Note4Students
From UPSC perspective, the following things are important :
Prelims level: Bad Bank
Mains level: Paper 3- Creation of Bad Bank is right idea at wrong time
The article argues that instead of creating the Bad Bank, several steps taken by the government and the bank regulator could deal with the problem of NPAs and also improve the performance of the banks.
Challenge of NPA: Is Bad Bank and answer to it?
- Recently, RBI governor said that the RBI was open to considering setting up of a “bad bank”.
- India’s economic growth, unless pandemic risks resurface, should be good enough to largely take care of its non-performing assets (NPAs) in the coming years.
- It was the high economic and credit growth of the 2003-08 period that whittled down the NPA ratio.
- The provision coverage ratio at banks had gone up from 42% in 2016 to 72.4% in September 2020, and that net NPAs were down to 2.8% in March 2020.
- The bad loan legacy is almost done with.
- Consequently, the bad bank is a right idea at the wrong time.
Steps the government and RBI should take
1) Resume the operation of IBC
- The government should reinstate the operation of the Insolvency and Bankruptcy Code (IBC).
- The code had improved the recovery rate from NPAs in the banking system.
- There is a need to create disincentives for deliberate delaying tactics, so that the original timeline of 270 days is honoured more in its observance than in breach.
2) Recapitalisation of banks
- The government should provide more than adequate capital to the strong banks it owns, and adequate capital to the not-so-strong ones, with well-defined performance criteria for them to receive more.
- If they don’t deliver, then the government should consolidate them or begin diluting its stake below 51% in such banks.
3) Level playing field improvement in compliance culture
- The government should level the regulatory playing field between private-sector and government-owned banks.
- The risk management and compliance culture in public-sector banks must improve.
- However, public sector banks should not be subject to excessive oversight by government investigative and audit agencies.
4) Plug the sources of NPAs through policy changes
- More than these, there are two other important things that constitute the fountainheads of NPAs.
- The government should evolve a framework for passing on explicit development goals of the state for banks to achieve through the credit mechanism.
- The government should provide for them in the budget and compensate banks rather than direct credit by diktat.
- The cost of directed lending is not just the creation of NPAs, but morale and market-value erosion as well.
- In any case, recapitalization needs mean that the fiscal costs are not avoided. It is self-defeating.
- Then, governments (Union and states) should plug the other underlying sources of NPAs.
- Among things, they should ensure economic pricing of utilities, honour power purchase contracts and raw material purchase agreements, pay arrears to private counterparties, and stop being reflexive litigants.
Consider the question ” What is the Bad Bank? Do you agree with the view that India needs Bad Bank?”
Conclusion
The above measures would greatly help the country achieve high growth and sustain it. Setting up a bad bank may be unnecessary.
Back2Basics: Provisioning Coverage Ratio (PCR)
- Banks usually set aside a portion of their profits as a provision against bad loans.
- Provisioning Coverage Ratio (PCR) is essentially the ratio of provisioning to gross non-performing assets (NPA) and indicates the extent of funds a bank has kept aside to cover loan losses.
- A high PCR ratio (ideally above 70%) means most asset quality issues have been taken care of and the bank is not vulnerable.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: Not much
Mains level: Paper 3- Reforms for economic growth
The article suggests the reforms that should be included in the next budget to boost the Indian economy.
Need for further reforms
- Government has leveraged the Covid-19 slowdown as an opportunity for introducing transformative reforms.
- The recently introduced reforms include liberalising agricultural markets, diluting the onslaught of labour laws, credit guarantees for SME loans, and a liberal PLI to stimulate manufacturing.
- These reforms have created a cautious optimism among investors worldwide awaiting the forthcoming Budget.
- India’s reforms require further acceleration, and a consensus that good economics makes good politics.
Reforms required to attract investment
- Cost of acquiring land has increased substantially, which needs to be reduced.
- The government must categorise 44 central laws into compensation, social security, industrial relations, and health and safety—and draft a unified model labour law to replace archaic laws for adoption by states.
- India’s trade-to-GDP ratio must improve.
- Having turned away from the RCEP, India needs to conclude trade agreements with the UK and other major economies. Announcing such intent would be welcome.
- Effective corporate tax rate for domestic companies is 25.17%, while that for foreign firms is 43.68%, India should maintain tax parity across domestic and foreign companies.
- With such parity, India will enhance investment attractiveness.
- In view of the recent international arbitration rulings, India should discontinue retrospective taxation.
- Defence FDI could be raised from 74% to 100% under automatic route.
- The rationale to maintain FDI in the insurance sector at 49% now holds limited logic, India could increase it to a majority stake or even 100%.
- Bottled-in-origin and bulk spirits attract a high basic customs duty (150%), deterring companies eyeing the Indian market, and depriving India of the corresponding FDI.
- Phased reduction of duty on these products to 75% and finally to 30% is advisable.
Areas that need increased spending
- Spending on public healthcare needs to rise from 1.3% to 3% of GDP with Covid-19 exposing glaring inadequacies.
- Revising the National List of Essential Medicines to exempt inexpensively-priced medicines from price controls would help investments in innovation and API manufacturing.
- If the New Education Policy is to be implemented properly, public spend on education and skill development must rise from 3% to 4.5% of GDP.
- The government must raise defence allocations to over 2.5% of GDP given India’s new threat perceptions and increase capital component of total fiscal allocations for defence could be increased from 34% to 40%.
Other measures to boost the economy
- Developing data adequacy agreements with the UK and other key countries would facilitate cross-border movement of personal data based on a mutual adequacy basis.
- The online gaming industry should be supported by a model law, tax regime and self-regulation so that the government accrues tax revenues estimated at Rs 15,000 crore.
- Most countries tax domestic corporate dividends at lower rates and, therefore, FPIs’ dividend income should be taxed at 10%.
- Foreign banks must be brought at par with Indian banks with 8.5% deduction for NPA provisioning.
- Excluding financial services from the e-commerce equalisation levy would be appropriate.
- PSU disinvestments have slowed, and the Budget needs to announce measures for their acceleration as a privatisation push would be transformative for India in the long run.
Consider the question”What are the hurdles in making India the more attractive to the investors? Discuss the measures to make India more attractive for investors.”
Conclusion
As developed countries contemplate relocating their manufacturing supply chains to destinations besides China, a progressive Budget would send positive signals to overseas investors and would propel India’s rightful ambition to be the world’s next manufacturing workshop, in consonance with the Atmanirbhar Bharat vision.
Source:
https://www.financialexpress.com/opinion/union-budget-fy22-good-economics-must-make-good-politics/2173553/
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: National Mineral Policy
Mains level: Paper 3- Issues with our mining policies and changes needed to make them sustainable
The rate at which we are extracting mineral and spending the proceeds from it without consideration for the future generation needs a rethink. The article deals with this issue.
The principle of Intergenerational Equity
- We cannot compromise the ability of future generations to meet their needs, and this is reflected in the aim for the sustainable economy.
- The principle of Intergenerational Equity would make it imperative for us to ensure future generations inherit at least as much as we did.
- If we are successful in abiding by intergenerational equity, our children will be at least as well off as we are.
Issues with our mineral policy
- India’s National Mineral Policy 2019 states: “natural resources, including minerals, are a shared inheritance where the state is the trustee on behalf of the people to ensure that future generations receive the benefit of inheritance.”
- The extraction of oil, gas, and minerals is effectively the sale of this inheritance.
- Unfortunately, governments everywhere treat the mineral sale proceeds as revenue or income which is basically a sale of inherited wealth.
- This results in governments selling minerals at prices significantly lower than what they are worth, driven by lobbying, political donations, and corruption.
Error in accounting
- Proceeds received by the government are treated as “revenue” and spent.
- This is just not sustainable.
- There is growing empirical evidence of large losses in mining from around the world.
- There is also growing evidence from the International Monetary Fund that many governments of resource-rich nations face declining public sector net worth, i.e., their governments are becoming poorer.
- Due to the high profits involved, the extractors are keen to extract as quickly as possible and move on.
- More mining would make a bad situation significantly worse.
- The Government Accounting Standards Advisory Board needs to correct this error in the standards for public sector accounting and reporting for mineral wealth.
Way forward
- If we extract and sell our mineral wealth, the explicit objective must be to achieve zero loss in value; the state as trustee must capture the full economic rent.
- Any loss is a loss to all of us and our future generations, and makes some rich; that is patently unfair.
- India’s National Mineral Policy 2019 says: “State Governments will endeavor to ensure that the full value of the extracted minerals is received by the State.”
- Like Norway, the entire mineral sale proceeds must be saved in a Future Generations Fund.
- The Future Generations Fund could be passively invested through the National Pension Scheme framework.
- The real income of a fund of this nature may be distributed only as a citizens’ dividend, equally to all as owners.
- For the Indian economy, this is sustainable — capital has been maintained; the savings rate would rise, making available more long-term domestic capital; it diversifies risk while likely improving returns.
Consider the question “What are the issues with our mining policies? Suggest the changes to make it more sustainable.”
Conclusion
Through these changes, let us be the generation that changes the course of history for the better, not the one that consumed the planet.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: NPA, Bad Bank
Mains level: Asset reconstructions post NPA buzz
The idea of setting up a bad bank to resolve the growing problem of non-performing assets (NPAs), or loans on which borrowers have defaulted, is back on the table.
Q.What is Bad Bank? Discuss how it is different from an Asset Reconstruction Company (ARC)?
Why in news?
- Commercial banks are set to witness a spike in NPAs, or bad loans, in the wake of the contraction in the economy as a result of the pandemic.
- Hence the RBI recently agreed to look at the proposal for the creation of a bad bank.
- This is in the response to a six-month moratorium it has announced to tackle the economic slowdown.
What is a Bad Bank?
- A bad bank conveys the impression that it will function as a bank but has bad assets to start with.
- Technically, it is an asset reconstruction company (ARC) or an asset management company that takes over the bad loans of commercial banks, manages them and finally recovers the money over a period of time.
- Such bank is not involved in lending and taking deposits, but helps commercial banks clean up their balance sheets and resolve bad loans.
- The takeover of bad loans is normally below the book value of the loan and the bad bank tries to recover as much as possible subsequently.
Global examples of Bad Bank
- US-based BNY Mellon Bank created the first bad bank in 1988, after which the concept has been implemented in other countries including Sweden, Finland, France and Germany.
- However, resolution agencies or ARCs set up as banks, which originate or guarantee to lend, have ended up turning into reckless lenders in some countries.
Do we need a bad bank?
- The idea gained currency during Rajan’s tenure as RBI Governor.
- The RBI had then initiated an asset quality review (AQR) of banks and found that several banks had suppressed or hidden bad loans to show a healthy balance sheet.
- However, the idea remained on paper amid lack of consensus on the efficacy of such an institution.
- ARCs have not made any impact in resolving bad loans due to many procedural issues.
What is the stand of the RBI and government?
- While the RBI did not show much enthusiasm about a bad bank all these years, there are signs that it can look at the idea now.
- Experts, however, argue that it would be better to limit the objective of these asset management companies to the orderly resolution of stressed assets, followed by a graceful exit.
Key suggestions
Former RBI Dy. Governor Acharya suggested two models to solve the problem of stressed assets.
- The first is a private asset management company (PAMC), which is said to be suitable for stressed sectors where the assets are likely to have an economic value in the short run, with moderate levels of debt forgiveness.
- The second model is the National Asset Management Company (NAMC), which would be necessary for sectors where the problem is not just one of excess capacity but possibly also of economically unviable assets in the short to medium terms.
Good about the bad banks
- The problem of NPAs continues in the banking sector, especially among the weaker banks.
- The bad bank concept is in some ways similar to an ARC but is funded by the government initially, with banks and other investors co-investing in due course.
- The presence of the government is seen as a means to speed up the clean-up process.
- Many other countries had set up institutional mechanisms such as the Troubled Asset Relief Programme (TARP) in the US to deal with a problem of stress in the financial system.
Pandemic and the NPAs
- Bad loans in the system are expected to balloon in the wake of contraction in the economy and the problems being faced by many sectors.
- The RBI noted in its recent Financial Stability Report that the gross NPAs of the banking sector is expected to shoot up to 13.5% of advances by September 2021, from 7.5% in September 2020.
- The report warned that if the macroeconomic environment worsens into a severe stress scenario, the ratio may escalate to 14.8%.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: Article 15, 16
Mains level: Quota in Promotion debate
The Supreme Court has asked Attorney General to compile the various issues being raised by States with regard to the 2006 M. Nagaraj case, which had upheld the application of creamy layer principle to members of the SC/ST communities in promotions.
Must read edition: Reservation not a Fundamental Right
What is the case about?
- The Centre’s plea came despite the Supreme Court, in September 2018, in Jarnail Singh case, reiterating the Nagaraj judgment of 2006.
- The 2006 judgment required the States to show quantifiable data to prove the ‘backwardness’ of a community to provide quota in promotion in public employment,
- The 2018 judgment, which was authored by Justice Rohinton F. Nariman, had refused the government’s plea to refer the 2006 Nagaraj judgment to a seven-judge Bench.
- It had while modifying the part of the Nagaraj verdict, rejected the Centre’s argument that Nagaraj misread the creamy layer concept by applying it to SC/ST.
Nagaraj Case
- In Jarnail Singh vs Lachhmi Narain Gupta (2018), the court dealt with a batch of appeals on the correctness of the Supreme Court’s judgment in M Nagaraj & Others vs Union of India (2006).
- The Nagaraj case, in turn, had arisen out of a challenge to the validity of four Constitution amendments, which the court eventually upheld.
What were the amendments?
- 77th Amendment: It introduced Clause 4A to the Constitution, empowering the state to make provisions for reservation in matters of promotion to SC/ST employees if the state feels they are not adequately represented.
- 81st Amendment: It introduced Clause 4B, which says unfilled SC/ST quota of a particular year, when carried forward to the next year, will be treated separately and not clubbed with the regular vacancies of that year to find out whether the total quota has breached the 50% limit set by the Supreme Court.
- 82nd Amendment: It inserted a proviso at the end of Article 335 to enable the state to make any provision for SC/STs “for relaxation in qualifying marks in any examination or lowering the standards of evaluation, for reservation in matters of promotion to any class or classes of services or posts in connection with the affairs of the Union or of a State”.
- 85th Amendment: It said reservation in the promotion can be applied with consequential seniority for the SC/ST employee.
What is Art.335 about?
- Article 335 of the Constitution relates to claims of SCs and STs to services and posts.
- It reads: “The claims of the members of the SC’s and ST’s shall be taken into consideration, consistently with the maintenance of efficiency of administration, in the making of appointments to services and posts in connection with the affairs of the Union or of a State.”
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: NA
Mains level: Age of marriage
The task force set up to take a re-look at the age of marriage for women has submitted its report to the Prime Minister’s Office and the Ministry of Women and Child Development.
Try this question for mains:
Q.The different minimum age of marriage for women and men is a discriminatory provision. Analyse.
What is the issue?
- PM in his I-Day speech last year spoke about a panel formed to decide on the “right age of marriage” for women.
- The minimum age of marriage, especially for women, has been a contentious issue.
- The law evolved in the face of much resistance from religious and social conservatives.
- Currently, the law prescribes that the minimum age of marriage is 21 years and 18 years for men and women respectively.
Invoking ‘Majority’
- The minimum age of marriage is distinct from the age of majority which is gender-neutral.
- An individual attains the age of majority at 18 as per the Indian Majority Act, 1875.
- The law prescribes a minimum age of marriage to essentially outlaw child marriages and prevents the abuse of minors.
About the Committee
- The Union Ministry for WCD had set up a task force to examine matters pertaining to the age of motherhood, imperatives of lowering Maternal Mortality Ratio and the improvement of nutritional levels among women.
- The task force would examine the correlation of age of marriage and motherhood with health, medical well-being, and nutritional status of the mother and neonate, infant or child, during pregnancy, birth and thereafter.
- It will also examine the possibility of increasing the age of marriage for women from the present 18 years to 21 years.
How common are child marriages in India?
- UNICEF estimates suggest that each year, at least 1.5 million girls under the age of 18 are married in India.
- It makes our country home to the largest number of child brides in the world — accounting for a third of the global total.
- Nearly 16 per cent adolescent girls aged 15-19 are currently married.
Provisions for the minimum age for marriage
- Personal laws of various religions that deal with marriage have their own standards, often reflecting custom.
- For Hindus, Section 5(iii) of The Hindu Marriage Act, 1955, sets 18 years as the minimum age for the bride and 21 years as the minimum age for the groom.
- However, child marriages are not illegal — even though they can be declared void at the request of the minor in the marriage.
- In Islam, the marriage of a minor who has attained puberty is considered valid.
- The Special Marriage Act, 1954 and the Prohibition of Child Marriage Act, 2006 also prescribe 18 and 21 years as the minimum age of consent for marriage for women and men respectively.
- Additionally, sexual intercourse with a minor is rape, and the ‘consent’ of a minor is regarded as invalid since she is deemed incapable of giving consent at that age.
Evolution of the law
- The IPC enacted in 1860 criminalised sexual intercourse with a girl below the age of 10.
- The provision of rape was amended in 1927 through The Age of Consent Bill, 1927, which declared that marriage with a girl under 12 would be invalid.
- The law faced opposition from conservative leaders of the Indian National Movement, who saw the British intervention as an attack on Hindu customs.
- A legal framework for the age of consent for marriage in India only began in the 1880s.
Comes in: The Sarda Act
- In 1929, The Child Marriage Restraint Act set 16 and 18 years as the minimum age of marriage for girls and boys respectively.
- The law, popularly known as the Sarda Act after its sponsor Harbilas Sarda, a judge and a member of Arya Samaj, was eventually amended in 1978 to prescribe 18 and 21 years as the age of marriage for a woman and a man respectively.
Contention over different legal standards
- There is no reasoning in the law for having different legal standards of age for men and women to marry. The laws are a codification of custom and religious practices.
- The Law Commission consultation paper has argued that having different legal standards “contributes to the stereotype that wives must be younger than their husbands”.
- Women’s rights activists have argued that the law also perpetuates the stereotype that women are more mature than men of the same age and, therefore, can be allowed to marry sooner.
- The international treaty Committee on the Elimination of Discrimination against Women (CEDAW), also calls for the abolition of laws that assume women have a different physical or intellectual rate of growth than men.
Why is the law being relooked at?
- Despite laws mandating minimum age and criminalizing sexual intercourse with a minor, child marriages are very prevalent in the country.
- From bringing in gender-neutrality to reduce the risks of early pregnancy among women, there are many arguments in favour of increasing the minimum age of marriage of women.
- Early pregnancy is associated with increased child mortality rates and affects the health of the mother.
Upholding the Constitution
- Petitioners, in this case, had challenged the law on the grounds of discrimination.
- It is argued that Articles 14 and 21 of the Constitution, which guarantee the right to equality and the right to live with dignity, were violated by having different legal ages for men and women to marry.
- Two significant Supreme Court rulings can act as precedents to support the petitioner’s claim.
- In 2014, in the ‘NALSA v Union of India’ case, the Supreme Court, while recognising transgenders as the third gender, said that justice is delivered with the “assumption that humans have equal value and should, therefore, be treated as equal, as well as by equal laws”.
- In 2019, in ‘Joseph Shine v Union of India’, the Supreme Court decriminalized adultery, and said that “a law that treats women differently based on gender stereotypes is an affront to women’s dignity”.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: Indian innovation index
Mains level: Innovation ecosystem in India
NITI Aayog is set to release the second edition of the India Innovation Index 2020 tomorrow.
*Statewise rankings will be updated tomorrow.
Updated on 21st Jan, Thursday.
India Innovation Index (III)
- The release of the second edition of the index—the first was launched in October 2019—demonstrates the Government’s continued commitment towards transforming the country into an innovation-driven economy.
- The index attempts to create an extensive framework for the continual evaluation of the innovation environment of 29 states and seven UTs in India.
- It intends to perform the following three functions-
- Ranking of states and UTs based on their index scores
- Recognizing opportunities and challenges, and
- Assisting in tailoring governmental policies to foster innovation
- The India Innovation Index 2019 is calculated as the average of the scores of its two dimensions – Enablers and Performance.
- The states have been bifurcated into three categories: major states, north-east and hill states, and union territories/city-states/small states.
Significance
- The study examines the innovation ecosystem of Indian states and union territories.
- The aim is to create a holistic tool which can be used by policymakers across the country to identify the challenges to be addressed and strengths to build on when designing policies.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: Harike Wetland
Mains level: Wetland conservation in India
Winter migratory waterbirds using the central Asian flyway have started making a beeline to Punjab’s Harike wetland, offering a delight for bird lovers.
Try this PYQ:
Q.In which one among the following categories of protected areas in India are local people not allowed to collect and use the biomass?
(a) Biosphere reserves
(b) National parks
(c) Wetlands declared under Ramsar convention
(d) Wildlife sanctuaries
Harike Wetland
- Harike Wetland also is the largest wetland in northern India in the border of Tarn Taran Sahib district and Ferozepur district of Punjab.
- The wetland and the lake were formed by constructing the headworks across the Sutlej River in 1953.
- The headworks is located downstream of the confluence of the Beas and Sutlej rivers just south of Harike village.
- The rich biodiversity of the wetland which plays a vital role in maintaining the precious hydrological balance in the catchment with its vast concentration of migratory fauna.
- It was accorded as a wetland in 1990, by the Ramsar Convention, as one of the Ramsar sites in India, for conservation, development and preservation of the ecosystem.
Back2Basics: Ramsar Convention
- The Convention on Wetlands of International Importance (better known as the Ramsar Convention) is an international agreement promoting the conservation and wise use of wetlands.
- It is the only global treaty to focus on a single ecosystem.
- The convention was adopted in the Iranian city of Ramsar in 1971 and came into force in 1975.
- Traditionally viewed as a wasteland or breeding ground of disease, wetlands actually provide fresh water and food and serve as nature’s shock absorber.
- Wetlands, critical for biodiversity, are disappearing rapidly, with recent estimates showing that 64% or more of the world’s wetlands have vanished since 1900.
- Major changes in land use for agriculture and grazing, water diversion for dams and canals and infrastructure development are considered to be some of the main causes of loss and degradation of wetlands.
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