THE CONTEXT: The recent farmer agitation has brought the issue of farmer distress front and centre in the public consciousness. The time seems ripe to find new solutions to the structural challenges facing farmers. One of the solution is to support farmers by Direct Income Support (DIS) but in recent time several reports highlighted that such schemes are facing many challenges. In this article, we will discuss that what should be the way forward for the effective implementation of these scheme.

INCOME SUPPORT SCHEME IN INDIA FOR FARMERS

• In agriculture, there are two major types of government support measures. The first one is price support measure and the second is income support measures.
• Price support means the government is procuring the agricultural produce from farmers at a remunerative price. India’s Minimum Support Price based procurement is a classic example of price support scheme.

DIRECT INCOME SUPPORT

• The second type of support is DIRECT INCOME SUPPORT (DIS).In this scheme,government transfers direct payment to the poor farmers.
• Under the WTO terminology, it is called Direct payments to farmers or Decoupled Income Support. Decoupled means such an income transfer to farmers will not influence (or minimum influence) production and price of the respective crops.

PM KISAN SAMMAN SAMMAN NIDHI

• The Pradhan Mantri Kisan Samman Nidhi (PM-KISAN) is the first universal basic income-type of scheme targeted towards landed farmers.
• It was introduced in December 2018 to manage agricultural stress.

Initially, the scheme was targeted at small and medium landed farmers, but with the declining growth in gross value added of the agricultural sector, it was extended to all farmers in May 2019.

• This direct benefit transfer scheme was aimed at addressing the liquidity constraints of farmers in meeting their expenses for agricultural inputs and services.

Features of the scheme:

• Income support: The primary feature of this Yojana is the minimum income support it provides to farmers. Each eligible farmer family is entitled to receive Rs.6000 per annum across India. However, the amount is not disbursed at once. It’s divided into three equal instalments and meted out four months apart.
• Funding: PMKSNY is an Indian government-sponsored farmer support scheme. Therefore, the entirety of its funding comes from the Government of India.
• Identification responsibility: While the responsibility of funding lies with GOI, the identification of beneficiaries is not under its purview. Instead, it’s the responsibility of State and Union Territory governments.

BENEFITS OF DIRECT INCOME SUPPORT

Direct Income Supports’ ability to encourage farmers to raise production is less. At the same time, it has some positives:

• There is no leakage – income is transferred through DBT.
• There is protection for farmers against income loss and adverse terms of trade impact on agriculture.
• It is less distortionary and is WTO combatable; there is less influence on production and price.
• Farm income support is superior to price support as it is crop neutral. The farmer is getting reward for continuing with agriculture whatever may be the crop he is cultivating. On the other hand, India’s MSP historically, favored wheat and rice farmers as procurement was concentrated on these two crops.

PM KISAN AFTER TWO YEARS: A CRITICAL REVIEW

The PM KISAN scheme has completed two years (seven installments are released of the scheme) but facing several crises.  The scheme is a useful vehicle to provide support to farmers and it was included in the Pradhan Mantri Garib Kalyan Package during lockdown but, was this a useful way of relieving distress during the lockdown?  A survey by NCAER National Data Innovation Centre in June 2020 provides some useful insights in this regard:

Findings of the survey

• Lower level of economic distress among farmers than among other groups.
• While farmers faced some logistical challenges in transporting and selling their produce, 97 per cent of them continued to harvest Rabi crops and prepared for the Kharif season.
• Nearly 75 per cent of the cultivators who usually hire labourers for agricultural activities continued to do so.
• The farmers were relatively immune to the economic impact of the lockdown as nearly 32 per cent of them experienced a large income loss which is much lower compared to the proportion among casual wage workers and business households.
• The proportion of households that had to borrow to meet their day-to-day consumption needs during the lockdown was relatively low for the farmers.
• While 7 per cent of farm households suffered from occasional unavailability of food during the lockdown, this figure was much higher for casual workers and business households.

Performance of PM-KISAN during the Pandemic

• Only 21 per cent households received cash transfers through PM-KISAN.
• Around two-thirds reported receiving Rs 2,000 and about a fourth received Rs 4,000, possibly because family members engaged in agricultural activities may be co-residing within a household.
• About 35 per cent of rural PM-KISAN recipients suffered income losses to a large extent in comparison to more than half of the non-recipients.
• A little more than a third of PM-KISAN recipients borrowed money during this period as against 48 per cent of non-recipients.

WHAT ARE THE ISSUES WITH THE SCHEME AND WHY THE SCHEME IS NOT PERFORMING AS PER THE EXPECTATIONS?

Lack of DataBase

• The scheme was hurriedly announced right ahead of the 2018 elections and then the government did not have proper database of farmers.
• There are nearly 14.5 crore families in India but govt did not has proper database of these families. Many states like West Bengal, have delayed or did not submit the data related to farmers.

Difficulty in Identifying Beneficiary Farmers

• According to agricultural census of 2015-16, number of landholdings in the country was projected at Rs 14.65 crore. But landholding do not determine the number of farmer families present in the country as there are multiple owners for a single land. In such scenario, all the farmer families which own the land are eligible for the scheme.
• Number of landholdings in Punjab according to agricultural census were 10.39 lakh but number of beneficiaries’ farmers in PM-kisan database list were 17.52 lakh till October 23, 2019.
• It may happen that a single farmer holds multiple lands. The agricultural census may record multiple land holdings which PM-Kisan scheme would otherwise recognise as single farmer.

Census Issue

• Other problem includes the agricultural census that counts the number of operational landholdings. Which is the piece of land being used for cultivation without considering the title of land. Whereas PM-kisan scheme considers the farmer families recognised as land holders under the state or union territory.
• Further, around 14.3 crore landless farmers (census 2011) will not be able to avail this scheme. Mainly due to the fact they are not the land holders and are contract farmers.
• However, the government is trying to release fund to farmers by linking their account to Aadhaar card. Government extended the date to seed the adhaar account to November 30 2019.

Others

1. Intended Farm Households are not covered: PM-KISAN is not reaching all farmer households as intended as most of the farmers in UP, Haryana and Rajasthan own land and should be receiving benefits but only 21 per cent of the cultivators interviewed reported receiving the benefit.
2. Not a pro-poor scheme: it is not pro-poor since recipients of PM-KISAN seemed to be better off than the general rural population even before the lockdown.
3. Lack of digitized land records: In many States, land records are not updated regularly and therefore, there could be instances where the cultivating farmers would have partitioned their holdings from other family members, but would not have the records-of-right to claim the benefit instantly.
4. Overlapping of with other schemes: Various state governments have launched schemes with similar benefits such as Rythu Bandhu (Telangana), Annadata Sukhibhava (Andhra Pradesh), KALIA Scheme (Odisha) and Bhavantar Bhugtaan Yojana (Madhya Pradesh).

WHAT SHOULD BE THE WAY FORWARD?

Proactive role of Banks

• There are reports that after the loan waiver in Maharashtra or transfer of first instalment to the Bank accounts of farmers under KALIA scheme in Odisha, concerned bank branches adjusted the deposit money against past liabilities of few farmers.
• This kind of scenarios may lead to subversion of the objectives of the income support scheme, which is clearly intended to assist the farmers with some disposable cash for purchase of inputs.
• Banks involved in primary sector lending or disbursement of crop loans, etc need to be sensitized properly on their critical role in implementation of PM-KISAN.

Strengthening IT backbone

• Needless to say that States with robust computerized land records data base and a good IT infrastructure will be in a better position to implement PM-KISAN.
• With ICT usage and direct transfer of money to farmers’ bank accounts, pilferage would also be less.
• Farmers not having bank accounts should be encouraged to open ‘no-frills’ accounts under the Jan-Dhan Yojana. Linking Aadhaar data base will further strengthen the system and analytics later on from this big-data eco-system could assist decision making empirically.

Targeting benefits and updation of land records

• In many States, land records are not updated regularly and therefore, there could be instances where the cultivating farmers would have partitioned their holdings from other family members, but would not have the records-of-right to claim the benefit instantly.
• These kind of genuine cases need to be redressed by revenue authorities so that eligible cases are not deprived.
• Similarly, fraudulent claims should also be avoided. Involving the Gram Panchayats, wherever possible in targeting of beneficiaries may be explored.

LESSON FROM STATES POLICIES

• Odisha’s KALIA scheme offers some important lessons for the effective implementation of the scheme.
• Odisha used a three-step framework to identify beneficiaries. These are:
• Unification: The first step involved unifying state databases with “green forms” which were essentially applications from farmers who wanted to opt in.
• Verification: The second step involved verification of information through databases like the Socio-Economic Caste Census, National Food Security Act and other databases; de-duplication through Aadhaar; and bank account verification through bank databases.
• Exclusion: The third step involved excluding ineligible applicants like government employees, tax payers, large farmers, and those that voluntarily opted out.
• The use of technology and non-farm databases meant that KALIA could include sharecroppers, tenant and landless farmers as beneficiaries, which is a significant step towards inclusive agricultural policy-making.
• KALIA has now laid the foundation for a state-wide farmer database with 100 per cent Aadhaar, mobile number and financial address seeding. This database can be leveraged for targeted scheme delivery beyond DIS, issuing customised agri-advisories and improving financial access.

CONCLUSION: PM- KISAN is India’s first direct support scheme, which should be surely successful. But for this, govt of India should learn some important lessons from other sources like the KALIA scheme and for that technology can play a vital role. The potential of technology to transform social welfare delivery is exciting. An approach that leverages data to maximize citizen benefits, while ensuring privacy, security and access, must be the way forward if we are to truly realize the power of digital to serve every Indian.

JUST ADD TO YOUR KNOWLEDGE

THE MSP AS A PRICE SUPPORT MEASURE

• WTO calls these subsidies as amber box subsidies that distorts trade. Such subsidies should be reduced as they may make a high cost producer a big produce and the country may export its produce.
• According to the WTO, a support (subsidy) by the government that influences production and price is trade distorting and it should be reduced.

PM-KISAN (DIRECT INCOME SUPPORT)

• In this case; the government will be giving direct payment to the farmers for their low income from farming.
• Under the WTO terminology, it is called Direct payments to farmers or Decoupled Income Support.
• Decoupled means such an income transfer to farmers will not influence production and price of the respective croops.
• Under Agreement on Agriculture (WTO), the direct payment to farmers comes under the Green Box.
• The Green Box subsidies can be given by a government or in other words they need not be reduced.

THE CONTEXT: In June 2021, the Group of Seven (G7) major developed economies held their first in-person summit since 2019 in Cornwall, UK. The discussion focused on addressing the Covid-19 crisis, climate change, global taxation, etc. This article analyses the tax-related outcome in detail.

GLOBAL MINIMUM TAX

• The June 4-5 agreement between the G7 Finance Ministers to plug the cross-border tax loopholes used by the giant multinational companies (MNCs) to evade taxes has immense potential to reform and revolutionize the global tax system.
• The reform blueprint is based on two pillars:
• To distribute the profits equitably among countries where these are generated, enabling them to tax such profits
• Adoption of a minimum corporate tax rate of at least 15 percent globally.

The G7 proposal

• Besides proposing a global minimum tax rate of 15 percent, the G7 communique states that multinational companies, which have a 10 percent profit margin, will be taxed on at least 20 percent of the profits which exceed this figure, in countries where they operate.
• It underlines that for the new tax system to take effect, countries like India, which charges a two percent equalization levy on digital companies, will have to abolish their existing taxes on digital services.

WHY THE MOVE

• Using a tax avoidance strategy called Base Erosion and Profit Shifting (BEPS), MNCs have been artificially ‘shifting’ their profits year after year from higher-tax jurisdictions to tax-havens where they pay little or no tax, thus ‘eroding’ the ‘tax bases of the former.
• Countries like Ireland, Luxembourg, Cyprus, Caribbean countries like the British Virgin Islands, Bahamas or Cayman Islands, and Central American countries like Panama have used their tax rate arbitrage to attract the MNCs- About 40 percent of MNCs’ overseas profits are estimated to be shifted to low-tax countries in this way.

LOSS DUE TO PRESENT RULING

• The tax losses are stupendous – estimated to be $50 billion for the USA and over $10 billion for India.
• A global minimum tax rate of 15 percent would preclude countries from undercutting each other, yielding an estimated $50 billion $80 billion in extra tax annually from the MNCs.

RESENT TAX RATES

• The US tax rate was cut down to 21 percent from 35 percent by then President Donald Trump in 2017, which his successor Joe Biden now proposes to increase to 28 percent.
• The average OECD corporate tax rate in 2020 was 21.5 percent, with 18 out of 37 members charging higher rates. Only three countries charge rates lower than 15 percent: Ireland (12.5 percent), Hungary (eight percent), and Switzerland (8.5 percent).
• The average tax rate for Asian countries is around 23 percent; while China and South Korea charge 25 percent, Singapore charges only a 17 percent rate.
• In 2019, India also sharply reduced its corporate tax rates to 22 percent for domestic companies (15 percent for new manufacturing companies) without any deductions, aligning its corporate tax rate to global standards.

WHAT WILL CHANGE AFTER NEW TAX SLABS?

• It can bring to an end the decades-long “race to the bottom” in which some countries compete with each to attract corporate giants with ultra-low tax rates and exemptions, depriving the governments of other countries where the MNCs reap most of their profits of billions of dollars in taxes.
• It will also bring to an end a very lucrative business model of these MNCs that park most of their profits in tax havens, bring to an end the golden era of the heavens themselves.
• The tech giants which operate remotely through digital mediums like Google, Amazon, Facebook, Apple, etc. would start feeling the pinch.

WHAT ARE THE INDIA’S CONCERNS?

SOVEREIGN ISSUE

• The G7 proposal interferes with India’s sovereign right to determine its tax policy. However, in today’s digitally interconnected world, such an approach is anachronistic.

INVESTMENT

• Countries such as Ireland, and Singapore have managed to position themselves as attractive investment destinations by offering low tax rates. This investment, in turn, helps them generate demand by efficiently utilizing resources and creating employment. The Indian government’s decision to slash corporate tax rates in 2019 is a tacit recognition of this larger economic impact of taxation.

TAX COLLECTION REDUCTION

• Since the economic reforms of 1991, the corporate tax rate in India has never come down below 22 percent for domestic companies.
• The tax cuts in 2019 are expected to cost the Indian exchequer Rs 1.45 lakh crore annually. Therefore, the likelihood of the Indian government further reducing the corporate tax rate appears slim as it risks widening the fiscal deficit.

BUT IT CAN BE A GAME-CHANGER FOR INDIA

• The high tax rates in India have meant that corporations devise innovative structures to avoid paying their share. As per the Tax Justice Network, India loses out approximately $10 billion, which is about 0.41 percent of the GDP, on tax revenues annually. As a result, the already-stretched Indian tax administration is engaged in costly litigation with multinationals for decades.
• India is likely to gain in tax revenue on this account, given the size of its market and the growth opportunities it offers. The country has been at the forefront to legislate in her domestic tax laws the concept of ‘significant economic presence (SEP) to create the ability to levy tax on income generated in India (from Indian customers) by foreign digital commerce companies.
• A global minimum corporate tax rate of 15 percent is also expected to be beneficial to India. The Tax Justice Network estimates the country to gain at least $4bn (Rs 300 bn), equivalent to ~6 percent of FY21 corporate tax collections.
• Besides, it would not hurt FDI to India or create any adverse or incremental tax liability in the hands of foreign investors given that the minimum tax rate for new manufacturing business has recently been legislated at 15 percent (plus surcharges).
• At the same time, in respect of outbound investments, it will prevent base erosion of tax in the country as the government will be able to claw back any shortfall in tax paid below 15 percent by an overseas business owned by an Indian resident, once the global threshold rule becomes operational.

ABOUT THE SUMMIT

DATE OF SUMMIT

11-13 June 2021

PARTICIPATION

• Apart from seven G- 7 members (Including UK, USA, Canada, Germany, Japan, Italy, and France), This year the United Kingdom has invited the leaders of four other prominent democracies to the Summit, these are
• Australia
• India
• The Republic of Korea
• South Africa

MAJOR OUTCOMES OF THE SUMMIT

• Climate change: G7 nations are moving closer on their climate strategies, but differences over key details will prevent more concerted action for now.
• Building back better, and greener: G7 countries will channel more international development finance into infrastructure and climate change projects, but they refused to label the initiative as a direct rival to China’s Belt and Road Initiative (BRI).
• Shifting approach towards China: The official communiqué directly mentioned competition with China for the first time—a notable shift from previous summits, although countries differ in their approach.
• Global Covid-19 vaccine rollout: G7 countries are ramping up their vaccine diplomacy efforts. G7 states have lost the public relations battle to China and Russia.
• Global tax agreement remains elusive: Leaders endorsed the 15% global minimum corporate tax plan.

INDIA AT THE SUMMIT

PM took part in two sessions of Summit: ‘Building Back Together—Open Societies and Economies’ and ‘Building Back Greener: Climate and Nature’.

Highlights of PM speech

• India is a natural ally for the G7 countries in defending the shared values from a host of threats stemming from authoritarianism, terrorism and violent extremism, disinformation, and economic coercion.
• Democracy and freedom were a part of India’s civilizations ethos.
• Need to ensure that cyberspace remains an avenue for advancing democratic values and not of subverting them.
• Developing countries need better access to climate finance and emphasized that the planet’s atmosphere, biodiversity, and oceans cannot be protected by countries acting in isolation.
• The planet’s atmosphere, biodiversity, and oceans cannot be protected by countries acting in silos and called for collective action on climate change.
• Indian Railways is committed to achieving Net Zero Emissions by 2030.
• India is the only G-20 country on track to meet its Paris commitments.
• India is increasing the effectiveness of the two major global initiatives nurtured by India i.e. the CDRI and the International Solar Alliance.
• Developing countries need better access to climate finance.
• India’s ‘whole of society’ approach to fighting the pandemic, and also committed support to improve global health governance.

AN ANALYSIS OF THE SUMMIT

ON COVID AND VACCINATION

Positives

• On Covid-19, G7 is right to focus on vaccinating the world. After all, it is now conventional wisdom that no one is safe until everyone is safe.

Negatives

G7 ignores the three immediate actions recommended

1. One billion vaccine doses by September 2021 and two billion doses by end of 2022;
2. Waiving intellectual property rights (IPR)
3. Committing 60% of the $19 billion required for Access to Covid-19 Tools (Act) Accelerator in 2021 for vaccines, therapeutics, diagnostics, and strengthening of health systems.

G7 falls short significantly on all three counts.

• By providing for a paltry one billion vaccine doses over the next year, G7 has effectively indicated that even by the end of 2022, not everyone on this planet will be vaccinated.

ON CLIMATE

• On climate, the question was not whether G7 countries would commit to net zero emissions by 2050. That was the basic minimum that they were expected to do, and which they have done.
• The real question related to climate finance is how will the world’s richest countries meet their Paris Accord commitment of $100 billion every year to finance the energy transition of developing and least developed countries?
• Here again, the communique comes up with the vaguest of language, referring to increasing and improving climate finance to 2025 and reaffirming the developed country’s goal to mobilize $100 billion.

ON CHINA

• While G7 wish to cooperate with China on issues such as climate but called for respect to respect human rights in Xinjiang and autonomy for Hong Kong. Taiwan also gets a mention for the first time.
• G7 has made a valiant attempt to counter the Belt Road Initiative with its Build Back Better for the World (B3W) plan.
• The biggest signal for China is the “Open Societies Statement” signed by G7 and guest countries.
• The statement spells out the unconditional commitment of these countries to human rights for all, democracy, social inclusion, gender equality, freedom of expression, and rule of law.
• This is a welcome move and is perhaps the best sign that democracies can unite based on these universal values.

HOW SHOULD INDIA READ THE G7 SUMMIT?

A TEMPLATE FOR INDIAN ENGAGEMENT WITH THE WEST

• PM Narendra Modi’s statement that India is a natural ally of G7, with an emphasis on its civilizational commitment to democracy, freedom of thought, and liberty, will be welcomed by India’s friends all over the world.
• The PM’s statement should put these doubts about India’s commitment to rest.

ON CLIMATE

• On climate finance, India has a mountain to climb.
• India will come under pressure at the COP 26 meeting in Glasgow to commit to net-zero emissions by 2050.
• Not just this, the communique appears to endorse the idea of “carbon leakage” and hence gives implicit approval to the European Union’s idea of a carbon border tax. This is particularly unwelcome for India.

FAIRTRADE AND FREE TRADE

• The communique harps on “fair trade” much more than it does on “free trade”.
• Fairtrade, by definition, stresses labor and environmental standards and the communique says as much. How these will be implemented without resort to protectionism remains to be seen.
• Similarly, G7 endorses plurilateral initiatives at the World Trade Organization, something India hitherto has studiously avoided. Things will come to a head at the 12th Ministerial Conference of the WTO in December.

WAY FORWARD:

• The Indian government would do well to engage with the multilateral ecosystem to ensure that future multilateral rules do not disadvantage developing economies, instead of outrightly rejecting them.
• India should focus on capacity building and timely resolution of disputes.
• A minimum global tax rate would disincentives corporations to artificially shift their profits to low-tax jurisdictions. It will also reverse the trend of offshore incorporation in Indian entities by eliminating tax arbitrage. The Indian government can consider suggesting carve-outs to the proposal that can mitigate any unintentional adverse impact.
• India’s 2022-23 presidency of the G20 presents an opportunity for the country to articulate a forward-looking vision for fair and comprehensive global tax rules.

CONCLUSION: India’s engagement with the west and the recent tax proposal by G7 is the opportunity for India to overcome the challenge that occurred after Covid-19. Although, India’s concerns are justified, surely, the global minimum tax would be a game-changer for countries like India. The proposal indicates a political momentum and a desire to fast-track structural taxation reforms that could improve India’s economic competitiveness and lower jurisdictional tax arbitrage.

THE CONTEXT: After recent months of back and forth attempting to negotiate a better trade agreement for India to join the Regional Comprehensive Economic Partnership (RCEP), the Indian government decided not to join the trade forum and be excluded from what has been seen as one of the biggest plurilateral free-trade partnerships in the world.

India had been a part of negotiations for almost nine years till it pulled out in November 2019, stating that inadequate safeguards and lowering of customs duties will adversely impact its manufacturing, agriculture and dairy sectors.

However, by staying out, India has blocked itself from a trade bloc that represents 30% of the global economy and world population, touching over 2.2 billion people.

Further, as the summary of the final agreement shows that the pact does cover and attempt to address some issues that India had flagged, including rules of origin, trade in services, movement of persons. Therefore, this makes the case of India to review its decision and look RCEP through the lens of economic realism.

REASONS FOR INDIA’S NOT SIGNING RCEP

India’s withdrawals from RCEP may be attributed to its trade and technical concerns:

TRADE CONCERNS

INDIA’S BILATERAL TRADE-DEFICIT WITH RCEP COUNTRIES

India has already a bilateral Free Trade Agreements (FTAs) with South Korea, ASEAN countries and Japan which are the part of RCEP. Though trade has increased the post-Free Trade Agreement with these countries, imports have risen faster than exports from India.

According to a paper published by NITI Aayog, India has a bilateral trade deficit with most of the member countries of RCEP.

TRADE & STRATEGIC CONCERNS WITH CHINA

India has already signed FTA with all the countries of RCEP except China. Trade data suggests that India’s deficit with China, without any trade pact with it, is higher than that of the remaining RCEP constituents put together.

India already has a massive trade deficit with China and a lower custom duty-invoked by this trade agreement, would have made its commodity markets extremely vulnerable to an influx of Chinese goods. This trade deficit is the primary concern for India, as after signing RCEP cheaper products from China would have flooded the Indian market.

Further, from a geopolitical perspective, RCEP is China-led or is intended to expand China’s influence in Asia.

PROTECTION OF DOMESTIC INDUSTRY

India’s withdrawal from RCEP is due to its possible negative effects on small and medium scale farmers, traders and industries, which are already experiencing a chronic slowdown. India had also reportedly expressed apprehensions on lowering and eliminating tariffs on several products like dairy, steel etc. For instance, the dairy industry is expected to face stiff competition from Australia and New Zealand. Currently, India’s average bound tariff for dairy products is on average 35%.The RCEP binds countries to reduce that current level of tariffs to zero within the next 15 years.

TECHNICAL CONCERNS

UNAVAILABILITY OF THE MOST FAVORED NATION (MFN) CLAUSE

One key issue for India was the unavailability of the Most Favored Nation (MFN) clause that would have made India to give the same treatment to RCEP nations that it gave to others.

NON-ACCEPTANCE OF AUTO-TRIGGER MECHANISM

To deal with the imminent rise in imports, India had been seeking an auto-trigger mechanism.Auto-trigger Mechanism would have allowed India to raise tariffs on products in instances where imports cross a certain threshold. However, other countries in the RCEP were against this proposal.

LACK OF CONSENSUS ON RULES OF ORIGIN

India was concerned about a “possible circumvention” of rules of origin. Rules of origin are the criteria used to determine the national source of a product. Current provisions in the deal reportedly do not prevent countries from routing, through other countries, products on which India would maintain higher tariffs.

WHY INDIA SHOULD HAVE SIGNED RCEP?

More than the technical reasons, it is the concerns of cheaper inflows of imported goods from RCEP countries and trade deficit with them that may have given reasons to India for not signing this agreement. However,

• If India is not part of trade pacts with major countries, and the WTO process is in trouble, it will quite quickly run out of countries to trade with. Sure, India can continue to export to these countries, but it will suffer a disadvantage since, with the pact-countries, there will be no/low import duties on most goods traded while this will not hold for India.
• What makes an exports push all the more critical is that India’s high GDP growth in the past has been directly related to exports growth, not that of local consumption. In the boom years of 2003-08, JP Morgan chief India economist Sajjid Chinoy points out, India’s real exports growth averaged 17.8% annually while (public and private) consumption grew just 7.2%; a similar point has also been made by former chief economic advisor Arvind Subramanian.

Analysis by Pravin Krishna of Johns Hopkins University, for the period 2007 to 2018, shows that India’s trade deficit—as a share of its total trade deficit—with the ASEAN fell from 9.9% to 6.6%. For all bilateral agreements that India has, such as with Japan, Korea, etc, this fell from 12.6% to 7.5%. Interestingly, the sharpest deterioration in India’s deficit is with China, a country with which it has no FTA.

INDIA’S POOR COMPETITIVENESS IS THE REAL ISSUE:

• The real issue that comes out is that of India’s poor competitiveness, and that has little to do with FTAs. To understand this better, let’s keep India out of the equation, just look at the overall exports of various countries.
• In the last 20 years (see graphic), India’s exports grew 9 times while those of China rose 13 times—on a base that is 5.5 times India’s—and Vietnam’s rose 23 times; as a result, from a mere 32% of India’s in 1999, Vietnam’s exports are 81.5% of India’s today. In other words, whether or not we sign a trade pact with these countries, chances are their exports will grow faster than India’s; the fact that their exports are growing faster than ours means they are more competitive.
• The same result, of lack of competitiveness, as it happens, is visible from India’s overall exports. From 16.8% of GDP in FY12, India’s exports fell to 10.9% in FY20; and while imports fell from 26.8% to 16.5%, imports are significantly higher than exports.
• Indeed, the production linked incentive (PLI) scheme that the government has finalised for mobile phones—and plans to do for 10 other sectors soon—is itself recognition of this reality since the PLI offered are meant to offset a part of the disadvantage of producing in India. One of the studies on the disadvantage in the case of mobile phones put this at 9.4-12.5% versus manufacturing in Vietnam; the cost of electricity (based on the amount used for production) added one per cent to the cost of production of a phone in India, expensive bank loans added 1.5-2% to the costs, logistics 0.5%, land one per cent, etc.

REASONS FOR INDIA TO REVIEW

GLOBAL ECONOMIC STAGNATION DUE TO COVID-19

With global trade and the economy facing a steep decline due to Covid-19 pandemic, RCEP can serve as a bulwark in containing the free fall of the global economy and re-energising economic activity.Further, the RCEP presents a unique opportunity to support India’s economic recovery, inclusive development and job creation even as it helps strengthen regional supply chains.

NEED FOR ECONOMIC REALISM

India should deter seeing RCEP only from the Chinese perspective.India should acknowledge that the trade bloc represents 30% of the global economy and world population, touching over 2.2 billion people, and staying out of RCEP may result in suboptimal economic growth without leveraging Asia-Pacific demand.

In this regard, India can draw inspiration from Japan & Australia, as they chose to bury their geopolitical differences with China to prioritise what they collectively see as a mutually beneficial trading compact.

STRATEGIC NEED

It is not just because gains from trade are significant, but the RCEP’s membership is a prerequisite to having a say in shaping RCEP’s rules. This is necessary to safeguard India’s interests and the interests of several countries that are too small to stand up to the largest member, China. Moreover, staying out of RCEP may also affect India’s Act East policy.

CONCLUSION: According to some experts, one of the ways India can offset the trade and strategic loss due to signing out of this RCEP is by signing FTA with both the USA and the EU. While it is theoretically possible India’s exports can grow faster should there be an FTA with both the US and EU—even so, China and Vietnam’s higher competitiveness is an issue—it is by no means a given that such an FTA can be signed quickly. Indeed, for decades, India has resisted opening up sectors that the US and EU have been interested in. That something like the import duties on Harley Davidson motorcycles was allowed to become a friction point between India and the US despite no serious manufacture of these motorcycles in India indicates just how inflexible India has been; imagine its ability to open up sectors or reduce duties in sectors where there are a large number of local producers who will be hit.

Given the economic and market power India wields, the RCEP members have left the door open for India. It would be in India’s interest to dispassionately review its position on RCEP and carry out structural reforms that will help India to mitigate some of the repercussions arising from the RCEP.

THE CONTEXT: India experienced a power crisis in October 2021, as the stock of coal held by the country’s thermal power plants has hit critically low levels. Many power plants are operating with zero reserve stock or with stocks that could last just a few days. Some States have witnessed partial load-shedding aimed at saving power. This article analyses the reasons behind the coal shortage and provides the way forward for ensuring an uninterrupted power supply in the country.

ABOUT THE COAL CRISIS

How bad is the problem?

• According to data released by the Central Electricity Authority, as of 13^th October 2021, India’s 135 thermal power plants overall had on average coal stock that would last just four days.
• The government usually mandates the power plants to hold stocks that would last at least two weeks. It has, however, reduced this requirement to 10 days now to avoid hoarding and ensure a more equitable distribution of coal among the plants.
• India relies on coal to meet over 70% of its power needs, and Coal India Limited (CIL) supplies over 80% of the total coal.
• The current coal crisis comes amid a broader energy crisis across the world, with the prices of natural gas, coal and oil rising sharply in the international market.

Is it a “crisis” or shortage?

• “Crisis” is a subjective term. There are no objective criteria for determining whether there is a crisis or not. However, “shortage” can be determined objectively.
• No one can deny the fact that the supply of coal in India is well below the demand. Whereas the demand is nearly a billion million tonnes (MT), the country’s supply is well below 800 MT.
• When this shortage becomes acute, in terms of the availability of coal at power plants, it is sometimes called a crisis.
• The acute shortage can be on account of production, increased demand or a failure of supply chain management when the stocks are sufficient at the pit head but requisite supply is not made to the power plants.

ANALYSIS

What are the reasons behind the present crisis?

• The current crisis in the availability of coal has been the result of lacklustre domestic production and a sharp drop in imports over the last few years.

• According to BP Global Energy Statistics, domestic coal production in India has stagnated since 2018. At the same time, the amount of coal imported from other countries to meet domestic demand, too, has dropped significantly. In fact, the government last year said it would stop all coal imports by FY24.
• Reasons also include short-term issues like flooding in coal-mining areas, transport issues, labour disruptions in major coal-mining countries and the sudden rise in power demand as the economy revives from the pandemic.
• Stagnating supply did not cause trouble last year, with the economy shut down to tackle the COVID-19 pandemic. But the rise in power demand this year has exposed the government’s inability to push domestic production or compensate for insufficient domestic production by increasing imports.

What are the structural problems in coal sector and power industry?

• Populist politics has ensured that the price that many consumers pay for power is not commensurate with the production costs. In FY19, for instance, the revenues of distribution companies covered only about 70% of their total costs.
• This has discouraged private investment in power generation and distribution even as the demand for power continues to rise each year.
• It has also increased the debt burden on public sector distribution companies as they have not been compensated for their losses while selling power at subsidized rates.
• The mining of raw materials such as coal is nearly monopolized by public sector companies like CIL that are not run primarily for profits. In fact, CIL has kept its coal price low even as international prices have risen significantly this year.
• The financial crisis is brewing in the power sector. GENCOs have a receivable of more ₹2,00,000 crore from distribution companies. They, in turn, owe more than ₹20,000 crores to CIL.

What can we expect in the near future?

• In recent years, many countries have been trying to cut down on their fossil fuel consumption in order to meet emission targets. But with the current energy crunch, which is prevalent not just in India, fossil fuels are likely to make a strong comeback.
• India and China, the top two consumers of coal in the world, are expected to further increase the production of fossil fuels.
• The Indian government has been pushing CIL to ramp up production to meet the rising demand and cut down on the country’s reliance on imported coal. However, it is expected to ease restrictions on imported coal in the near future to tide over the crisis.
• China, which consumes half of the world’s coal output and has committed itself to reduce its carbon emissions by 65% by 2030, is set to install more coal-powered power plants to meet its rising energy needs.

THE WAY FORWARD:

1. Increase the coal production to meet the increased demand:

• Ironically, all the coal resides in States that are ruled by non-National Democratic Alliance (NDA) parties. Officers from the Union Government will have to go down to the States, convey a value proposition and sit with State-level officers to resolve issues related to land acquisition and forest clearances.
• The Union Government will also have to take up clearance-related issues with the Ministry of Environment, Forest and Climate Change.
• Funds will have to be arranged to CIL for the expansion of existing mines as well as the opening of new ones.
• First, the Union Government should stop squeezing more funds out of CIL as it has done during the past few years by way of dividends to balance its budget when this money should have been used to open new mines and expand existing ones.
• Second, it should consider providing cash to CIL against the dues owed by GENCOs.
• Non- CIL production will have to be augmented.
• An inter-ministerial Coal Project Monitoring Group (CPMG), which was set up in 2015 to fast-track clearances, became dormant. This will need to be revived.

2. Ease restrictions on imported coal and compulsory use of imported coal: The government recently mandated the thermal power plants to blend imported coal with domestic coal up to a limit of 10%.
3. Reducing the power losses from the transmission and improving the efficiency & management of power DISCOMS.
4. Shifting towards renewable energy sources for power production and integrating them into national grid. India has the ambitious target of installing 450 GW capacity by 2030 from renewable sources. This will also help to meet the NDCs committed to Paris Agreement.
5. Working on demand-side management to optimize the demand of power especially in domestic and agriculture sector Power-efficient appliances should be promoted and solar energy for irrigation pumps used by farmers (PM KUSUM scheme).

THE CONCLUSION: The coal crisis may be temporarily over, but if the fundamentals of the crisis are not taken care of, it is likely to recur. Uninterrupted supply of power is of paramount importance for economic growth in the country. Therefore, the government of India should address the structural problems in the coal sector and power sector so as to avoid any energy crisis in the near future.

THE CONTEXT: As per the data released by the RBI on 4th June 2021, India’s foreign exchange reserves have crossed the milestone $600 billion marks for the first time in the country’s history. As per the data released by the RBI on 16th July, 2021 forex reserves rose to a record $612.73 billion with which India becomes the 4th largest forex reserves holder globally. A rise in forex is mainly due to a rise in Foreign Currency Assets (FCA).

MORE ON THE NEWS:

• Currently, China has the largest reserves followed by Japan and Switzerland. India has overtaken Russia to become the fourth largest country with foreign exchange reserves.
  1. China – $3,349 Billion
  2. Japan – $1,376 Billion
  3. Switzerland – $1,074 Billion
  4. India – $612.73 Billion
  5. Russia – $597.40 Billion
• To increase the foreign exchange reserves, the Government of India has taken many initiatives like Aatma-Nirbhar Bharat. The government also has started schemes like Duty Exemption Scheme, Remission of Duty or Taxes on Export Product (RoDTEP), Nirvik (Niryat Rin Vikas Yojana) scheme, etc. Apart from these schemes, India is one of the top countries that attracted the highest amount of Foreign Direct Investment.
• Although our foreign exchange reserves have been increasing continuously for the last three decades, the growth has become faster than ever in the last 18 months.
• Compared with 1991, when India faced a situation of acute shortage of foreign exchange, such that our reserves were not enough to pay for imports of even seven days, today the situation is such that our foreign exchange reserves are enough to pay for 18 months of imports.

ALL YOU NEED TO KNOW: FOREX RESERVES

WHAT ARE FOREX RESERVES?

• Forex reserves are external assets in the form of gold, SDRs, and foreign currency assets accumulated by India and controlled by the Reserve Bank of India.
• Reserve Bank of India Act and the Foreign Exchange Management Act, 1999 set the legal provisions for governing the foreign exchange reserves.
• RBI accumulates foreign currency reserves by purchasing from authorized dealers in open market operations.

THE COMPONENTS OF FOREX RESERVES

• The Forex reserves of India consist of four categories:
  1. Foreign Currency Assets(capital inflows to the capital markets, FDI, and external commercial borrowings)
  2. Gold
  3. Special Drawing Rights (SDRs of IMF)
  4. Reserve Tranche Position

SIGNIFICANCE OF FOREX RESERVES

• The IMF says official foreign exchange reserves are held in support of a range of objectives like supporting and maintaining confidence in the policies for monetary and exchange rate management including the capacity to intervene in support of the national or union currency.
• It will also limit external vulnerability by maintaining foreign currency liquidity to absorb shocks during times of crisis or when access to borrowing is curtailed.

WHAT DOES THE RBI DO WITH THE FOREX RESERVES?

• The RBI functions as the custodian and manager of forex reserves and operates within the overall policy framework agreed upon with the government.
• The RBI allocates the dollars for specific purposes. For example, under the Liberalized Remittances Scheme, individuals are allowed to remit up to $250,000 every year.
• The RBI uses its forex kitty for the orderly movement of the rupee. It sells the dollar when the rupee weakens and buys the dollar when the rupee strengthens.

WHERE ARE INDIA’S FOREX RESERVES KEPT?

• The RBI Act, 1934 provides the overarching legal framework for the deployment of reserves in different foreign currency assets and gold within the broad parameters of currencies, instruments, issuers, and counterparties.
• As much as 64 percent of the foreign currency reserves are held in the securities like Treasury bills of foreign countries, mainly the US.
• 28 percent is deposited in foreign central banks and 7.4 percent is also deposited in commercial banks abroad.

IS THERE A COST INVOLVED IN MAINTAINING FOREX RESERVES?

• The return on India’s forex reserves kept in foreign central banks and commercial banks is negligible.
• While the RBI has not divulged the return on forex investment, analysts say it could be around one percent, or even less than that, considering the fall in interest rates in the US and Eurozone.

WHY IS FOREX RISING DESPITE THE SLOWDOWN IN THE ECONOMY?

RISE IN FPI AND FII

• The major reason for the rise in FOREX reserves is the rise in investment in foreign portfolio investors in Indian stocks and foreign direct investments (FDIs). For example, last year- Reliance Industries subsidiary -Jio Platforms – has witnessed a series of foreign investments totaling 97,000 crores.

CRASH IN OIL PRICES

• The fall in crude oil prices has brought down the oil import bill, saving the foreign exchange.

FALL IN OVERSEAS REMITTANCES AND FOREIGN TRAVEL

• Overseas remittances and foreign travels have fallen steeply, down 61 percent in April from $12.87 billion.

WHAT WE CAN DO WITH EXCESS RESERVES

ACQUIRING STAKES IN DEVELOPED COUNTRY FIRMS

• While keeping the forex reserves in the treasury is costly for the country with low interests in it, countries need to use the funds to acquire stakes in firms of developed countries to increase profit.

SETTING UP FUNDS

• The recent surge in reserves is mostly a result of speculative capital inflows on the capital account. Rather than ‘sovereign wealth’, these inflows are ‘liabilities’ and are therefore vulnerable to sudden outflows by foreign investors amid an increase in domestic or global risk aversion. These funds such as Stabilisation funds or Pension funds can help the economy during outflow.

USING AS A TOOL OF INTERNATIONAL POLITICS

• The US bonds have been used by China for a long time as a tool for achieving its interests concerning the US. India too needs to learn and use it for favorable terms in trade and solving challenges such as Pakistan.

GROWTH AND DEVELOPMENT OF NATIONS

• The forex reserves can be utilized for reaching the SDG goals given that an adequate amount of funds are maintained for any unforeseen circumstance.

ISSUES RELATED TO RISING FOREX RESERVES

• According to the former RBI Governor YV Reddy, there are some differences among academics on the direct as well as indirect costs and benefits of the level of forex reserves, from the point of view of macro-economic policy, financial stability, and fiscal or quasi-fiscal impact.
• China’s foreign exchange reserves increased mostly thanks to a balance of payments (BOP) surplus of China with most of their trading partners. To some extent, they also grew due to foreign direct investment. Whereas in India’s case, the increases in India’s foreign exchange reserves are mainly due to foreign direct investment (FDI) and foreign portfolio/ institutional investment (FPI). Generally, our balance of payments remains in huge deficit.
• Economists agree that the best option as a source of foreign exchange is the balance of payments surplus.
• Even if the foreign exchange is obtained through investment in the stock markets, then also it has many side effects like-
• It causes volatility not only in the stock markets but also in the exchange rate. Its result can be ominous for the country.
• The country has to pay a heavy price for this inflow of foreign exchange as these investors take back the huge profits to their countries of origin even as the value of their assets keeps increasing.
• While foreign institutional investors have invested a total of $281 billion in India to date, the total valuation of their assets has reached $607 billion as of March 31, 2021. They can sell their $607 billion worth of shares and bonds and go back at any moment and all our foreign exchange reserves can run out in a jiffy. That is why portfolio investment is also called ‘hot money”.
• Foreign investment, foreign loans are taken by private companies, and remittances by Indians are all important for increasing foreign exchange reserves. But not all these sources have a similar effect on the reserves.
• Remittances by Indians normally do not have any repayment obligations and generally, all these amounts remain in India forever.
• Foreign investors (Both foreign direct investors or portfolio investors) repatriate huge amounts of money. In the last ten years (2010-11 to 2019-20), these foreign investors have withdrawn $390 billion, in the form of dividends, royalties, technical fees, interest, and salaries and this amount has been increasing year after year.
• There is no stability in portfolio investment. It is not possible to estimate how much foreign exchange the portfolio investors will bring in and when they will withdraw. Their volatility affects the exchange rate, causing huge losses. Not only this, these investors cause huge volatility in the stock markets as well.

SHOULD FOREX RESERVES FINANCE STIMULUS TO THE INDIAN ECONOMY?

YES 

• The sufficiency of forex reserves is sometimes measured by how many months’ worth of imports a country can afford. While forex reserves amounting to import cover of six months is considered sufficient by the RBI, India import cover is enough to sustain imports up to 18 months.
• In case of a credit shock, India can mitigate any balance of payment crisis, as there are sufficient arrangements for foreign exchange reserves in the form of a credit line from the IMF and many Central bank liquidity swap agreements with countries like Japan.
• As there is a lack of considerable space both on the monetary and fiscal front to support economic growth, part of the country’s forex reserves can be used for stimulating the economy.
• Economist has theorized that holding high forex reserves are unnecessary. Not using them for mega-projects (like financing infrastructure projects) are lost opportunities.

NO

• In the future oil prices might increase further. With the rise of 1$ per barrel of crude oil prices, India has to additionally pay nearly Rs 15000 crore. Given this, India should deter using forex reserves for providing economic stimulus.
• The rise in current forex reserves is due to the massive inflow of FIIs. However, FIIs by their nature are investments based on speculation. Therefore, the current surge in forex reserves should not be treated as permanent nature.
• High forex reserves also help India to maintain its global rating, especially in the context of falling GDP growth rate. The depletion in forex reserves may harm these ratings, which in turn may reduce foreign investment inflows into India.
• RBI has been fundamentally using India’s foreign exchange to ensure rupee stability. Given the fluctuation in the Indian rupee vis-a-vis the dollar, the Indian rupee has become one of Asia’s worst currencies. Thus, RBI will need enough forex reserves to maintain the stability of the Indian Rupee.
• An economic stimulus is ineffective without structural reforms. Even using forex reserves would not resolve all the challenges facing Indian infrastructure development.

WAY FORWARD:

• Over-reliance on forex reserves to provide economic stimulus may prove to be dangerous for the economic stability of the Indian economy.
• Foreign investors are repatriating huge profits from India while the country’s returns from these foreign exchange reserves are very negligible. Avenues will have to be found for gainful use of foreign exchange reserves beyond a limit.
• Since there’s continuously the fear that these outside organization speculators may take off with their “hot money” anytime. In this respect, an arrangement of a ‘lock-in period’ can be forced on them. On the off chance that they still need to require their cashback, at that point an arrangement can too be made to levy tax on them. This charge was recommended by an economist named James Tobin; subsequently, it is additionally called ‘Tobin Tax’.

CONCLUSION: Over-reliance on forex reserves is problematic; not using them is a lost opportunity. If the government intends to use forex reserves as an emergency fund, it should ensure that they do not shrink just when they are most needed. Apart from it, there is a need for separate attention to carry out structural reforms that can pull out the Indian economy from a persistent slowdown.

THE CONTEXT: The concept and practice of gig economy has gained wide currency across the globe. In India, the entry of various food delivery apps, cab aggregators and others have revolutionized this segment of the economy. While they provide huge scope for freelance/part time jobs for India’s demographic dividend, the management practices of these platforms have raised concerns of labour exploitation. In this context, this write up examines how gig economy results in informalisation of labour on the one hand and provides freedom of work on the other.

OPPORTUNITY AND POTENTIAL OF GIG ECONOMY IN INDIAN CONTEXT

• The Indian gig economy has the potential to serve up to 90 million jobs in the non-farm sectors of India and can add 1.25 per cent to the country’s GDP.
• Startups like Ola,Uber, Zomato,Swiggy have established themselves as the main source of gig economy in India. The gig sector has the potential to grow to US $455 billion at a CAGR of 17 per cent by 2024, an ASSOCHAM report says.
• The gig economy is understood as the process in which labour or money is exchanged between two individuals or companies through digital platforms for a short period of time and on the basis of payment by task.
• Independence and flexibility are two special features of gig economy. Those who want to earn extra money or like flexibility in working condition will prefer the format.
• Gig workers could be the rideshare and delivery boys, handymen, grocery shoppers, graphic designers, writers, developers and the list goes on.
• All the independent workers from the sectors of e-commerce, technology, food and beverages, home services fall into the category of gig economy.
• Gig workers have a better potential to earn than the regular job owners. The gig workers can enhance their income by upgrading their skills.
• The concept is catching up with the young generation as they find flexibility of work convenient. India is the biggest market for flexi staffing as the survey of the Indian economy 2021.

DEVELOPING CONCEPTUAL UNDERSTANDING

WHAT IS GIG ECONOMY?

• The gig economy is a job market which consists of short-term or part-time work done by people who are self-employed or on temporary contracts.
• Section 2(35) of the Code on Social Security 2020 defines a gig worker as a person who participates in a work arrangement and earns from such activities outside of a traditional employer-employee relationship
• As per the World Economic Forum, gig economy is defined by its focus on workforce participation and income generation via “gigs”, single projects or tasks for which a worker is hired.
• The term “gig” is a slang word for a job that lasts a specified period of time; it is typically used by musicians.
• Examples of gig employees in the workforce could include work arrangements such as freelancers, independent contractors, project-based workers and temporary or part-time hires.
• As there is no employer-employee relationship, the gig workers are not tied to any particular employer and therefore have greater flexibility in terms of the work they can choose and the hours they dedicate.
• Businesses have flexibility when they are not dependent on a set of employees for executing tasks, and additionally benefit from avoiding the cost of social security and fixed remuneration provided to employees.
• The service sector fuelled by digital economy has been the most resilient segment of the gig economy. The size of the gig economy is projected to grow at Compounded Annual Growth Rate of 17% and is likely to hit a gross volume of $455 billion by 2023, as per ASSOCHAM.

WHAT IS PLATFORM WORK?

• Platform work means a work arrangement in which an organization or an individual uses online platforms to provide goods and services to consumers. For example, Uber, Ola, Zomato etc.
• The Code on Social Security 2021 defines platform work as a work arrangement outside the traditional employer-employee relationship in which organisations or individuals use an online platform to access other organisations or individuals to solve specific problems or to provide specific services in exchange for payment.
• Section 2(61) of the Code on Social Security defines a platform worker as someone engaged in or undertaking platform work.
• In general, platform workers are the most visible and vulnerable faces of the gig economy. The gig work includes platform work also and often these terms are used interchangeably. For the purpose of our discussion, we also take a similar approach

WHAT IS MEANT BY INFORMALISATION OF LABOUR?

• When the share of the informal workers in the total labour force increases, the situation is called informalisation of labour.
• It is a process of consistent decline in the percentage of formal sector labour force and consistent increase in the percentage of informal sector labour force in the economy.
• The Economic Survey of 2018-19, released in July 2019, said “almost 93%” of the total workforce is “informal”.
• These workers are engaged in economic activities with lower productivity resulting in lower incomes. They are also engaged in activities with less stable employment contracts (including the self-employed) and fewer or nil social security benefits.

WHAT IS THE MEANING OF FORMAL AND INFORMAL SECTOR?

• It must be made very clear that there is no universally accepted definition of formal and informal or organised and unorganised sector in India (http://iamrindia.gov.in/writereaddata/UploadFile/org_unorg.pdf read for further information)
• In general, the informal sector of the economy is characterised by irregular and low income, precarious working conditions, no access to social safety nets, lack of legal safeguards etc.
• While the formal sector has fixed working conditions, social security benefits and labour law being applied to them.

DEFINITION OF LABOUR FORCE

• Persons who are either ‘working’ (employed) or ‘seeking or available for work’ (unemployed) or both during a major part of the reference period, constitute the labour force. In simple words persons who are employed and unemployed are included in labour force (15-60 in general).

DEFINITION OF WORKFORCE

• The Work force on the other hand includes only the employed and excludes the unemployed. People who are actually working are included in workforce. The difference between labour force and workforce is the total number of unemployed persons.

HOW GIG ECONOMY LEADS TO INFORMALISATION?

OUTSIDE THE PURVIEW OF REGULATORY FRAMEWORK

• The gig economy is outside the ambit of almost all the regulations applicable to the other sectors of the economy. The formal sector employment has been a tightly regulated one and even the informal sector faces some regulation. There is near absence of regulation in the area of gig economy especially in the context of labour rights.

UNCLEAR EMPLOYMENT RELATIONSHIP

• In gig economy, the traditional employer and employee’s relationship is replaced by vague ideas of “partners, independent contractors and the like “. These companies call themselves as “aggregators and not employers” which provides escape route from the application of labour laws to them

EXPLOITATIVE SERVICE CONDITIONS

• The remuneration and working conditions are arbitrarily set by the companies and workers often complain unwarranted deduction from their salaries. There exists no grievance mechanism to raise the concerns of the workers. For instance, a Swiggy delivery boy earlier received 50 rupees for an order which has been progressively reduced to 20(10 in some cases) rupees on weekdays.

SUBJUGATION TO ALGORITHMS

• The platform workers’ work life is controlled by the software application. It decides everything from when and where to onboard (log in), how much time is allowed for delivery, calculation of incentives and even imposition of penalty! The gig worker has no voice in deciding any of these aspects and the Application exerts total control over the workers.

NON EXISTENT SOCIAL SAFETY NET

• None of the social security benefits available to the traditional workers are available to gig workers. Even the adhoc group insurance is available only on “on duty days’.  The workers are vulnerable to risks of accidents and many have lost lives during the course of their duties. The companies don’t even have any data on how many of its partners have succumbed to Covid 19 or were infected by the virus.

DEMAND AND SUPPLY MISMATCH

• when the labour supply is high and more disposable, the gig workers have no power to influence payment offerings, and freedom to choose becomes an illusion. In the interplay of demand and supply mechanisms, the gig workers always lose out. Thus, as platforms become more popular among gig workers, more of them join the pool, which leads to companies dictating the terms and conditions of work. The All India Gig Workers union has been protesting against the wage reduction by Swiggy but to no avail.

NO SCOPE FOR COLLECTIVE BARGAINING

• The problem lack of a formal relationship within the gig economy landscape is accentuated by lack of effective unionization of the workers. The temporary nature of work, disaggregated location of workers etc do not make it feasible for a collective airing of grievances. Even the recently formed Indian federation of App based Transport workers’ protests did not change the status quo

EXERCISING CONTROL WITHOUT ACCOUNTABILITY

• The companies claim that its workers are self-employed, and they can choose when and how long they wish to work. This is not true as for instance, Swiggy does not allow “home log in” and the worker has to reach a “hot zone” for log in. When a worker logs out or is irregular, then the frequency of the orders he receives is reduced. In other words, the companies exercise almost all the control of a traditional employer without commensurate responsibility to workers.

GIG ECONOMY AND THE FREEDOM OF WORK

FREEDOM OF CHOICE

• The employees have the freedom to choose from a host of firms operating in the sector. For instance, a delivery executive can choose Swiggy, Zomato or any other food delivery app. This choice is also available in the case of e- commerce companies or cab aggregators and others. This freedom to choose can help the workers to look for greener pastures.

FLEXIBLE WORKING HOURS

• There are no mandatory working hours in these sectors and the worker is free to join in or out any time. This flexibility provides scope for control over one’s work which can be harnessed by those looking for part-time job like students, under employed etc,

NO FORMAL TRAINING REQUIRED

• The gig economy generally does not demand any formal education, skills or formal training for carrying out these jobs. For instance, a smart phone and a bike is enough for getting work in food delivery apps (of course subject to company policies). Thus it provides great livelihood opportunities for the unskilled and semi-skilled.

INCENTIVISATION OF HARD WORK

• The gig economy works on the principle of ‘the more you work, the more you earn’. This approach encourages those having the zeal for hard work by providing incentives on a par with the output of work. The scope for extra earning works as a great motivator.

GENDER EMPOWERMENT

• The technology based platforms enable women to be a part of workforce by virtue of their openness.
• Women could utilize the informal nature of the platforms especially factors like no restriction of time and place for their advantages. Studies indicate that women students and even housewives have been harnessing the opportunities for financial independence and supporting family during pandemic.

HOW TO BRING ELEMENTS OF FORMALIZATION IN GIG ECONOMY?

DATA ON THE SIZE OF THE GIG WORKFORCE

• Any step towards addressing the issue of informalisation in gig economy require proper data on the size of the workforce. The Parliamentary Standing Committee on Labour has criticized the labour ministry for its lackadaisical attitude relating to data collection. Data driven policy making and governance need to be the core of reforming the sector.

LEGAL INTERVENTIONS

• Regulation by the State of this sector without undermining its animal spirit is the need of hour. The Code on Social Security although defines the gig and platform workers, is silent on the aspect of regulation. A separate regulatory regime for gig sector can be brought which must balance the interest of both the companies and workers.

PROVIDING CONCRETE SOCIAL SAFETY MEASURES.

• The companies need to be persuaded to set up social security system for the workers. Alternatively, they can be legally mandated to contribute to the fund established by Centre or state governments.
• For instance, the Code on Social Security, 2020, mandate companies employing gig or on-demand workers, to allocate 1-2% of their annual turnover or 5% of the wages paid to gig workers.

CLARIFYING THE RELATIONSHIP BETWEEN COMPANY AND THE WORKERS

• It is necessary to define clearly the nature of relation between these platform companies and the workers. Taking shelter under terms (partner etc) which have no legal basis will only lead to conflicts between workers and the companies and eventually impact the business prospects of the companies.

LEARNING FROM INTERNATIONAL JUDICIAL INTERVENTIONS

• In 2021, the UK Supreme Court ruled that Uber’s drivers were entitled to employee benefits; in 2018, the California Supreme Court specified a test for determining an employer-employee relationship, which effectively designated gig workers are employees.  Indian courts must take a leaf out of these progressive judicial interventions.

UNIONIZATION OF THE WORKERS

• There is strength in numbers and the workers need to organize themselves to press for legitimate demands from the government and the companies. A federation of all gig workers must be established to work as a pressure group and a forum for constructive suggestions in improving the work culture and business practices.

BEST PRACTICES OF THE STATE GOVERNMENTS.

• Karnataka govt is in the process of drafting a law to provide minimum wages and social security benefits to the gig workers. It also formed a company, inter alia, to promote gig economy companies. The Karnataka Digital Economy Mission, a company with 51% stake for the industries aim to promote the gig economy through various facilitative measures. These types of positive interventions can be replicated in other states also.

THE WAY FORWARD

• The gig economy rides on the innovative and entrepreneurial spirit of the business leaders. Light-touch regulation of the sector which focuses on enabling the companies to accommodate the concerns of the labour rather than coercing them need to be adopted.
• The huge success of the Initial Public Offerings of Swiggy and Zomato in Bombay Stock Exchange point out to the enthusiasm and trust of investors in the growth prospects of the sector. The listing of these companies means they have to disclose details of business practices under SEBI’s business responsibility and sustainability reporting (BRSR) requirements. This may nudge/force the companies to address the concerns of forced labour as the employees are paid below minimum wages in many cases.
• Although the Social Security Code 2020 aims to provide social security benefits to the gig workers, these are not legally guaranteed. It means the benefits will be available to the workers as and when government formulates the schemes. It is high time the good intentions are translated into concrete actions. The Industry is also in line with this approach as in a recent report, ASSOCHAM had suggested that gig workers should be entitled to potable benefits.
• Neoliberal policies adopted by governments world over have put capital in high pedestal over labour. In India also the condition is not different as the race to attract private capital and investment have led to dilution of workers’ rights and their progressive informalisation. This is clearly visible in the context of the criticism of the four labour codes brought in by the government and the data provided by Periodic Labour Force Survey 19-20. Therefore, a Welfare State and Compassionate Capitalism must work in tandem for equitable distribution of surplus among the management and labour.

THE CONCLUSION: The Economic Survey 2021 has appreciated the role played by gig economy in terms of service delivery and provision of employment to the labour force in the pandemic period. This sector holds out huge promise especially in the context of governments’ push towards digital economy through Digital India. It is true that the freelance nature of the work and other attributes may not strictly fit into the traditional employer-employee matrix. But that does not mean the labour should be left for exploitation and suffer from poor working conditions. It is in the interest of all stakeholders; the promoters, management, workers, the shareholders the consumers and others that adequate concreate measures be adopted for a win situation for all.

THE CONTEXT: Three decades ago, India embarked on a new economic journey when Manmohan Singh, then Finance Minister, placed the reform Bill and echoed Victor Hugo, “No power on earth can stop an idea whose time has come,” in Parliament. Since then, the crisis-hit economy has come a long way and marked its firm presence in the global platform. In this article, we will analyse India’s Journey in these three decades.

AN INTRODUCTION OF THE ECONOMIC REFORMS

• Economic reforms in India refer to the structural adjustments initiated in 1991 to liberalise the economy and accelerate its economic growth rate. The Narsimha Rao Government, in 1991, introduced economic reforms to restore internal and external confidence in the Indian economy.
• The reforms aimed at bringing in greater participation of the private sector in the growth process of the Indian economy. Policy changes were introduced with respect to industrial licensing, technology up-gradation, removal of restrictions on the private sector, foreign investments, and foreign trade.
• The reforms aimed to attain a high rate of economic growth, reduce the rate of inflation, reduce the current account deficit, and overcome the balance of payments crisis. The important features of the economic reforms were Liberalisation, Privatisation and Globalisation, popularly known as LPG.

NEED FOR ECONOMIC REFORMS

The need for the introduction of the reforms was because of the following factors:

POOR PERFORMANCE OF THE INDUSTRIAL SECTOR

Before the introduction of economic reforms, the industrial sector suffered due to bureaucratic controls. The industries had to obtain several licenses and permissions for any undertaking activity such as setting up a new firm, starting a new product line, expanding existing business, foreign investments, etc. Many public sector enterprises were incurring huge losses due to poor productivity.

The main objectives of the industrial policy introduced in 1991 were:

 I. To unshackle the Indian industrial sector from the cobwebs of unscrupulous bureaucratic controls.

II. To introduce liberalisation to integrate the Indian economy with the world economy.

III. To remove restrictions on foreign investments and relieve the entrepreneurs from the restrictions of the MRTP Act.

IV. To shed the load of public enterprises that were incurring heavy losses.

ADVERSE BALANCE OF PAYMENTS

• India faced a severe economic crisis during the end of the 1980s. India was unable to meet its international debt obligations and was pushed to a situation of near bankruptcy.
• The foreign exchange reserves were insufficient to pay the import bills. The Balance of Payments deficit could not be financed beyond a certain point.

Some of the factors responsible for the crisis were:

  I. The rising level of expenditure over revenue.

 II. Heavy government borrowing.

III. Inefficient utilisation of resources.

 IV. Excessive protection to domestic industries.

 V. Inefficient management of public sector enterprises.

 VI. Lack of technological development and innovation

 VII. Lack of investments in research and development.

RISE IN FISCAL DEFICIT

• This was mainly due to the increase in the non-developmental expenditure of the government. The government had to borrow a huge sum of money to finance the deficit and meet these debts’ interest obligations.
• The government was in a debt trap. Thus, there was a need to bring in reforms to reduce the non-developmental expenditure and to bring about a fiscal discipline.

INFLATION

• Due to continuous borrowing by the government to meet its mounting expenditure, there was a rapid increase in the money supply.
• The government resorted to deficit financing wherein the RBI financed the borrowings by the Government of India by printing currency notes.
• This leads to a rise in the money supply. When the money supply increased, the demand for goods and services also rose, increasing their prices and causing an inflationary situation.

THE GULF WAR

• The Gulf war during 1990-91 had a significant impact on the supply of oil. As a result, the price of oil shot up, increasing India’s foreign currency outlays. The Gulf crisis also affected the flow of foreign currency into India.
• The NRI deposits were moving out of India and remittances from Indians employed abroad were also affected during the war.

THE ECONOMIC REFORMS

Economic reforms in India were implemented to change the pattern of economic activities to liberalise the Indian economy and accelerate the rate of economic growth. These new economic reforms brought about a structural change in the share of different sectors in the national income.

The new economic reform policies mainly focused on structural reforms in the agricultural sector, industrial sector, financial sector, and global trade. Such economic reforms were possible with the help of broad and comprehensive policies on liberalisation, privatisation and globalisation.

LIBERALISATION – MEANING AND FEATURES

The main objective of liberalisation was to unshackle the industrial sector from the cobwebs of unnecessary bureaucratic controls.

The main features of liberalisation policy were

ABOLITION OF INDUSTRIAL LICENSING

• The new industrial policy of 1991 abolished the industrial licensing for all the industries except for a selected 18 industries due to security and strategic concerns.

REMOVAL OF RESTRICTIONS

• Other than those 18, all industries could set up and sell shares without any restrictions; they could expand their business and start a new product line without obtaining any license.

RELAXATION OF MRTP RESTRICTIONS

• The Monopolies and Restrictive Trade Practices (MRTP) Act aimed at controlling monopoly practices to prevent concentration of economic power.
• The MRTP Act has now been replaced by the Competition Act, 2002, which came into effect in 2009. The Competition Act checks all anti-competitive practices and prohibits abuse of dominance. To protect consumer interest at large, it aims at promoting and sustaining competition in the market.

FOREIGN INVESTMENT

• The reforms reduced several procedural bottlenecks for foreign investments. Approval was given for foreign direct investment up to 51 percent of the equity in high priority industries.

FOREIGN TECHNOLOGY

• Automatic approval was provided to Indian industries with respect to foreign technology agreements, especially in the case of high priority industries.
• Permissions were not required for hiring foreign technicians and experts and for foreign testing of indigenously developed technologies.

GLOBALISATION – MEANING AND FEATURES:

Globalisation may be defined as the integration of the domestic economy with the world economy to facilitate the free movement of goods, services, people, ideas, technology, etc. It refers to the opening of the economy to international competition.

The major features of globalisation measures as undertaken in 1991 were:

Reduction of Trade Barriers

• With the introduction of globalisation measures, trade barriers restrictions were reduced.
• It provided immense opportunities to Indian industries to expand their markets abroad and offered Indian consumers a wide variety of quality goods at competitive prices.
• The export-import policy announced for the period 1992-97 removed all restrictions on external trade and enhanced the export capabilities of the Indian industries.

Promotion of Foreign Direct Investment:

• Many Indian industries were opened to foreign direct investment.
• India became a favourable investment destination for foreign investors due to the low cost of production and availability of cheap labour resources.
• The government of India further initiated a series of measures to promote foreign technical collaborations in case of high priority industries and for the import of foreign technology. Foreign Investment Promotion Board (FIPB) was set up to facilitate foreign direct investments in India.

To Encourage Efficiency

• Globalisation encouraged domestic industries to become more competitive and efficient to face competition at the global level.
• The domestic industries had to produce quality goods at low cost to compete with the foreign producers’ cheaper and superior quality goods.

Diffusion of Technology

• An opportunity to India to have access to global technology and India could utilise the technologies of developed countries without many investments in research and development.

PRIVATISATION-MEANING AND FEATURES:

Privatisation refers to the introduction of private ownership in public sector enterprises. The government holding in public sector enterprises was sold to increase private participation.

Many public-sector units were incurring losses due to inefficiencies in management and lack of innovation and investments in research and development. Privatisation measures enabled modern technology, improved the quality of service, and led to efficient utilisation of resources.

Various privatisation measures introduced in India included:

1. Transfer of ownership of public sector units, either fully or partly, to private hands through denationalisation.
2. Transfer of control to the private sector through disinvestment policies.
3. Opening of areas that were exclusively reserved for public sector.
4. Transfer of management to the private sector through franchising, contracting, and leasing.
5. Limiting the scope of the public sector.

The privatisation wave in India, which was a part of the economic reforms of 1991, increased the role of the private sector and restricted the public sector to priority areas which included:

1. Physical and social infrastructure
2. Mining and oil exploration
3. Manufacture of products that were of strategic importance and where security concerns were involved like in the case of manufacture of defence equipment, and
4. Investments in technologies that required huge outlay and where private sector investment was inadequate.

Privatisation measures were introduced in India as part of the economic reforms in 1991 for the following reasons:

To Reduce the Burden of the Government

• Many public sector units were only functioning to protect the interests of the laborers. Privatisation offloaded this burden from the government and reduced the strain on resources.

To Promote Efficiency

• Many public sector companies were also struggling due to inefficient management, lack of transparency and corruptive practices.
• Privatisation measures got rid of these problems and enabled the public sector units to achieve optimum productivity.

To Enhance Investment Opportunities

• Privatisation helped in reducing the inconsistencies in management and improved the economic status of many public sector units. This brought in good returns and attracted investments.

To Facilitate Growth of Infrastructure

• Privatisation of industries led to the growth of industrial sector on modern lines. The private enterprises, to provide competitive products and services, initiated and facilitated the improvement of the infrastructure.

To Reduce Unnecessary Bureaucratic Interventions

• Privatisation reduced unnecessary government intervention in the management, thereby giving the private enterprises more autonomy in management and operations. This enhanced their efficiency and profitability.

SUCCESS AND FAILURE OF REFORMS: AN ANALYSIS

THE SUCCESS:

SIZE OF GDP AND GROWTH

From a GDP of $512.92 billion in 1991, India had grown to $2.70 trillion by 2020. Besides, the average annual growth rates in GDP, post the 1990s, have been around 6.25 per cent against 4.18 per cent for the three decades prior to the reforms.

RATE OF INFLATION

The average annual inflation rates in the post-reform period were significantly lower at around 5 per cent and the gross fiscal deficit was below 4.80 per cent of GDP. While curbing automatic monetisation of deficits and strong monetary measures contributed to lower inflation, disinvestment via privatisation and fiscal restraint in the form of lower subsidies arrested the deficits.

IMPORT- EXPORT

On the external front, the reforms made a significant impact too. Firstly, India’s trade openness increased from a meagre 13 per cent in 1990-91 to 42 per cent in 2020. The exports, driven by the devaluation of the rupee in 1991 and further depreciation in later years, have increased from $17.96 billion in 1990 to $324.43 billion in 2019.

FOREIGN INVESTMENT

Abolition of licence-raj and curbing of excessive regulations saw rewards in terms of better foreign investment. From $236.69 million in 1991, the net FDI inflows stood at $50.61 billion in 2020. With more foreign companies entering India, domestic consumers benefited from healthy market competition. For Indian manufacturing, the foreign collaborations meant access to technology and, thereby, efficient production. Also, there has been a significant improvement in forex reserves, which are now sufficient to cover 15 months’ imports.

REDUCING POVERTY

The reforms had a telling impact on India’s socio-economic fabric. From about 45 per cent of the population below the national poverty line in 1994, the rates fell to 21.9 per cent in 2011. There have also been improvements in literacy rates, gross enrolments ratio and life expectancy, among others.

AVERAGE MONTHLY PER CAPITA HOUSEHOLD CONSUMPTION EXPENDITURE

It was Rs 243.5 and Rs 370.3 in July-Dec 1991 and this stood at Rs 1,430 and Rs 2,629.7 from July 2011 to June-2012 for rural and urban areas.

FOREIGN EXCHANGE RESERVE

Increased $1.1 billion in 1991 to $642 billion in 2021.

PER CAPITA INCOME

Increased $300.10 to $2200.60 in 2020.

However, opening up the economy makes it susceptible to external shocks. Within a few years after the reforms, the first challenge for India came from its East Asian neighbours in 1997. In a span of three years, the world economy was hit by the dot-com bubble, and the third challenge came in the form of the global financial crisis in 2008. It was prudent economic policies and disciplined financial markets that helped the Indian economy to resist and recover quickly from all three crises.

THE FAILURES:

INCONSISTENT PERFORMANCE

• India’s growth rate and its progression as one of the leading developing economies of the world is inconsistent with the Human Development Index (131st rank in 2020), Global Hunger Index (94th position in 2020), Gender Inequality Index (122nd rank in 2018) and Environmental Performance Index (168th rank in 2020).

RICH-POOR DIVIDE

• It has widened the gap between rich and poor. The World Bank estimates show that the Gini index, a measure of income inequality, had deteriorated marginally from 31.7 in 1993 to 35.7 in 2011.
• According to NSSO consumption surveys, while the bottom 20 per cent of the population contributed to 9.20 per cent of consumption expenditure in 1993-94, their contribution had declined to 8.10 per cent in 2011-12. Further, the share of the top 20 per cent of the population has fattened from 39.70 per cent to 44.70 per cent during the same time.

POVERTY RATE

• As per the Tendulkar Committee estimations, India’s 21.92% of the population was living below the poverty line in 2011-12. However, as per the National Family Health Survey-4 (2015-16), the multi-dimensional poverty rate stood at 27.9%.
• The poverty rate, which was 45% in 1994, declined, especially during 2004-2011 when India implemented substantive anti-poverty measures and rights-based initiatives to uplift the poor.
• This has been affected by the pandemic due to loss of work and earnings and the people, especially informal and daily wage labourers, are pushed into the vicious cycle of poverty.
• A study conducted by the Azim Premji University (2021) finds that “230 million additional individuals slipped below the poverty line defined by the national floor minimum wage” and took away the anti-poverty efforts that were in place during the pandemic for the last 25 years.

UNEMPLOYMENT

• The reduction in poverty rate during 2004-2012 was due to the employment shift from farm to non-farm, especially in the services sector. The construction sector absorbed many informal/unskilled labour resulting in the real wages enhancing the purchasing power of the people.
• On the other side, the number of jobs created during this period was very less, ie, 0.6% per year than the growth of the working-age population.
• According to the International Labour Organization’s ILOSTAT database, India’s unemployment rate in 2020 was the highest since 1991 with 7.11%.

MORTALITY RATE

• Surely economic liberalisation should result in better care for our children, the country has made considerable progress on that front, with the under-five mortality rate coming down from 125.8 per thousand in 1990 to 47.7 per thousand in 2015. But neighbouring Bangladesh and Nepal, much poorer than India, have brought down their under-five mortality rates more than India.

SHARE OF MANUFACTURING IN GDP%

• One would have expected that the New Industrial Policy would have been a pivotal moment for the manufacturing sector and India would soon take its place among the manufacturing powers of East Asia. Still, while, in 1989-90, the share of manufacturing in the gross domestic product was 16.4%, it reduced to 16.2% in 2015-16.

COMBINED FISCAL DEFICIT OF CENTRE AND STATES

• One underlying reason for the crisis of 1991 was the indiscriminate rise in government borrowing in earlier years. It was only to be expected therefore that after the crisis, the government would do all it could to curb its fiscal deficit and that of the states. Unfortunately, that didn’t happen. By 2000-01, the combined fiscal deficit of the centre plus the states, as a percentage of GDP, had risen beyond the 1991 level.

TAX TO GDP RATIO

• One reason why government deficits remained high is that, despite robust economic growth, tax revenues weren’t buoyant. The central government’s gross tax revenues as a percentage of the gross domestic product have remained below the 1991-92 level.

DOES INDIA NEED ANOTHER REFORM?

Successive governments have built on LPG reforms, but a lot more needs to be done if India is to achieve its full potential. A look at the key areas that need urgent intervention to address long-standing issues to help the country achieve double-digit growth.

EDUCATION

• Possibly the most pressing focus area given the urgency to leverage human resources.
• Total revamp from primary level to higher education with equal emphasis on skills.
• Outcome- and learning-based education so that only those eligible progress to the next level.
• Along with health, education should get much higher funding.

HEALTHCARE

• Needs reorganisation and more funding.
• Expensive out-of-pocket health spending major cause of poverty.
• Massive public healthcare supported by insurance for critical care is needed.

JUDICIAL REFORMS

• Inadequate court capacity & judicial delays undermining the economy.
• More courts, better processes, and simpler laws to reduce caseload.

(Vacancies of Judges- 38.70%)

(Pending cases- 63,146 in SC, 56.43 lakh in High Courts and 3.71 Cr in Districts and Subordinate Courts)

TAX REFORMS

• Direct tax reforms progressing as per template.
• GST needs a makeover; all items should be included.

POWER SECTOR

• Unbridled populism has made power expensive, unreliable and inadequate.
• State finances are in disarray in many cases due to power subsidies.
• Users must pay for power; DBT for those states want to support.
• Privatise discoms, enforce open access, continue focus on renewables.

INNOVATION

• Unshackle the startup system totally.
• Provide funding missions for startups in innovation areas crucial to India.
• Encourage blockchain technology in payment systems.

UNIVERSAL BROADBAND

• Reach broadband across the country, keep it affordable.
• Go for satellite broadband in remote areas.

EASE OF DOING BUSINESS

• Much progress made, but the cost of doing business is still high.
• Multiple last-mile hurdles, particularly in the states.
• Massive review of policy, rules and regulations to simplify business.
• Use technology for governance and nonintrusive oversight.

SOME OTHER TARGET AREAS

• Comprehensive social security, which would also make labour reforms easier.
• Steps towards low carbon economy; continued emphasis on EVs and renewables.
• Further relaxation of foreign investment where possible.
• Massive privatisation to reduce state sector.
• Clear framework to bring back private investment in infrastructure.
• Framework for dispute resolution and enforceability of contracts.

THE WAY FORWARD

• The journey of three decades of economic reforms has certainly transformed our economy from a slow and regulated to a fastened and liberalised path of growth. During this process, what was really missed out was the large workforce of the informal sector. This non-inclusive approach is one of the limitations of the trickle-down economic growth model and needs serious revision.
• The 1991 reforms have provided the required dynamism to the economy. However, it has fallen short in sustaining the pace of growth owing to structural and institutional deficits, including the model of development and centralised governance. 91% of the labour force participation working in the informal sector needs to be provided better avenues of employment by leveraging the inherent potentials of agriculture and allied sectors.
• In spite of the pandemic, the expenditure on the health sector is still low compared with our neighbours like Bangladesh and Sri Lanka, which are ahead of India in terms of human development. Social and political (governance) reforms are imperative to achieve the goal of sustainable and equitable economic growth.

THE CONCLUSION: While Covid-19 has been a big blow, the economy was already showing signs of deteriorating growth even in periods preceding the pandemic. This would require immediate intervention to tackle the predicaments of unemployment, poverty, and other social issues. The pandemic has also raised concerns over existing health infrastructure and the future of education. The government must make higher investments in these sectors.

JUST ADD TO YOUR KNOWLEDGE

Disinvestment:

This is one of the most important strategies adopted by the Government of India as a part of its privatisation measures. A disinvestment is an act by which the government sells its complete or a part of its holding in a public sector unit to the private sector.

The disinvestment policies of the government also enable it to raise huge revenue to finance its fiscal deficit. About Rs. 20,000 cores were raised through disinvestment in public sector units between the period of 1991-92 to 2001-02.

The funds raised through disinvestment are also used:

1. To shut down the industries declared sick by the Board of Industrial and Financial Reconstruction (BIFR) and settle their claims.

2. To restructure and modernise the public sector enterprises.

3. To settle the public debt.

The disinvestment policies of the government, by bringing in private participation, improve the efficiency of public sector units by lowering their costs of production. It enables access to modern technology, thus, improving the quality of products and services. Disinvestment can be carried out through the public issue of equities to retail investors through Initial Public Offer (IPO).

THE CONTEXT: Fifteenth Finance Commission Chairperson NK Singh on 19 April 2022 delivered a lecture in Delhi School of Economics and warned about how the politics of freebies could lead to fiscal disasters. Over the years the politics of freebies has become an integral part of the electoral battles in India and the scenario was no different in the recently held assembly polls in five states, Uttar Pradesh, Uttarakhand, Goa, Punjab and Manipur. This article analyzes the socio-economic costs of freebies by distinguishing it from the concept of “expenditure on the public good, having overall benefits.”

THE IDEA OF FREEBIES

• The literal meaning of freebie is something that is given free of charge or cost.
• Political parties are outdoing each other in promising free electricity and water supply, laptops, cycles, electronic appliances, etc. These are called ‘freebies’ and are characterized as unwise for long term fiscal stability.
• However, during the pandemic, governments (both Union and states), as well as the RBI, took several measures to mitigate pandemic effects. This included expansion of the food security scheme for two full years; cash transfer schemes for farmers, expansion of the jobs scheme etc.

THE COMPLEX ISSUE OF FREEBIES

• There is great ambiguity in what “freebies” mean.
• Merit goods Vs. Public goods: We need to distinguish between the concept of merit goods and public goods on which expenditure outlays have overall benefits such as the strengthening and deepening of the public distribution system, employment guarantee schemes, support to education and enhanced outlays for health, particularly during the pandemic.
• Around the world, these are considered to be desirable expenditures.
• It is important to analyse, not how cheap the freebies are but how expensive they are for the economy, life quality and social cohesion in the long run.

Merit goods: are those public goods which results in interference with consumer choices. Here the government will be providing the goods (merit) to specific section of the society because of their backward status, poverty etc (depending on their merit, like the Sarva Shiksha Abhiyan).

Public goods: refer to those goods which satisfy public wants. The main attribute of public good is that they are supplied by the government jointly for the entire public.Examples for public goods are defense services, pollution control, streetlight etc.

REASONS FOR THE RISE OF FREEBIE CULTURE DURING ELECTIONS

CONSTITUTIONAL MANDATE FOR THE WELFARE OF THE CITIZENS

• It is based on the principles of equality and is keen to provide equal opportunity to all. It also aims to ensure equitable distribution of wealth.The 4th century BC treatise on the art of statecraft laid out a framework for good governance and welfare, however in present times it is imperative to draw a line between dole or a handout and spending on the public good having greater benefits.

POLITICAL MANDATE

• Political parties contesting the polls release their manifesto stating their aims and plans for every section of the society albeit having much of the focus on announcing schemes for their largest chunk of the votebank i.e. the lower strata of the society.
• Freebies are often used as a tool to conceal the poor performance of the incumbent government on the socio-economic parameters and provide an opportunity to alter the voter’s mindset from real issues to short term gains.

HISTORICAL BAGGAGE

• Since independence, parties have been promising some form of freebies to attract voters.
• Even if a new party comes to power, then also it can’t rationalize or outrightly abolish the freebie commitments of prior governments.
• For e.g., Several State Governments have been forced to continue power and irrigation subsidies due to political pressure. Governments fear that discontinuance will antagonize their voter base.

COMPETITIVE POLITICS AND DOMINO EFFECT

• The rise in coalition era politics since the 1990s has witnessed a rise of new political parties. These small and new parties have to offer more freebies than larger parties to lure the voters. Moreover the increase in competition among the parties to seek the votes, each party tries to outdo the others in terms of populist promises.

ARGUMENTS IN SUPPORT OF FREEBIES

WELFARE STATE

• The Constitution places an obligation on the State to take proactive measures for the welfare of the poor and downtrodden.
• For instance, Art. 39(b) of The Constitution of India calls for resource distribution for achieving a common good.

GLARING INEQUALITY IN THE SOCIETY

• In India, there is a wide inequality between the rich and the poor in terms of income and wealth. The OXFAM report 2021 showed that the income of 84% of households in the country declined in 2021, but at the same time the number of Indian billionaires grew from 102 to 142.

STRUCTURAL HURDLES AND MAKING THE BENEFITS OF GROWTH TO REACH THE LOWEST LEVEL

• They gave up land for cities, roads, factories and dams. However, they largely became landless workers and slum dwellers. Several economists argue that the gains of development have hardly trickled down to the most marginalized section of the society, especially after 1991. The cost of freebies offered is a fraction of what the poor lose.
• The World Bank recognized in the 1980s that the prevalent policies marginalize the poor and a ‘safety net’ (freebies) is needed.

ECONOMIC PUSH

• They help increase the demand that prevents the rate of growth from declining further. Free education and health are anyway justified because they are cases of ‘merit wants’ and increase the productivity of labour.

SOCIAL STABILITY

• Freebies enable the government to release the growing discontent in the marginalized section. They keep a lid on societal disruption which would be far more expensive.

INCENTIVES FOR THE RICH

• The well-off and businesses get ‘freebies’ that are euphemistically called ‘incentives’. Since 2006, the Union Budget estimates these to be between Rs 4-6 lakh crore each year. If the well-off who don’t really need freebies can get so much, why can’t the marginalized (especially women and youth) get a fraction of it?

CUSHION DURING EMERGENCIES

• COVID-19 has been one of the biggest health emergencies in the world for over a century. Such extreme events warrant state support to prevent chaos and disruption in society e.g., the free COVID-19 vaccination for every individual in India led to more prudent management of the pandemic.

ARGUMENTS AGAINST FREEBIES

UNDERMINES THE SPIRIT OF DEMOCRACY

• This is the primary concern as many people tend to vote for parties based on the free incentives offered by them. They fail to judge them on their performance and don’t utilize their franchise as per merit. Even the Supreme Court has observed that freebies shake the root of free and fair elections.

FALL IN PRODUCTIVITY

• Freebies create a feeling in the masses that they can live with minimal effort. This decreases their productivity towards work e.g., a trend has been created that whoever avail loan from banks does not repay them, expecting a waiver of loans during the election. This gives rise to moral hazard and an incentive to default.

FISCAL STRESS

• Freebies generally form part of revenue expenditure. Excess allocation towards them leaves little to spend on capital expenditure which is a prerequisite for achieving long-term growth.
• A case in point is the states which have been rolling out freebies in keeping with poll promises and ended up increased public debt with unsustainable fiscal conditions.

DISCOURAGES THE HONEST TAXPAYER

• It creates a sense of discontentment in the mind of an honest taxpayer whose money is used to fund the freebie expenditure. This feeling is more dominant especially when the State is unable to improve the public services due to freebie commitments.

SECTORAL COLLAPSE

• The populist measures of loan waivers have put significant pressure on the banking sector.
• Similarly, rising power subsidies have enhanced pressures on Discoms who are failing to sustain themselves.

WASTAGE OF RESOURCES

• Promises of free water and electricity create severe stress on the water table and lead to over-exploitation as seen in the states of Punjab and Haryana.
• NITI Aayog has cautioned that 21 major cities of India are on the verge of running out of groundwater in a few years.

ALLEGED INFRINGEMENT OF CONSTITUTIONAL PROVISIONS

• Promise/distribution of irrational freebies from the public fund before election unduly influences the voters, shakes the roots of the free-fair election, disturbs level playing field, vitiates the purity of election process and also allegedly violates Articles 14, 162, 266(3) and 282.

LANGUOR AMONG THE MASSES

• Recurring nature of the freebies in Indian socio-political scenario also make the masses develop the habit of acting irresponsibly and dampen their spirit to work hard.

THE ANALYSIS OF THE ISSUE

• India could face the prospect of sub-national bankruptcies if States continued to dole out freebies to influence the electorate, Fifteenth Finance Commission Chairperson NK Singh cautioned, terming the political competition over such sops a “quick passport to fiscal disaster”.
• We must strive instead, for a race to efficiency through laboratories of democracy and sanguine federalism where states use their authority to harness innovative ideas and solutions to common problems which other states can emulate.
• If the political parties go for effective economic policies where the welfare policies or government schemes have good reach without any leakages or corruption and it is targeted at the right audience, then infrastructure and development will take care of itself and the people will not require such kinds of freebies.
• Central government’s debt-to-GDP ratio is supposed to be 40% but now it has crossed 90%of the GDP, while the states have managed to keep their debt-to-GDP ratio at almost 27% in FY2020. Hence the problem of fiscal stability is more pressing at the level of the centre.
• Political parties shall also provide the roadmap for achieving the targets mentioned in the manifesto and also the rationale behind for enlisting such targets.
• Certain freebies are important to cushion or safeguard the socio-economic fabric such as the basic healthcare facilities, school education, subsidized ration etc. Such interventions by the government, guide the economy in the long term growth by strengthening the human capital.
• Freebies during the crises situation also help in sustaining the economic cycle through demand pull growth such as in COVID times.
• Qualified freebies such as the ascribed conditions of creating public assets through MGNREGA also contribute in more than one way in economic growth by increasing the productive capacity of the population.

THE WAY FORWARD:

• There should be a strengthening of internal party democracy so that promises of development and not freebies are made in the elections. This would also reduce the magnitude of the criminalization of politics.
• The Election Commission should be given greater powers like the power to deregister a political party, power of contempt etc. This would curtail the distribution of liquor and other goods during elections and ensure expenditure as per the desired limit.
• The Government should use the money spent on freebies towards job creation and infrastructure development as advised by Madras HC in 2021. This will lead to social upliftment and progression of the State.
• The focus should now be tilted on improving the efficiency of public expenditure. This requires focusing on outcomes and not merely outlays. One good example is the Pradhan Mantri Ujjwala Yojana:
• Arresting the health hazards associated with cooking based on fossil fuels thereby reducing the out of the pocket expenditure on health.
• Employment for rural youth in the supply chain of cooking gas.
• Improving India’s performance on Sustainable Development Goals-SDG 3 (Good Health and Well-being) and SDG 5 (gender equality) and specially SDG 7, which aims to ensure access to affordable, reliable, sustainable, and modern energy for all.
• Distribution of LPG subsidy through direct benefit transfer (DBT) also led to a decline in the subsidy bill.
• In the long run, eradication of unnecessary freebie culture requires an attitudinal change in the masses. It is high time that the ruling government should be made accountable for using tax revenue because freebies always prove to be a burden on taxpayers.
• The idea rendered by Vice President M Venkaiah Naidu has called for a wider debate on the freebies promised during polls and the possibility of making election manifestos legally binding. This will restrict the poll parties from making extravagant promises.

THE CONCLUSION: India has experienced the politics of freebies for a long time and the outcome of those policies has been sub-optimal, inefficient, and unsustainable. Therefore rather than doling out money, the focus should be on spending it efficiently. It is high time the discourse on improving public expenditure efficiency should take centre stage while discussing the role of fiscal policy in India. However, until that is achieved, reliance on acceptable freebies like health, education etc. can’t be completely stopped.

THE CONTEXT: On August 23^rd 2021, Union Minister for Finance and Corporate Affairs launched the asset monetisation pipeline of Central ministries and public sector entities – National Monetization Pipeline.

WHAT IS MONETISATION?

• In a monetisation transaction, the Government transfers revenue rights to private parties for a specified transaction period in return for upfront money, a revenue share, and commitment of investments in the assets. On the other hand, Disinvestment is pulling out the money invested in the company by selling the stake, either partially or fully. Disinvestment involves dilution of ownership of the business / PSU.
• Real estate investment trusts (REITs) and infrastructure investment trusts (InvITs), for instance, are the key structures used to monetise assets in the roads and power sectors.
• These are also listed on stock exchanges, providing investors liquidity through secondary markets as well.
• While these are structured financing vehicles, other monetisation models on PPP (Public Private Partnership) basis include: Operate Maintain Transfer (OMT), Toll Operate Transfer (TOT), and Operations, Maintenance & Development (OMD). OMT and TOT have been used in the highways sector, while OMD is being deployed in the case of airports.

ALL YOU NEED TO KNOW ABOUT THE NATIONAL MONETISATION PIPELINE

INTRODUCTION

• Union Budget 2021-22 has identified the monetisation of operating public infrastructure assets as a key means for sustainable infrastructure financing.
• The Budget provided for the preparation of a ‘National Monetisation Pipeline (NMP)’ of potential brownfield infrastructure assets. NITI Aayog, in consultation with infra line ministries, has prepared the report on NMP.
• NMP aims to provide a medium-term programme roadmap for public asset owners, along with visibility on potential assets to the private sector.
• The end objective of this initiative is to enable ‘Infrastructure Creation through Monetisation’ wherein the public and private sector collaborate, each excelling in their core areas of competence, to deliver socio-economic growth and quality of life to the country’s citizens.
• The report on NMP has been organised into two volumes.

ü  Volume I is structured as a guidebook, detailing the conceptual approaches and potential models for asset monetisation.

ü  Volume II is the actual roadmap for monetisation, including the pipeline of core infrastructure assets under Central Govt.

FRAMEWORK

• The framework for monetisation of core asset monetisation has three key imperatives.

ESTIMATED POTENTIAL

• Considering that infrastructure creation is inextricably linked to monetisation, the period for NMP has been decided to be co-terminus with the balance period under National Infrastructure Pipeline (NIP).
• The aggregate asset pipeline under NMP over the four years, FY 2022-2025, is indicatively valued at Rs 6.0 lakh crore.
• The estimated value corresponds to ~14% of the proposed outlay for the Centre under NIP (Rs 43 lakh crore).
• This includes more than 12 line ministries and more than 20 asset classes. The sectors included are roads, ports, airports, railways, warehousing, gas & product pipeline, power generation and transmission, mining, telecom, stadium, hospitality and housing.
• Sector-wise Monetisation Pipeline over FY 2022-25 (Rs crore):

• The top 5 sectors (by estimated value) capture ~83% of the aggregate pipeline value. These top 5 sectors include Roads (27%) followed by Railways (25%), Power (15%), oil & gas pipelines (8%) and telecom (6%).
• Regarding annual phasing by value, 15% of assets with an indicative value of Rs 0.88 lakh crore are envisaged to be rolled out in the current financial year (FY 2021-22).

Indicative value of the monetisation pipeline year-wise (Rs crore):

IMPLEMENTATION & MONITORING MECHANISM

• The programme is envisaged to be supported through necessary policy and regulatory interventions by the Government to ensure an efficient and effective asset monetisation process.
• These will include streamlining operational modalities, encouraging investor participation and facilitating commercial efficiency, among others.
• Real-time monitoring will be undertaken through the asset monetisation dashboard, as envisaged under Union Budget 2021-22, to be rolled out shortly.
• The assets and transactions identified under the NMP are expected to be rolled out through various instruments. These include direct contractual instruments such as public-private partnership concessions and capital market instruments such as Infrastructure Investment Trusts (InvIT).
• The sector will determine the choice of instrument, nature of the asset, the timing of transactions (including market considerations), target investor profile, the level of operational/investment control envisaged to be retained by the asset owner, etc.
• The monetisation value that is expected to be realised by the public asset owner through the asset monetisation process may either be in the form of upfront accruals or by way of private sector investment.
• The potential value assessed under NMP is only an indicative high-level estimate based on thumb rules. This is based on various approaches such as market or cost or the book or enterprise value etc., as applicable and available for respective sectors.

BENEFITS

• Ensures resource efficiency in infrastructure operations and maintenance by creating capital assets and addressing the country’s infrastructure needs.
• It aims to provide a transparent system that allows public authorities to monitor private players’ performance and investors to plan their future actions.
• Because these are brownfield initiatives, there is less risk for the private sector. As a result, there will be no significant delays due to land and environmental approvals.
• Globally, government-led capital creation has been a vital force in overcoming the COVID-19 pandemic-induced economic slump.
• NITI Aayog’s efforts to add coherence to contracts will improve the ease of doing business, particularly in contract enforcement.
• Assist in the creation of high-quality jobs in the various industries as envisioned by the programme.

CHALLENGES

ASSET-SPECIFIC CHALLENGES

• The MNP framework notes that other critical impediments to the monetisation process are asset-specific challenges, such as an identifiable revenue stream. This is specifically relevant to the railway sector, which has seen limited PPP success as a project delivery model.
• Konkan Railway, for instance, has multiple stakeholders, including state governments, which own a stake in the entity. Creating an effective monetisation transaction structure could be a bit challenging in this case.
• Other Asset-specific Challenges are:

ü  Low level of capacity utilisation in gas and petroleum pipeline networks.

ü  Regulated tariffs in power sector assets.

ü  Low interest among investors in national highways below four lanes.

SLOW PACE OF PRIVATISATION

• The slow pace of privatisation in government companies including Air India and BPCL. Further, less-than-encouraging bids in the recently launched PPP initiative in trains indicate that attracting private investors’ interest is not that easy.

REALISING ADEQUATE VALUE

• The other challenge is whether the adequate value from the assets will be realised or not. This depends on the quality of the bidding process and whether enough private players are attracted to bid.

MONOPOLISTIC OUTLOOK

• The only way of ensuring that asset monetisation doesn’t lead to cronyism is to make the bidding conditions such that the people eligible to bid are not a minor, predetermined set.  However, because of the project’s capital intensity, not everybody is going to be able to bid.

EXECUTION RISK

• There will be execution risk in such a large programme. However, this is exactly why NMP is not adopting a one-size-fits-all approach.

TAXPAYERS’ MONEY

• The taxpayers have already paid for these public assets — and, so, why should they pay again to a private party to use them.

THE LACK OF CLEAR THINKING ON SOME OF THE DEEPER ISSUES

• A greater problem is the lack of clear thinking on some of the deeper issues that may arise as a result of such monetisation. Take the monetisation of hill /mountain railways sought to be done through the Operate, Maintain and Develop (OMD) based PPP model for a period of 30-50 years, which may be extended.
• While the concessionaire is required to maintain the heritage nature of project assets, they would not just get the right to earn fare and non-fare revenues for 30-50 years through train operations but would also be allowed to charge user charges and sub-lease rights on the station and adjoining real estate on railway land for 30-50 years.
• This has the potential to jeopardise the rights of the locals living in these areas and cause protests.

A DROP IN THE OCEAN

• Such monetisation, however well-intentioned, is a drop in the ocean. It is expected to finance no more than 5-6% of the CAPEX (of Rs. 111 lakh crore) under the National Infrastructure Pipeline over the period.
• More importantly, 13 sectors, each with multiple assets, are sought to be monetised over the next four years—when the Government has been missing its disinvestment targets year on year, even when it involves blue-chip companies like BPCL.

LITTLE CLARITY ON USE PROCEEDS

• There is a larger question of where within the Budget will such proceeds from monetisation be accounted for and how these proceeds will be spent.
• The NMP document does speak about these proceeds being used to finance further infrastructure. There are no specific guidelines/rules, however, on how these proceeds could be used. Could they be used (more importantly not used) for paying salaries, giving pensions and subsidies, etc., thereby incurring revenue expenditure?

THE LITTLE ATTENTION ON IMPLEMENTATION

• The big miss is the little attention paid to the issue of how the NMP would be implemented and a precise scenario planning based on the Government’s experience in Disinvestment.
• The 101-page Volume II document with only one page devoted to an Implementation Plan, in a nutshell, maybe the biggest challenge of the NMP.

EMPLOYMENT

• The document has been silent on maintaining the current level of jobs in assets that will be monetised.

THE WAY FORWARD

• EXECUTION IS THE KEY TO SUCCESS: While the Government has attempted to solve several difficulties due to the NMP framework’s infrastructure development, the plan’s execution remains critical to its success.
• APPROACH WITH MULTI-STAKEHOLDER: Other stakeholders must do their part if the infrastructure expansion plan is to succeed. State governments and their public-sector enterprises, as well as the private sector, are among them. In this regard, the Fifteenth Finance Commission has advocated the formation of a High-Powered Intergovernmental Group to re-examine the Centre’s and States’ fiscal responsibility legislation.
• OTHER METHODS OF RAISING RESOURCES: Other strategies for raising funds include establishing a development finance institution (DFI) and increasing the percentage of infrastructure investment in the federal and state budgets.
• DISPUTE RESOLUTION MECHANISM: The importance of strengthening judicial systems cannot be overstated. The design and implementation of NMP will naturally and automatically benefit from efficient and effective conflict resolution processes.
• STREAMLINE PPP: Based on recent experience, public-private partnerships (PPPs) now feature transparent auctions, a clear understanding of the risks and payoffs, and an open field for all interested parties. As a result, the value of PPP in greenfield projects should not be overlooked.
• TRANSPARENT BIDDING: Maintaining transparency is critical to achieving a sufficient realisation of asset value.
• NITI AAYOG RECOMMENDATIONS:
  • Bringing InvITs Under Insolvency and Bankruptcy Code (IBC):Extending IBC provisions to InvITs would help lenders access a faster and more effective debt restructuring and resolution option.
  • Tax Breaks:Tax-efficient and user-friendly mechanisms like allowing tax benefits in InvITs would attract retail investors (individual/non-professional investors).

THE CONCLUSION: Raising financial resources upfront is a bold, proactive, and confident policy statement when global economic conditions remain unpredictable and uncertain. It sends a strong message to the rest of the world that India is open to business while protecting the public purse and its inhabitants.

THE CONTEXT: Given a very poor and pessimistic fiscal situation in the economy a discussion was doing the round as to the use of ‘monetisation of deficit’. Even the finance minister of India remarked that the government is keeping this option too in its mind.

Usually, market borrowing is resorted to by the government to tide over its fiscal deficit. We need to understand if we have reached the point where borrowings are no longer a viable and feasible option.

PRESENT DEFICIT SCENARIO

• Indian economy is passing through an unprecedented phase, and so is the fiscal health of the country.
• Apparently, the government will not be able to achieve its FY21 fiscal deficit target of 3.5% of GDP.
• The exchequer is facing a revenue crunch due to falling tax revenue post the lockdown.
• There is also difficulty in realising the disinvestment target in an uncertain market.
• Adding to it, the RBI has projected a negative GDP growth rate for the Indian economy in FY21.
• The Government has even raised its gross market borrowing for FY21 by 54% (Rs 7.8 – 12 lakh crore).
• Given these, the fiscal deficit as a percentage of GDP may even cross the double-digit mark.
• The government stimulus package of Rs 20 lakh crore also seems to be inadequate to revive the economy.
• As is seen, a large part of it accounts for liquidity-boosting measures by the RBI.
• Because, the weak fiscal position has forced the government to restrict the stimulus.
• It is in this scenario, that the need for monetisation of deficit has been widely felt.

WHAT IS MONETISATION OF DEFICIT?

• Monetising of deficit is also called deficit financing in India. It simply refers to printing of new currencies by the RBI equal to help the government meet its expenditure. In other words, this means printing more money by the central bank, in order to give them to the government for its expenditure.
• In other way, deficit monetisation happens when the RBI buys government securities directly from the primary market to fund government’s expenses.

HOW HAVE THE MODES EVOLVED?

• Monetisation of deficit was in practice in India since 1955.
• It remained in force till 1997.
• Monetisation of debt or deficit is also known as deficit financing in India.
• Back then, the central bank automatically monetised government deficit.
• It does it through the issuance of ad-hoc treasury bills.
• However, two agreements were signed between the government and RBI in 1994 and 1997.
• This was to completely phase-out funding through ad-hoc treasury bills.
• Later on, with the enactment of FRBM Act, 2003, RBI was completely barred from subscribing to the primary issuances of the government from April 1, 2006.
• It was agreed that henceforth, the RBI would operate only in the secondary market through the OMO (open market operations) route.
• [OMOs involve the sale and purchase of government securities to and from the market by the RBI to adjust the rupee liquidity conditions.]
• The implied understanding was that the RBI would use the OMO route not so much to support government borrowing.
• Instead, it would be used as a liquidity instrument.
• This was to manage the balance between the policy objectives of supporting growth, checking inflation and preserving financial stability.

HOW DOES IT WORK?

• Government issues ad-hoc T-Bills which are subscribed by the central bank in the primary market. The government gets money directly from the central bank against those bills.
• Direct monetisation (or simply ‘monetisation’) of the deficit does not mean the government is getting free money from the RBI. However, the interest rate could be much lower as compared to market rate of interest.

DOWNSIDE OF MONETIZATION OF DEFICIT

• Since monetisation of deficit increases money supply, the move is replete with the danger of causing inflation.
• The central bank looses its control over money supply and finds it difficult to ensure stability of price.
• Monetisation of deficit puts a downward pressure on domestic currency leading to its depreciation.
• The government has no incentives to check its unnecessary expenditure.
• If, despite these, the government decides to go ahead, markets will fear that the constraints on fiscal policy are being abandoned.
• They may see the government as planning to solve its fiscal problems by inflating away its debt.
• If that occurs, yields on government bonds will shoot up, which is the opposite of what is sought to be achieved.
• If in fact bond yields shoot up in real terms, there might be a case for monetisation, strictly as a one-time measure.

WHAT GOES IN FAVOUR OF MONETISATION OF DEFICIT?

• The strongest argument given against ‘monetisation of deficit’ is that it causes expansion in money supply which could be inflationary. As long as inflation is kept under control, it is hard to argue against monetisation of the deficit in a situation such as the one we are now confronted with. For this, the RBI can issue bonds in the market to absorb excess liquidity.
• Secondly, this objection has little substance in a situation where aggregate demand has fallen sharply and there is an increase in unemployment. In such a situation, monetisation of the deficit is more likely to raise actual output closer to potential output without any great increase in inflation.
• Debt to GDP ratio would remain unchanged as a result of monetisation. Rating agencies will not downgrade our rating if we are able to control inflation and engender growth.
• It is a cost-effective way of overcoming deficit.

CONCLUSION:

The idea of monetising government deficit by the central bank is not a new one. We were using this before 1997 when this was put to an end following an agreement between the government and the RBI. Later on, FRBM Act, 2003 took this power of the RBI to subscribe to the government bonds in primary market since 2006. The economy experienced an enormous benefits of doing away with direct monetisation of government deficit by the RBI.

Then what is the reasoning for jeopardising the hard-won gains of this move? Has India exhausted its entire option and left with only monetisation of deficit?

The Fiscal Responsibility and Budget Management Act as amended in 2017 contains an escape clause which permits monetisation of the deficit under special circumstances. The case for invoking this escape clause is that there just aren’t enough savings in the economy to finance government borrowing of such a large size.

The situation on the ground is not that grim. There is no reason to believe that we are anywhere close to the above-mentioned situation. At present, India is a saving surplus economy with no so strong demand for funds by the private sector. The government can borrow at around the same rate as inflation, implying a real rate (at current inflation) of 0 per cent.

If in fact bond yields shoot up in real terms, there might be a case for monetisation, strictly as a one-time measure for specific purpose.

With the economy now showing positive vibes, coming on track and realization of GST increasing, monetisation of deficit is looking like a distant probability.

THE CONTEXT: Unprecedented fall in GDP in the first quarter of current financial year has brought back the importance of fiscal policy into limelight. With monetary policy not producing the desired result; consumption and private investment expenditure remaining subdued, the onus of reviving the economy rests on the fiscal policy. The expansionary fiscal policy (huge government expenditure or a cut in tax rate) can bring about a visible and concrete change in the status of Indian economy.

The government is expected to shun the path of fiscal orthodoxy and make a meaningful expenditure to arrest the decline in GDP or income. Fiscal stimulus seems to be the need of the hour.

The present article analyses the rationale and feasibility of fiscal support that the economy needs to mitigate the impact of covid-induced recession.

REASONS FOR A FISCAL BOOST

• The unprecedented 23.9% decline in the gross domestic product (GDP) in the first quarter of 2020–21, mainly due to the stringent lockdown enforced after the COVID-19 outbreak, is the main reason demand for a massive fiscal stimulus has arisen.
• Taking into consideration the activities in the informal sector of the economy, the decline could be much larger than reported. This is because quarterly estimation of GDP does not capture informal sector which accounts for almost half of our GDP.
• The largest decline was in manufacturing, construction, and trade, hotels, transport, and communication where output fell by 39.3%, 50.3% and 47%, respectively. These three segments ­account for almost three-fourths of the total workers employed outside of agriculture and the sharp fall in output would have wiped out millions of jobs.
• Similarly, the expenditure-side numbers indicate a sharp fall in both consumption and investments. While private consumption, the biggest component, has declined by almost a quarter, the gross fixed capital formation or investment has almost halved. This urgently necessitates huge government stimulus.
• The economy had already slipped into a crisis even before the pandemic struck. In fact, the quarterly GDP has steadily decelerated for nineth consecutive quarters and brought down growth rates from a high of 8.1% in the last quarter of 2017–18 to a low of -23.9% in the first quarter of 2020-21. And, given the current trends, it can now be safely assumed that the GDP will shrink substantially, maybe even by double digits, in the fiscal year 2020–21.
• Historically, India’s GDP has shrunk four times since the early 1950s, with the sharpest and the most recent one being in 1979–80 when GDP declined by 5.2%. But, the current decline is both much more extensive and severe. There is a simultaneous fall in consumption, investments, and exports and only concerted and radical interventions by the government can ensure that the growth bounces back closer to double digits.
• The pandemic has also exposed many lacunae in the economy, especially in the health and social security network. very few informal workers in the economy, who account for around 92.4% of the total workforce, have any social security benefits like paid leave or other non-wage benefits that will help them tide over a crisis.
• International commitments towards SDG should also be reasons for enlarging government expenditure.

FISCAL RESPONSE SO FAR

The government’s response to the pandemic so far has been slow and inadequate.

Despite the havoc heaped by the pandemic, on both business and employment, and the millions of migrants fleeing to the safety of their villages, the government delayed any substantial relief till the third week of May. And, though the stimulus package announced in May 2020 was as large as `20 lakh crore, or around 10% of the GDP, most measures were focused on monetary policy interventions. Fiscal support was only a little more than 1% of the GDP. The government clung on to fiscal orthodoxy even as the economy suffered one of the biggest hits ever.

So, the burden of recovery was shifted largely on to the central bank, which steadily cut rates and pumped up credit flows to productive sectors. But, as consumer inflation steadily rose to exceed the central bank’s targets, mainly due to high taxes on fuel and bottlenecks in food supply, the Reserve Bank of India was soon forced to pause the rate cuts.

Many economists and commentators have mentioned that Government announcement on the stimulus of Rs 20 lakh crores tries to resolve only supply-side issues. There is nothing to bring in an additional demand.

INDIA’S FISCAL STIMULUS IS INADEQUATE AS COMPARED WITH DEVELOPED AS WELL AS ITS DEVELOPING PEERS

Across the world, country stimulus responses vary from 1 percent of GDP to 12 percent of GDP as of now. Rich countries seem to have announced larger stimulus packages (5 to 10 percent) and poor countries have announced smaller packages (2 to 5 percent). In case of India, it is a bit more than only 1 per cent of its GDP.

DO WE HAVE A FISCAL SPACE?

There is no denying the fact that the fiscal space with the government to deal with recession is limited. Corporate tax has already been cut and, now, with growth slumping into negative territory, the ability of the government to raise tax revenue in coming months would further get hampered.

In this dire situation, the increased expenditure on fiscal stimulus can be dealt with by raising market borrowings. India has already raised its estimated fiscal deficit from 7.8 lakh cr to 12 lakh cr.

DOES THE CENTRAL GOVERNMENT HAVE MORE CAPACITY TO BORROW?

Yes. The following points illustrate this;

• Surplus liquidity and limited private credit demand will ensure that government bond auctions remain well subscribed.
• India is running a current account surplus. That’s compounded by strong capital flows. So we have the pool of savings. Banks don’t want to lend to the real economy. There is a presumption here that those resources will ultimately be channelled into government bonds.
• In addition, the government can choose to roll-over the treasury bills issued in the first half of the year. The government has borrowed and issued close to Rs 5 lakh crore in treasury bills already. One way the government can finance more of its deficit is by rolling over those treasury bills.

Eventually, the extent to which the government can allow its debt burden to build up during the pandemic will depend on the expected trend growth in the economy.

If India’s growth is at 7% over the next five years, India can absorb a much larger stimulus this year and in the medium term, debt-to-GDP come down. If India’s trend growth settles at 5%, even a muted fiscal response this year will result in debt to GDP rising enormously. So we should not lose sight of the fact that trend growth matters a lot.

WAY FORWARD:

Government can carve out more fiscal space to boost spending without any downside risks. It must release funds through a multi-year asset sale programme.The public authorities in India have a good amount of shares in public sector undertakings (PSUs), public land, and foreign exchange reserves. There is scope and anyway a need for reducing public holdings of these assets.

Disinvestment:

The market return on investments in PSUs is very low and it is doubtful if even the social returns are large; there is a rationale for disinvestment or privatisation (Dutta 2010). Indeed, the GOI has been engaged in a disinvestment programme for quite some time.

Monetising Public Land:

public authorities in India hold excess land; 13 major port trusts have 100,000 hectares of land, the International Airports Authority of India has 20,400 hectares of (additional) land, the Ministry of Defence has 283,280 hectares of land, and the Indian Railways has 43,000 hectares that is valued roughly at a whopping Rs. 3 trillion, which is significantly more than the true fiscal component of the big financial package of about Rs. 21 trillion announced in May 2020. So, here again, we have a way to mobilise funds by selling excess land – more so when the market price of land in India is more than the fundamental value of land.

Forex Reserve:

Finally, let us come to the foreign exchange reserves with the RBI. These stand at US$ 560 billion or Rs. 42.5 trillion as on 30 October 2021 (this is about 2 times the size of the relief package announced by the GOI in May 2021). It has been argued that these reserves can be reduced significantly without endangering macro-financial stability.

All this suggests that the public authorities have considerable fiscal space if we consider their assets.

CONCLUSION:

Nobody is advocating that India does the kind of stimulus that the UK or Germany or other developed countries are able to adopt, because we don’t have the kind of hard currency that they have. However, a meaningful demand-driven expenditure could be made to turn the course of the economy.

• Basic income in terms of cash transfer to a selected group of people, like women, will go a long way in addressing the demand side .
• Government should spend on creation of social and economic infrastructure which will not only generate employment abut also crowd-in private investment.
• Building an efficient social security network to protect all workers from economic instabilities.
• Rolling out programmes to scale up medical coverage across the country to ensure better protection from future pandemics.

Clearly, the government’s efforts to provide relief and revive the economy have now reached a dead end, and the only way to kick-start a steady recovery is to launch a massive fiscal stimulus package to stem the fall and ensure a quick recovery.

THE CONTEXT: Recently, there is a debate on illusion of rating agencies. Basically, the issues are -their necessities, flaws & fragilities, and the need for regulation. Similarly, credit score has also become complicated due to the current covid induced financial crisis.

WHAT IS A RATING AGENCY?

Credit rating is an informed opinion of a recognised entity on the relative creditworthiness of an issuer or instrument. In other words, it is an opinion “on the relative degree of risk associated with the timely payment of interest and principal on a debt instrument”. Such recognised entity is known as Credit Rating Agencies (CRAs).

CRAs typically rate on the basis.

• Debt securities
• Short term debt instruments, like commercial papers
• Structured debt obligations
• Loans and fixed deposits

WHY THERE ARE ISSUES OF ILLUSION?

IDEOLOGICAL BIASES

• CRAs might lower ratings for left governments as a strategy to limit negative policy and market surprises as they strive to keep ratings stable over the medium term.
• For e.g. a panel analysis of Standard & Poor’s, Moody’s, and Fitch’s rating actions for 23 Organisation for Economic Co-Operation and Development (OECD) countries from 1995 to 2014 shows that left executives and the electoral victory of nonincumbent left executives are associated with significantly higher probabilities of negative rating changes.

CONFLICT OF INTERESTS

• CRAs are funded by the very companies they rate.

LACK OF ABILITY TO PREDICT

• CRAs follow the market, so the market alerts the agencies of trouble. This reason can be attributed to CRAs ability to predict frequent near default, default, and financial disasters.

NEGLIGENCE & INCOMPETENCE

• The methodology of CRAs has come under question. For example, even after using different methodologies, the result for sovereign debts comes the same. It is also alleged that CRAs can make a sound judgement on rating, but they didn’t make an effort to do it.
• For e.g. Moody accepted that it did not have a good model on which it could have estimated a correlation between mortgage-backed securities, so they made them up.

POLITICALLY MOTIVATED

• It has also been alleged that CRAs, through their rating mechanism, force the govt to follow the path they prescribe.
• For e.g. during the turmoil in Tunisia, S&P issued a report warning of “downward rating pressures” on neighbouring governments if they tried to calm social unrest with “populist” tax cuts or spending increases. Further, after Crimea annexation, rating agencies downgraded the rating of Russia.

POLICY MEDDLING

• In 203, to stop predatory lending state of Georgia brought a law. Other state of the USA, were to follow suit until S&P retaliated. And it is well known that predatory lending is responsible for the financial crisis of 2008-09.

HOW A RATING AGENCY FUNCTION

1. FOR COMPANIES

It is evident from the Above picture that credit rating agencies depend upon the audited statements. The agencies are only as effective the as honesty of their clients.

2. FOR COUNTRY

Following are the parameters on which a country is rated

• Regulatory framework
• Tariffs
• Fiscal Policy
• Monetary Policy
• Foreign Currency Control
• Physical and human Infrastructure
• Financial Markets
• Macro Factors (Consumer spending, Inflation, Interest Rates)

WHY RATING AGENCY IS REQUIRED

From the 80s onwards, as the financial system became more deregulated, companies started borrowing more and more from the globalised debt markets, and so the opinion of the credit ratings agencies became more and more relevant.

ROLE OF THE CRAs

REDUCE INFORMATION ASYMMETRY

• Since CRAs get access to the company’s management and confidential information about its working, they can give an informed opinion about the ability of an instrument to meet its obligations.

UTILITY FOR ISSUERS

• Issuer concisely communicates the quality of their issue through the rating of the CRAs, which help it establish its creditworthiness.

GATEKEEPERS FOR FINANCIAL MARKETS

• CRAs provide tangible benefits to financial market regulators by reducing the costs of regulation. Regulators such as RBI use CRAs to improve the awareness and decision-making of their regulated entities. For instance, credit ratings are used to determine the capital adequacy of banks the resolution of stressed assets.

PURVEYORS OF REGULATORY LICENSES

• Some financial regulators mandate that certain instruments must be rated mandatorily before they are issued. Extensive integration of CRAs into the financial system transforms their role as purveyors.

MORAL SUASION

• It compels developing countries to pursue more prudent and sensible monetary and fiscal policies.

INSTANCES WHEN RATING AGENCIES FAILED

• The financial collapse of New York City in the mid-1970s
• Asian financial crisis
• Enron scandal,
• Global Financial Crisis
• During the global financial crisis, hundreds of billions of dollars worth of triple-A-rated mortgage-backed securities were abruptly downgraded from triple-A to “junk” (the lowest possible rating) within two years of the issue of the original rating.
• The US Financial Crisis Inquiry Commission called them “key enablers” of the financial crisis and “cogs in the wheel of financial destruction.”

THE HISTORY OF RATING AGENCY

• Credit rating agencies were first established after the financial crisis of 1837 in the US. Such agencies were then needed to rate the ability of a merchant to pay his debts, consolidating such data in ledgers.
• Systematic credit rating started with the rating of US railroad bonds by John Moody in 1909.

COMPARATIVE RATING SYMBOLS FOR LONG TERM RATINGS

DEGREE OF SAFETY  –   RATING  –   Meaning

Highest – AAA – Timely payment of financial obligations

High – AA – Timely payment of financial obligations

Adequate – A – Changes in circumstances can adversely affect such issues more than those in the higher rating categories.

Moderate – BBB – Changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal.

Inadequate – BB – Less likely to default in the immediate future

Greater likelihood of default – B – While currently financial obligations are met, adverse business or economic conditions would lead to a lack of ability or willingness.

Vulnerable to default – C – Timely payment of financial obligations is possible only if favourable circumstances continue

In default or are expected to default – D – Such instruments are extremely speculative and returns from these instruments may be realised only on reorganisation or liquidation.

Some factors which render instruments outstanding meaningless – NM – Factors include reorganisation or liquidation of the issuer; the obligation is under dispute in a court of law or before a statutory authority etc.

CREDIT RATING AGENCIES IN INDIA

CRISIL

• This full-service rating agency is India’s major credit rating agency, with a market share of more than 60%.
• It is offering its services in the financial, manufacturing, service, and SME sectors.
• The headquarter of CRISIL is in Mumbai.
• The majority stake of CRISIL was held by the world’s largest rating agency, Standard & Poor’s.

CREDIT ANALYSIS AND RESEARCH LIMITED RATINGS (CARE) RATINGS

• Credit Analysis and Research Limited Ratings was established in 1993.
• It is supported by Canara Bank, Unit Trust of India (UTI), Industrial Development Bank of India (IDBI), and other financial and lending institutions.
• This is considered the second-largest credit rating company in India.
• The headquarter of Credit Analysis, and Research Limited Ratings is in Mumbai.

SMALL AND MEDIUM ENTERPRISES RATING AGENCY (SMERA)

• It is a rating agency entirely created for the rating of Small Medium Enterprises.
• It is a joint enterprise by SIDBI, Dun & Bradstreet Information Services India Private Limited (D&B), and some chief banks in India.
• The headquarter of SMERA is in Mumbai
• It has accomplished 7000 ratings.

ONICRA CREDIT RATING AGENCY

• Mr. Sonu Mirchandani incorporated it in 1993
• It investigates data and arranges for possible rating solutions for Small and Medium Enterprises and Individuals.
• The headquarter of ONICRA Credit Rating Agency is located in Gurgaon
• It has broad experience in performing a wide range of areas such as Accounting, Finance, Back-end Management, Analytics, and Customer Relations. It has rated more than 2500 SMEs.

FITCH (INDIA RATINGS & RESEARCH)

• Fitch Ratings is a global rating agency dedicated to providing the world’s credit markets with independent and prospective credit opinions, research, and data.
• The headquarter of Fitch Ratings is in Mumbai.

ICRA

• It was created in 1991 by prominent financial institutions and commercial banks in India with a devoted crew of experts for the MSME sector
• Moody’s, which is considered as the international credit rating agency holds the major share.

DIFFERENT BUSINESS MODELS OF CREDIT RATING AGENCIES

MODELS

ISSUER PAY MODEL

ADVANTAGE

• Ratings are available to the entire market free of charge and will greatly aid small investors.
• It gives the rating agencies access to high-quality information that enhances the quality of analysis.

DISADVANTAGE

• It can lead to serious conflict of interest since the company pays the CRAs to get the rating. The CRAs may inflate the rating to satisfy the company.
• It may lead to ‘Rating Shopping’ which refers to the situations where an issuer approaches different rating agencies for the ratings and then choose to publish the most favourable ratings to disclose it to the public via media while concealing the lower ratings.

INVESTOR PAYS MODEL

ADVANTAGE

• It would avoid the serious conflict of interest of the CRAs.
• This would enable the investors to get the credit rating based on the company’s true and actual financial condition.

DISADVANTAGE

• Ratings would be available only to those investors who can pay for them and takes ratings out of the public domain and thus affects the small investors.
• The company may not always share all the necessary information with the CRAs which can have an adverse impact on the quality of the ratings.
• It can pose serious conflict of interest involving the investors themselves. If investors are the payees, they can influence CRAs to give lower-than-warranted ratings to help them negotiate higher interest rates.

REGULATOR PAYS MODEL

ADVANTAGE

• It eliminates the conflict of interest as seen in both Issuer Pay Model and Investor Pay Model.

DISADVANTAGE

• The problem with this model lies in choosing the CRA and payment to be fixed.
• The CRA chosen by the regulator may not provide the best credit rating. Further, if the regulator pays less amount of money to the CRA, the CRA may find it difficult to continue with its business and could have an adverse impact on the quality of the ratings issued.

SHOULD RATING AGENCIES BE REGULATED?

• RATING SHOPPING: It has often been seen that both issuer and investor are involved in rating shopping. CRAs inflate the rating particularly for structured product markets for getting more market share and profit margins.
• OLIGOPOLISTIC TENDENCIES: Around 95% of the market is controlled by only 3 CRA VIZ. S&P, MOODY’S and  Further, they use expansionist marketing. For e.g. Hannover Re lost a big chunk of the market share when it didn’t pay the service fee. (CRAs promised it free service).
• HEGEMONIC CONTROL: As the big three CRAs are located in north America, America exerts a great control on the functioning of CRAs. When CRAs downgraded USA, CRAs were fined. Further, rating of country is not done objectively. UK was rated lower than USA, even when the fiscal deficit of UK was lower than USA.
• CONTROL: CRAs have great control on the world economy as their rating can result in the flight of the capital.
• ACCOUNTABILITY: CRAs are not accountable to any country and their functioning is not transparent

CHANGES THAT IS IMPERATIVE FOR BETTER FUNCTIONING

DODD FRANK ACT

In response to the Global Financial Crisis of 2008-2009, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act in July 2010. It encourages CRAs to invest in due diligence, strengthen internal controls and corporate governance, and improve their methodology. But some of the following provision of it are still unimplemented:

• legal liability of credit rating agencies should be increased.
• Use of credit ratings in regulations that set capital requirements and restrict asset holdings for financial institutions should be removed or replaced.
• Internal controls, conflicts of interest for credit analysts, standards for credit analysts, transparency, internal conflict of interest, and rating performance statistics should be ruled based and regulated.

THE WAY FORWARD

• A ratings agency run by the UN, funded by pooled contributions from both lenders and borrowers should be established. Ratings business must be made a utility, rather than a semi-cartel that intimidates elected politicians and rakes in excess profits
• With the help of technology, open-source models with fully transparent inputs and outputs should be created and promoted. Credit Risk Initiative of National University of Singapore Risk Management Institute is one such example.

THE CONCLUSION: CRAs play a valuable role in financial markets by analysing credit for many investors, but their inaccurate ratings can create problem of enormous proportion for world economy. A unified, integrated effort by all the country is needed to avoid another economic meltdown which would severe repercussion for both, any country or its citizen

THE CONTEXT: In November 2021, RBI issued a revised Prompt Corrective Action (PCA) Framework for Scheduled Commercial Banks (SCBs) excluding Small Finance Banks, Payment Banks, and Regional Rural Banks to enable intervention at the appropriate time and require the SCB to initiate and implement remedial measures in a timely manner. The provisions of the revised PCA framework will be effective from January 1, 2022. The detailed analysis of the development is as follows.

THE DEVELOPMENT

• The revised framework excludes return on assets as a parameter that may trigger action under the framework.
• Payments banks and small finance banks (SFBs) have also been removed from the list of lenders where prompt corrective action can be initiated. Capital, asset quality and leverage will be the key areas for monitoring in the revised framework.
• Indicators to be tracked for capital, asset quality and leverage would be CRAR/ common equity tier I ratio, net NPA ratio and tier I leverage ratio, respectively.
• In governance-related actions, the RBI can supersede the board under Section 36ACA of the BR Act, 1949.
• The framework will apply to all banks operating in India, including foreign banks operating through branches or subsidiaries based on breach of risk thresholds of identified indicators.

WHAT HAS CHANGED?

2017 (Revised) Framework

Key Monitoring areas

Capital, asset quality and profitability, while leverage would be monitored additionally.

Indicators to be tracked

Capital, asset quality and profitability would be CRAR/ Common Equity Tier I ratio, Net NPA ratio and Return on Assets, respectively.

Profitability – ROA

Negative ROA for 2/3/4 consecutive years

Leverage

Tier 1 Leverage ratio:

• Threshold 1: <=4.0% but > = 3.5% (leverage is over 25 times Tier 1 capital)
• Threshold 2: < 3.5% (leverage is over 28.6 times Tier 1 capital)

Expense monitoring

The following points were mandatory:

• Threshold 2: Higher provisions as part of the coverage regime
• Threshold 3: Restriction on management compensation and directors’ fees, as applicable

Discretionary Corrective Actions – Special Supervisory Actions

RBI could amalgamate/ reconstruct a bank under extant regulations

Exit from PCA and Withdrawal of Restrictions under PCA

Exit of a bank from the PCA framework was based on RBI’s assessment on multiple parameters based on the financials of the bank.

New Framework

Key Monitoring areas

Capital, Asset Quality and Leverage

Indicators to be tracked

Capital, Asset Quality and Leverage would be CRAR/ Common Equity Tier I Ratio, Net NPA Ratio, and Tier I Leverage Ratio, respectively.

Profitability – ROA

Has been removed from the New Framework

Capital – Risk Threshold 3

RBI has specifically included this level of 400 bps below CRAR as a monitorable

Leverage

Monitoring of leverage has been made explicit and levels have been made explicit across thresholds

• Threshold 1: Up to 50 bps below the regulatory minimum
• Threshold 2: More than 50 bps but not exceeding 100 bps below the regulatory minimum
• Threshold 3: More than 100 bps below the regulatory minimum

Expense monitoring

These actions have been included in discretionary activities and have been made applicable across all thresholds. They have been combined and made more stringent by restriction/ reduction on variable operating costs, outsourcing activities, and restriction/reduction of outsourcing activities. Further restrictions on capital expenditure, other than for technological up-gradation within board-approved limits, have been made mandatory in risk threshold 3.

Discretionary Corrective Actions – Special Supervisory Actions

The RBI has specifically included resolution of the bank by Amalgamation or Reconstruction (Ref. Section 45 of Banking Regulation Act 1949) under the revised framework.

Exit from PCA and Withdrawal of Restrictions under PCA

The new framework has laid down an explicit framework for a bank to exit the PCA framework as follows:

Once a bank is placed under PCA, taking the bank out of PCA Framework and/or withdrawal of restrictions imposed under the PCA Framework will be considered: a) if no breaches in risk thresholds in any of the parameters are observed as per four continuous quarterly financial statements, one of which should be Audited Annual Financial Statement (subject to assessment by RBI); and b) based on Supervisory comfort of the RBI, including an assessment on sustainability of profitability of the bank.

WHAT IS PCA FRAMEWORK?

• Prompt Corrective Action or PCA is a framework under which banks with weak financial metrics are put under watch by the RBI. The PCA framework deems banks as risky if they slip below certain norms on three parameters — capital ratios, asset quality and profitability.
• Based on where a bank stands on these ratios, it has three risk threshold levels (1 being the lowest and 3 the highest). Banks with capital to risk-weighted assets ratio (CRAR) of less than 10.25 per cent but more than 7.75 per cent fall under threshold 1.
• Those with CRAR of more than 6.25 per cent but less than 7.75 per cent fall in the second threshold. In case a bank’s common equity Tier 1 (the bare minimum capital under CRAR) falls below 3.625 per cent, it gets categorised under the third threshold level.
• Banks that have a net NPA of 6 per cent or more but less than 9 per cent fall under threshold 1, and those with 12 per cent or more fall under the third threshold level.
• On profitability, banks with negative return on assets for two, three, and four years fall under threshold 1, threshold 2 and threshold 3, respectively.

WHAT IS THE PURPOSE OF THE PCA FRAMEWORK?

• The objective of the PCA framework is to enable supervisory intervention at the appropriate time and require the supervised entity to initiate and implement remedial measures in a timely manner to restore its financial health.
• Act as a tool for effective market discipline.
• It does not preclude the Reserve Bank of India from taking any other action as it deems fit at any time, in addition to the corrective actions prescribed in the framework”.
• In the last almost two decades — the PCA was first notified in December 2002 — several banks have been placed under the framework, with their operations restricted. In 2021, UCO Bank, IDBI Bank and Indian Overseas Bank exited the framework on improved performance. Only the Central Bank of India remains under it now.

HOW DO BANKS BENEFIT FROM PCA?

• One of the objectives of PCA is to amend a bank’s mistakes before they lead to a crisis.
• RBI controls the loan disbursal of banks belonging to the PCA watchlist. That said, note that the regulator does not entirely prohibit PCA banks from disbursing loans.
• RBI’s PCA framework has been designed to improve a bank’s financial performance by tracking vital metrics. In other words, it involves the RBI taking remedial measures.
• PCA banks cannot enter a new line of business, which improves their core financials.
• In some rare cases RBI might choose to close non-compliant banks or initiate amalgamation for them.

WHEN DOES RBI INVOKE PROMPT CORRECTIVE ACTION?

RBI considers four factors to determine whether it needs to put a bank under the PCA framework. These include profitability, asset quality, capital ratios and debt level. The central bank grades each of these factors based on actions depending upon the grade/threshold level, categorised from one to three, where 1 is the lowest of the lot and 3 being the highest based on how banks stand with respective frameworks.

Following is a look at these factors and their grades:

CAPITAL ADEQUACY RATIO (CRAR)

• The CRAR is the capital needed for a bank measured in assets (mostly loans) disbursed by the banks. The higher the assets, the higher should be the capital retained by the bank. This measures how much debt and equity capital banks possess to cover their asset book risk. If CRAR is less than 10.25%, but above 7.75%, the bank falls in the first grade. Banks having a CRAR of over 6.25%, but below 7.75%, fall under grade 2. However, if a bank’s capital adequacy ratio is less than 3.625%, it is categorised under grade 3.

ASSET QUALITY

• This parameter refers to the non-performing assets of a bank. If the net NPA of a bank is more than 6%, but less than 9%, it falls under the first threshold. If Net NPA crosses the 9% mark, it triggers the second grade. That said, if this metric is 12% or more, the bank will fall in the third grade of PCA.

PROFITABILITY

• The regulator considers the bank’s return on assets (ROA) as the key measure for profitability. Note that if a bank’s ROA is negative for two, three and four years in a row, it will be categorised as grade 1, grade 2 and grade 3, respectively.

DEBT LEVEL/LEVERAGE

• The last factor that RBI considers to measure the financial risk of any bank is its overall debt level/leverage. The regulator triggers grade 1 if the overall leverage is more than 25 times its Tier 1 capital. However, when total leverage is over 28.5 times its core capital (including disclosed reserves), RBI acts according to grade 2 of PCA.

WHAT HAPPENS WHEN RBI PUTS A BANK UNDER PCA?

When RBI puts a bank on its PCA watchlist, it imposes two types of limitations on it – mandatory and discretionary. These include restrictions related to the expansion of a branch, dividend, and director’s remuneration and so on.

Nevertheless, the Central Bank may choose to take these actions at their discretion, where the RBI can:

• Ask the bank’s board to reassess its business model and evaluate the profitability of the business line and operations.
• Advise banks to reassess their business plans and strategy to take remedial measures, including dismissing certain officials from employment.
• Ask a Bank’s board to implement a resolution plan after seeking approval from the supervisor.
• Advise banks to gauge their viability over the medium to long term besides evaluating balance sheet estimates.
• PCA banks might not be able to hire more employees or fill up vacant positions.
• Lastly, RBI may allow PCA banks to incur capital expenditure only to upgrade technology. However, the allocation of funds for the same has to be within pre-approved limits.

ANALYSIS OF NEW FRAMEWORK

• The revised rules propose changes on three fronts —

• the triggers to invoke PCA against a bank,
• the mandatory actions RBI may take after it
• conditions for a bank to exit it.

• Rules currently allow RBI to invoke PCA, if a bank’s capital-to-risk weighted assets ratio and Tier 1 capital ratio, Return on Assets (ROA), net Non-Performing Assets and leverage fall well short of statutory thresholds.
• Under the new regime, a negative ROA will no longer trigger a bank to invite corrective action. This appears sensible because the accounting profit for a bank is the residual sum left over after provisioning for bad and doubtful loans.
• A bank that proactively provisions for possible NPAs and maintains high provision coverage may report losses, but is better protecting the interests of its stakeholders than a bank that skimps provisioning to show a profit.
• Some of the corrective actions to be taken by RBI once a bank falls under PCA, have been left to its discretion instead of being mandated.
• PCA rules require RBI to enforce higher provisioning norms and cap management compensation. The new rules allow it to take a discretionary call, perhaps to avoid denting depositor confidence.
• The existing curbs placed by the RBI on PCA banks lending to lower-rated or unsecured borrowers have been diluted and replaced with more generic powers, which is a good step.

THE CONCLUSION: While the new framework rightly affords RBI greater flexibility in resolving stressed banks on a case-to-case basis, the roadmap it offers for a bank’s exit from PCA appears to run counter to this. While such exit was earlier left to RBI’s discretion, the new regime requires a bank to stay above-mandated capital, NPA and leverage thresholds for four consecutive quarters to apply for the exit. This may be a rather high bar. A troubled bank can mend its capital adequacy or leverage quickly with an infusion from its promoter. But resolving legacy NPAs often requires it to pursue business growth or margin-improving strategies that may not be possible while PCA ties its hands.

THE CONTEXT: In September 2021, Union Finance Minister announced that the Cabinet had approved Rs 30,600 crore in security receipts to be issued by the National Asset Reconstruction Company (NARC) or Bad Bank towards the resolution of bad loans.

WHAT IS THE PROPOSAL?

• The move is another step in the direction of making the NARC operational.
• Banks have identified bad loans worth Rs 2 lakh crore, which will be shifted to the NARC for resolution, and nearly Rs 90,000 crore of bad debt would be resolved in the first phase.
• The NARC is now awaiting a licence of operation from the Reserve Bank of India after applying with the central bank.
• The government indicated that the licence is under process and could be issued soon.

THE DEVELOPMENT SO FAR

• The National Asset Reconstruction Company Limited (NARCL) has already been incorporated under the Companies Act. It will acquire stressed assets worth about Rs 2 lakh crore from various commercial banks in different phases.
• Another entity — India Debt Resolution Company Ltd (IDRCL), which has also been set up — will then try to sell the stressed assets in the market. The NARCL-IDRCL structure is the new bad bank.
• To make it work, the government has okayed Rs 30,600 crore to be used as a guarantee.

How will the NARCL-IDRCL work?

• The NARCL will first purchase bad loans from banks, and it will pay 15% of the agreed price in cash, and the remaining 85% will be in the form of “Security Receipts”. When the assets are sold, with the help of IDRCL, the commercial banks will be paid back the rest.
• Suppose the bad bank is unable to sell the bad loan or has to sell it at a loss. In that case, the government guarantee will be invoked and the difference between what the commercial bank was supposed to get and what the bad bank was able to raise will be paid from the Rs 30,600 crore that the government has provided.

ALL YOU NEED TO KNOW ABOUT BAD BANK

What is the bad bank?

• A bad bank is a financial entity set up to buy banks’ non-performing assets (NPAs) or bad loans.
• Setting up a bad bank aims to help ease the burden on banks by taking bad loans off their balance sheets and getting them to lend again to customers without constraints.
• After purchasing a bad loan from a bank, the bad bank may later try to restructure and sell the NPA to investors who might be interested in buying it.
• Generating profits is usually not the primary purpose of a bad bank – the objective is to ease the burden on banks, hold a large pile of stressed assets, and get them to lend more actively.

Why Bad Bank?

• Indian banks’ pile of bad loans is a significant drag on the economy, and it’s a drain on banks’ profits.
• Due to the lockdown imposed last year, the proportion of banks’ gross non-performing assets is expected to rise sharply from 7.5% of gross advances in September 2020 to at least 13.5% of gross advances in September 2021.
• Because profits are eroded, public sector banks (PSBs), where the bulk of the bad loans reside, cannot raise enough capital to fund credit growth.
• Lack of credit growth, in turn, comes in the way of the economy’s return to an 8% growth trajectory. Therefore, the bad loan problem requires effective resolution.

Evolution of Concept of Bad Bank:

• The concept was pioneered at the Pittsburgh-headquartered Mellon Bank in 1988 in response to problems in the bank’s commercial real estate portfolio.
• According to McKinsey & Co, the concept of a “bad bank” was applied in previous banking crises in Sweden, France, and Germany.

PROS AND CONS OF SETTING UP A BAD BANK

PROS 

• In one quick move, a bank will get rid of all its toxic assets, which were eating up its profits.
• When the recovery money is paid back, it will further improve the bank’s position. Meanwhile, it can start lending again.
• It can help consolidate all bad loans of banks under a single exclusive entity. A single government entity will be more competent to take decisions rather than 28 individual PSBs.
• International experience: The troubled asset relief program, also known as TARP, implemented by the U.S. Treasury in the aftermath of the 2008 financial crisis, was modelled around the idea of a bad bank. Under the program, the U.S. Treasury bought troubled assets, such as mortgage-backed securities, from U.S. banks at the peak of the crisis and later resold them when market conditions improved. According to reports, it is estimated that the Treasury, through its operations, earned nominal profits.

CONS

• Former RBI governor Raghuram Rajan has been one of the critics, arguing that a bad bank backed by the government will merely shift bad assets from the hands of public sector banks, which the government owns, to the hands of a bad bank, which the government again owns.
• Analysts believe that unlike a bad bank set up by the private sector, a bad bank backed by the government is likely to pay too much for stressed assets.
• While this may be good news for public sector banks, which have been reluctant to incur losses by selling off their bad loans at low prices, it is bad news for taxpayers, who will once again have to foot the bill for bailing out troubled banks.

AN ANALYSIS OF THE MOVE?

IS IT A RIGHT MOVE?

• Professional Management: The new bad bank can be equipped with professional management which will be capable enough to run the assets and sell them while making a profit.
• Competition: The new bad bank can provide the required competition to the private bad banks and thus provide better pricing to the banks for their NPAs.
• Failure of the current system of Private Bad Banks: Banks are scared of selling the bad loans to private sector bad banks at a heavy discount due to the fear of being accused of causing loss to the bank and exchequer. Thus, the current system has failed.
• Ownership of new Bad Bank: The new bad bank should be owned by the Public sector banks and by private banks that want to join in and their respective shares of ownership can be their share in the total bad loan portfolio. Thus, the profit by resolution will accrue to the banks themselves and thus, the scare of causing loss to the bank and exchequer is eliminated.

CASE OF JHABUA POWER: IBC vs. Bad Bank

1. Jhabua power for resolution under Insolvency and Bankruptcy code on account of shortage of working capital.
2. Bids: Two bids were received for Jhabua power.
a. NTPC Bid – 1900 Crore at the rate of Rs. 3.2 per MW.
b. Adani Power – 750 crores at Rs 1.25 per MW.
Lesson: If NTPC had not entered the bid, the plant, in all probability, could have been purchased by Adani power at the cost to the exchequer. This would have given less money to the government and also brought the wrath of CVC/CBI and further litigation. A Bad bank can do this with expertise and manage the asset until it finds a suitable buyer.

WILL A ‘BAD BANK’ REALLY HELP EASE THE BAD LOAN CRISIS?

• Some critics point out that a key reason behind the bad loan crisis in public sector banks is the nature of their ownership. Unlike private banks, which are owned by individuals with strong financial incentives to manage them well, public sector banks are managed by bureaucrats who may often not have the same commitment to ensuring these lenders’ profitability. To that extent, bailing out banks through a bad bank does not address the root problem of the bad loan crisis.
• Further, there is a huge risk of moral hazard. Commercial banks that a bad bank bails out are likely to have little reason to mend their ways. After all, the safety net provided by a bad bank gives these banks more reason to lend recklessly, and thus, further exacerbate the bad loan crisis.

2. HOW WILL BANKS BENEFIT FROM NARC?

For banks, mainly state-owned banks, the NARC is heaven-sent. It will allow banks to transfer the bad loans from their balance sheets to NARC. The reduction of bad loans on balance sheets will enable banks to free up capital that was locked up to cover the bad loans. Eventually, a successful resolution of the bad loan will also allow banks to reverse a substantial chunk of their provisions depending on the amount recovered, which will boost their earnings.

3. HOW WILL NARC BENEFIT THE ECONOMY?

• The majority of the bad loan pile in India is stuck with the state-owned lenders. The pandemic has worsened the crisis, although relatively less than expected, RBI is projecting Indian banking sector GNPAs to rise in 2021-22.
• Public sector banks account for the majority of loans generated in the Indian economy. Because their capital has been stuck in providing for a large amount of bad loans, their ability to lend has been constrained.
• For post-COVID recovery, banks must be free of their bad loans for providing fresh loans, which will play a major role in recovery.

BUT THERE ARE SOME CONCERNS ALSO

1. Current Situation: India already has 28 asset reconstruction companies in operation and banks have been unable to sell their bad loans to these entities.
2. Just Shifting Blame: Raghuram Rajan, in his book “I Do What I Do” suggests that by creating bad bank, we are just shifting blame from the bank to Bad Bank. If the bad bank is owned by Public Sector, the reluctance to act will be shifted to bad bank.
3. Insolvency and Bankruptcy Code: The enactment of IBC has reduced the need for having a bad bank as a transparent and open process is available to all lenders for resolving insolvency.
4. Government Resources: COVID-19 has already strained the government resources and setting up a bad bank will further put tremendous strain on the resources.
5. Pricing: The price at which toxic assets are transferred are not market-determined and price discovery might not happen.

THINGS TO CONSIDER WHILE CREATING A BAD BANK

• The first is that it should be based on a criterion that any such exercise should not create a moral hazard.
• Second, there have to be strict performance criteria for the banks selling such assets. This can be through a multi-stage approach where these assets are bought piecemeal by the bad bank based on how future incremental assets perform.
• Third, the criteria for buying assets should be transparent and a pecking order must be drawn up where probably the restructured assets get priority.
• Last, a competitive approach should prevail among the banks to work hard to qualify for the sale of bad assets to the bad bank. This, in fact, will ensure better governance standards too.

“BAD BANK A BAD IDEA FOR INDIA”- RAGHURAM RAJAN

Former RBI governor Raghuram Rajan was ‘fundamentally’ opposed to the idea of a bad bank. Reserve Bank of India (RBI) former governor Raghuram Rajan view the concept of a good bank and bad bank may not be relevant for India since much of the assets backing the banks’ loans are viable or can be made viable. He emphasized the need to deepen the corporate bond market.

Why he opposed the idea?

• Rajan was of the view that banks should themselves recover their dues.
• He also believed that in specific cases where the loans are not appropriately prices, the transfer of NPA to the “bad bank” would create further issues.
• Additionally, he thought that the idea of a good and bad bank might not make sense for India.
• He felt that most of the assets backing the banks’ loans are viable or could be made viable.

How other Countries solve NPA Problem?

• There have been several successful instances of resolution of the NPA problem in different countries in the past. For example, asset management companies formed in Sweden after the banking crisis of the early 1990s have done well. One of the underlying features of the resolution of the banking crisis in Sweden was political unity. Political unity eased the passage through parliament of measures to support the financial system.
• The Korea Asset Management Corp. has also been successful in resolving the bad debt problem in Korea after the Asian financial crisis.
• The bank investment programmes under the Troubled Asset Relief Program, implemented after the 2008 financial crisis in the US, has earned positive returns for the government.

WAY FORWARD

1. Capitalisation of Banks: It is being said that bad banks will not be beneficial unless we simultaneously also recapitalise the banks. It can help improve their capacity to lend.
2. Two Tiered Bad Bank Structure: A two tiered bad bank structure can be created as follows
a. First Tier (NARCL): It will include an Asset Reconstruction company fully backed by the government, which will buy bad loans from banks and issue security receipts to them.
b. Second Tier (IDRCL): It will include an Asset Management Company, which would be run by private and public bodies, including banks, turnaround professionals etc.
3. Legal Backing: Parliament can pass a law to set up a bad bank and empower it to recover from borrowers, with minimum legal hassles and respect to the acquisition or disposal of bad assets.
4. Learn from International Experience: Bad banks have successfully resolved NPAs in countries such as UK, the US, Spain, Malaysia, France, Finland, Belgium, Germany, Austria and Sweden. India can learn from their experience.

CONCLUSION: A bad bank, in reality, could help improve bank lending not by shoring up bank reserves but by improving banks’ capital buffers. To the extent that a new bad bank set up by the government can improve banks’ capital buffers by freeing up capital, it could help banks feel more confident to start lending again. However, the only sustainable solution is to improve the lending operation in PSBs.

THE CONTEXT: The Insolvency and Bankruptcy Code 2016 has been a path breaking reform in the corporate governance in India. According to the 32nd report of the Parliamentary standing committee on Finance, August 2021 its potential to address the problems of Non performing assets and release of capital to productive areas has not been realised. In this backdrop, this article examines the various aspects of the IBC ecosystem so that students develop the right perspective about IBC and related issues.

NEED FOR INSOLVENCY AND BANKRUPTCY CODE

• Pre IBC insolvency and bankruptcy legal framework in India was fragmented and ineffective
• For corporates, bankruptcy proceedings in India were governed by multiple laws — the Companies Act, SARFAESI Act, Sick Industrial Companies Act, and so on.
• For individuals, The Presidential Towns Insolvency Act 1909 and Provincial Insolvency Act 1920 existed which were rarely used.
• The entire process of winding up was also very long-winded, with courts, debt recovery tribunals and the Board for Industrial and Financial Reconstruction all having a say in the process
• In actual practice, this system worked for the advantages of the Debtors, willful defaulters and resulted in mounting NPA.
• In view of the above. a new legislation was required for the development of credit markets, encourage entrepreneurship and promote ease of doing business.
• The code consolidates around 11 laws relating to insolvency and bankruptcy and creates dedicated institutions for various actions under the code.
• The Code also stipulates the role, responsibilities and the timeline that must be adhered to by all stakeholders.
• Thus IBC replaces the erstwhile “debtors’ regime” with “creditors’ regime” so as to bring financial integrity in corporate management.

KEY PILLARS OF THE IBC ECOSYSTEM.

CLARIFYING CONCEPTS

• INSOLVENCY A situation where the debtor is unable to pay back the creditor. It depicts a condition of financial distress of an individual or an entity.
• BANKRUPTCY A situation when a competent court declares that an individual or entity is insolvent. It is a legal declaration of insolvency.
• LIQUIDATION When the assets of an individual/entity are sold to pay off the debt, it is known as liquidation.
• RESOLUTION It is a plan of rehabilitation or liquidation of a corporate debtor. The approved plan may lead to restructuring the debt or acquisition by another entity or eventual liquidation of assets.

ADJUDICATING AUTHORITY

• National Company Law Tribunal (NCLT) and Debt Recovery Tribunal are statutory bodies responsible for adjudicating resolution of matters related to insolvency and bankruptcy.
• NCLT is for companies and limited liability partnerships and DRT is for unlimited liability partnerships and sole proprietors

COMMITTEE OF CREDITORS(COC)

• COC consists only of financial creditors. The role of the COC is to approve and disapprove the resolution plan proposed by the resolution professional
• The minimum vote required to approve the resolution plan is 75% in a meeting of COC.

INSOLVENCY PROFESSIONALS

• The entire insolvency resolution process is managed by an Insolvency Professional who is appointed by the Insolvency and Bankruptcy Board of India

INSOLVENCY AND BANKRUPTCY BOARD OF INDIA

• Most important institutional arrangement for the new insolvency and bankruptcy regime is IBBI.
• It was created as the Umpiring institution with multiple tasks including creation of regulations and control of agencies and professionals involved in the insolvency and bankruptcy business.

FINANCIAL CREDITOR

• Financial Creditors (FC) are the creditors who give money to the promoters. Banks, home buyers, etc. are considered as financial creditors.
• In the Committee of Creditors of Essar Steel Ltd. v. Satish Kumar Gupta, 2019, the supreme court has upheld the primacy of financial creditors over operational creditors in the resolution process.

OPERATIONAL CREDITOR

• Operational Creditors (OC) are those creditors who do not give money or cash to the promoters but they provide goods and services to the promoters. Both FC and OC can initiate the insolvency resolution although there are substantial and procedural variations.

CORPORATE DEBTOR

• Corporate debtors are the promoters who take loans or money from financial creditors or take goods or services from operational creditors as a debt.

LIQUIDATION

• If the Resolution Process fails to find a resolution for the corporate debtor within the stipulated timeline or if the COC does not approve the resolution plan by a vote of not less than 66% of the voting share, the corporate debtor is liquidated.

FIGURE 1: INSOLVENCY AND BANKRUPTCY CODE PROCESS

UNIQUE FEATURES AND BENEFITS OF THE CODE

1. Comprehensiveness: A comprehensive regime dealing with all aspects of insolvency and bankruptcy of all kinds.
2. Division of Responsibilities: Separating commercial aspects of insolvency and bankruptcy proceedings from judicial aspects and empowered stakeholders and adjudicating authorities to decide the matters expeditiously.
3. Changes in Orientation: Moving away from the ‘debtor-in-possession’ regime toa ‘creditors-in-control regime where creditors decide matters with the assistance of insolvency professionals.
4. Collective Action: Providing collective mechanism to resolve insolvency rather than recovery of loan by a creditor.
5. Timeliness: Achieving insolvency resolution in a time bound manner and empowers the stakeholders to complete transactions in time.
6. Reducing Business Failure: The code reduces incidence of failure as the inevitable consequence of default in terms of insolvency proceedings prompts behavioral changes on the part of debtor to try hard to prevent business failures.
7. Focus on Viability: It reduces failure by setting in motion a process that rehabilitates failing businesses that are viable.
8. Safe to Fail approach: By allowing closure of non-viable firms, the code enables an entrepreneur to get in and get out of business with ease, undeterred by failure (honest failure for business reasons).

ACHIEVEMENT OF INSOLVENCY AND BANKRUPTCY CODE

EASE OF DOING BUSINESS RANKING

• The legislation enabled India to leapfrog in World Bank’s Doing Business rankings from a lowly 142 in 2014 to 63 in 2020 due to the faster insolvency resolution process and others.

QUANTUM OF RECOVERY

• IBC resulted in mean recoveries of 44% for financial creditors in comparison to 24% from Debt Recovery Tribunals (DRT), SARFAESI Act and Lok Adalats combined, for financial years 2018-2020.

GROSS NON-PERFORMING ASSETS (GNPA)

• The banking sector’s GNPA ratio is estimated to have declined to 10 per cent in the end-March 2019 from 11.5 per cent the year before on the same date, as recoveries through IBC helped banks recovery bad loans, as per rating agency Crisil.

REDUCTION IN AVERAGE TIME

• The Standing Committee noted that the average time to resolve insolvency reduced from 4.3 years to 1.6 years between 2017 and 2020, since the implementation of the IBC

REVIVAL OF COMPANIES

• Several good debt-laden companies like Essar Steel, Bhushan Steel, Electro Steel, Amtek Steel, Bhushan Power and Steel, Alok Industries, and Reliance Communications have been revived with minimal loss of employment, loss of assets or loss in production.

PRACTICING NUDGE THEORY

• More than half of the CIRPs initiated by the OCs have been closed on appeal, review or withdrawal.
• This indicates that for fear of losing control and ownership of the company, debtors have preferred to pay the OCs and resolve amicably.

SUCCESS STORY OF THE IBC: THE ESSAR STEEL RESOLUTION CASE STUDY

• The Essar Steel Ltd (ESL for short) had financial debts of Rs 49,000 crore. The money was owed to a group of banks led by SBI, which included PSU and private sector banks.
• The NCLT admitted the insolvency proceedings in August 2017 and it was followed by the submission of bids by five metal giants, including ArcelorMittal.
• The NCLT handed over the interim management of ESL to another company which resulted into its turnaround.
• Meanwhile, government introduced Section 29A in the Code, which barred the promoters of companies that defaulted on loans for 12 months from submitting bids.
• These factors encouraged Arcelor Mittal to not only pay back 7500 crores of its due payment but also to increase its bid for ESL to Rs 42,000 crore from its initial bid of Rs. 29,000 crores, amounting to 92% of the credit liability.
• Various benefits accrued from these developments are outlined below.

BENEFITS TO THE BANKING SECTOR(FCs)

• Rs 42,000 crores (92%) were realised and introduced in the economy as against a debt of Rs. 49,000 crores within three years.
• In the earlier system, the resolution would have involved a protracted legal battle for a decade or so, while the debtor company would have closed down operations, and assets, plants and machinery would have been put to disuse and decay.
• Finally, only a pittance would have been recovered from whatever asset could be salvaged.

BENEFIT TO OPERATIONAL CREDITORS

• Since the company continued to be run by the turnaround specialists, the OCs were willing to extend credits.
• The company achieved operational turnaround and so the operational creditors got to continue their business with the company and also realise their dues. This was a win-win for both the OCs and the company.

BENEFIT TO EMPLOYEES

• The resolution proceedings ensured that not only did the company continue its operations but also achieved an operational turnaround. This was great news for employees who feared retrenchment.
• After the resolution, ArcelorMittal took over the company and continued its operations. Hence, most of the employees except the top management echelons would get to keep their jobs. This could never happen in resolution proceedings prior to the Code.

IBC PITFALLS AND SOLUTIONS: STANDING COMMITTEE OBSERVATIONS

ITEMS

CRITICISM

WAY FORWARD

EXCESSIVE AMENDMENTS

• The IBC has deviated from its original intent due to as many as six amendments in the last 5 years. The IBC now have a different orientation from its basic design
• There is a need for an evaluation of the extent of fulfilment of the original aims during the implementation of the Code over the years and a thorough overhauling based on the findings.

VERY LOW RECOVERY

• 95% haircut and delay in the resolution process with more than 71% cases pending for more than 180 days meant deviation from the objective of the Code.
• Provide greater clarity to strengthen creditor rights and have a benchmark for haircuts comparable to global standards.

DELAY AND VACANCIES IN NCLT

• 13,170 IBC cases involving nine lakh core rupees are pending before the NCLT
• More than 50% of the sanctioned strength of the NCLT is vacant including that of the President (32 out of 64)
• To address this delay, it recommended creating dedicated benches of the NCLT for matters related to IBC.
• Analyzing required capacity based on projected number of cases and planning recruitment in advance among others can reduce vacancies.

CRISIS IN MSMEs

• MSMEs were negatively impacted by the COVID-19 pandemic and under the current mechanism, they are considered as operational creditors, whose claims are addressed only after secured creditors
• Instituting additional protections for MSMEs, considering the current economic situation by suitable changes in the code is necessary

POST HOC BIDS

• Bidders wait for the highest bidder(H1) to become public and then try to exceed this bid through an unsolicited offer that is submitted after the specified deadline.
• This creates tremendous procedural uncertainty; delay and genuine bidders are discouraged from bidding at the right time.
• IBC needs to be amended so that no post hoc bids are allowed during the resolution process.
• There should be sanctity in deadlines so that value is protected and the prices move smoothly.

INSOLVENCY RESOLUTION PROFESSIONALS (IRPS)

• Fresh graduates are being appointed as IRPs whose competence is highly doubtful in handling the complex cases.
• Also there are issues of professional misconduct and disciplinary action has been taken against 123 IRPs.
• Professional self-regulator for insolvency resolution professionals (IRPs) that functions like the Institute of Chartered Accountants of India (ICAI) should be put in place.
• An Institute of Resolution Professionals may be established to oversee and regulate the functioning of IRPs so that there are appropriate standards and fair self-regulation

CONCLUSION: The IBC system provides a reformed resolution regime that balances the interests of all stakeholders. However, its potential to be the game changer in Indian financial landscape has not been fully successful. Now that, the one-year pause in IBC process due to Covid 19 has been lifted, fast tracking reforms cannot wait. Thus a comprehensive rejig of the Code by incorporating the recommendations of the Standing Committee and findings of a post legislative impact study is imperative. The success of IBC also depends on reforms in banking governance, working of tribunals and judicial interventions or its lack thereof, which must also be addressed immediately.

THE CONTEXT: The progression to electric vehicles(EVs) is important for India because such vehicles are sustainable and profitable in the long term. Reducing dependence on crude oil will save the government money, reduce carbon emissions, and build domestic energy independence. Besides being an economically and environmentally viable option, India’s transition to electric vehicles will allow us to fine-tune our infrastructure.

THE TRANSITION TOWARDS ELECTRIC MOBILITY

The transition towards electric mobility offers India not only an opportunity to improve efficiency and transform the transport sector but also addresses several issues that the country is currently grappling with. The concerns regarding energy security and rising current account deficit (CAD) on account of rising fossil fuel imports can be addressed with the uptake of electric mobility.

India is a power surplus country and is currently witnessing lower plant load factors due to lower capacity utilization. As per the conservative estimates, demand from electric vehicles (EV) could greatly improve the utilization factor of underutilized power plants, as charging pattern of EV users is considered to coincide with power demand during the non-peak hours in the country.

India has a clear intention of multiplying its generation from renewable energy (RE) sources which are inherently intermittent. Several reports suggest that EVs can complement the intermittent nature of power generated from RE by absorbing power at off-peak hours. The batteries in EVs can act as ancillary services for the proliferation of distributed generation resources (DER).

Apart from supporting RE generation, EVs with feasible vehicle to grid technology can act as a dynamic storage media and can enhance the grid resilience through ancillary market. This can reduce the burden of exchequer to create static energy storage systems, especially in distribution networks, to support proliferation of grid-connected roof top solar and DERs.

ELECTRIC MOBILITY INITIATIVES IN INDIA

Electric mobility initiatives in India, initially, were led by the Ministry of Heavy Industries and Public Enterprises (MoHIPE) who launched the National Electric Mobility Mission Plan (NEMMP) in 2013 and Faster Adoption and Manufacturing of (Hybrid &) Electric Vehicles in India (FAME India) in 2015. Over the years, identifying cross-sectoral complex linkages of electric mobility and achieving a multi-stakeholder development NITI-Aayog was mandated to anchor and coordinate the Electric mobility efforts in India.

Coordinated efforts resulted in six key facilitative initiatives, namely, FAME II, Urban facilitation, power sector facilitation, evolving tax regime, public private alliances and demand aggregation, which are attributed for the development of electric mobility in India.

The FAME India Scheme

• The FAME India Scheme is aimed at incentivizing all vehicle segments.

Two phases of the scheme:

1. Phase I: started in 2015 and was completed on 31st March, 2019
2. Phase II: started from April, 2019, will be completed by 31st March, 2022

• The scheme covers Hybrid & Electric technologies like Mild Hybrid, Strong Hybrid, Plug in Hybrid & Battery Electric Vehicles.
• Monitoring Authority: Department of Heavy Industries, the Ministry of Heavy Industries and Public Enterprises.

Fame India Scheme has four focus Areas:

1. Technology development
2.  Demand Creation
3.  Pilot Projects
4.  Charging Infrastructure

Objectives of FAME Scheme:

• Encourage faster adoption of electric and hybrid vehicles by way of offering upfront Incentive on purchase of Electric vehicles.
• Establish a necessary charging Infrastructure for electric vehicles.
• To address the issue of environmental pollution and fuel security.

SHIFTING ENERGY RESOURCES FROM MIDDLE EAST TO LATIN AMERICA

The government has allocated $1.3 billion in incentives for electric buses, three-wheelers and four-wheelers to be used for commercial purposes till 2022, and earmarked another $135 million for charging stations. Besides these incentives, a proposal for a $4.6 billion subsidy for battery makers has also been proposed by the NITI Aayog.

These policies are embedded with the vision to have 30% electric vehicles plying the roads by 2030. In September 2019, Japanese automobile major Suzuki Motor formed a consortium with Japanese automotive component manufacturer Denso and multinational conglomerate Toshiba to set up a manufacturing unit in Gujarat to venture into the production of lithium-ion batteries and electrodes.

Developing domestic battery manufacturing capacity may fundamentally change India’s relationship with resource-rich Latin America as the government plans to buy overseas lithium reserves.

India’s energy security dependence will shift from West Asia to Latin America. India imported 228.6 MT of crude oil worth $120 billion in 2018–19, which made it the third-largest oil importer in the world in terms of value.

Lithium triangle

Latin America’s famous lithium triangle that encompasses lithium deposits under the salt flats of northwest Argentina, northern Chile, and southwest Bolivia holds about 80% of the explored lithium of the world. In Latin America, most of the production comes from Argentina, Chile, and Bolivia.

At present, India’s lithium-ion battery demand is fulfilled by imports from China, Vietnam, and Hong Kong. In the last two years, India has had a growing appetite for lithium-ion batteries, and so, lithium imports have tripled from $384 mn to $1.2 bn.Notably, the government has intercepted this growing demand from its incipience. With its policy intervention to support battery manufacturers by supplying lithium and cobalt, this industry is more likely to grow domestically to support India’s goal to switch to electric mobility.

CHALLENGES FOR INDIA’S ELECTRIC MOBILITY INITIATIVES

Presently, India is one of the fastest growing economies in the world, but its increasing dependency on oil imports, rising environmental concerns and growing need for sustainable mobility solutions are posing serious economic and social challenges for the country. Some of these changes are following:

Rising crude oil imports –an energy security challenge

Since the early 2000, India’s crude oil imports have risen exponentially reaching a record high of 4.3mb/d in 2016. The demand for oil grew by 5.1% in 2016, higher than the world’s largest net importers, the US (0.7%) and China (2.9%), making India the world’s third largest crude oil consumer.

India’s crude oil deficits stood at US$52 billion in 2017 and accounted for almost 50% of the total trade deficit of US$109 billion. This crude oil deficit is further expected to almost double to US$100 billion against the total trade deficit of US$202 billion in 2019.

Rising pollution levels –An environmental challenge

India ranks as the third largest carbon emitting country in the world accounting for 6% of the global carbon dioxide emissions from fuel combustion. According to the WHO Global Air Pollution Database (2018), 14 out of the 20 most polluted cities of the world are in India.

Rising population –A sustainable mobility challenge

India’s current population of 1.2 billion is expected to reach 1.5 billion by 2030. Out of the 1.5 billion people, 40% of the population is expected to live in urban areas compared to 34% of 2018 population projection. The additional 6% population growth is likely to further add strain on the struggling urban infrastructure in the country, including a rise in demand for sustainable mobility solutions.

Evolving global automotive market –A manufacturing transition challenge

India is the world’s fourth largest producer of internal combustion engine (ICE) based automobiles. The growth in automotive market in India has been the highest in the world, growing at a rate of 9.5% in2017. The recent shift in global automotive technology and an increasing uptake in electric vehicles is likely to pose a challenge to the existing automotive market if the country does not plan its transition towards newer mobility solutions and develop the required manufacturing competencies.

ELECTRIC MOBILITY: A POTENTIAL SOLUTIONS FOR INDIA

In India, majority of the oil demand comes from the transport sector. The sector accounts for over 40% of the total oil consumption with around 90% of the demand arising from the road transport.

By 2020, 330 mt(million tons) of carbon emissions are expected to arise from the transportation sector, 90% of which may be from road transport alone.

The premier think tank of GoI, NITI Aayog (National Institution for Transforming India), reports that India can save 64% of anticipated passenger road-based and mobility-related energy demand and 37% of carbon emissions by 2030 if it pursues electric mobility in future.

This would probably result in an annual reduction of 156 MToE in diesel and petrol consumption for 2030, saving India INR3.9 lakh crores (or ~US$60 billion (at US$52/bbl of crude)).

The cumulative savings for the tenure 2017-2030 is expected to reach 876 MToE of savings for petrol and diesel, which totals to INR 22 lakh crores (or ~US$330 billion), and 1 gigaton for carbon-dioxide emissions.

WAY FORWARD:

The Indian market needs encouragement for indigenous technologies that are suited for India from both strategic and economic standpoint.

Since investment in local research and development is necessary to bring prices down, it makes sense to leverage local universities and existing industrial hubs.

Breaking away the old norms and establishing a new consumer behaviour is always a challenge. Thus, a lot of sensitization and education is needed, in order to bust several myths and promote EVs within the Indian market.

Subsidizing manufacturing for an electric supply chain will certainly improve the EV development in India. Along with charging infrastructure, the establishment of a robust supply chain will also be needed. Further, recycling stations for batteries will need to recover the metals from batteries used in electrification to create the closed-loop required for the shift to electric cars to be an environmentally-sound decision.

CONCLUSION:

Operationalizing mass transition to electric mobility for a country of 1.3 billion people is a great challenge. Thus, a strong common vision, an objective framework for comparing state policies and a platform for public-private collaboration are needed. In the present scenario, India must need to change its energy policy- from the Middle East to Latin America.

THE CONTEXT: A November 2020 decision by the Reserve Bank of India (RBI) to permit banks to “co-lend with all registered NBFCs (including HFCs) based on a prior agreement” has led to unusual tie-ups like the one announced in December 2021 between the State Bank of India (SBI) and Adani Capital. This article analyses the issue in detail.

THE ‘CO-LENDING MODEL’

• In September 2018, the RBI had announced “co-origination of loans” by banks and Non-Banking Financial Companies (NBFCs) for lending to the priority sector. The arrangement entailed joint contribution of credit at the facility level by both the lenders as also sharing of risks and rewards”, the RBI said.
• Subsequently, based on feedback from stakeholders and “to better leverage the respective comparative advantages of the banks and NBFCs in a collaborative effort”, the central bank allowed the lenders greater operational flexibility while requiring them to conform to regulatory guidelines.
• The primary focus of the revised scheme, rechristened as ‘Co-Lending Model’ (CLM), was to “improve the flow of credit to the unserved and underserved sector of the economy and make available funds to the ultimate beneficiary at an affordable cost, considering the lower cost of funds from banks and the greater reach of the NBFCs.

HOW DOES A CO-LENDING MODEL WORK?

• The Reserve Bank of India (RBI) came out with the co-origination framework in 2018, allowing banks and NBFCs to co-originate loans. These guidelines were later amended in 2020 and rechristened as co-lending models (CML) by including Housing Finance Companies and some changes in the framework.
• The primary aim of CLM is to improve the flow of credit to the unserved and underserved segments of the economy at an affordable cost. This happens as banks have lower costs of funds and NBFCs have greater reach beyond tier-2 centres.
• A minimum of 20 percent of the credit risk by way of direct exposure shall be on NBFC’s books till maturity and the balance are on the bank’s books. Upon maturity, the repayment or recovery of interest is shared by the bank and NBFC in proportion to their share of credit and interest.
• This joint origination allows banks to claim priority sector status in respect of their share of the credit. NBFCs act as the single point of interface for the customers and a tripartite agreement is done between the customers, banks and NBFCs.

BANK-NBFC TIE-UPS

• Several banks have entered into co-lending ‘master agreements’ with NBFCs, and more are in the pipeline.
• In December 2021, SBI, the country’s largest lender, signed a deal with Adani Capital, a small NBFC of a big corporate house, for co-lending to farmers to help them buy tractors and farm implements.
• SBI’s giant network includes 22,230 branches, 64,122 automated teller machines (ATMs) and cash deposit machines (CDMs), and 70,786 business correspondent (BC) outlets across the country. Adani Capital has a network of just 60 branches and has disbursed around Rs 1,000 crore, according to its website.
• On November 24, Union Bank of India entered into a co-lending agreement with Capri Global Capital Ltd (GCC), with the aim “to enhance last-mile finance and drive financial inclusion to MSMEs by offering secured loans between Rs 10 lakh to Rs 100 lakh” initially through “100+ touch points pan-India”.

CORPORATES IN BANKING

• While the RBI hasn’t officially allowed the entry of big corporate houses into the banking space, NBFCs, mostly floated by corporate houses, were already accepting public deposits. They now have more opportunities on the lending side through direct co-lending arrangements.
• This had come at a time when four big finance firms — IL&FS, DHFL, SREI and Reliance Capital — which collected public funds through fixed deposits and non-convertible debentures, have collapsed in the last three years despite tight monitoring by the RBI. Collectively, these firms owe around Rs 1 lakh crore to investors.
• While the RBI has referred to “the greater reach of the NBFCs”, many bankers point out that the reach of banks is far wider than small NBFCs with 100-branch networks in serving underserved and unserved segments.

WHAT TOOK SO LONG FOR CO-LENDING TO TAKE OFF?

• On several occasions, the Ministry of Finance has pushed for PSU banks to adopt co-lending models. Some of the PSU banks in the initial days had tied up with large non-banks. For instance, SBI had tied up with ECL Finance, a subsidiary of Edelweiss Financial Services, in September 2019.
• But some of these tie-ups didn’t take off as expected. According to bankers, banks and NBFCs both are open for these kinds of tie-ups, but the challenge was in execution at ground level.
• Some of the main hurdles were IT integration of systems as both banks and NBFCs would operate on different systems, different underwriting processes and parameters. All of these took a lot of time to solve for the marriage to happen.
• In the co-lending model, beyond technology challenges, the longevity of the relationship of Banks and NBFCs is a concern.
• The co-lending model is still in the nascent stages, and one may enter into an agreement, but over a period of time, the relationship should sustain.
• Most of these arrangements are with NBFCs that have sizable distribution but are low on capital. Most of the mid-sized well-rated NBFCs still opt for term loans over entering into co-lending models, given the complexities around integration and processes.

WHAT ARE THE OPPORTUNITIES?

• The co-lending model, if it takes off and is executed rightly, will ensure delivery of credit to the unserved and underserved.
• The real gap of credit exists with the segments such as small and medium businesses, credit to lower and middle-income groups, rural areas, etc.
• The opportunity can be taken up by digital lending start-ups and mid-size NBFCs, and they can actually marry their strength of distribution with bank’s funds.
• As banks are flushed with funds, they can cater to vast customers as NBFCs have reached in tier-3 and tier-4 cities. On the execution side, it really needs to be tested at ground level.

RISK IN CO-LENDING

• The move by big banks to tie up with small NBFCs for co-lending has come in for criticism from several quarters.
• Under the CLM, NBFCs are required to retain at least a 20 per cent share of individual loans on their books. This means 80 per cent of the risk will be with the banks — who will take the big hit in case of a default.
• The terms of the master agreement may provide for the banks to either mandatorily take their share of the individual loans originated by the NBFCs on their books or to retain the discretion to reject certain loans after due diligence prior to taking them on their books.
• Interestingly, the RBI guidelines provide for the NBFCs to be the single point of interface for customers and to enter into loan agreements with borrowers, which should lay down the features of the arrangement and the roles and responsibilities of the NBFCs and banks. In effect, while the banks fund the major chunk of the loan, the NBFC decides the borrower.

CAN CHANGES IN THE CO-LENDING MODEL EASE CREDIT AVAILABILITY FOR THE PRIORITY SECTOR?

Though, direct assignment in a co-lending model typically with a bank calls for various critical challenges, as below.

COMPLIANCE WITH DIRECT ASSIGNMENT GUIDELINES

• The co-lending model requires that the taking over bank shall ensure compliance with all the requirements of direct assignment guidelines except the Minimum Holding Period (MHP) requirement.
• In a traditional direct assignment transaction, the direct assignment happens for a pool of assets through execution of an assignment deed, payment of stamp duty on the deed, seeking legal opinion on true sale, among others.
• Replicating the same in co-lending would mean the execution of assignment deeds for each customer, payment of stamp duty on a case-to-case basis and so on.
• This will not only increase the documentation/ procedures but also add to the cost of lending to the end borrower.

SECURITY CREATION AND RECOVERY

• The co-lending model very conveniently mentions that the co-lenders shall arrange for the creation of security and charge as per mutually agreeable terms and same for monitoring and recovery too.
• The bank which is to typically own a larger share in the exposure, would want the security to be created in its name.
• The loan is getting disbursed by the NBFC, and the security is created before even knowing the bank’s decision on its participation. It is not practically possible to create security in the name of a bank.

TAKEOVER OF LOAN AND CREDIT ENHANCEMENT

• The transaction in the co-lending arrangement involving post disbursal takeover of the bank’s share in the loan is akin to direct assignment, and the cases will be sourced as per the pre-agreed parameters.]
• Banks still want to do a 360-degree diligence within their internal policies while cherry-picking the loans and tend to follow an ideal co-origination approach.
• PSUs have always been unconvinced about the processes and practices of NBFCs.

Bottom line: Despite its multiple operational challenges, the direct assignment mode of co-lending has done justification in drawing a lot of confidence amongst the banks. The attributing factor is the familiarity of its structure and practical aspects. Riding on the same, combined with the greater objective of leveraging the collaborative efforts effectively towards financial inclusion, would certainly garner positive results in the time to come.

THE WAY FORWARD:

• To address the huge credit gap, the co-lending model is one of the right ways to go forward, but challenges around tech integrations and ground-level executions should be addressed.
• The country’s largest lender, SBI, it is actively looking at co-lending opportunities with multiple NBFCs / NBFC-MFIs for financing farm mechanisation, warehouse receipt finance, farmer producer organisations (FPOs), etc., for enhancing credit flow to double the farmers’/individuals’ income.
• The bank entered into a co-lending agreement with Vedika Credit Capital Ltd (VCCL), Save Microfinance Pvt Ltd (SMPL) and Paisalo Digital Ltd (PDL); it is a good move.
• Finance Minister Nirmala Sitharaman in visited to Mumbai in August to meet MDs of PSU banks. The focus should be towards credit growth to support MSMEs and underserved segments.
• The necessity of making the co-lending model work to enhance affordable credit to MSME and retail sectors.
• As the economy recovers coupled with pent-up demand, these kinds of models will evolve and grow to fulfil the credit requirements of the priority sector segments.

THE CONCLUSION: The co-lending model is a necessary step to help the priority sector. Though it has many challenges, it brings confidence in India’s banking sector that is much needed to address the challenges in a pandemic time. The collaboration is an effective effort for financial inclusion would certainly garner positive results in the time upcoming time.

THE CONTEXT: An ongoing debate in India is whether or not Indian non-banking fi nancial companies (NBFCs) are “shadow banks”. This question appears important because we have learned from the ongoing global financial crisis that shadow banking might create systemic risks which have been defined “broadly as the expected losses from the risk that the failure of a significant part of the financial sector leads to a reduction in credit availability with the potential for adversely affecting the real estate and economy at large.

WHAT IS SHADOW BANKING?

• Shadow banking is a blanket term to describe financial activities that take place among non-bank financial institutions outside the scope of federal regulators. These include investment banks, mortgage lenders, money market funds, insurance companies, hedge funds, private equity funds and payday lenders, all of which are a significant and growing source of credit in the economy.
• Although these entities do not accept traditional demand deposits offered by banks, they do provide services similar to what commercial banks offer.
• The shadow banking system had overtaken the regular banking system in offering loans in US before the financial crisis erupted in 2008.

WHAT ARE THE RISKS ASSOCIATED WITH SHADOW BANKING?

• The 2008 financial crisis has shown that shadow banking can be a source of systemic risk to the banking system. The risks can be transmitted directly and through the interconnectedness of partially-regulated entities with the banking system.

WHY IS RBI TIGHTENING SHADOW BANKING RULES?

• The Reserve Bank is simply following the trend of global central banks increasing surveillance on shadow banking. Basel III norms require central banks to tighten supervision on shadow banks across the globe through steps such as defining minimum capital.

WHAT STEPS ARE RBI TAKING?

• The Usha Thorat committee has come out with draft regulations on NBFCs, such as increasing tier I capital and risk weight on certain assets. After the recommendations, smaller NBFCs with asset size of less then 25 crore are likely to go out of business.

WHAT IS THE GLOBAL SITUATION?

• The size of shadow banking has reached a record $67 trillion in 2011, according to a report by the Finance Stability Board, a regulatory task force for the world’s group of 20 economies. America has the biggest shadow banking system, followed by the Eurozone and the United Kingdom.

Key Takeaways:

• The shadow banking system consists of lenders, brokers, and other credit intermediaries who fall outside the realm of traditional regulated banking.
• It is generally unregulated and not subject to the same kinds of risk, liquidity, and capital restrictions as traditional banks are.
• The shadow banking system played a major role in the expansion of housing credit in the run up to the 2008 financial crisis, but has grown in size and largely escaped government oversight even since then.

WHY SHADOW BANKING SHOULD WORRY POLICYMAKERS?

• RBI has warned that economic disruptions may intensify systemic risks to India’s financial sector primarily because NBFCs remain vulnerable with their deteriorating asset quality and reluctance of the market to lend them money.
• The banking regulator RBI issued a clear warning in its Fiscal Stability Report, that the economic disruptions may intensify risks to its shadow banking firms, the Non-Banking Financial Companies (NBFCs), “and consequently” the systemic risks to the entire financial sector.

THREAT TO INDIA’S FINANCIAL SYSTEM

• The threats to the NBFCs come from two sources: (i) their deteriorating asset quality and (ii) continued reluctance of market to lend money in the aftermath of implosion in two leading NBFC players, Infrastructure Leasing & Financial Services Limited (IL&FS) and Dewan Housing Finance Corporation Ltd (DHFL) in 2018 and 2019. Both were taken over by the RBI for loan defaults and now face bankruptcy proceedings.
• About 50% of the NBFCs’ aggregate assets were under the moratorium on loan repayment as per the latest analysis. Banks, which have been fighting shy of lending directly to the industry because of growing threat of bad loans (non-performing assets or NPAs), increased their lending to the NBFCs in recent years, as a result of which bank lending accounted for 28.9% of the total NBFC borrowings in December 2019 – up from 23.1% in March 2017.
• The RBI noted that notwithstanding this support from banks, the real risks to the NBFCs’ liquidity come from declining market borrowings. It said that under the stress tests, 11.2% to 19.5% of NBFCs would not be able to comply with the minimum regulatory capital requirements (CRAR) of 15%.

The following graph maps the NBFCs’ assets quality (GNPA and NNPA ratios) and capital-to-risk-assets ratio (CRAR) since FY14.

In the meanwhile, the NBFCs have grown in influence, as is evident from the RBI data mapped below, against the GDP (at constant prices).

• Shadow banking not only poses a threat to India but is equally a risk to the global financial order. For better appreciation, the 2007-08 financial crisis needs to be revisited.

ENDURING OVERALL GROWTH IN SHADOW BANKING

• When the world woke up and started monitoring shadow banking, Kodres recorded the growth in their assets. In 2015, she wrote, their assets in the US was 28% of the total financial sector (down from 32% in 2011); in the euro area, it was 33% (up from 32% in 2011) and globally they accounted for $92 trillion (up from $62 trillion in 2007 and $59 trillion during the crisis).
• One big initiative to monitor shadow banking was the multinational Financial Stability Board (FSB), set up in 2011. India is a part of this initiative.
• But Kodres was not happy. She commented: “The authorities (monitoring shadow banking) are making progress, but they work in the shadows themselves – trying to piece together disparate and incomplete data to see what, if any, systemic risks are associated with the various activities, entities, and instruments that comprise the shadow banking system.”
• Initially, the FSB defined shadow banks broadly to include all entities “outside the regulated banking system that perform core banking function”, which meant credit intermediation (taking money from savers and lending it to borrowers) and they were called Non-Banking Financial Intermediation (NBFI).
• In its latest report of January 2020, the FSB divided those into three categories: (a) MUNFI (Monitoring Universe of Non-bank Financial Intermediation): “broad measure” of all NBFIs that are not central banks, banks or public financial institutions (b) OFIs (Other Financial Intermediaries): a subset of MUNFI that excludes insurance corporations, pension funds or financial auxiliaries and (c) NBFIs: “narrow measure” of NBFI comprising of non-banks that authorities have identified as the ones that may pose bank-like financial stability risks and/or regulatory arbitrage.
• The NBFIs (narrow measure) are the ones identified as posing systemic risks.

HEIGHTENED SYSTEMIC RISKS FROM SHADOW BANKING

• The 2020 FSB report shows that global estimates for the MUNFI assets stood at $183.6 trillion in 2018 or 49% of the total financial assets ($379 trillion). Of this, OFIs accounted for $114.3 trillion (30% of the total); NBFI for $50.9 trillion (13.4% of the total), and the rest for $18 trillion.
• The FSB 2020 report says the “systemic risk” comes from activities that are “typically performed by banks, such as maturity/liquidity transformation and the creation of leverage”.
• The alarming aspect of the NBFI is that it is growing.
• The FSB 2020 report says it “has grown faster than GDP since 2012, increasing to 77% of all participating jurisdictions’ GDP in 2018 from 64% in 2012. This trend is observed in most jurisdictions”.
• The FSB measures 29 jurisdictions (including India and China), representing over 80% of global GDP.

GROWTH IN INDIA’S SHADOW BANKING (NBFCS)

• What does the FSB of 2020 say about India? (India’s NBFCs correspond to the NBFIs.)  It shows India is an outlier – in a negative way.

Here are two examples –

• India recorded 22.4% growth in OFI assets in 2018, while the global growth was 0.4%.
• As for NBFIs (NBFCs in India), a major drawback is their over-dependence on short-term funding for long-term lending (technically called EF2 function).
• Globally, such funding accounted for 7% of the total in 2018 and it grew 6.9%. In sharp contrast, India recorded a 17.4% growth in 2018. As for its share in the total NBFC funding, the RBI’s banking trend report released in December 2017 revealed that it stood at an unbelievably high of 99.7%.
• In the NBFC context, short-term means a period of up to three years and long-term for up to 15 years, as in the case of housing and infrastructure loans. Why such anomaly continues in the NBFCs’ functioning is an abiding mystery.
• Little wonder, when the NBFC crisis hit India in 2018 and 2019, the two big players to implode (IL&FS and DHIL) were associated with infrastructure and housing sectors, though this is only one part of the saga.

IS SHADOW BANKING A SERIOUS THREAT IN EMERGING MARKETS?

• The IL&FS crisis has exposed the vulnerabilities of non-bank lending. But in India,the problem is one of a huge bad debt pile-up despite low credit disbursal.
• Everyone seems to have woken up to the fact that global debt levels are too high and portent difficulties ahead. As Figure 1 indicates, the levels of credit to GDP, which were so high as to be unsustainable and resulted in the big crisis of 2008, have increased even more since then.
• There was a phase of deleveraging in the advanced economies until around 2014, and in developing countries and emerging markets until 2011, but since then, credit/debt has been expanding again.
• So much so that the credit GDP levels in 2017 were 15 per cent higher than in 2008 in the advanced economies, and more than 80 per cent higher for emerging markets (Figure 1).
• More recently, the attention has shifted from bank lending to shadow banking activities, which are by those institutions that do not collect deposits but still provide loans. These include a variety of institutions, ranging from trusts, investment funds and similar corporations to kerb lenders.
• Because they do not come under the regulatory framework for banks, yet tend to be interlinked with them in various ways, there are concerns that over lending and default in such institutions can destabilise the financial system.

LINGERING FRAGILITIES

• Ever since the IL&FS crisis broke in India, there has been much discussion of the fragilities posed by non-bank lending and the potential for financial and economic crises in emerging markets that could be led by the collapse of shadow banks. This is in no small measure due to the significant role played by such shadow lending in the core capitalist countries (especially the US) in the build-up to the Great Financial Crisis in 2008.
• However, since then, shadow lending appears to have reduced, or at least been contained relative to GDP, as indicated by Figure 2. For the G20 countries taken as a group, credit from non-banks as a per cent of GDP was about 6 percentage points lower in 2017 than in 2007, while bank credit had actually increased by 15 percentage points. This suggests that excessive debt creation is much more a problem of the banking sector as a whole than the non-bank or shadow bank sector.
• Table 1 provides data for some important advanced and emerging economies to assess the extent to which this argument is valid. Significantly, the reliance on shadow banking appears to have reduced significantly in the advanced economies by 2015-17 from what it was during 2008-10, other than in Germany where it seems to have remained at roughly the same level of around 30 per cent. Even the increase in bank credit was confined to Japan and South Korea, rather than the US, UK or Germany, where it has fallen relative to the levels of 2008-10.

WAY FORWARD:

• It is also increasingly suggested that the problem of shadow banking has become more significant in emerging markets rather than in advanced economies, and that the dramatic increase in such loans in these economies is what will be associated with the next big systemic risk to global finance.
• In particular, it is suggested that the rapid increase of shadow banking in Asia, especially China, points to the likely area of greatest future concern.

CONCLUSION:

NBFC sector has been stung by a crisis set off by the shock collapse of non-bank lender IL&FS group in 2018. India’s shadow banks, which lend to everyone from teashop merchants to property tycoons, get a mixed bill of health in Bloomberg’s latest check. Revitalization of the industry, whose woes mounted when major mortgage lender Dewan Housing Finance Corp. missed repayments, is key to helping staunch a further slowdown in the nation’s economy. In a sign that creditors remain jittery, borrowing costs rose. The extra yield investors demand to hold five-year AAA rated bonds from shadow banks over government notes increased, one of the gauges shows. Shadow lender woes have made it harder for policy makers to prop up the economy, which grew at its weakest pace since 2009. The slowdown hurts borrowers’ ability to repay debt, and has prompted the central bank to predict that an improvement in banks’ bad-loan ratios will reverse. So, it is established that Indian NBFCs are shadow banks and they do pose systemic risks to certain extent. Hence, the RBI should make a long term policy for Indian NBFC sector to mitigate any risk that may crop up in the already fragile financial sector in India.

THE CONTEXT: The Indian government was planning to introduce a Bill, the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 during the recently concluded Winter Session of the Parliament to classify cryptocurrencies as financial assets while protecting the interests of small investors. The Bill also proposes to lay the groundwork for the creation of the official digital currency to be issued by the Reserve Bank of India (RBI) and regulated under the RBI Act.

Note: The Bill has not been introduced in the Winter Session.

WHAT IS CRYPTOCURRENCY?

A cryptocurrency is a medium of exchange such as the Indian Rupee, US dollar etc. Bitcoin, the first cryptocurrency, appeared in January 2009 and was the creation of a computer programmer using the pseudonym Satoshi Nakamoto.

The term cryptocurrency is used because the technology is based on public-key cryptography, meaning that the communication is secure from third parties. This is a well-known technology used in both online transactions and communication systems.

Public key cryptography involves a pair of keys known as a public key and a private key (a public key pair), which are associated with an entity that needs to authenticate its identity electronically or to sign or encrypt data. Each public key is published, and the corresponding private key is kept secret. Data that is encrypted with the public key can be decrypted only with the corresponding private key.

CRYPTOCURRENCY V/S NORMAL CURRENCY

Cryptocurrency

• Like the US dollar, cryptocurrency has no intrinsic value. Therefore, it is not redeemable for another commodity such as gold.
• Cryptocurrency is not backed by any central bank
• Cryptocurrency doesn’t have any physical form
• Its supply is not determined by a central bank and the network is completely decentralized, with all transactions performed by the users of the system.

US Dollar ($) or Indian currency (₹)

• It also has no intrinsic value.
• It is a legal tender, which implies it is backed by a central bank or the government. Thus, banks cannot refuse to accept it.
• The currency does have a physical form
• Its supply is determined by the central bank on the basis of inflation or contractionary or expansionist fiscal policies.

WHY DO CRYPTOCURRENCIES NEED TO BE REGULATED?

PREVENT MARKET MANIPULATION AND PROTECT INVESTORS:

• Market manipulation and price volatility are common in cryptocurrencies. Take, for example, Bitcoin, the world’s oldest and most popular cryptocurrency, which rose to all-time highs since the beginning of 2021, before plummeting and losing a huge amount of its value.
• So, the lack of authorised information on these digital assets and the technological complexities associated with them makes it imperative to put regulations in place for safeguarding investors.

PROVIDING MARKET INFORMATION

• Thousands of cryptocurrencies exist around the world. Most investors, however, are only familiar with a few of those, such as Bitcoin, Ether, Ripple, and Dogecoin among others. They hardly have any knowledge about the thousands of other virtual assets.
• So, to protect customers, a regulatory authority clearing cryptocurrency is required, which can disclose all information about the performance of the digital assets, their risks, and potential.

UNDERSTANDING RISKS ASSOCIATED WITH TECHNOLOGY

• Technology is advancing at a breakneck pace. This carries a significant danger, as such changes have the potential to render technology, including blockchain, outdated in the future.
• Given the rapid rate of technological change, information infrastructure and professional financial advisors skilled in cryptocurrency are required. That way, investors can understand the technological risks of cryptocurrencies and make informed decisions.

ENSURING ACCOUNTABILITY

• Investing in cryptocurrencies comes with another risk — online fraud. Hacking is a major threat worldwide, and cyber-attacks have become common. One cyber-attack could result in losses for investors who have put their savings in cryptocurrencies.
• Through regulations, the authorities can implement measures to help cryptocurrency investors protect their assets. Also, investors can address concerns or reclaim their investments in case they lose them.

MONEY LAUNDERING

• Any unregulated system has the ability to fund criminal acts. As a result, a client due diligence process akin to that of a bank is required.
• For long, it was theoretical that cryptos could be used for money laundering and for terror financing. Recently, it turned out that the Enforcement Directorate of India had identified that using cryptos, Rs 4,000 crores has been laundered out of India in the last one year.
• This can help in keeping track of investors’ real identities and verifying their locations when they are buying or selling cryptocurrencies. Any infringement of such norms should be met with severe sanctions.

TAX ON THE TRANSACTIONS

• Nearly 10 crore Indians already have investments exceeding a total of $10 million in them.
• This not only creates an avenue for the generation of tax revenue for the nation but also puts forth a Herculean challenge for the tax authorities who must track and tax transactions involving cryptocurrencies.

WHAT HAS BEEN THE STEPS TAKEN BY THE GOVERNMENT TO REGULATE THE CRYPTOCURRENCY?

Currently, there is no regulation or any ban on the use of cryptocurrencies in the country. The Reserve Bank of India’s (RBI) order banning banks from supporting crypto transactions, was reversed by the Supreme Court order of March 2020.

HERE WE EXAMINE THE REGULATORY JOURNEY OF CRYPTOCURRENCY IN INDIA SO FAR.

• In 2013, the Reserve Bank of India (RBI) issued a circular warning to the public against the use of virtual currencies. The bank warned users, holders, and traders of virtual currencies about the potential financial, operational, legal, customer protection, and security-related risks they are exposing themselves to.
• The central bank pointed out that it has been keeping a close eye on developments in the virtual currency world, including Bitcoins, Litecoins, and other altcoins.
• But as banks continued to allow transactions on cryptocurrency exchanges — on February 1, 2017, RBI released another circular, reiterating its concerns with virtual coins. And by the end of 2017, a warning was issued by RBI and the finance ministry clarifying that virtual currencies are not legal tender.
• At the same time, two Public Interest Litigations (PILs) were filed in the Supreme Court, one asking for a ban on buying and selling of cryptocurrencies in India, the other asking for them to be regulated. In November, the government formed a committee to study issues around virtual currencies and propose actions.
• At this time, there was no ban on cryptocurrencies and most banks allowed transactions from cryptocurrency exchanges.

2018-2020

• In March 2018, the Central Board of Direct Tax (CBDT) submitted a draft scheme to the finance ministry for banning virtual currencies.
• A month later, the RBI issued a circular that restrained banks and financial institutions from providing financial services to virtual currency exchanges.
• In April 2018, the finance ministry appointed committee proposed a draft Bill for the regulation of virtual currencies but did not recommend a ban. However, in February 2019, the committee proposed a fresh draft Bill that recommended a blanket ban.
• In March 2020 a significant development took place, the Supreme Court of India lifted the curb on cryptocurrency imposed by RBI, which restricted banks and financial institutions from providing access to banking services to those engaged in transactions in crypto assets.

2021

• In November 2021, the Standing Committee on Finance met representatives of crypto exchanges, Blockchain and Crypto Assets Council (BACC), among others, and came to the conclusion that cryptocurrencies should not be banned, but regulated.
• In the same month, Prime Minister Narendra Modi called a meeting on cryptocurrencies with senior officials. The indications are that strong regulatory steps will probably be taken to deal with the issue.
• Meanwhile, the Reserve Bank of India has repeatedly underlined its strong view against cryptocurrencies, saying these pose a serious threat to the macroeconomic and financial stability of the country. It has also raised doubts about the number of investors trading on cryptocurrencies and their claimed market value.
• During the winter session, the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 was listed for introduction in Parliament’s. However, it allows for certain exceptions to promote the underlying technology of cryptocurrency and its uses.

Although, Government wants to regulate cryptocurrencies, RBI in a complete ban on such currencies. In December 2021 RBI Said that “Cryptocurrencies are a serious concern to RBI from a macroeconomic and financial stability standpoint”.

SO, IF BITCOIN IS LEGALISED IN INDIA, THE FOLLOWING WOULD HAPPEN:

• It would fall under the purview of RBI’s 1934 Act.
• Its investors would be taxed.
• RBI would issue guidelines regarding investment and purchase of Bitcoin.
• If any foreign payment is made through Bitcoins, it would fall under the purview of the FEMA Act.
• Returns from investment in Bitcoin would be taxed.

HOW THE CRYPTOCURRENCIES ARE BEING REGULATED AROUND THE WORLD?

• United States:The US has regulations under the central and state governments (similar to India), which means that rules differ from state to state. The overall sentiment, however, is positive.
• China:China has been the harshest towards cryptocurrencies, moving from initially welcoming crypto mining to completely banning it as of June 2021.
• United Kingdom:The UK does not have specific legislation on cryptocurrencies and the sector is currently governed by the Financial Conduct Authority (FCA), which grants licenses for crypto businesses and exchanges.
• El Salvador: The South American country became the first to officially declare Bitcoin legal tender.

THE BLOCKCHAIN TECHNOLOGY AND ITS USE IN CRYPTOCURRENCY

1. The blockchain is the technology underlying Bitcoin and other cryptocurrencies. In the blockchain, the data is stored in the cloud network. In the case of Bitcoin, the decentralized public ledger takes the place of cloud storage that keeps a record of all transactions that take place across the peer-to-peer network.
2. This technology allows participants to transfer assets across the Internet without the need for a broker or an intermediary (central third party).
3. Blockchain technology uses public-key cryptography to secure transactions. Public-key cryptography employs two keys: a public key and a private key. An individual party to the crypto transaction will have a public key and a private key. The public key is widely distributed across the network, while the private key is a secret key for the individual.
4. Using a private key, a digital signature can be created so that anyone with the corresponding public key can verify that the message was created by the owner of the private key and was not modified since (See the diagram: Digital Signature).
5.  Using this a transaction record is created. One transaction record is called one block. When other transactions happen in the future, those transactions are recorded once again in a block and connected to the earlier block in a chain network. This chain of transactions from the source of origin to the end is called the blockchain. Thus, you can backtrace the source money by travelling back in the chain.
6. Given the latest block, it is possible to access all previous blocks linked together in the chain, so a blockchain database retains the complete history of all assets and instructions executed since the very first one – making its data verifiable and independently auditable.

FEATURES OF BLOCKCHAIN

• Data is stored in a decentralized cloud network. In the case of Bitcoin, this cloud is the public transaction ledger.
• Blockchain code is resistant to counterfeiting since data once added, can’t be reversed.
• Data security is enabled by public-private key cryptography.

WHAT ARE THE DIFFERENCES BETWEEN PUBLIC AND PRIVATE BLOCKCHAINS?

There are different types of blockchain: some are open and public and some are private and only accessible to people who are given permission to use them.

PUBLIC BLOCKCHAIN

• A public blockchain is an open network. Anyone can download the protocol and read, write or participate in the network.
• A public blockchain is distributed and decentralised. Transactions are recorded as blocks and linked together to form a chain. Each new block must be time stamped and validated by all the computers connected to the network, known as nodes before it is written into the blockchain.
• All transactions are public, and all nodes are equal. This means a public blockchain is immutable: once verified, data cannot be altered.
• The best-known public blockchains used for cryptocurrency are Bitcoin and Ethereum: open-source, smart contract blockchains.

PRIVATE BLOCKCHAIN

• A private blockchain is an invitation-only network governed by a single entity.
• Entrants to the network require permission to read, write or audit the blockchain. There can be different levels of access and information can be encrypted to protect commercial confidentiality.
• Private blockchains allow organisations to employ distributed ledger technology without making data public.
• But this means they lack a defining feature of blockchains: decentralisation. Some critics claim private blockchains are not blockchains at all, but centralised databases that use distributed ledger technology.
• Private blockchains are faster, more efficient and more cost-effective than public blockchains, which require a lot of time and energy to validate transactions.

ADVANTAGES OF BLOCKCHAIN IN THE INDIAN CONTEXT

1. Online voting: With a unique digital identity to identify the voter and a private key, online voting can be facilitated. Since blockchain doesn’t allow reversing the data once entered, every voter using this option can exercise this privilege only once.
2. To trace black money: Provided people become completely cashless and shift to digital transactions. That is the biggest challenge since this operates on a digital network. Most blockchains are entirely open-source software. This means that anyone and everyone can view its code. This gives auditors the ability to review cryptocurrencies like Bitcoin for security.
3. Improve the efficiency of the approval process in the social benefits scheme: If personal health record is stored on a cloud network and secured with blockchain, every single addition of data by a medical practitioner will be recorded and connected to earlier blocks of data. Tracing the sequence of earlier treatments and medical tests will reduce the duplication of the same tests and treatment. This will make the process of approval of health insurance policies faster and more efficient. This is what Estonia has done and can be used in the Indian context to improve the efficiency of medical insurance schemes faster. Additionally, since the data is stored in the cloud, some person can sell it for clinical trials or experiments or research to a pharma company within a few seconds, since the digital data can be transferred in a few mouse clicks.
4. Reduces chances of fraud: Since all the data is stored in the cloud and encrypted and can be transferred across platforms, it will help to reduce frauds since this can be checked immediately. For e.g., if all the banks and insurance companies collaborate the data of blacklisted people on a common blockchain platform that they can check, chances are rare that the person under suspicion will be able to commit the same once again.  Since every single payment will be recorded on the blockchain network and transparent to authorized people on the blockchain network, it will reduce the chances of scams.
5. To reduce the burden of pending cases on courts: If all the land records are digitized and stored on the blockchain, each and every transaction can be back-traced with complete details including the identity of the person, time and place when the land title was transferred etc. This will help to immediately trace out frauds.
6. Protection of Aadhaar data by creating a Dynamic registry (a distributed database that updates as assets are exchanged on the digital platform: Since the blockchain stores all the records including, when the transaction has happened, who stored the data, who added value to it, it can be used to trace when and from where my Aadhar data was accessed by whom. This will help to trace the source of leakage if any fraud has happened by using Aadhar data.

WHAT ARE THE CURRENT BOTTLENECKS IN REGULATING CRYPTO?

TYPE OF REGULATION

• The Industry bodies demand self-regulation by crypto exchanges while the RBI wants complete ban. The government has set up committees and which said regulation by government. Thus, there seems to be divergence on this aspect.

WHETHER CRYPTO CAN BE REGULATED AT ALL?

• Some analysts point out that it is nearly impossible to regulate crypto currencies as they simply move to P2P exchanges outside India, may use hawala type informal system to get around regulation.
• Crypto exchanges that are operating outside India and accessible from India just like any other internet-based service will not follow the laws of the Indian government.
• How can one enforce any regulation brought in by the government in such a case?

CURRENCY OR COMMODITY?

• Cryptocurrency itself is a misnomer as its legal existence in most countries is that of a commodity and not a currency. What it implies is that most countries globally do not accept cryptos as legal tender.
• In the Indian context, this aspect need to be made clear and the regulation need to tailored accordingly

CAPACITY TO REGULATE

• Crypto is a cutting edge technological innovation that is being improved upon day by day. Thus to regulate them, the regulator should have the expertise, technical capacity etc.
• Whether the country especially the government sector has the talent pool is a debatable issue.

ISSUE OF PRIVATE AND PUBLIC  CRYPTO CURRENCY

• The Bill seeks to ban all private crypto currencies in India with some exceptions. But since the Bill is not in the open, what is public crypto and private crypto is open to interpretation.
• Whether the Central Bank Digital Currency will be the public crypto that will be allowed is also not clear?
• If RBI regulates crypto and is itself a player, that would create conflict of interest is another issue.

THE WAY FORWARD:

• Banning cryptocurrency is not a viable solution, so it must be regulated. Banning will lead to underground activities and people will continue illegal trading of these currencies.
• The decision for banning/regulation should be based on consensus and it should not be taken in a hurry.
• India can learn from other countries how to regulate such currencies and how to tax them (for example, Israel).
• Digital currencies have the potential to solve many issues, India needs to use it utility.
• Accepting cryptocurrency allows scope for effective regulation. RBI has already expressed interest in blockchain technology and is even planning to introduce its own Digital Rupee, much like the Digital Yuan. This entry into the e-money market could well be a balancing act by the RBI, perhaps making it a more acceptable fiat than crypto, while being well within the ambit of regulation.
• Cryptocurrency opens great opportunities for the economy. It poses an intriguing ‘regulator’s dilemma’ – striking a balance between technological progress ushering financial innovation while remaining as sovereign authority. The central bank can investigate what constitutes crypto and technologies like blockchain to assess its role in the value chain instead of banning it altogether.
• A comprehensive crypto currency Bill is the need of the hour.

THE CONCLUSION: India is considered an inspiration when it’s comes to frugal innovation. Combing the advantage of a highly skilled workforce in IT Sector, Artificial intelligence and encrypted data stored on the blockchain, India can be a scale up the efficiency of the delivery of its various schemes and the pace of delivery of justice. The need of the hour is to develop an architecture or an institution that can implement this at the grassroots level.

THE CONTEXT: December 12 marked the five-year anniversary of the Paris Agreement. The international community, including the European Union (EU) and India, gathered at the Climate Ambition Summit 2020 to celebrate and recognize our resolve in working towards a safer, more resilient world with net-zero emissions.

ABOUT PARIS AGREEMENT

• The Paris Agreement is a legally binding international treaty on climate change. It was adopted by 196 Parties at COP 21 in Paris, on 12 December 2015 and entered into force on 4 November 2016.
• Its goal is to limit global warming to well below 2, preferably to 5 degrees Celsius, compared to pre-industrial levels.
• To achieve this long-term temperature goal, countries aim to reach global peaking of greenhouse gas emissions as soon as possible to achieve a climate neutral world by mid-century.
• The Paris Agreement is a landmark in the multilateral climate change process because, for the first time, a binding agreement brings all nations into a common cause to undertake ambitious efforts to combat climate change and adapt to its effects.

IMPLEMENTATION OF PARIS AGREEMENT

Implementation of the Paris Agreement requires economic and social transformation, based on the best available science. The Paris Agreement works on a 5- year cycle of increasingly ambitious climate action carried out by countries. By 2020, countries submit their plans for climate action known as nationally determined contributions (NDCs).

Nationally Determined Contributions (NDCs)

In their NDCs, countries communicate actions they will take to reduce their Greenhouse Gas emissions in order to reach the goals of the Paris Agreement. Countries also communicate in the NDCs actions they will take to build resilience to adapt to the impacts of rising temperatures.

Long-Term Strategies

To better frame the efforts towards the long-term goal, the Paris Agreement invites countries to formulate and submit by 2020 long-term low greenhouse gas emission development strategies (LT-LEDS).

LT-LEDS provide the long-term horizon to the NDCs. Unlike NDCs, they are not mandatory. Nevertheless, they place the NDCs into the context of countries’ long-term planning and development priorities, providing a vision and direction for future development.

Is the Paris agreement binding?

The legal nature of the deal–whether it will be binding–had been a hotly debated topic in the lead up to the negotiations. The agreement walks a fine line, binding in some elements like reporting requirements, while leaving other aspects of the deal—such as the setting of emissions targets for any individual country—as non-binding.

Difference between Paris Climate and Kyoto Protocol

• The Kyoto Protocol had a differentiation between developed and developing countries listed as Annex 1 countries and non-Annex 1 countries But, in the Paris agreement, there is no difference between developing and developed countries.
• The Kyoto Protocol aimed at 6 major greenhouse gases but the Paris Agreement is focused on reducing all anthropogenic greenhouse gases causing climate change.

Talanoa dialogue

• The UNFCCC Climate Change Conference (COP23) was held in Bonn, Germany and was presided over by Government of Fiji. It concluded with countries putting in place a roadmap for ‘Talanoa Dialogue’, a year-long process to assess countries’ progress on climate actions.

What is Talanoa?

• Talanoa is a traditional approach used in Fiji and the Pacific to engage in an inclusive, participatory and transparent dialogue;
• The purpose of Talanoa is to share stories, build empathy and trust;
• During the process, participants advance their knowledge through common understanding;
• It creates a platform of dialogue, which results in better decision-making for the collective good;
• By focusing on the benefits of collective action, this process will inform decision-making and move the global climate agenda forward.

The significance of Talanoa dialogue

• The goal of the Paris Agreement on climate change, as agreed at the Conference of the Parties in 2015, is to keep global temperature rise this century to well below 2 degrees Celsius above pre-industrial levels. It also calls for efforts to limit the temperature increase even further to 1.5 degrees Celsius.

The Under2 Coalition

• The Under2 Coalition is a coalition of subnational governments that aims to achieve greenhouse gases emissions mitigation. It started as a memorandum of understanding, which was signed by twelve founding jurisdictions on May 19, 2015 in Sacramento, California. Although it was originally called the Under2 MOU, it became known as the Under2 Coalition in 2017.
• As of September 2018, the list of signatories has grown to over 220 jurisdictions which combined encompasses over 1.3 billion people and 43% of the world economy.
• The intent of the memorandum signatories is for each to achieve Greenhouse gas emission reductions consistent with a trajectory of 80 to 95 percent below 1990 levels by 2050and/or achieving a per capita annual emission goal of less than 2 metric tons by 2050.
• Currently, Telangana and Chhattisgarh are signatories to this pact from India, as compared to representations from the other top emitters: 26 subnational governments in China and 24 in the U.S. Greater representation of Indian States is crucial.

FRAMEWORK OF PARIS AGREEMENT

The Paris Agreement provides a framework for financial, technical and capacity building support to those countries who need it.

Finance

The Paris Agreement reaffirms that developed countries should take the lead in providing financial assistance to countries that are less endowed and more vulnerable, while for the first time also encouraging voluntary contributions by other Parties. Climate finance is needed for mitigation, because large-scale investments are required to significantly reduce emissions. Climate finance is equally important for adaptation, as significant financial resources are needed to adapt to the adverse effects and reduce the impacts of a changing climate.

Technology

The Paris Agreement speaks of the vision of fully realizing technology development and transfer for both improving resilience to climate change and reducing GHG emissions. It establishes a technology framework to provide overarching guidance to the well-functioning Technology Mechanism. The mechanism is accelerating technology development and transfer through it’s policy and implementation arms.

Capacity-Building

Not all developing countries have sufficient capacities to deal with many of the challenges brought by climate change. As a result, the Paris Agreement places great emphasis on climate-related capacity-building for developing countries and requests all developed countries to enhance support for capacity-building actions in developing countries.

ENHANCED TRANSPARENCY FRAMEWORK (ETF)

With the Paris Agreement, countries established an enhanced transparency framework (ETF). Under ETF, starting in 2024, countries will report transparently on actions taken and progress in climate change mitigation, adaptation measures and support provided or received. It also provides for international procedures for the review of the submitted reports.

The information gathered through the ETF will feed into the Global stocktake which will assess the collective progress towards the long-term climate goals.

This will lead to recommendations for countries to set more ambitious plans in the next round.

INDIA AND PARIS AGREEMENT

India has not only achieved its targets but has exceeded them beyond expectations as per the Prime Minister. He delivered a virtual speech at the Climate Ambition Summit that India has reduced its global emissions by 21 percent compared to 2005 and is on its way to do more.

• India mentioned that it has not caused the climate change crisis and it is meeting its obligations under the Paris Climate Accord.
• It stated that the developed nations have been the highest carbon emitters and thus, were responsible for global warming.
• It mentioned that besides India, only Bhutan, the Philippines, Costa Rica, Ethiopia, Morocco and Gambia were complying with the accord.

India’s Intended Nationally Determined Contribution (INDC)

• To reduce the emissions intensity of its GDP by 33 to 35 percent by 2030 from 2005 level.
• To create an additional carbon sink of 2.5 to 3 billion tonnes of CO2 equivalent through additional forest and tree cover by 2030.
• A total of 40% of the installed capacity for electricity will be from non-fossil fuel sources.

India’s effort to address Climate Change

The Government of India has launched eight Missions under the National Action Plan on Climate Change (NAPCC) for assessment of the impact and actions required to address climate change. These eight missions are:

1. National Solar Mission
2. National Mission for Enhanced Energy Efficiency
3. National Mission on Sustainable Habitat
4. National Water Mission
5. National Mission for Sustaining the Himalayan Ecosystem
6. National Mission for A Green India
7. National Mission for Sustainable Agriculture
8. National Mission on Strategic Knowledge for Climate Change

Recent developments

• India has achieved a reduction of 21% in emission intensity of its GDP between 2005 and 2014, which fulfills its pre-2020 voluntary target.
• The Renewable energy installed capacity has increased by 226% in the last 5 years and stands more than 87 GW.
• The Government has provided 80 million LPG connections in rural areas, providing them with clean cooking fuel and a healthy environment.
• More than 360 million LED bulbs have been distributed under the UJALA scheme, which has led to energy saving of about 47 billion units of electricity per year and reduction of 38 million tonnes of CO2 per year.
• It leapfrogged from Bharat Stage-IV (BS-IV) to Bharat Stage-VI (BS-VI) emission norms by April 1, 2020 which was earlier to be adopted by 2024.

FIVE YEARS AFTER PARIS AGREEMENT

All states have submitted their national contributions to mitigate and adapt to climate change. Distant hypothetical targets are being set. Seems like we are still speeding in the wrong direction or we are lagging far behind.

(1) Unclear targets and response

The world is still unclear since five years as to how the net-zero pledges will translate into shorter term targets. Few of the countries that have announced ambitious long-term goals have implemented national policies to reach them in time.

(2) Degradation isn’t stopped

Meanwhile, we continue to destroy the world’s carbon sinks, by cutting down forests – the world is still losing an area of forest the size of the UK each year, despite commitments to stop deforestation – as well as drying out peatlands and wetlands, and reducing the ocean’s capacity to absorb carbon from the air.

(3) Countries aren’t scaling up their targets

Although 151 states have indicated that they will submit stronger targets before December 31, only 13 of them, covering 2.4 per cent of global emissions, have submitted such targets. While states have been slow to update their national contributions for 2025-2030, several have announced exaggeratedly high “net zero” targets in the recent past.

WAY FORWARD:

• The Paris agreement still provides the best hope of avoiding the worst ravages of climate breakdown: the question is whether countries are prepared to back it up with action, rather than more hot air.
• Renewing the shorter term commitments is the best way ahead.
• Making promises for the 2050s-60s is one thing, but major policy changes are needed now to shift national economies on to a low-carbon footing.
• None of these (net zero) targets will be meaningful without very aggressive action in this decade. Diplomacy is inevitably a tool in global climate action.

CONCLUSION:

For many, there is a mismatch between short-term actions and long-term commitments. A credible short-term commitment with a clear pathway is the key. Not all states will be in a position to pledge net-zero targets, nor should they be expected to. All states, including India, can, however, pledge actions that are credible, accountable and fair. Our real test on climate change is on building a new domestic consensus that can address the economic and political costs associated with an internal adjustment to the prospect of a great global reset.

THE CONTEXT: On February 11, 2022,the Securities and Exchange Board of India (SEBI) passed an order involving the country’s largest stock exchange-The National Stock Exchange. Apart from highlighting the issue of corporate misgovernance, the whole episode has raised questions on the role of the capital market regulator. In this article, we examine the issue in detail.

ALL YOU NEED TO KNOW ABOUT THE NSE IMBROGLIO

THE SEBI FINDINGS

• The National Stock Exchange (NSE)’s former Managing Director (MD) and Chief Executive Officer (CEO) is penalized for misusing her office for:
• making appointments,
• concealing confidential information pertaining to operations of the exchange,
• and making incorrect and misleading submissions to the Securities and Exchange Board of India (SEBI).
• The regulator states that her unknown spiritual guru influenced her decision making.
• The former NSE Chief is also being examined for a case registered in May 2018 pertaining to alleged abuse of a trading software of the exchange and the SEBI order comes in this backdrop (Read Ahead).

IMPROPER PERSONNEL MANAGEMENT

• The former NSE head appointed a person as the Chief Strategic Officer (CSO) of the exchange despite the latter not having any exposure to capital markets.
• SEBI notes that the exchange had not advertised any vacancy pertaining to the appointment of CSO
• SEBI notes that his previous work experience was not relevant to his new consultancy position at NSE. With recurrent appraisals and performance ratings, his compensation rose to ₹4.21 crore within two years(1.8 crore when he joined)

DIVULGING CONFIDENTIAL INFORMATION

• The regulator found the former NSE Chief guilty of divulging confidential information pertaining to the NSE’s organizational appointments, financial results and projections, dividend pay-out ratio and board meeting consultations to her unknown spiritual guru.

FAILURE OF THE NSE BOARD

• The NSE Board was found guilty of not informing the market’s regulator and opting to keep it under wraps.

PENALTIES IMPOSED

• The former NSE Chief has been forbidden from dealing in stocks, etc. for a period of three years, alongside a penalty of ₹3 crore.
• The erstwhile CSO has been restrained from associating with any market infrastructure institution or an intermediary for three years. He would also have to pay a penalty of ₹2 crore.
• NSE has been ordered not to launch any new product for the next six months.

AN ANALYSIS OF THE NSE SCAM?

BLOW TO CAPITAL MARKETS

• The NSE is a Market Infrastructure Institution that provides facilities for trading stocks and other products in the capital market.
• The scam has sent alarm bells to the investors and trading community and even has the potential to undermine the economic security of the nation apart from hugely denting investors’ confidence.
• The government has already indicated that it will initiate measures to sustain investors’ confidence in the Indian capital market.

POOR CORPORATE GOVERNANCE

• The approach by the Board of NSE amounted to a cover-up of the entire episode so that no outsider, including the regulator, would ever come to know.
• The public interest and shareholder directors collectively decided to not document the board discussion with respect to the irregularities of the management, thereby abdicating their primary responsibilities.
• Instead of sacking her, the Board allowed her to resign with respectable compensation and buried the matter, reflecting the complete collapse of corporate governance in NSE.

REWARDING MALFEASANCE

• The entire Board’s complicity is further indicated by the fact that, despite being aware that the MD-cum-CEO was divulging confidential information of the NSE to an anonymous individual and had recruited and excessively rewarded another individual, the Board allowed her to resign on December 2, 2016.
• For good measure, the Board placed on record her “sterling contribution and approved a 44-crore severance package!

CONDUCT OF DIRECTORS OF GOVT COMPANIES/BANKS

• Senior executives of the LIC, the SBI group and the Stock Holding Corporations etc, are part of the BoD who are delegated to protect the interests of their companies. But they have not raised any alarm but went along with the questionable approach of the management.
• Their role highlights a troubling issue that when they are on the Board of prominent private sector companies, they apparently abandon their own companies.
• And it also seems they are ready to align themselves and take instructions from the executive management of the private sector companies. It raises questions for the public about how the parent companies themselves are managed.

REGULATOR’S CONDUCT

• The SEBI’s order on the NSE saga and the delay of six years in concluding the probe raises troubling questions on the regulator’s role (Read Ahead)

A SERIES OF SCAMS IN NSE

• The current scam comes in the backdrop of a progressing CBI led investigation into the co-location scam and other glaring irregularities in NSEs.
• This point out that the NSE’s financial success and near-monopoly has clouded the judgement of the NSE leadership or they believe to be above the rule of law.

WHAT IS THE CO-LOCATION SCAM?

WHAT ARE CO-LOCATION FACILITIES?

• There are dedicated spaces in the exchange building, right next to the exchange servers, where high-frequency and algo traders can place their systems or programs.

BENEFITS OF THESE FACILITIES

• With the co-location facilities being extremely close to stock exchange servers, traders here have an advantage over other traders due to the improvement in latency (time taken for order execution).
• But the co-location is mainly used only by institutional investors and brokers for their proprietary trader. Retail investors have a negligible presence here.

UNFAIR ACCESS TO SERVERS

• The scam in NSE’s co-location facility took place almost a decade ago. It was alleged that one of the trading members, OPG Securities, was provided unfair access between 2012 and 2014 that enabled him to log in first to the server and get the data before others in the co-location facility.
• It was alleged that the owner and promoter of said private company abused the server architecture of NSE in conspiracy with unknown officials of NSE, SEBI etc.
• This preferential access allowed the algo trades of this member to be ahead of others in the order execution.

ROLE OF WHISTLEBLOWER AND MEDIA

• The scam came to light due to a whistle-blower’s complaint to SEBI in 2015, in which the entire modus operandi of the people gaming the system was laid out.
• When Money life(a media outlet) exposed the scam, the NSE management adopted a high-handed attitude, slapping a ₹100 crore defamation suit against Money life.
• The matter moved to Bombay High Court, which came down hard on NSE and dismissed its suit. Further, NSE was told to pay ₹50 lakh as the penalty for its arrogant attitude in responding to the media.

EXTENT OF LOSS

• The point to note is that there is no way of proving any loss to any investors or traders due to this scam. The SEBI order of 2019 directed OPG Securities and its directors to disgorge unfair gains of ₹15.7 core with the interest of 12 per cent from April 7, 2014, as a notional loss.

PENALTY ON NSE

• In 2016, SEBI asked NSE to carry out a forensic audit of its systems and deposit the entire revenue from its co-location facilities into an escrow account. Deloitte was tasked with the job of conducting a forensic audit of NSE’s systems.
• In 2019, SEBI passed its order on the issue, asking NSE to pay ₹625 crore with an interest of 12 per cent and also barred NSE from raising money from stock market for six months.

CORRECTIVE MEASURES

• NSE has changed its order execution protocol in the co-location facility to Multicast TBT from April 2014, thus plugging the loophole that allowed some to game the system.

THE SECURITIES AND EXCHANGE BOARD OF INDIA: AN OVERVIEW

CONSTITUTION OF SEBI

• The Securities and Exchange Board of India was constituted as a non-statutory body on April 12, 1988, through a resolution of the Government of India.
• The Securities and Exchange Board of India was established as a statutory body in the year 1992 and the provisions of the Securities and Exchange Board of India Act, 1992 (15 of 1992) came into force on January 30, 1992.

PROTECTIVE FUNCTION OF SEBI

• Checking price rigging
• Prevent insider trading
• Promote fair practices
• Create awareness among investors
• Prohibit fraudulent and unfair trade practices

REGULATORY FUNCTION OF SEBI

• Designing guidelines and code of conduct for the proper functioning of financial intermediaries and corporate.
• Regulation of takeover of companies
• Conducting inquiries and audits of exchanges
• Registration of brokers, sub-brokers, merchant bankers etc.
• Levying of fees
• Performing and exercising powers
• Register and regulate credit rating agency

DEVELOPMENT FUNCTION OF SEBI

• Imparting training to intermediaries
• Promotion of fair trading and reduction of malpractices
• Carry out research work
• Encouraging self-regulating organizations
• Buy-sell mutual funds directly from AMC through a broker

OBJECTIVES OF SEBI

• Protection to the investors: The primary objective of SEBI is to protect the interest of people in the stock market and provide a healthy environment for them.
• Prevention of malpractices: This was the reason why SEBI was formed. Among the main objectives, preventing malpractices is one of them.
• Fair and proper functioning: SEBI is responsible for the orderly functioning of the capital markets and keeps a close check over the activities of the financial intermediaries such as brokers, sub-brokers, etc.

POWERS OF SEBI

SEBI is a quasi-legislative, quasi-judicial and quasi-executive body.

• SEBI has the power to regulate and approve any laws related to functions in the stock exchanges.
• It has the powers to access the books of records and accounts for all the stock exchanges and it can arrange for periodical checks and returns into the workings of the stock exchanges.
• It can also conduct hearings and pass judgments if there are any malpractices detected on the stock exchanges.
• When it comes to the treatment of companies, it has the power to get companies listed and de-listed from any stock exchange in the country.
• It has the power to completely regulate all aspects of insider trading and announce penalties and expulsions if a company is caught doing something unethical.

GOVERNANCE OF SEBI

The SEBI Board consist of nine members-

• One Chairman appointed by the Government of India
• Two members who are officers from Union Finance Ministry
• One member from the Reserve Bank of India
• Five members appointed by the Union Government of India

ENFORCEMENT OF LAWS

• SEBI enforces provisions of the SEBI Act, the Depositories Act 1996, the Securities Contracts (Regulation) Act, 1956, among others.
• A Securities Appellate Tribunal established under section 15-K of the Securities and Exchange Board of India Act hears appeal from the orders of SEBI which can be challenged in the SC only.

A QUESTION MARK ON SEBI’S REGULATORY ROLE

INEXPLICABLE DELAY

• Though SEBI began investigations in 2016, it has taken six years to arrive at this order. However, SEBI’s order raises more questions than it answers as it has not taken the issue into a logical conclusion.

DILUTION OF OFFENCE

• The order passed by SEBI’s whole-time member contains no provision for conducting any investigation into the possible criminal aspects of the then NSE Chief’s conduct.
   It appears that SEBI sees her criminal offence of sharing NSE’s internal confidential information with an unknown person as indiscretion.
   But converting a grave criminal offence into a regulatory indiscretion may set a dangerous precedent for the entire capital market ecosystem.

POOR CAPACITY OF SEBI

• Multiple complaints were lodged in SEBI against the then NSE MD & CEO, which led SEBI to investigate her case.
   If SEBI lacked the capability or capacity to take the investigation further, it should have sought the assistance of other investigating agencies.
• The NSE Board chairman, upon discovering that Chitra was sharing information regarding NSE with her Himalayan Yogi, apprised the NSE Board members in a closed-door meeting. And that information was too sensitive to be even recorded in minutes of the board meeting.

NO FEAR FOR REGULATOR

• NSE had knowledge that she shared sensitive information with the alleged yogi and NSE Board had concealed this information from SEBI Long after she had resigned, and only when SEBI probed, NSE directed Ernst & Young to figure out the identity the alleged Yogi.
   The whole episode reflects poorly on the status and respect the SEBI commands or put in other words; the regulated seems to have scant regard for the regulator and seems to believe that the system can be gamed and they will never get caught.

LOST OPPORTUNITY FOR REFORMS

• SEBI missed an opportunity to make an example of the CMD’s case as a warning to rogue managers. However, the meagre penalty meted out by SEBI indicates the regulator is as keen as NSE to close the case rather than address the ethical and legal cracks within the system. Penalty imposed on her is ₹3 crore – less than 7% of her severance package of ₹44 crore.

SEBI’S FAILURE TO UPHOLD NATIONAL INTEREST

• By relegating this case to a mere issue of breach of compliance, SEBI has effectively turned a possible criminal offence into a civil case. This case will embolden more who may now find it easier to abuse their official positions to compromise their own company’s integrity or hurt national interest.

ABDICATION OF AUTHORITY

• Despite being armed with exceptional powers among financial regulators to summon market participants and to search and seize evidence, SEBI failed to show the intent to get to the bottom of the scam while the trail was still hot.

REVITALIZING THE REGULATOR AND REFORMING THE NSE: THE WAY FORWARD

SCALE UP THE RESOURCE BASE

• SEBI as a regulator has to scrutinize millions of transactions done almost every minute in the stock market and that by itself makes its task herculean. The problem is compounded by the need to act swiftly, and naturally, there are limitations.
   Hence, the resource base of SEBI, especially human infrastructure, needs to be scaled up so also its technological capability through AI, etc.

FAST TRACK REFORMS IN NSE

• A leading stock exchange like NSE is a systemically important institution as it serves an economic function and is the symbol of the free market. Any disruption in the NSE has a repercussion on the economy and the country.
   The NSE leadership needs to put their house in order by upholding the laws of the land and also by holding accountability of the management to the Board, which also need to be accountable to the public.
   Processes and practices currently in place at NSE need to be revisited so that such an event doesn’t re-occur at such an important market infrastructure institution.

ACTIONS BY SEBI

• SEBI has also instituted various changes in the governance of market infrastructure institutions (MIIs), including board committee structures and oversights, the tenor of management, accountability for lapses at MIIs etc., which can strengthen the control environment.

FULFILLING SEBI’S MANDATE

• SEBI has been tasked with preserving the integrity of the capital market and institutionalizing good governance in the stock market ecosystem.
   For the sake of millions who trust SEBI to preserve the integrity of the Indian capital market, the regulator must fix the systemic deficiencies in Indian exchange.
   It must not be seen as favouring or taking a soft approach to matters of regulatory violation, especially by powerful players.

EXPECTATION FROM THE NEW SEBI CHIEF

• Regulating the stock exchanges in an independent and efficient manner, especially when doubts have risen regarding the functioning of the NSE, should be high on the list of tasks for the newly appointed chairperson of SEBI.

ROLE OF PMO AND OTHERS

• The SEBI order itself seems incomplete and there seems to be something more than what meets the eye. This could require further investigation by other agencies, and the Finance Ministry and the Prime Minister’s Office needs to act expeditiously.
   The CBI investigation into this scam also need to be fast-tracked and should be done in a professional manner to unearth the truth and to prosecute and punish the guilty.

REGULATING THE REGULATOR

• The SEBI order has done more damage to its own credibility and many questions have remained unanswered. Thus, a thorough inquiry into the investigation conducted by SEBI by independent agencies needs to be undertaken to find out if any extraneous considerations were involved in the manner of investigation or its findings.
   This does not in anyway will deem to be an encroachment into the regulator’s autonomy but will be a step towards improving regulatory quality.
   Additionally, a Regulatory Impact Assessment need to be conducted to assess the functioning of SEBI and the Parliament’s control over it need to be strengthened through standing committee oversight, periodic reports, etc.

RESTRUCTURING THE BOARD OF NSE

• Persons occupying key management positions at important institutions, even if professionals, should be rotated at reasonable intervals.
• Allowing an individual to turn into a permanent fixture as CEO or MD is a bad idea. It is improper for an outgoing CEO/MD to continue on the Board.
• And it is worse if this happens when the ex-CEO’s deputy assumes charge as the new CEO. Not only can this create situations of nexus, but it can also tie down the successor from initiating a clean-up of legacy structures.

WHISTLEBLOWER PROTECTION

• As it was a whistle-blower letter that alerted SEBI to the irregularities at NSE, MIIs must be asked to put in place well-defined employee whistleblower mechanisms, where complaints can be lodged directly with the concerned.

1. The identity of the whistle-blower must be strictly protected to prevent vindictive action.

PROFESSIONAL CONDUCT OF THE GOVT COMPANY/BANK REPRESENTATIVES

• The LIC is coming to the market for its initial public offering, and prospective shareholders and policyholders have a right to demand an explanation from LIC on the unprofessional conduct of its representatives on NSE in this period.
• Similarly, shareholders of SBI also should demand an explanation from SBI on the conduct of its officers when deputed as directors in other companies.
• The govt should take note of the negligence/irresponsibility of these members and stringent actions need to be taken against them if found to be complicit.

THE CONCLUSION: Despite the capture of power by a few individuals and the governance infractions they indulged in, few can dispute that the National Stock Exchange (NSE) has served Indian financial markets extremely well in the three decades of its existence. Its state-of-the-art electronic platform and reliable trading and settlement systems have ensured that there were no systemic failures through the worst of upheavals. It is therefore critical for the government and the regulator to get to work on fixing the loopholes in the governance structures at the NSE so that such infractions don’t recur. Clearly, the regulator needs to introspect on its actions both in the co-location and ‘yogi’ scams and learn from the mistakes.

THE CONTEXT: A WTO panel, in its ruling on December 14, 2021, recommended India to withdraw its subsidies on sugar under the Production Assistance, the Buffer Stock, and the Marketing and Transportation Schemes as they are violative of the WTO norms and rules. Ruling in favour of Brazil, Australia and Guatemala in their trade dispute against India over its sugar subsidies, the WTO panel has stated that the support measures are inconsistent with WTO trade rules. This article analyse this issue in detail.

ANALYSIS OF THE ISSUE

COMPLAINT AGAINST INDIA

• Australia, Brazil, and Guatemala said India’s domestic support and export subsidy measures appeared to be inconsistent with various articles of the WTO’s Agreement on Agriculture and the Agreement on Subsidies and Countervailing Measures (SCM).

SUBSIDIES BEYOND DE MINIMIS LEVEL

• All three countries complained that India provides domestic support to sugarcane producers that exceed the de minimis level of 10% of the total value of sugarcane production. They said it was inconsistent with the Agreement on Agriculture. (READ AHEAD).

OTHER POINTS OF CHALLENGES.

• They also raised the issue of India’s alleged export subsidies, subsidies under the production assistance and buffer stock schemes, and the marketing and transportation scheme.
• Australia accused India of “failing” to notify its annual domestic support for sugarcane and sugar subsequent to 1995-96, and its export subsidies since 2009-10, which it said were inconsistent with the provisions of the SCM Agreement.

PROCESS AT WTO

• The consultation followed between these countries and India did not resolve the issue.
• These countries then approached the Dispute Settlement Body (DSB) with the complaint that set up three panels to inquire into the allegations. These panels ruled against India.

THE PANELS’ FINDINGS.

• From 2014-15 to 2018-19, India’s domestic support to sugarcane producers exceeded the permitted level of 10% of the total value of sugarcane production.
• Therefore, India is acting inconsistently with its obligations under the Agreement on Agriculture.
• On the export subsidy, the panel also found that the support provided by India violated its obligations and India’s failure to notify its support measures to relevant WTO Committees also violated WTO norms.

THE PANELS’ RECOMMENDATIONS

• The panel asked India to bring its support measures in conformity with WTO rules and withdraw the prohibited subsidies.

WHAT HAS BEEN INDIA’S RESPONSE?

RESPONSE OF THE COMMERCE MINISTRY

• The findings of the panel were “completely unacceptable” to India.
• Australia, Brazil, and Guatemala had wrongly claimed that domestic support provided by India to sugarcane producers is in excess of the limit allowed by the WTO and that India provides prohibited export subsidies to sugar mills.
• The panel’s findings were “erroneous”, “unreasoned”, and “not supported by the WTO rules.
• The Panel has also evaded key issues which it was obliged to determine. Similarly, the Panel’s findings on alleged export subsidies undermine logic and rationale.
• As of now, there is no export subsidy on sugar, and hence the ruling will have no impact on the sugar export.

ON DOMESTIC SUPPORT/SUBSIDY.

• India held that its subsidy does not come under the meaning of market price support under the AoA. It pointed out that the FRP is paid to the sugar mills and not to the sugarcane producers.
• It argued that as per the meaning of market price support, it would be violated only when the govt pays for or procures the agricultural product.
• The panel rejected this argument — saying “market price support does not require governments to purchase or procure the relevant agricultural product”.

APPEAL TO APPELLATE BODY(AB)

• India has appealed against the ruling of the World Trade Organization’s (WTO) trade dispute settlement panel.
• India filed the appeal in the WTO’s Appellate Body, the final authority on such trade disputes.
• Pending the disposal, India is not bound to implement the orders of the DSB Panel. The AB has not been operational due to vacancies that the USA has consistently refused to fill.

CLARIFYING CONCEPTS: THE WTO TERMINOLOGIES

WHAT IS AoA?

To reform the agriculture trade and to improve the predictability and security of importing and exporting countries, the World Trade Organization came up with the agriculture agreement. It was negotiated during the Uruguay Round of the General Agreement on Tariffs and Trade, and entered into force with the establishment of the WTO on January 1, 1995. The three provisions/pillars that the agriculture agreement focuses on are –

• Market access — the use of trade restrictions, such as tariffs on imports
• Domestic support — the use of subsidies and other support programmes that directly stimulate production and distort trade
• Export competition — export subsidies and other government support programmes that subsidize exports.

DOMESTIC SUPPORT

• There are two categories of domestic support — support with no, or minimal, distortive effect on trade on the one hand (often referred to as “Green Box” measures) and trade-distorting support on the other hand (often referred to as “Amber Box” measures).
• For example, government-provided agricultural research or training is considered the former type, while government buying-in at a guaranteed price (“market price support”) falls into the latter category.
• Under the Agreement on Agriculture, all domestic support favouring agricultural producers is subject to rules. The Green Box also provides for the use of direct payments to producers, which are not linked to production decisions, i.e. although the farmer receives a payment from the government, this payment does not influence the type or volume of agricultural production (“decoupling”).
• The “Blue Box” exemption category covers any support measure that would normally be in the “Amber Box”, but which is placed in the “Blue Box” if the support also requires farmers to limit their production.
• All domestic support measures which do not correspond to the exceptional arrangements known as the “Green” and “Blue” boxes, are considered to distort production and trade and therefore fall into the “Amber Box” category.

DE MINIMIS LEVEL

• Minimal amounts of domestic support that are allowed even though they distort trade — up to 5% of production value for developed countries, 10% for developing.
• All domestic support measures favouring agricultural producers that do not fit into any of the above exempt categories are subject to reduction commitments. This domestic support category captures policies, such as market price support measures, direct production subsidies or input subsidies.
• However, under the de minimis provisions of the Agreement there is no requirement to reduce such trade-distorting domestic support in any year in which the aggregate value of the product-specific support does not exceed 5 percent of the total value of production of the agricultural product in question.
• In addition, non-product specific support of less than 5 percent of the value of total agricultural production is also exempt from reduction. The 5 per cent threshold applies to developed countries, whereas in the case of developing countries, the de minimis ceiling is 10 percent.

AGGREGATE MEASUREMENT OF SUPPORT

• The AMS represents trade-distorting domestic support and is referred as the “amber box”. As per the WTO norms, the AMS can be given up to 10 % of a country’s agricultural GDP in the case of developing countries.
• On the other hand, the limit is 5% for a developed economy. This limit is called de minimis level of support. It means that the AMS and the De Minimis Level are similar. Both relates to the Amber box.

SCM

• The Agreement on Subsidies and Countervailing Measures (Subsidies Agreement) of the World Trade Organization (WTO) provides rules for government subsidies and applying remedies to address subsidized trade that has harmful commercial effects.
• These remedies can be pursued through the WTO’s dispute settlement procedures, or through a countervailing duty (CVD) investigation which can be undertaken unilaterally by any WTO member government.
• Countervailing measures may be used against subsidies when imports of subsidized goods harm a competing domestic industry. They are used to offset the effect of the subsidy by, for example, imposing a countervailing duty (limited to the amount of the subsidy) on the import of subsidized goods or securing quid pro quo commitments from the subsidizing country (that it will abolish or restrict the subsidy, or that exporters will raise prices).
• Export subsidies which are in full conformity with the Agriculture Agreement are not prohibited by the SCM Agreement, although they remain countervailable. Domestic supports which are in full conformity with the Agriculture Agreement are not actionable multilaterally, although they also may be subject to countervailing duties.

DISPUTE SETTLEMENT BODY (DSB)

• Settling disputes is the responsibility of the Dispute Settlement Body (the General Council in another guise), which consists of all WTO members. The Dispute Settlement Body has the sole authority to establish “panels” of experts to consider the case and accept or reject the panels’ findings or the results of an appeal. It monitors the implementation of the rulings and recommendations and can authorize retaliation when a country does not comply with a ruling.
• Under the Subsidies Agreement, if a WTO member government believes that non permissible subsidy is being granted or maintained by another member government, it can request consultations with that government under the WTO’s dispute settlement procedures.
• If no mutually agreeable solution is reached in initial consultations, the matter can be referred to the WTO’s Dispute Settlement Body (DSB), which consists of representatives of all WTO members.
• The DSB establishes a panel, which reports its findings to the parties to the dispute with in a time frame. If the panel finds that the measure in question is a prohibited subsidy, the subsidizing government must withdraw it without delay.
• But when the appeal is filed in the AB and not yet decided, the practice is that the member country does not withdraw the subsidy immediately. The DSB can only reject the recommendations of the Panel on consensus among the members.

APPELLATE BODY

• The Appellate Body was established in 1995 under Article 17 of the Understanding on Rules and Procedures Governing the Settlement of Disputes (DSU). It is a standing body of seven persons that hears appeals from reports issued by panels in disputes brought by WTO Members. The Appellate Body can uphold, modify or reverse the legal findings and conclusions of a panel. Appellate Body Reports are adopted by the Dispute Settlement Body (DSB) unless all members decide not to do so. The Appellate Body has its seat in Geneva, Switzerland.
• Currently, the Appellate Body is unable to review appeals given its ongoing vacancies. The term of the last sitting Appellate Body member expired on 30 November 2020.

NAIROBI PACKAGE

• The Nairobi Ministerial conference was held in 2015. WTO members decided to eliminate the export subsidies on agriculture and make new rules on export measures that have a covalent effect. To implement this decision, the developed countries will remove all the subsidies on export immediately. Developing countries will have a little longer period to eliminate the subsidies except for a few agricultural products.
• The decision was taken to give effect to the sustainable development goal on zero hunger and also help the farmers of the developing countries who face intense competition against the rich countries and the artificially boosted exports by the help of subsidies.
• Members also collectively agreed to find a permanent solution for developing countries to use the public stockholding programs for food security purposes. Negotiation on a special safeguard mechanism, which allows the developing countries to raise tariffs temporarily on agricultural products in cases of import surges or price falls, was also agreed upon by the ministers.

BALI PACKAGE 2013

• Members agreed to refrain from challenging the breach of domestic support commitments that resulted from developing countries’ public stockholding programs for food security if they met certain conditions. They also decided to negotiate towards the permanent solution for public stockholding for security purposes.
• A more transparent tariff rate quota administration was called for whereby the governments were not allowed to create trade barriers by distributing quotas among importers.
• The list of general services includes more spending on land use, Land Reforms water management, and other poverty reduction programs that come under the green box( Green box is domestic support which is allowed without any limit as it does not distort the trade) were to be expanded.
• A declaration on the reduction of all forms of export subsidies and enhancement of transparency and monitoring was made.
• The Bali package also provides for a peace clause that protects the food procurement programs of developing countries from the action of other WTO members if the developing country branches the subsidy ceiling as given.
• In 2018-19 India became the first WTO member country to invoke this clause in the financial year. India stated that its rice production was $43.67 billion and it provided subsidies of $ 5 billion to the farmers, which is more than the de minimis level of 10%. To safeguard its domestic support policy the Indian government invoked the peace clause.

PUBLIC STOCKHOLDING FOR FOOD SECURITY PURPOSES: ANOTHER PRESSING ISSUE

Some governments use public stockholding programmes to purchase, stockpile and distribute food to people in need. While food security is a legitimate policy objective, some stockholding programmes are considered to distort trade when they involve purchases from farmers at prices fixed by the governments, known as “supported” or “administered” prices.

In India’s case the subsidies provided to run the food security programme (NFSA) as per the developed member countries are trade distorting and they fall under the   Amber box. As per AMS, the total support in monetary terns should not exceed 10 percent of the total value of agri production as on 1986-88. The government buys the produce at MSP which subsidises the prices of food grains. In the instant case (sugar subsidy), the public stock holding programme per se was not challenged but one specific component “buffer stock” of sugar, presumably related to the subsidised sugar provision to the Antyodaya Anna Yojna category under the NFSA. But India argues that the public stockholding programme is vital for its food security, nutritional needs, supporting the marginalised farmers, and meeting the goals of SDGs.

At the 2013 Bali Ministerial Conference, ministers agreed that, on an interim basis, public stockholding programmes in developing countries would not be challenged legally even if a country’s agreed limits for trade-distorting domestic support were breached. They also agreed to negotiate a permanent solution to this issue.

A decision on public stockholding taken at the 2015 Nairobi Ministerial Conference reaffirmed this commitment and encouraged WTO members to make all concerted efforts to agree on a permanent solution.

In the MC III, the G 33 is seeking a permanent solution to the stockholding issue.

VARIOUS SUBSIDIES PROVIDED BY INDIA FOR SUGAR SECTOR

SCHEME FOR EXTENDING FINANCIAL ASSISTANCE TO SUGAR UNDERTAKINGS (SEFASU-2014)

• The Government on 3.1.2014 notified a Scheme for Extending Financial Assistance to Sugar Undertakings (SEFASU-2014) envisaging interest free loans by bank as additional working capital to sugar mills, for clearance of cane price arrears of previous sugar seasons and timely settlement of cane price of current sugar season to sugarcane farmers. Rs. 6484.77 crore has been disbursed under the scheme. For five years, the interest burden on this loan is borne by the Government through Sugar Development Fund.

SOFT LOAN TO SUGAR MILLS TO FACILITATE CLEARANCE OF CANE PRICE ARREARS

• A scheme was notified on in 2015 to provide soft loan to sugar mills to facilitate clearance of cane price arrears of current sugar season 2014-15. Rs. 4213 cores have been disbursed under the scheme. The Government bore interest subvention during moratorium period of one year. About 32 lakh farmers have been benefited.

OTHERS

• The procurement at the Fair and Remunerative Prices and the PDS operations for sugar for AAY card holders etc.

EXPORT SUBSIDY

• There is no export subsidy for sugar as of now.

WHAT IS THE WAY FORWARD?

OVERHAULING THE AoA

• The genesis of the problem lies in the skewed nature of many agreements that are set in stone at WTO.
• The agreements that were negotiated during the Uruguay Round of the General Agreement on Trade and Tariffs, which governed global trade before the establishment of WTO on January 1, 1995.
• The most egregious of these is AOA which astute negotiators pushed through from the rich world to suit their interests.

RE WORKING OF SUBSIDIES AND RE DEFINITION OF “ BOXES”.

• Those considered non-distorting are listed in the green box, the minimally distorting ones come under the blue box while subsidies seen as causing serious market distortions are categorised as amber box subsidies.
• Nearly all the rich countries’ subsidies fall into the green box while those of developing nations are mostly in the amber box.
• There is no expenditure limit on the subsidies that fall into the first two boxes while the amber box subsidies have to be limited to 10 per cent of the value of agricultural production for developing countries and 5 per cent for developed countries.

PRO ACTIVE LOBBYING BY G-33

• The G 33 needs to work in a coordinated manner and position itself as a pressure group to safeguard and promote the developing countries’ interests transparently. The forthcoming MC 12, scheduled to be held in Geneva at the end of 2021 has been postponed which will provide more time for the G 33 to develop consensus and common strategy on issue like Public Stock holding, food security, fisheries subsidy, domestic support etc.
• The momentum generated  from the G-33 Virtual Informal Ministerial Meeting organized by Indonesia in December 2021 needs to be harnessed and follow up actions needs to be continued at official level.

APPEALING THE DECISION

• India has appealed the ruling on sugar subsidy and as the AB is not functional as of now it provides enough space to India for recalibrating the content and compositions of its subsidies if need be.

LEARNING FROM SETBACKS.

• Of late India has been at the receiving end of the WTO dispute resolutions and many decisions  have gone against it like the Domestic Content  Requirement  on solar panels, the export subsidy schemes in 2019, and the recent challenges. It means that there is a requirement  for India to bring its subsidy/support regime in consistent  with the WTO norms and at the same time devise such innovative measures that comply with WTO regimes.

THE CONCLUSION: The WTO system is the sheet anchor for a rule based multilateral trading system. Thus, the dispute setline and adherence to the rulings is necessary for realizing the objective. But that does not mean the sovereign rights of a country to devise policies for the welfare and development of a country should be forfeited. What is necessary is to create a healthy balance between the two and that’s why there has to be synergy between foreign trade policy and domestic agricultural policies which are dynamically linked with the WTO norm and rules.

THE CONTEXT: To understand why, how and what of the COVID-19 being declared as a ‘notified disaster’, one should know first about disaster, how disaster is categorized and funding is determined by the Centre. In brief, one should have understanding of some legal and procedural aspects of the NDMA 2005.

DO YOU KNOW?

As you are aware that the NDMA 2005 was one of the very significant legislation of 2005 and first important landmark legislation for a holistic disaster management in India which is blueprint for making India a disaster resilient country. The law has become basis for taking a series of steps by the government to establish policy, procedural and institutional mechanisms for disaster management in India.

THE KEY FEATURES OF THE NDMA 2005

The law lays down following key mechanisms to make India a disaster resilient country and match to the global standards in disaster management. The key features are:

1. It envisages for an institutional mechanism from top to bottom for decision making, planning, relief and rescue
2. It envisages for laying down a disaster management policy and plan at national and state level
3. It deals with disaster management holistically consisting of pre-disaster, during disaster and post disaster cycle
4. It envisages for two separate funds knows as DMMF/DMRF for centre and SDMMF/SDMRF for states
5.  It lays down for a dedicates disaster management force known as NDRF capable of tackling all types of disaster through land, air and sea
6. It also has also provisions for promoting research and studies through IIDM, New Delhi.

At the apex, it is the national disaster management authority headed by the Prime Minister which is responsible for taking important decisions related to disaster management in India followed by several committees, ministries and departments.

HOW DOES THE TERM ‘DISASTER’ IS DEFINED BY THE NDMA?

As per the Disaster Management Act, 2005, “disaster” means a catastrophe, mishap, calamity or grave occurrence in any area, arising from natural or man-made causes, or by accident or negligence which results in substantial loss of life or human suffering or damage to, and destruction of, property, or damage to, or degradation of, environment, and is of such a nature or magnitude as to be beyond the coping capacity of the community of the affected area. A natural disaster includes earthquake, flood, landslide, cyclone, tsunami, urban flood, heatwave; a man-made disaster can be nuclear, biological and chemical.

HOW THE TERM DISASTER IS CLASSIFIED?

We often hear demands by the states to declare a calamity as national disaster from the Centre. You also know that at times there is difference in view on whether a disaster should be declared as national disaster.

But you will wonder to notice the fact that there is no any defined standards or legal provision for the categorization of disasters. The NDMA is silent on this provision that it doesn’t have a clearly defined mechanism for the classification of the disasters. Rather, the classification is done on the case by case basis. For instance, learning from the past experiences, the disasters have been classified as

CLASSIFICATIONS

DISASTERS

A. A calamity of unprecedented severity

1. The 1999 super cyclone in Odisha
2. The 2001 Gujarat earthquake

B. Calamities of severe nature

1. The flash floods in Uttarakhand
2. Cyclone Hudhud
3. The Kerala floods

C. Notified disaster

1. COVID-19

DOES IT MEAN THE TERM NATIONAL DISASTER WHICH IS OFTEN USED HAS NO LEGAL BASIS?

Yes, the term has no legal basis and it is used in general parlance by the governments and media. For instance, the state of Kerala demanded that the flood should be declared as National Disaster but the central government replied that there is no such term like national disaster.

The central government examine the proposal of the Kerala and the MoS (Home) replied to a question in Parliament “The existing guidelines of State Disaster Response Fund (SDRF)/ National Disaster Response Fund (NDRF), do not contemplate declaring a disaster as a ‘National Calamity’.” There is no provision, executive or legal, to declare a natural calamity as a national calamity. It is used more in general parlance.

Therefore, there is no provision in the law or rules for the government to designate a disaster a “national calamity” and the guidelines of the NDRF and SDRFs don’t contemplate declaring a disaster a national calamity. The Centre also informed the Kerala High Court that there was no legal provision to declare a disaster as a national calamity, amid demands for declaring the floods as a national disaster.

DOES IT MEAN THERE HAS BEEN NO EFFORTS TO DEFINE THE STANDARDS OF DISASTERS?

In 2001, the National Committee on Disaster Management under the chairmanship of the then Prime Minister was mandated to look into the parameters that should define a national calamity. However, the committee did not suggest any fixed criterion.

The 10th Finance Commission (1995-2000) examined a proposal that a disaster be termed “a national calamity of rarest severity” if it affects one-third of the population of a state. The panel did not define a “calamity of rare severity” but stated that a calamity of rare severity would necessarily have to be adjudged on a case-to-case basis taking into account, inter-alia,

1. The intensity and magnitude of the calamity,
2. Level of assistance needed,
3. The capacity of the state to tackle the problem,
4. The alternatives and flexibility available within the plans to provide succour and relief

WHY IS IT IMPORTANT TO CLASSIFY A CALAMITY OR DISASTER?

Simply because it is the categorization which ultimately determines the quantum of relief sanctioned by the CENTRE to the states under the SDRFs. If a disaster is categorized as ‘rare severe nature’ then accordingly the state will receive the relief from the Centre.

WHICH AUTHORITY IS RESPONSIBLE FOR CATEGORISING THE DISASTERS?

The classification is the responsibility of the NDMA which is headed by the Prime Minister. But in actual practice, it is done by the national executive committee headed by the Home Secretary and is notified by the Ministry of Home Affairs. In general, it can be said that disasters are categorized and notified by the Ministry of Home Affairs.

WHAT HAPPENS IF A CALAMITY IS SO CATEGORISED?

1. When a calamity is declared to be of “rare severity”/”severe nature”, support to the state government is provided at the national level. The Centre also considers additional assistance from the NDRF.
2. A Calamity Relief Fund (CRF) is set Up, with the corpus shared 3:1 between Centre and state.
3. When resources in the CRF are inadequate, additional assistance is considered from the National Calamity Contingency Fund (NCCF), funded 100% by the Centre.
4. Relief in repayment of loans or for grant of fresh loans to the persons affected on concessional terms, too, are considered once a calamity is declared “severe”.

HOW IS THE FUNDING DECIDED?

1. For calamity with national ramifications: As per the National Policy on Disaster Management, 2009, the National Crisis Management Committee headed by the Cabinet Secretary deals with major crises that have serious or national ramifications.
2. For other calamities:For calamities of severe nature, inter-ministerial central teams are deputed to the affected states for assessment of damage and relief assistance required. An inter-ministerial group, headed by the Union Home Secretary, studies the assessment and recommends the quantum of assistance from the NDRF/National Calamity Contingency Fund (NCCF). Based on this, a high-level committee comprising the Finance Minister as chairman and the Home Minister, Agriculture Minister, and Planning Commission Deputy Chairman as members approves the central assistance.

HOW MUCH FUNDS HAS THE CENTRE BEEN DISBURSING UNDER THE NDRF?

According to a reply in Parliament by MoS (Home) in January 2020, the Centre released Rs 3,460.88 crore in 2014-15, Rs 12,451.9 crore in 2015-16, and Rs 11,441.30 crore in 2016-17 under the NDRF to various states. In 2017-18 until December 27, it had disbursed Rs 2,082.45 crore. State-wise figures showed that the highest amounts for 2016-17 were released to

1. Karnataka (Rs 2,292.50 crore),
2. Maharashtra (Rs 2,224.78 crore) and
3. Rajasthan (Rs 1,378.13 crore).

HOW ARE THE NDRF AND THE SDRFS FUNDED?

The funding of the NDRF: The NDRF is funded through a National Calamity Contingent Duty levied on pan masala, chewing tobacco and cigarettes, and with budgetary provisions as and when needed. A provision exists to encourage any person or institution to make a contribution to the NDRF.

The 14th Finance Commission recommended changes to this structure once the cess was discontinued or subsumed within the Goods and Services Tax. However, the government, instead, decided to continue with the National Calamity Contingent Duty even in the GST regime.

The funding of the SDRF:

1. The SDRF corpus is contributed by the Union government and the respective State governments in a 75:25 ratio for general category States and 90:10 for Special Category States.
2. The allocation of the SDRF for each State is done by the Finance Commission, and the Centre contributes its specified share each financial year.
3. The Central share of SDRF is released in two equal instalments, in June and then in December.

What has been the trend in budgetary allocations to the NDRF and SDRFs?

The Union government has maintained a steady flow of funds to the NDRF each year, ranging from ₹5,690 crore in 2015-16 to a budgeted amount of ₹2,500 crore for the current financial year. In addition, the Centre has also been contributing to the SDRFs every year, amounting to ₹ 8,374.95 crore in 2016-17 and ₹7,281.76 crore in 2017-18.

HOW DO OTHER COUNTRIES CLASSIFY DISASTERS?

In the US, the Federal Emergency Management Agency (FEMA) coordinates the government’s role in disaster management. When an incident is of such severity and magnitude that effective response is beyond the capabilities of state and local governments, the Governor or Chief Executive of a tribe can request federal assistance under the Stafford Act. In special cases, the US President may declare an emergency without a request from a Governor. The Stafford Act authorises the President to provide financial and other assistance to local and state governments, certain private non-profit organisations, and individuals following declaration as a Stafford Act Emergency (limited) or Major Disaster (more severe).

WEAKNESSES IN CATEGORISATION AND FUNDING OF DISASTERS

When there is lack of institutionalized and standardized mechanisms for the categorization and determining the quantum of funds to states then it results into

1. Ad hocism in the process of determining the funds
2. Politics into who should get what? Since India is a federal state and the states are dependent on Centre, hence the decisions are politically motivated
3. It results into delay in sanctioning of relief materials to states like in case of COVID-19 the states have complained for scarcity of funds and delay in release of funds by the Centre.
4. It affects decentralized governance system
5. It promotes tensions and conflicts in union-states relations

CONCLUSION AND WAY FORWARD

To deal effectively with the disasters when they strike, it is essential to have a robust mechanism for categorization and immediate relief package to the states. Since India is a federal state in which the states are heavily dependent on the Centre, hence without an institutionalized standard for the transfer of disaster funds, there can be huge loss to human life, resources and will become a hurdle in making Indian society disaster resilient.

Hence, the government should improve the NDMA 2005 by taking the following steps:

1. There should be standards set for categorizations of disasters in consultation with state governments
2. The quantum of funds should be clearly linked with the levels of disasters categorized
3. The funds should be immediately transferred when the disaster strikes

The disaster management in India has improved since 2005 due to adoption of a new legal and institutional framework according to which the Centre has also come up with the National Disaster Management Policy 2009 and the National Disaster Management Plan 2016. The states have also taken similar steps. But still there is huge scope for improvement in disaster management in India based on the COVID-19 experiences and other recent disasters like Kerala flood and cyclones in South India.