suffered losses because of human activities such as intensive livestock grazing, agricultural activities, and other land-use activities.
• Most of the world’s grasslands have a positive carbon balance, meaning the land is stable or well-maintained.

About Grasslands:

• Grasslands are areas dominated by grasses.
• Distribution: Grasslands are found in areas having well-defined hot and dry, warm and rainy seasons.
• Grasslands can majorly be divided into two parts:
• Tropical Grasslands – Savannah, Campos, and Llanos
• Temperate Grasslands- Pampas, Prairie, Veld, Steppe, and Down.

Significance of Grasslands :

• Farmers who keep cattle or goats, as well as shepherds who keep sheep, are highly dependent on grasslands.
• Domestic animals are grazed in the ‘common’ land of the village.
• Fodder is collected and stored to feed cattle when there is no grass left for them to graze in summer.
• The grass is also used to thatch houses and farm sheds.
• The thorny bushes and branches of the few trees that are seen in grasslands are used as a major source of fuelwood.
• Nutrient cycling (biogeochemical cycles)
• Ecological succession or ecosystem development

PRELIMS PERSPECTIVE

5. SURVEY OF INDIA

TAGS: PRELIMS PERSPECTIVE

THE CONTEXT: Recently, the Centre officially released the National Geospatial Policy of India which allows any private agency to make high-resolution maps.

THE EXPLANATION:

About Survey of India:

• Survey of India, The National Survey and Mapping Organization of the country under the Department of Science & Technology.
• It is the oldest scientific department of the Indian government.
• It was established in 1767 to help consolidate the Indian territories of the British East India Company.
• Its assigned role as the nation’s Principal Mapping Agency.
• It is headquartered in Dehradun, Uttarakhand.
• It is India’s principal mapping agency and functions under the Department of Science and Technology (DST), Ministry of Science and Technology, Government of India.
• It provides base maps for expeditious and integrated development of the country by ensuring that all resources contribute to the progress, security, and prosperity of the nation for the present and the future.
• It is headed by the Surveyor-General of India.

[WpProQuiz 430]

THE CONTEXT:  The supreme Court recently in its decision upheld by 4:1 majority the decision taken by the Union Government six years ago to demonetize the currency notes of Rs. 500 and Rs.1000 denominations.A five-judge Constitution bench headed by Justice S A Nazeer, who will retire on January 4,  pronounced its verdict on the matter.

BACKGROUND OF THE ISSUE

WHAT IS DEMONETIZATION

• It refers to the withdrawal of currencies by the central bank from the economy so that it will not be used further as the legal tender.
• These decisions are taken around the world to curb the black money and counterfeit currency.

GOVERNMENT DECISION AND ITS RATIONALE

• On 8 November 2016, Prime Minister announced the “demonetization” of `500 and `1,000 notes with effect from the next day. It was sought that the demonetization will help the country in many ways
• Rational of demonetization-

Ø It was claimed that the demonetization will help curb terror financing.

Ø It would lead to unearthing the black money.

Ø The fiscal space of the government will increase.

Ø It would lead to reduce the the interest rate of the banking system.

Ø It would create the less cash economy- as it would formalize the Indian economy and digital transactions will be promoted.

PETITION AGAINST GOVERNMENT DECISION

• A total of 58 petition was filed challenging the central government’s 2016 notification to ban Rs 500 and Rs 1,000 currency notes.
• Supreme Court was hearing these petitions as they were referred to a Constitution bench of the Supreme Court in December 2016.
• Supreme Court decision-Supreme Court bench’s majority verdict differed from the minority judgment on their interpretation of a provision of the Reserve Bank of India Act, 1934.
• The main point of difference between the majority and minority judgments was the interpretation of Section 26(2) of the RBI Act, 1934, which allows the central government to declare that “any series of bank notes of any denomination shall cease to be legal tender” after a recommendation from the central board of RBI.

Section 26(2) in The Reserve Bank of India Act, 1934

(2) On recommendation of the Central Board the 2[Central Govern­ment] may, by notification in the Gazette of India, declare that, with effect from such date as may be specified in the notifica­tion, any series of bank notes of any denomination shall cease to be legal tender 3[save at such office or agency of the Bank and to such extent as may be specified in the notification].

SUMMARY OF THE JUDGEMENT

ON LEGALITY

• Supreme Court by 4:1 majority, holds that the decision-making process behind the demonetization of Rs.500 and Rs.1000 currency notes in 2016 was lawful.

ON RBI ACT

• Supreme Court held that – the word “any” in Section 26(2) must be interpreted as “all”, otherwise it would lead to an anomaly – e.g. if there are 20 series of a particular denomination, the Centre cannot demonetize 19 series and leave behind one series to continue as legal tender – an interpretation which nullifies the purpose for which power is bestowed would be contrary to the principle of purposive interpretation.

ON GOVERNMENT

• Supreme Court held that the decision making process is not flawed in law – the duty of the Court is to confine itself to the question of legality – it ought to determine whether a decision-making authority exceeded its powers, committed an error of law, committed a breach of the rules of natural justice. It is not concerned with the manner in which the decision was taken.
• The Court held that it does not have the expertise to go into the question whether the object with which demonetization was effected is served or not – mere errors of government are nor subject to judicial review, only palpably arbitrary ones are declared void. Thus it provided for balance between judiciary review and executive actions.
• Supreme Court applied the test of proportionality —reasonable nexus between the measure of demonetization with the purpose of addressing issues of fake currency bank notes, black money, drug trafficking and terror financing – Court does not possess the expertise to decide what alternative measure could have been undertaken – there is a proper relation between importance of curbing the menace of fake currency, black money etc.if there was reasonable restriction, it was in the larger public interest.

DISSENTING OPINION

• When Central Board recommends demonetization, it is only a particular series of banknotes of a particular denomination as recommended under Section 26(2) – the word ‘any’ cannot be read as ‘all’ – if ‘any’ is to be read as ‘all’, it would provide unguided discretion to the Central Board.
• Supreme Court held that only the Central Board of RBI is the initiator of the process of demonetization – the provision has a restricted operation, either the Central Government accepts the recommendation of the Central Board and issues a gazette notification or refuses to accept the recommendation.
• Supreme Court judge held that Central Government has the power to demonetize ‘all’ series of banknotes of ‘all’ denominations, even without the recommendation of the Central Board, but not in exercise of Section 26(2) – such an extensive power is to be exercised only through a legislative process [legislation/Ordinance (if urgent)] and not by way of an executive act – the Parliament should be involved in the process of implementation of such a scheme of demonetization.
• It held that government must seek the opinion of the Central Board of RBI as RBI is the sole authority to regulate circulation of bank notes. The opinion of the Central Board ought to be an independent and frank opinion – the Central Government can move ahead with demonetization irrespective of positive or negative opinion of the Central Board, but by enacting legislation or by way of an Ordinance and not an executive notification.

ANALYZE 26(2) IN THIS CONTEXT RBI ACT AND INNOVATIVE CONSULTATIVE PROCESS

• Reserve Bank of India Act, 1934 – Section 26(2) – The decision taken by the Central Government to demonetize is to be based on the recommendation of the Central Board of RBI.supreme court in its judgement said — the recommendation ought to be construed in the context in which it is used – in the present context “recommendation” would mean a consultative process between the Central Board and the Central Government.
• Instead of focusing on individual stakeholder, the Supreme court said it is to be considered by the Court whether each of the parties had disclosed all relevant facts and factors to each other for due consideration.
• Monetary Policy Committee is the manifestation of the innovative consultative process, where Government and RBI takes consultative decisions. It affects the independence and autonomy of the RBI. However, the influence of the government has increased as earlier RBI was taking the sole decision but now government say has increased.

Advantage of the consultative process

• Better sharing of ideas through a consultative process
• The good and innovative decision is taken
• Better coordination between fiscal and monetary policy.

ANALYSIS OF LIMITATION OF STATUTORY INTERPRETATION VS PARLIAMENT

• Demonetisation was the process which was done through executive action without going through the legislative process. Thus it accounts for executive activism. In this way executive accountability in the Parliament is not ensured. Thus, the accountability of the executive to the legislature is bypassed through it. For Example, the Aadhar act was passed as a Money Bill.
• Statutory interpretation is the process by which Court interpret the law. Supreme Court has been given authority under article 13 for judicial review. It can declare any law null and void if it is against fundamental rights. In Indian Constitution the doctrine of process established by law has been followed In which the law is valid only if the procedure is followed. However, after Maneka Gandhi case Supreme Court adopted due process of law . Under this doctrine, the rights of the citizen are protected based on the fairness of the law.
• However, at various occasions, the Supreme Court has not been able to make the executable accountable. In the recent judgment on demonetization, majority opinion has given the interpretation of the law based on the written words. The substance of the welfare of the people has been neglected in the judgement. Demonetisation has affected a large number of people.

ANALYSIS OF INDEPENDENT AGENCY, PARTICULARLY RBI VIS-VIS PROFESSIONAL ACCOUNTABILITY AND INSTITUTIONAL ARCHITECTURE

“RBI is not just any other statutory authority. It is not like a stream which cannot be greater than the source.” —Justice Navarathna.

• Regulatory bodies are independent agencies that are assigned to address the market failures, and anti-competitive pricing and promote public welfare. It stems from the Article 53(3) which authorizes the Parliament to confer by law regulatory function to authorities.However there are issues with autonomy and independence of these regulatory bodies.
• Financial independence— First criteria for independence is financial independence. Their institutional structure should be such that they an function independently and autonomous. However, financial independence is compromised as they depend upon line ministry for the budget. There is no fixed tenure, so the government has been meddling by changing the tenure. Functional independence is maintained when it maintain arms length with the interest group.
• Further there is overlapping jurisdiction, for Example, SEBI aane IRDAI and between RBI and Competition Commission of India (CCI) over merging of banks. Professional accountability should be toward the Parliament, however they are not answerable to the parliamentary directly . They don’t submit annual report to the Parliament. However there must be parliamentary accountability as it is an ideal form of political accountability. However, in contrast to this, the government interferes with these regulatory bodies.
• Various other institutions also face the issue of independence. For Example since the inception of TRAI, its independence has often been challenged. For a regulator to be independent in the true sense, it needs to have functional and financial independence from the government. In the case of TRAI, functional independence has been weakening over time. Political barriers to such independence are quite evident from a study of the sector‟s regulatory history, as a rollercoaster ride has characterized relations between the government and the TRAI.
• RBI is the central bank and regulatory body responsible for the regulation of the banking system. It regulates the inflation and money supply in the economy . It also issues the currency and act as a last resort to the banks. Under the inflation-targeting regime agreed upon between the RBI and Finance Ministry , RBI is required to maintain the inflation in the tolerance band as decided by Monetary Policy Committee (MPC).
• However at time institutional architecture affect the independence of the banks. For example, RBI has to transfer the surplus amount to the government, which may affect the RBI’s ability to manage the economy’s monetary policy.
• In a recent judgement of the supreme Court, Justice Nagarathna’s Dissenting Opinion held that the RBI act does not envisage initiation of demonetization of bank notes by the Central Government. Sub­section (2) of Section 26 of the Act, contemplates the demonetization of bank notes at the instance  of  the Central Board of the Reserve Bank of India. Thus if demonetization is to be initiated by the Central Government, such power is derived from Entry 36 of List I of the Seventh Schedule to the Constitution which speaks of currency, coinage and legal tender; foreign exchange. Thus if the government initiates the demonetization of the currency, without going through the legislative route,it interferes with the RBI’s domain.
• Further,Under section 7 of the RBI, the Central Government may, from time to time give such directions to the Bank as it may, after consultation with the Governor of the Bank, consider necessary in the public inter­est. Clearly, this section empowers the government to issue direction in terms of public interest to the central bank, which otherwise does not take orders from the government.

THE CONCLUSION: Parliamentary accountability is the bedrock of constitutionalism and Parliamentary democracy. Though demonetization of currency notes 500 and 1,000 was based on the legality under the RBI Act. The dissenting judgement highlighted the concern of the people. The demonetization was to curb the black money and terror financing, more concerted efforts can be made by proper planning and execution. Further, the Parliament should be taken into confidence as it could have provided crucial input and make the executive accountable. In this way, the demonetization drive could have become the national drive against black money and terror financing.

MAINS QUESTIONS

1. Analyze the Judicial review power of the Supreme Court in the context of demonetization.
2. “Despite RBI being an independent body, there has been a concern due to interference by the Government.”Critically examine.