Note4Students
From UPSC perspective, the following things are important :
Prelims level: CDS, CDO, ABS, MBS
Mains level: Paper 3- Difference between 2008 financial crisis and financial crisis caused due to Covid-19.
Not all financial crises are the same. And this is more so about the two crises that we have been witness to – the 2008 Global Financial Crisis (GFC) and the current Corona Financial Crisis (CFC). The author points out the four key difference in the two crises. These four difference also mean that the solution for 2008 GFC may not be the solution for the present CFC. But why is it so? Read to know more…
1. Origin of the two crises
- The GFC originated in the financial sector.
- In GFC, banks and financial intermediaries got carried away by irrational exuberance and recklessly piled on risk.
- CDS, CDO, MBS, ABS and various other became the villains in the GFC drama as it unfolded in the rich countries.
- As people lost their wealth and savings in the financial meltdown, demand collapsed and growth slumped.
- The contagion, which originated in the financial sector, spread to the real economy.
- In contrast, the CFC came from outside the economic system.
- The first impact came by way of a supply shock as China-centred supply chains broke down.
- And then as countries ordered lockdowns and economies shut down, demand slumped.
- The ensuing distress in the real economy led to distress in the financial system.
So, how origin of the crisis matter for its resolution?
- Restoring the faith in the financial system was key to the resolution of GFC.
- Which meant rescue and rehabilitation of banks and other financial institutions.
- Once that task in the financial sector was accomplished, repair of the real economy fell in place.
- The demand came back, supply resumed and growth picked up.
- In contrast, the central challenge in the resolution of the CFC is to beat the pandemic, and that solution has to come from science.
- Only when there is public confidence that the incidence of the pandemic has been brought down to a low-level equilibrium, will there be a resolution in both the real and financial economies.
- We are seeing that even during this crisis, just like in 2008, governments are coming out with fiscal stimulus packages and central banks with monetary stimulus packages.
- But these are not solutions to the pandemic; they are just holding operations till the central problem is resolved.
2. No one country hold key to solution
- The second difference between the two crises arises from the asymmetry of the solutions.
- The GFC originated in the subprime mortgage sector of the US and then, rapidly engulfed the world.
- The CFC originated in the Hubei province of China and rapidly engulfed the world.
- But the similarity ends there.
- For the resolution of the GFC, restoring financial stability in the US was necessary, and a sufficient condition for restoration of financial stability everywhere.
- But the situation with the CFC is different.
- Every country needs to control the pandemic within its borders.
- But that is not sufficient because the virus can hit back from across the border.
- No country is safe until every country is safe.
3. Policy interventions involve a dilemma
- How the policy interventions interact with one another makes for the third difference between the two crises.
- During the resolution of the GFC, solutions in the financial sector and in the real economy reinforced each other.
- For example, to mitigate the crisis, the RBI cut rates and intervened in the forex market, the government extended special concessions for housing and real estate sectors to provide stimulus in the real economy.
- There was synergy in these actions.
- In contrast, in managing the challenge of the CFC, what we are seeing is tension between the various sets of policy actions.
- The effort to contain the pandemic is exacerbating the challenges in both the real economy and the financial sector.
- The more stringent the lockdown to save lives, the more extensive the loss of livelihoods.
- Managing this tension is by far the biggest dilemma for governments battling the crisis.
4. No single large economy to keep the world afloat
- The global financial crisis, although it was called “global” did not affect all countries equally.
- China was less affected even as all rich countries were in a financial meltdown.
- In fact, one of the less acknowledged facts of the 2008 crisis is that it was the stimulus provided by China that kept the global economy afloat.
- In contrast, now all rich and big economies are weighed down by the virus, and there is not a single large economy to keep the rest of the world afloat.
Consider the question “Analyse the key differences in the Global Financial Crisis of 2008 and the financial crisis caused by the Covid-19.”
Conclusion
If pandemics are going to be more frequent, as is now suspected, it is all the more important that there is a more enforceable global protocol on early warning and information sharing. For all their differences, the GFC and CFC are similar in one respect — they both teach us life-enhancing lessons. The GFC forcefully reminded us that greed and avarice will only bring tears in the end. The CFC is teaching us that the force of nature is bigger than the combined force of our science and technology.
Back2Basics: Credit Default Swap (CDS)
- A credit default swap (CDS) is a type of credit derivative that provides the buyer with protection against default and other risks.
- The buyer of a CDS makes periodic payments to the seller until the credit maturity date.
- In the agreement, the seller commits that, if the debt issuer defaults, the seller will pay the buyer all premiums and interest that would’ve been paid up to the date of maturity.
Collateralised Debt Obligations (CDO), MBS and ABS
- To create a CDO, investment banks gather cash flow-generating assets—such as mortgages, bonds, and other types of debt.
- These assets are then repackaged into discrete classes or tranches based on the level of credit risk assumed by the investor.
- These tranches of securities become the final investment products: bonds, whose names can reflect their specific underlying assets.
- For example, mortgage-backed securities (MBS) are comprised of mortgage loans.
- And asset-backed securities (ABS) contain corporate debt, auto loans, or credit card debt.
- CDOs are called “collateralized” because the promised repayments of the underlying assets are the collateral that gives the CDOs their value.
- Mortgage-backed securities played a central role in the financial crisis that began in 2007 and went on to wipe out trillions of dollars in wealth, bring down Lehman Brothers, and roil the world financial markets.
- In retrospect, it seems inevitable that the rapid increase in home prices and the growing demand for MBS would encourage banks to lower their lending standards and drive consumers to jump into the market at any cost.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: IATA
Mains level: Paper 3- Impact of corona pandemic on aviation industry.
Primarily the major driver of connectivity, the aviation industry is one of the worst affected industries in the corona crisis. It is in the need of relief package from the government. The article discusses the contribution of the industry in the economy. Finer details of the operation of the industry are also explained. In the end, details of the measures expected from the government relief package are discussed.
Significance of aviation industry in Indian economy
- The air transport industry, including airlines and its supply chain, is estimated to contribute directly or indirectly $72 billion of GDP to India.
- India being the fastest-growing domestic market in the world at 18.6 per cent per annum, followed by China at 11.6 per cent. (IATA report)
Impact of Covid-19 crisis
- The same IATA report says that in India, 29.32 lakh jobs in the aviation sector are at risk.
- Airlines in the Asia Pacific region may see the largest revenue drop.
- The air transport business along with its supply chain may see a near wipeout of approximately 40 per cent of business volume in the current financial year.
- The two-month-long shutdown has eroded the capital of most airlines.
- The cost of maintaining Aircraft on Ground (AoG) is extremely high, and with nil revenues, this is a sure-shot recipe for disaster.
Economics of running airlines profitably
- You should be flying your entire fleet, with no Aircraft on Ground. (Airbus A-320 or similar)
- Every plane must fly for 11 hours a day.
- Which will be possible only if you have a turnaround time of 30-45 minutes.
- And you have an average Passenger Load Factor (PLF) of around 65 to 67 per cent.
Now, consider this:
- Forty per cent of your fleet is grounded.
- Due to social distancing and other hygiene protocols, an aircraft can fly only eight hours because of the elongated turnaround time.
- One-third seats are to be kept vacant.
- And finally, you are flying with a reduced 50 per cent PLF.
- The break-even ticket price in such a scenario would be astronomical.
Demand for financial relief package
- The Asia Pacific division of the IATA has corresponded with the Indian government, citing the case of some of the other nations which have announced financial relief packages for the sector.
- As per reports, countries like Australia, New Zealand and Singapore, have announced relief packages for airlines.
- FICCI has urged the government to immediately provide direct cash support to Indian carriers whereby the airlines can meet their fixed costs.
What relief measures could be provided?
- First, a moratorium for the next 12 months on all interest on the principal amount of loans without limitations of size or turnover through a direction to all financial institutions.
- Second, VAT on ATF by state governments, which ranges from 0-30 per cent, should be rationalised with immediate effect to a maximum of 4 per cent across all states for the next six months.
- Third, aviation turbine fuel needs to be brought under the ambit of 12 per cent GST, with full input tax credit on all goods and services.
- Fourth, a waiver for private airport operators space rentals and AAI, royalty, landing, parking, route navigation and route terminal changes for the next one year.
- This should be done not only for the airlines but all aviation-related businesses.
- Fifth, all airlines and aviation-related business must be treated as priority sector lending.
- Sixth, no loans to airlines and other aviation-related business should be classified as NPAs and no collateral enforced or enhanced during this moratorium.
- Finally, support the airlines and other-aviation related companies by paying or taking care of salaries of the employees for a period of six months.
- This will allow employee retention and is being done in a lot of countries.
A question was asked by the UPSC in 2017 related to the development of Airports in India under PPP model. This shows the importance of the aviation sector from UPSC point of view. Consider the question asked by the UPSC “Examine the development of Airports in India through joint ventures under PPP model. What are the challenges faced by the authorities in this regard?”
Conclusion
Recovery from this crisis is going to be a long and uphill task. It will take effort, planning and, most importantly, coordination between the aviation industry and the government.
Back2Basic: IATA-International Air Transport Association
- IATA was founded in Havana, Cuba, on 19 April 1945.
- It is the prime vehicle for inter-airline cooperation in promoting safe, reliable, secure and economical air services – for the benefit of the world’s consumers.
- The international scheduled air transport industry is more than 100 times larger than it was in 1945.
- Few industries can match the dynamism of that growth, which would have been much less spectacular without the standards, practices and procedures developed within IATA.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: ESCAP
Mains level: Paper 2-Challenges facing Asia-Pacific region and scope for cooperation
The United Nations Economic and Social Commission for Asia and the Pacific (ESCAP) is one of the five regional commissions under the jurisdiction of the United Nations Economic and Social Council. This article examines the common challenges that ESCAP region faces- such as danger of pollution to the marine ecosystem, lack of data about ocean, connectivity issue faces by small island nations etc. Scope for the collaboration between ESCAP nations is explored.
Strain on marine ecosystem and its implications
- The Asia-Pacific seas provide food, livelihoods and a sense of identity, especially for coastal communities in the Pacific island states.
- Escalating strains on the marine environment is threatening our growth and way of life.
- In less than a century, climate change and unsustainable resource management have degraded ecosystems and diminished biodiversity.
- Over-fishing has exponentially increased, leaving fish stocks and food systems vulnerable.
- Marine plastic pollution originating from region’s rivers has contributed to most of the debris flooding the ocean.
Lack of data for SDG 14: Life below water
- Insights from ‘Changing Sails: Accelerating Regional Actions for Sustainable Oceans in Asia and the Pacific’, the theme study of this year’s Economic and Social Commission for Asia and the Pacific (ESCAP), focuses a lot on the need of data collection in the region.
- At present, data are available for only two out of ten targets for the Sustainable Development Goal 14, ‘Life Below Water’.
- Due to limitations in methodology and national statistical systems, information gaps have persisted at uneven levels across countries.
Challenges facing the region
1. Plastic Pollution
- Asia and the Pacific produces nearly half of global plastic by volume, of which it consumes 38%.
- Plastics represent a double burden for the ocean: 1) their production generates CO2 absorbed by the ocean, 2) as a final product enters the ocean as pollution.
- Need of the hour is effective national policies and re-thinking production cycles i.e. promoting a circular economy approach.
- Economic incentives and disincentives are necessary for the adoption of these policies as well as for minimizing resource use.
2. Decline in fish stocks
- Region’s position as the world’s largest producer of fish has come at the cost of over-exploitation.
- The percentage of stocks fished at unsustainable levels has increased threefold from 10% in 1974 to 33% in 2015.
- Generating complete data on fish stocks, fighting illicit fishing activity and conserving marine areas must remain a priority.
3. Connectivity of island nations
- While the most connected shipping economies are in Asia, the small island developing States of the Pacific experience much lower levels of connectivity.
- This leaves them relatively isolated from the global economy.
- Closing the maritime connectivity gap must be placed at the centre of regional transport cooperation efforts.
- We must also work with the shipping community to navigate toward green shipping. Enforcing sustainable shipping policies is essential.
Areas of cooperation
- Trans-boundary ocean management and linking ocean data in the region can be the starting step.
- Harnessing ocean statistics through strong national statistical systems will serve as a compass guiding countries to monitor trends, devise timely responses and clear blind spots.
- ESCAP by using Ocean Accounts Partnership can help to harmonise ocean data and provide a space for regular dialogue among nations.
- Translating international agreements and standards into national action is the key here. Also ensuring capacity building among nations to do so.
- ESCAP is working with member states to implement International Maritime Organization (IMO) requirements.
Consider the question-“What are the challenges facing the nations of Asia-Pacific amid growing levels of pollution and climate change. How cooperation among the countries of the region mitigate the risks? “
Conclusion
Our oceans keep our economy and our lives above the waves. We must use the years ahead to steer our collective fleets toward sustainable oceans.
Back2Basics: ESCAP- United Nations Economic and Social Commission for Asia and the Pacific (ESCAP)
- India has been the founding member of ESCAP.
- UNESCAP is the regional development arm of the United Nations in Asia and the Pacific, with a membership of 62 Governments, including 58 from the region.
- Established in 1947 with its headquarters in Bangkok, Thailand.
- UNESCAP serves as the highest intergovernmental regional platform to promote cooperation among member States for creating a more interconnected region working to achieve inclusive and sustainable economic and social development.
- It carries out work in the areas of macroeconomic policy, poverty reduction and financing for development; trade and investment; transport; environment and sustainable development; information and communications technology and disaster risk reduction; social development; statistics, sub-regional activities for development; and energy.
- UNESCAP also focuses on sub-regional activities to provide in-depth technical assistance to address specific key priorities, including poverty reduction and sustainable development, in the respective sub-regions.
IMO- International Maritime Organisation
- The IMO was established following agreement at a UN conference held in Geneva in 1948.
- And the IMO came into existence ten years later, meeting for the first time in 1959.
- As a specialized agency of the United Nations, IMO is the global standard-setting authority for the safety, security and environmental performance of international shipping.
- Its main role is to create a regulatory framework for the shipping industry that is fair and effective, universally adopted and universally implemented.
- IMO measures cover all aspects of international shipping – including ship design, construction, equipment, manning, operation and disposal – to ensure that this vital sector for remains safe, environmentally sound, energy-efficient and secure.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: Various labour laws.
Mains level: Paper 2- Legal issues in the suspension of labour laws by the States.
In keeping with the exigencies caused by the pandemic, some State governments have suspended several provision of labour laws. This article analyses the implications of such suspensions. And also emphasises the lack of legal basis in the State governments actions. Evolution of the labour laws in India is also discussed here. So, what are these legal issues? Read to know more…
Some labour laws suspended by the UP government
- The Uttar Pradesh government has issued an ordinance keeping in abeyance almost all labour statutes.
- Which includes laws on maternity benefits and gratuity.
- The Factories Act, 1948.
- The Minimum Wages Act, 1948.
- The Industrial Establishments (Standing Orders) Act, 1946.
- The Trade Unions Act, 1926.
- This will take away the protection conferred on organised labour by Parliament.
Some repressive labour laws in colonial era
- Bengal Regulations VII, 1819 was enacted for the British planters in Assam tea estates.
- Workers had to work under a five-year contract and desertion was made punishable.
- Later, the Transport of Native Labourers’ Act, 1863 was passed in Bengal.
- The Act strengthened control of the employers and even enabled them to detain labourers in the district of employment and imprison them for six months.
- Bengal Act VI of 1865 was later passed to deploy Special Emigration Police to prevent labourers from leaving and return them to the plantation after detention.
Workers’ struggle in British India
- The labour laws in India have emerged out of workers’ struggles, which were very much part of the freedom movement against oppressive colonial industrialists.
- Since the 1920s there were a series of strikes and agitations for better working conditions.
- Several trade unionists were arrested under the Defence of India Rules.
- The workers’ demands were supported by our political leaders.
- Britain was forced to appoint the Royal Commission on Labour, which gave a report in 1935.
- The Government of India Act, 1935 enabled greater representation of Indians in law-making.
- This resulted in reforms, which are forerunners to the present labour enactments.
- The indentured plantation labour saw relief in the form of the Plantations Labour Act, 1951.
Acts passed in India to protect workers’ rights
- The Factories Act lays down eight-hour work shifts, with overtime wages, weekly offs, leave with wages and measures for health, hygiene and safety.
- The Industrial Disputes Act provides for workers participation to resolve wage and other disputes through negotiations so that strikes/lockouts, unjust retrenchments and dismissals are avoided.
- The Minimum Wages Act ensures wages below which it is not possible to subsist.
Constitutional basis of the labour laws
- These enactments further the Directive Principles of State Policy.
- These laws also protect the right to life and the right against exploitation under Articles 21 and 23.
- Trade unions have played critical roles in transforming the life of a worker from that of servitude to one of dignity.
- In the scheme of socio-economic justice the labour unions cannot be dispensed with.
Is the suspension of labour laws legally sound?
- The Supreme Court, in Glaxo Laboratories v. The Presiding Officer, Labour (1983) said about contract between employer and employee “the contract being not left to be negotiated by two unequal persons but statutorily imposed.”
- The ‘two unequal’ here refers to the inequality between employee and employer.
- In Life Insurance Corporation v. D. J. Bahadur & Ors (1980), the Supreme Court highlighted that any changes in the conditions of service can be only through a democratic process of negotiations or legislation.
- Moreover, Parliament did not delegate to the executive any blanket powers of exemption.
- Section 5 of the Factories Act empowers the State governments to exempt only in case of a “public emergency”.
- Which is explained as a “grave emergency whereby the security of India or any part of the territory thereof is threatened, whether by war or external aggression or internal disturbance”.
- There is no such threat to the security of India now.
- Labour is a concurrent subject in the Constitution and most pieces of labour legislation are Central enactments.
- The U.P. government by Ordinance has said that labour laws will not apply for the next three years.
- How can a State government, in one fell swoop, nullify Central enactments?
- The Constitution does not envisage approval by the President of a State Ordinance which makes a whole slew of laws enacted by Parliament inoperable in the absence of corresponding legislations on the same subject.
- The orders of the State governments therefore lack statutory support.
Consider the question, “Several State governments have resorted to the suspension of labour laws in the aftermath of corona crisis. Examine the implications of the suspension of the laws for the rights of the labours.”
Conclusion
Governments have a constitutional duty to ensure just, humane conditions of work and maternity benefits. The health and strength of the workers cannot be abused by force of economic necessity. Labour laws are thus civilisational goals and cannot be trumped on the excuse of a pandemic.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: Not much.
Mains level: Paper 3- Changes in labour laws and growth in the economy.
Recently several State governments made changes in their labour laws and removed or expanded limits on working hours and changed several other provisions. The article argues that the move may not be as beneficial as it is thought to be. So, how come the changes turned out to be detrimental to the interests of the workers? and what are the other issues involved? Read to know more…
What changed laws mean?
- Uttar Pradesh introduced an ordinance that has scrapped most labour law for three years.
- This was done ostensibly for two reasons- 1) creating jobs and 2)for attracting factories exiting China.
- These laws deal with -the occupational safety, health and working conditions of workers, regulation of hours of work, wages and settlement of industrial disputes.
- They apply mostly to the economy’s organised (formal) sector, that is, registered factories and companies, and large establishments in general.
- Madhya Pradesh and Gujarat have quickly followed suit.
- Reportedly, Punjab has already allowed 12-hour shifts per day.
Why it is not a good move?
- Significantly, migrant labour will be critical to restoring production once the lockdown is lifted.
- In fact, factories and shops are already staring at worker shortages.
- Instead of encouraging workers to stay back or return to cities by ensuring livelihood support and safety nets, State governments have sought to strip workers of their fundamental rights.
- The abrogation of labour laws raises many constitutional and political questions.
- Scrapping labour laws to save on labour costs will not help start the economy but will do exactly the opposite.
- It will reduce wages, lower earnings (particularly of low wage workers) and reduce consumer demand.
- Further, it will lead to an increase of low paid work that offers no security of tenure or income stability.
- It will increase informal employment in the formal sector instead of encouraging the growth of formal work.
Demand is a reason for the slowdown
- There are no inherent shortages at the moment as the inflation rate remains moderate.
- Before the lockdown, the annual GDP growth rate had plummeted to 4.7% during October-December quarter of 2019-20, from 8.3% in the full year of 2016-17.
- The slowdown is due to lack of demand, not of supply, as widely suggested.
- With massive job and income losses after the lockdown, aggregate demand has totally slumped, with practically no growth.
- Therefore, the way to restart the economy is to provide income support and restore jobs.
- This will not only address the humanitarian crisis but also help revive consumer demand by augmenting incomes.
2 concerns over the rationale of scrapping laws
- The rationale for scrapping labour laws to attract investment and boost manufacturing growth poses two additional questions.
- One, if the laws were in fact so strongly pro-worker, they would have raised wages and reduced business profitability.
- But the real wage growth (net of inflation) of directly employed workers in the factory sector has been flat (2000-01 to 2015-16).
- This is because firms have increasingly resorted to casualisation and informalisation of the workforce to suppress workers’ bargaining power.
- Two, it is not right to blame the disappointing industrial performance mainly on labour market regulations.
- Industrial performance is not just a function of the labour laws.
- The industrial performance also depend on the size of the market, fixed investment growth, credit availability, infrastructure, and government policies.
- In fact, there is little evidence to suggest that amendment of key labour laws by Rajasthan and Madhya Pradesh in 2014 took them any closer to their goal of creating more jobs or industrial growth.
- The role of labour market regulations may be more modest than the strong views expressed against them in the popular debates.
Time to rationalise the labour laws
- India’s complex web of labour laws, with around 47 central laws and 200 State laws, need rationalisation.
- However, now more than ever before, reforms need to maintain a delicate balance between the need for firms to adapt to ever-changing market conditions and workers’ employment security.
- Depriving workers of fundamental rights such as freedom of association and the right to collective bargaining, and a set of primary working conditions such as adequate living wages, limits on hours of work and safe and healthy workplaces, will create a fertile ground for the exploitation of the working class.
- Presently, over 90% of India’s workforce is in informal jobs.
- These informal jobs have no regulations for decent conditions of work, no provision for social security and no protection against any contingencies and arbitrary actions of employers.
Consider the question “There is a rising demand for reforms in the labours laws in India. Examine the issues with the current labour laws in India. Suggest the areas which require improvements “
Conclusion
The changes made by the State governments should not end up doing more harm than good. To ensure that there must be a careful calibration of the move and its consequences.
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From UPSC perspective, the following things are important :
Prelims level: MGNREGA
Mains level: Paper 3- Employment issues caused due to economic disruption of the pandemic.
The article suggests ways to revive the economy while keeping in mind the livelihood issues of the vulnerable section of society. Urgent concern should be addressed by the food and cash transfer, after that for livelihood in the rural area MGNREGA can be of great help. In the urban area, a scheme based on the lines of MGNREGA is suggested. In the end, some ways to increase revenue are suggested.
Food and cash transfers
- Providing every household with ₹7,000 per month for a period of three months and every individual with 10 kg of free foodgrains per month for a period of six months is likely to cost around 3% of our GDP (assuming 20% voluntary dropout).
- This could be financed immediately through larger borrowing by the Centre from the Reserve Bank of India.
- The Centre should also clear outstanding Goods and Services Tax compensation.
- Food and cash transfer are doable for the following reasons.
- First, foodgrains are plentiful, as the Food Corporation of India had 77 million tonnes, and rabi procurement could add 40 million tonnes.
- Second, because of the lockdown restrictions multiplier effect would be less. (so, fewer concerns about inflation)
- Third, cash transfers in many spheres will only enable current demand to continue (such as payment of house rent to continue occupancy) and not create any fresh demand.
- Fourth, when greater normalcy finally allows demand held back during lockdown to the surface, output could also expand because of resumed economic activity.
- Finally, putting money in the hands of the poor is the best stimulus to an economic revival, as it creates effective demand and in local markets.
- Hence, an immediate programme of food and cash transfers must command the highest priority.
Need for changes in MGNREGA
- Millions of migrant workers have gone back home, and are unlikely to return to towns in the foreseeable future.
- Employment has to be provided to them where they are, for which the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) must be expanded greatly and revamped with wage arrears paid immediately.
- The 100-day limit per household has to go.
- Work has to be provided on demand without any limit to all adults.
- And permissible work must include not just agricultural and construction work, but work in rural enterprises and in care activities too.
- The revamped MGNREGS could cover wage bills of rural enterprises started by panchayats, along with those of existing rural enterprises, until they can stand on their own feet.
- This can be an alternative strategy of development, recalling the successful experience of China’s Township and Village Enterprises (TVEs).
- Public banks could provide credit to such panchayat-owned enterprises and also assume a nurturing role vis-à-vis them.
- Pandemic highlighted unsustainability of the earlier globalisation.
- Which means that growth in India in the coming days will have to be sustained by the home market.
- Since the most important determinant of growth of the home market is agricultural growth, this must be urgently boosted.
- The MGNREGS can be used for this, paying wages for land development and farm work for small and medium farmers.
- Also the government support through remunerative procurement prices, subsidised institutional credit, other input subsidies, and redistribution of unused land with plantations is possible.
- Agricultural growth in turn can promote rural enterprises, both by creating a demand for their products and by providing inputs for them to process.
- Both these activities would generate substantial rural employment.
Focus on urban area
- In urban areas, it is absolutely essential to revive the Micro, Small and Medium Enterprises (MSMEs).
- Simultaneously, the vast numbers of workers who have stayed on in towns have to be provided with employment and income after our proposed cash transfers run out.
- The best way to overcome both problems would be to introduce an Urban Employment Guarantee Programme, to serve diverse groups of the urban unemployed, including the educated unemployed.
- Urban local bodies must take charge of this programme and would need to be revamped for this purpose.
- “Permissible” work under this programme should include, for the present, work in the MSMEs.
- This would ensure labour supply for the MSMEs and also cover their wage bills at the central government’s expense until they re-acquire robustness.
- It should imaginatively also include care work, including of old, disabled and ailing persons, educational activities, and ensuring public services in slums.
The CARE economy: Public health, education, employment
- The pandemic has underscored the extreme importance of a public health-care system, and the folly of privatisation of essential services.
- The post-pandemic period must see significant increases in public expenditure on education and health, especially primary and secondary health including for the urban and rural poor.
- The “care economy” provides immense scope for increasing employment.
- Vacancies in public employment, especially in such activities, must be immediately filled.
- Anganwadi and Accredited Social Health Activists/workers who provide essential services to the population, including during this pandemic, are paid a pittance and treated with extreme unfairness.
- We must improve their status, treat them as regular government employees and give them proper remuneration and associated benefits, and greatly expand their coverage in settlements of the urban poor.
- These could easily come within the total package announced by the Prime Minister, which could be financed by printing money.
- But in the medium term, public revenues must be increased.
- This is not because there is a shortage of real resources which, therefore, has to be taken from other existing uses through taxation.
- Rather, since much-unutilised capacity exists in the economy, the shortage is not of real resources; the government has to just get command over them.
Suggestions to increase public revenue
- A combination of wealth and inheritance taxation and getting multinational companies to pay the same effective rate as local companies through a system of unitary taxation will garner substantial public revenue.
- They will also reduce wealth and income inequalities which have become horrendous.
- A 2% wealth tax on the top 1% of the population, together with a 33% inheritance tax on the wealth they bequeath every year to their progeny, could finance an increase in government expenditure to the tune of 10% of GDP.
- It would be argued that this might cause large financial outflows, which the country can ill-afford.
- Contrarily, even foreign capital is more likely to be attracted to a growing economy than one in sharp decline because of a lack of stimulus.
- Also, a fresh issue of special drawing rights by the International Monetary Fund which India has surprisingly opposed along with the United States would provide additional external resources.
- These additional resources, would suffice to finance the institution of five universal, justiciable, fundamental economic rights:1) the right to food, 2)the right to employment, 3)the right to free public health care, 4)the right to free public education and 5)the right to a living old-age pension and disability benefits.
Consider the question, “The economic disruption caused by the pandemic threatens the progress made on the front of inclusive growth. Suggest the measures to ensure the livelihood of the economically vulnerable section of the society in the aftermath of the pandemic in rural and urban areas.”
Conclusion
The broken economy must be rebuilt in ways to ensure a life of dignity to the most disadvantaged citizen. The ways suggested here shows how to achieve that.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: National Plan under DMA 2005
Mains level: Paper 2- Cooperative federalism amid Covid-19.
Federalism is part of Basic Structure (Doctrine) of the Constitution. The article is about the lack of cooperative federalism in some of the Central Government’s actions in its fight against the corona crisis. What are those actions? Read to know…
Opinion of political thinkers on federalism in India
- K.C. Wheare notes, federalism traditionally signifies the independence of the Union and State governments of a country, in their own spheres.
- The members of India’s Constituent Assembly carefully studied the Constitutions of other great federations like the US, Canada, Australia and Switzerland.
- However, they adopted a ‘pick and choose’ policy to formulate a system suited uniquely to the Republic’s need.
- As a result, India’s Constituent Assembly became the first-ever constituent body in the world to embrace what H. Birch and others have referred to as ‘cooperative federalism’.
- ‘Cooperative federalism’ is administrative cooperation between the Centre and the States, and a partial dependence of the States upon payments from the Centre.
- Accordingly, Indian constitutional law expert Granville Austin remarks that despite a strong Centre, cooperative federalism doesn’t necessarily result in weaker States.
- He also said that the progress of the Republic rests upon active cooperation between the two.
Lack of consultation with States under DMA 2005
- The zone classifications into ‘red’ and ‘orange’ has evoked sharp criticisms from several States.
- The States have demanded more autonomy in making such classifications.
- The Disaster Management Act of 2005 under which binding COVID-19 guidelines are being issued by the Centre to the States mandates consultation with the States.
- The Act envisages the creation of a ‘National Plan’ under Section 11, as well as issuance of binding guidelines by the Centre to States under Section 6(2), in furtherance of the ‘National Plan’.
- The ‘National Plan’ then is a broader vision document while the binding guidelines are its enforcement mechanism.
- Now, Section 11(2) of the Act mandates State consultations before formulating a ‘National Plan’.
- And when such binding guidelines are ultimately issued under it, they are expected to represent the views of the States.
- However, the Centre has not formulated the ‘National Plan’, and has chosen instead to respond to COVID-19 through ad hoc binding guidelines issued to States.
- Such guidelines thereby circumvent the legislative mandate of State consultations.
- This selective application of the Act serves to concentrate all decision-making powers with the Centre.
Lack of funds
- The Centre has declared that corporations donating to PM-CARES can avail CSR exemptions, but those donating towards any Chief Minister’s Relief Fund cannot.
- This directly disincentivises donations to any Chief Minister’s Relief Fund.
- And diverts crores in potential State revenues to PM-CARES; and makes the States largely dependent upon the Centre.
- Further, the revenue streams of several States have dried up because of the liquor sale ban; negligible sale of petrol/diesel; no land dealings and registration of agreements.
- States’ GST collections have also been severely affected with their dues still not disbursed by the Centre.
- All this has made it difficult for States to defray expenses of salaries, pensions and welfare schemes.
- As it is the States which act as first responders to the pandemic, supplying them with adequate funds becomes a pre-requisite in effectively tackling the crisis.
- This requires the Centre to view the States as equals, and strengthen their capabilities, instead of increasing their dependence upon itself.
Consider the question-“Cooperative federalism is the key in the country’s fight against the corona pandemic. Critically examine.”
Conclusion
Keeping the spirit of cooperative federalism alive whether in consultation with the States or taking care of their finances is essential as the country is fighting the pandemic. The Centre must realise that we have the best chance of winning the war against pandemic when we are united.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: DMA 2005, Residuary power of the Union legislature.
Mains level: Paper 2- Issues arising out of the use of the DMA 2005 to deal with the pandemic.
This article analyses the legal basis of application of the Disaster Management Act to deal with the pandemic by the Central Government. The Disaster Management Act had been enacted using the residuary power of the Union legislature. So, its application to deal with the pandemic gives rise to certain legal issues. Read to know more about such issues.
Two examples of why centralised approach may be counter-productive?
- One, the Central government has classified all districts in the country as red, orange or green zones.
- This classification was done in a bid to lift lockdown restrictions in an area-specific manner.
- Some States/Union Territories objected to the classification of certain areas/districts as red zones on the ground that these areas are very large.
- They pointed out that there was no need to keep economic activity on hold in an entire district when cases had been reported only from a small portion of that district.
- Two, Kerala, probably the best-performing State in terms of its response to COVID-19, was sent a missive by the Central government to refrain from relaxing restrictions in the State.
- The Central government did not trust the wisdom and judgment of the State government in the matter.
The federal scheme and residuary power to legislate
- Under the federal scheme, Parliament can legislate on matters under the Union List (List I).
- Stage legislatures can legislate on matters under the State List (List II).
- And both Parliament and State legislatures can legislate on matters under the Concurrent List (List III).
- The residuary power to legislate on matters that are not mentioned in either List II or List III vests with Parliament under Article 248 of the Constitution read with Entry 97 of List I.
- Furthermore, the rule of harmonious construction dictates that the entries in the legislative lists must be interpreted harmoniously.
- And in the event of any overlap between two or more entries, the specific subject matter contained in a particular entry must be deemed to have been excluded from another entry which may deal with a more general subject matter.
- Finally, as per Articles 73 and 162, the executive power of the Centre and the States is co-extensive with their respective legislative powers.
- Coextensive legislative and executive power means that the Central and State governments can only take executive actions in matters where Parliament and State legislatures, respectively, have powers to legislate.
So, which list contains Disaster Management?
- Disaster management as a field of legislation does not find mention in either List II or List III.
- Nor does any particular entry in List I specifically deal with this.
- Thus, the Disaster Management Act could only have been enacted by Parliament in the exercise of its residuary powers of legislation under Article 248 read with Entry 97 of List I.
Legal problems in using Disaster Management Act for pandemic
- The Disaster Management Act allows the Centre to issue guidelines, directions or orders to the States for mitigating the effects of any disaster.
- The definition of ‘disaster’ under the Act is quite broad and, literally speaking, would include a pandemic too.
- Such a reading of the Act would vest the Central government with powers to issue directions and guidelines to State governments for dealing with the pandemic in their States.
- However, ‘public health and sanitation’ is a specific field of legislation under Entry 6 of List II.
- This would imply that States have the exclusive right to legislate and act on matters concerning public health.
- Thus, the Centre’s guidelines and directions to the States for dealing with the pandemic trench upon a field of legislation and executive action that is exclusively assigned to the States — public health.
- The Supreme Court has held time and again that federalism is a basic feature of the Constitution and the States are sovereign.
- The Disaster Management Act cannot be applied to pandemics in view of the fact that the power to legislate on public health is vested specifically and exclusively with the States.
- Also, under Entry 29 of List III, both Parliament and State legislatures are competent to legislate on matters involving inter-State spread of contagious or infectious diseases.
- Therefore, theoretically speaking, Parliament would be competent to pass a law that allows the Central government to issue directions to the States to prevent inter-State spread of a disease like COVID-19.
- That law is not the Disaster Management Act which is concerned with disasters in general, and not pandemics in particular.
- ‘Prevention of inter-State spread of contagious and infectious diseases’ being a specific legislative head provided in List III, the same must be deemed to have been excluded from Parliament’s residuary legislative powers.
- Therefore, the Disaster Management Act, which has been enacted under Parliament’s residuary legislative powers, cannot be applied to the prevention of the inter-State spread of contagious and infectious diseases.
Role of Centre under Epidemic Diseases Act 1897
- The Epidemic Diseases Act, 1897, has the objective of preventing “…the spread of dangerous epidemic diseases.”
- However, under this Act, it is the State governments which have the prerogative to take appropriate measures for arresting the outbreak or spread of a contagious or infectious disease in their respective States.
- The Central government’s powers are limited to taking measures for inspecting and detaining persons travelling out of or into the country.
- Even if that Act were to be amended, it would not empower the Central government to issue directions to the States to contain the pandemic within the State.
- It can only deal with the inter-State spread of the disease.
Consider the question, “Use of the Disaster Management Act to deal with the Covid-19 pandemic gave rise to certain legal issues. Examine them.”
Conclusion
Instead of resorting to the Epidemic Diseases Act which gives powers to the States, the Centre has applied the Disaster Management Act. The States are not legally bound to observe the directions/guidelines being issued by the Central government and would be well within their rights to challenge them before the apex court.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: Emergency provision dealing with internal disturbance/ Provisions related to ordinances
Mains level: Paper 2- Changes made in labour laws without consultation.
The article examines the changes made in the labour laws by several states. The legal route to make these changes are different. While some states used the Emergency provision, others used the Ordinance route. One major issue with these changes is that these were brought in without consultation.
What legal route was used by the States?
- Changes were made by the several state government in the labour laws dealing with the maximum working hours and other provisions.
- These changes have been made through notifications issued by the State governments and will be applicable for the next three months.
- M.P. has also suspended most provisions of the Industrial Disputes Act, 1946 (except those related to retrenchment and layoffs) for 1,000 days for State undertakings.
- In addition, M.P. issued an ordinance to amend two laws.
- The M.P. Industrial Employment Standing Orders Act will apply to establishments with more than 100 workmen (up from the existing threshold of 50), in line with the Central Act.
- The ordinance also enables the government to exempt establishments from the provision of another Act that provided for a labour welfare fund.
- The Uttar Pradesh government has approved an ordinance that exempts establishments from all labour laws for three years with some exceptions.
- As this will override provisions of some Central laws, it will require the assent of the President or, in effect, the assent of the Central government.
- The question is, was there sufficient consultation before all these changes were made?
Constitutional provisions for the legal route taken: Emergency and ordinance
- As per the Constitution, the legislature has the authority to make laws.
- Such laws could delegate powers to the government which are in the nature of detailing some requirements.
- For example, the Factories Act allows State governments to exempt factories from the provisions of the Act during public emergencies for a maximum period of three months.
- A public emergency is defined as a grave emergency whereby the security of India or any part is threatened by war, external aggression or internal disturbance.
- Most States have used this provision, presumably interpreting the current situation as an ‘internal disturbance’.
- Haryana has used a provision that allows relaxation of work hours “to deal with an exceptional press of work”.
- The Constitution also permits Central and State governments to make laws through the issuance of an ordinance when the legislature is not in session.
- Such a law needs to be ratified by the legislature within six weeks of the beginning of the next session. M.P. and U.P. are using this procedure.
Issues with the changes made
- Usually, any change in an Act follows a rigorous process of public consultation, scrutiny by committees of Parliament, and debates in the House before being approved.
- The changes described here have not gone through such a process.
- However, most of these have a three-month time limit, and any extension would need to be approved by the legislature.
The four labour codes
- The Parliament is consolidating 29 existing laws into four codes dealing with- 1) wages, 2) occupational safety and health, 3) industrial relations,4) social security.
- The first of these has been enacted, the Standing Committee on Labour has submitted the report on the next two, and is examining the last.
- The Code on Occupational Safety and Health does not specify the maximum hours of work but empowers the government to do so.
- The Standing Committee report states that the government agreed to incorporate a provision of maximum eight hours per day with overtime permitted for certain types of industry.
Consider the question “Several States made changes in the labour laws to deal with the problems caused by the corona pandemic. Examine the legal provisions used for making such changes by various States. What are the issues with such changes?”
Conclusion
Given the emergency, the government has to take quick action and change the response as the situation evolves. However, that should not be a reason to exclude the processes of consultation with and scrutiny by elected representatives. The legitimacy of state action in a parliamentary democracy comes from the fact that there is constant oversight and check by elected representatives.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: WTO
Mains level: Paper 3- Changes in trade politics in the US and opportunities for India.
The article focuses on the changes in the US trade politics fueled by the corona pandemic. Also there has been a growing demand for abandoning the WTO. So, amid this shift in the US politics, what are the opportunities for India at the global level?
What went wrong with the WTO: The US point of view
- Latest opposition to the WTO was expressed in a forceful article by a US senator, Josh Hawley.
- In his opinion, corona pandemic expresses the hard truth about the modern global economy: it weakens American workers and empowers China’s rise.
- So, what went wrong?
- Capital and goods moved across borders easier than before but so did jobs. And too many jobs left America’s borders for elsewhere.
- As factories closed, workers suffered, from small towns to the urban core.
- So, he wants US to abandon the WTO.
Rise of trade politics in the US
- Under Trump, the Republican Party has turned from the champion to a critic of free trade.
- The Democratic Party, which embraced globalisation since the early 1990s, has seen the erosion of working-class support.
- Elections this year could reveal if the shifting alignments on trade are now cast in stone or if anti-trade sentiment in America is deep and wide.
What alternatives are suggested by the senator?
- In replacing the WTO, Hawley suggests the following two measures-
- 1) The United States must seek new arrangements and new rules, in concert with other free nations, to restore America’s economic sovereignty.
- 2) This, in turn, involves building a new network of trusted friends and partners to resist Chinese economic imperialism.
How this matters for India?
- India will have to take a fresh look at the global economy battered by the coronavirus.
- India should pay close attention to Hawley’s theme on working with “trusted friends and partners” to restructure international trade.
- Hawley is not alone in articulating this view.
- Reuters reported from Washington that the Trump Administration is “turbocharging” an initiative to rearrange the global supply chains currently centered on China.
- This rearrangement of the global supply chain offers an opportunity for India to lead the future global supply chains.
Consider the question, “Critically analyse the opportunities presented to India by the changes in trade politics in the US”.
Conclusion
Hobbled as it was by shaky political coalitions and preoccupied by multiple domestic challenges, India in the mid-1990s struggled to cope with the profound changes in the global economic order. As the world trade system arrives at a contingent moment a quarter of a century later, India is hopefully better prepared.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: G-7, G-20, BRI etc.
Mains level: Paper 2- Recent changes in the global order that were hastened by the pandemic.
The article examines 7 trends that have been emerging in the global order for quite some time now. The corona crisis has only accentuated these trends. So, what are these trends? read to know more.
1. The rise of Asia
- The first trend which became clear in the aftermath of the 2008 global financial crisis is the rise of Asia.
- Economic historians pointed to its inevitability, recalling that till the 18th century, Asia accounted for half the global GDP.
- The Industrial Revolution accompanied by European naval expansion and colonialism contributed to the rise of the West, and now the balance is being restored.
- The 2008 financial crisis showed the resilience of Asian economies.
- And even today, economic forecasts indicate that out of the G-20 countries, only China and India are likely to register economic growth during 2020.
- Asian countries have also demonstrated greater agility in tackling the pandemic compared to the United States and Europe.
- This is not limited to China but a number of other Asian states have shown greater responsiveness and more effective state capacity.
- Consequently, Asian economies will recover faster than those in the West.
2. Decline of the US
- The second trend is the retreat of the U.S.after a century of being in the forefront of shaping the global order.
- The U.S. played a decisive role in shaping the world, from the World Wars to the leadership of the western world during the Cold War, molding global responses to threats posed by terrorism or proliferation or climate change.
- But recent examples show that interventions in Afghanistan and Iraq have become quagmires that have sapped domestic political will and resources.
- President Donald Trump called for “America first” and during the current crisis, the U.S.’s efforts at cornering supplies of scarce medical equipment and medicines and acquiring biotech companies engaged in research and development in allied states, shows that this may mean “America alone”.
- Moreover, even as countries were losing trust in the U.S.’s leadership, its mishandling at the home of the pandemic indicates that countries are also losing trust in the U.S.’s competence.
3. Weakening unity of the EU
- A third trend is the European Union’s continuing preoccupation with internal challenges.
- This internal disruption is generated three factors: 1) EU’s expansion of membership to include East European states 2) Impact of the financial crisis among the Eurozone members 3) Ongoing Brexit negotiations.
- Threat perceptions vary between old Europe and new Europe making it increasingly difficult to reach agreement on political matters e.g. relations with Russia and China.
- Rising populism has given greater voice to Euro-sceptics and permitted some EU members to espouse the virtues of “illiberal democracy”.
- Adding to this is the North-South divide within the Eurozone.
- This divide was seen when austerity measures were imposed on Greece, Italy, Spain and Portugal a decade ago by the European Central Bank.
- These austerity measures were persuaded by the fiscally conservative Austria, Germany and the Netherlands.
- The EU lacked solidarity when Italy was battling the pandemic alone.
- Further damage was done when Italy was denied medical equipment by its EU neighbours who introduced export controls.
- Schengen visa or free-border movement has already become a victim to the pandemic.
- The EU will need considerable soul searching to rediscover the limits of free movement of goods, services, capital and people, the underlying theme of the European experiment of shared sovereignty.
4. Rise of China
- China’s growing economic role has been visible since it joined the World Trade Organization in 2001.
- Its more assertive posture has taken shape under President Xi Jinping’s leadership with the call that a rejuvenated China is now ready to assume global responsibilities.
- In recent years, the U.S.-China relationship moved from cooperation to competition; and now with trade and technology wars, it is moving steadily to confrontation.
- A partial economic de-coupling had begun and will gather greater momentum.
- The Belt and Road Initiative involves investing trillions of dollars in infrastructure building as a kind of pre-emptive move against any U.S. attempts at containment.
- Even if Mr Xi’s leadership comes under questioning, it may soften some aggressive policy edges but the confrontational rivalry with the U.S. will remain.
5. Failure of multinational institutions
- With COVID-19, international and multilateral bodies are nowhere on the scene.
- The World Health Organisation (WHO) was the natural candidate to lead global efforts against the health crisis but it has become a victim of politics.
- The UN Security Council (UNSC), the G-7 and the G-20 are paralysed when the world faces the worst recession since 1929.
- The reality is that these institutions were always subjected to big power politics.
- During the Cold War, U.S.-Soviet rivalry blocked the UNSC on many sensitive issues and now with major power rivalry returning, finds itself paralysed again.
- Agencies such as WHO have lost autonomy over the decades as their regular budgets shrank.
- Budget constraints forced them to increasingly rely on voluntary contributions sourced largely from western countries and foundations.
- The absence of a multilateral response today highlights the long-felt need for reform of these bodies but this cannot happen without collective global leadership.
6. The oil prices
- The two trends were changing energy markets: 1)Growing interest in renewables and green technologies on account of climate change concerns. 2) The U.S. emerging as a major energy producer.
- Now, a looming economic recession and depressed oil prices will exacerbate internal tensions in West Asian countries which are solely dependent on oil revenues.
7. Stability of West Asia
- Long-standing rivalries in the region have often led to local conflicts but can now create political instability in countries where regime structures are fragile.
Consider the question “The Corona crisis contributed to speeding the failure of a global order which had been faltering before the pandemic afflicted the world. Examine the trends that have been accentuated by the pandemic.”
Conclusion
The vaccine may end the corona crisis when it comes, but the unfolding trends in the geopolitics have been altering the world even before the corona crisis and continue to do so after a pandemic is over.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: IBC 2016 provisions.
Mains level: Paper 3- IBC provisions and need for novel approach to deal with the economic fallout of the pandemic.
In this article the author suggests a new approach to deal with multiple bankruptcies and stressed assets that would come up post COVID. So, what is the new approach and how it is different from the existing IBC? Read further.
Why is speed of resolution important?
- First, because it is the only way to revive the economy.
- As revenues have dried up cash flow problems have cascaded down the supply chain.
- Firms will consequently be unable to restart production unless they first get credit to pay their suppliers and workers.
- But impaired firms cannot get credit and impaired banks cannot provide it.
- So, the entire economy will be stuck unless the balance sheet problem is sorted out.
- Second, speed will also minimise the losses from the COVID crisis.
- The value of bankrupt firms decays rapidly over time, and the bill for this loss will have to be borne ultimately by the government.
- So, speed is necessary to contain the damage to the government’s financial position, which has been badly eroded by the COVID crisis.
- But moving quickly will be difficult.
- The only real mechanism that currently exists to handle stress and bankruptcy is the Insolvency and Bankruptcy Code (IBC) system, which has been suspended for six months.
Why the IBC cannot help much?
- Many have therefore argued for bringing the IBC back into operation as soon as possible.
- Why such a strategy would not be very effective? The system is slow, with many cases taking two years or more; it could easily become overwhelmed completely if it is forced to absorb a large new set of bankrupt firms.
- In addition, the IBC envisages that banks maximise their recoveries by auctioning off the bankrupt firms to the highest bidder.
- But in a nation and indeed a world, where all balance sheets are damaged, it is not obvious who would be able to buy these firms, or at what prices.
- So recovery rates from sales could be low, undermining the objective of the exercise.
- Even if strong bidders could be found, there is a fundamental political, even philosophical, question of whether it is really right to take these firms away from their promoters.
- After all, many of these firms did nothing wrong; they got into financial difficulties because of the corona crisis.
So, what is the solution?
- What is needed is a new set of procedures that can utilise much of the existing IBC framework, but are simple, straightforward, and prompt, with a built-in expiry clause.
- Let’s Call them Special Non-Adversarial Procedures (SNAP).
- As soon as the lockdown is largely over, the IBC creditor committees (CoCs) could meet to assess the new wave of NPAs.
- The largest, most complex cases — say, those with debts exceeding Rs 10,000 crore — would be sent to the IBC for regular treatment.
- But all other cases would be eligible under SNAP
- After all, the wider the set of companies that are put back on their feet quickly, the stronger the recovery will be.
How would the SNAP work?
- Under SNAP, CoCs would, over the next three months, examine delinquent firms’ financial records, checking to see whether they are actually viable.
- If so, these firms would be designated as Lockdown Affected Enterprises (LAEs), eligible under SNAP.
- Since the basis of the designation would be that the firm is fundamentally sound but because of COVID impact, an Insolvency Professional (IP) appointed by the CoC would work with existing management (who would continue to run the firm) to arrange for interim finance.
- Then, the IP would assess how much of a debt reduction the firm needs, and within three months would present a specific proposal to the CoC.
- If the CoC can reach a two-third majority in favour of the proposal, the promoter would keep the firm, while the firm would be granted immediately released from bankruptcy.
- Since the National Company Law Tribunal (NCLT) is already overloaded, it would not be involved at all in SNAP.
- If the CoC cannot reach agreement within the three-month deadline, or if at any subsequent point the firm defaults on its newly reduced debt, it would be sent to the IBC for resolution.
- SNAP would be disbanded by end-December 2020.
Checks and balances under SNAP
- Such a system would have a series of checks and balances, to prevent firms from securing undeserved debt reductions.
- Banks would need to certify that defaulters are truly LAEs.
- IPs would need to certify the size of the debt reduction.
- A large majority of creditor banks would need to agree to the IP’s proposal.
What should be the role of the government in SNAP?
- With these checks and balances in place, the government should then commit to two things.
- First, it should provide some legal cover, ensuring that bankers would not be subject to investigations by the anti-corruption agencies, as long as they followed the LAE rules.
- Second, the public sector banks would be compensated for the costs of the reduction in the value of the asset, automatically and fully.
Major advantage of SNAP
- Besides speed, SNAP would have one further major advantage.
- It would reduce the adversarial nature of the IBC process, arising because promoters are forced to cede their firms.
- Under the proposed system, promoters would not only have incentives to cooperate; they would actually want to take the initiative, applying for LAE designation themselves, in the hopes that they could get back to business as soon as possible.
- Such a system might seem difficult to envisage, but it is certainly feasible: It is a design feature under Chapter 11 of the American bankruptcy act.
- If SNAP succeeds, some of the special procedures could be introduced permanently into the IBC framework, adding a new dimension: Not just liquidation and rehabilitation under new promoters but rehabilitation under existing management.
Way forward
- After SNAP, repair of the financial system would have to go back to addressing the long-standing problems, which will have been aggravated by the crisis.
- Firms that were unviable even before the COVID crisis would be sent directly to the IBC, but with the IBC reformed.
- The government should issue guidelines focusing on the following three-
- 1. Focusing the COCs on the goal of maximising value, disregarding non-commercial objectives.
- 2. Directing the NCLT courts to focus on the CoCs’ adherence to the procedure rather than on the merits of their decisions.
- 3. Increasing competition in the auction by allowing promoters to bid for their assets, as long as they have not been declared wilful defaulters.
- For the power and real estate sectors, a sui generis approach via the creation of a bad bank is still the best way forward.
- Real estate resolutions need to take into account the interests of home-owners, something that is almost impossible to do under the IBC.
Consider the question, “Economic revival after the pandemic would require some tweaks in the IBC as it was not designed to handle such situations. Suggest the ways to handle the bankruptcies more effectively and changes that are desired in the IBC.”
Conclusion
Introducing three-pronged strategy quickly would set the stage for the economic recovery of India: 1) Special, expedited, non-adversarial and time-bound bankruptcy procedures (SNAP) for COVID-affected firms 2) A reformed IBC focused squarely on loss-minimisation 3)Bad banks for stressed assets in the power and real estate sectors.
Back2Baciscs: What is Insolvency and Bankruptcy Code-2016?
- The Code creates time-bound processes for insolvency resolution of companies and individuals. These processes will be completed within 180 days. If insolvency cannot be resolved, the assets of the borrowers may be sold to repay creditors.
- The resolution processes will be conducted by licensed insolvency professionals (IPs). These IPs will be members of insolvency professional agencies (IPAs). IPAs will also furnish performance bonds equal to the assets of a company under insolvency resolution.
- Information utilities (IUs) will be established to collect, collate and disseminate financial information to facilitate insolvency resolution.
- The National Company Law Tribunal (NCLT) will adjudicate insolvency resolution for companies. The Debt Recovery Tribunal (DRT) will adjudicate insolvency resolution for individuals.
- The Insolvency and Bankruptcy Board of India will be set up to regulate functioning of IPs, IPAs and IUs.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: GVA, Fiscal deficit
Mains level: Paper 3- Extent of damage to various sectors of the economy and challenges ahead for the government.
Various projections of growth paint a grim picture of the Indian economy as well as the global economy. This article analyses the sector-wise impact and comes with the GVA projections for 2020-21. The government has to deal with serious challenges like financing huge fiscal deficits. So, what will be the growth rate for 2020-21 and what will be the size of GVA? Read to know!
Projections of growth and uncertainty
- Various institutions have assessed India’s growth prospects for 2020-21 ranging from 0.8% (Fitch)to 4.0% (Asian Development Bank).
- This wide range indicates the extent of uncertainty and tentative nature of these forecasts.
- The International Monetary Fund (IMF) has projected India’s growth at 1.9%, China’s at 1.2%, and the global growth at (-) 3.0%.
- The actual growth outcome for India would depend on: 1) the speed at which the economy is opened up 2) the time it takes to contain the spread of virus, and, 3) the government’s policy support.
Health of India economy before the crisis
- India slid into the novel coronavirus crisis on the back of a persistent economic downslide.
- There was a sustained fall in the saving and investment rates with unutilised capacity in the industrial sector.
- In 2019-20, there was a contraction in the Centre’s gross tax revenues in the first 11 months during April 2019 to February 2020, at (-) 0.8%.
- These trends continue to beset the Indian economy in this crisis.
Growth prospects for 20-21 from the output side
- In 2019-20, which would serve as the base year, India may show GVA growth of about 4.4%,
- This is well below the Central Statistics Office’s second advance estimate of 9%.
- The IMF’s GDP growth estimate for 2019-20 is at 2%.
- GVA is divided into eight broad sectors. Although all sectors have been disrupted, some may be affected less than the others. We divide the output sectors in four groups.
- Group A- This group is likely to suffer minimum disruption.
- Agriculture and allied sectors, and public administration, defence.
- Despite some labour shortage issues, agriculture sector may show near-normal performance.
- The public and defence services have been nearly fully active, with the health services at the forefront of the the COVID-19 fight.
- For the group A sectors, it may be possible to achieve 90% of the 2019-20 growth performance.
- Group D- This group is likely to suffer maximum disruption.
- This includes, trade, hotels, restaurants, travel and tourism under the broad group of “Trade, Hotels, Transport, Storage and Communications”.
- This sector may be able to show 30% of 2019-20 growth performance.
- Group B
- This comprises sectors which may suffer average disruption showing 50% of 2019-20 growth performance.
- These sectors are mining and quarrying, electricity, gas, water supply and other utility services, construction, and financial, real estate and professional services.
- Group C
- In this group come manufacturing which has suffered significant growth erosion in 2019-20.
- It is feasible to stimulate this sector by supporting demand.
- In this case a 40% performance factor on the average growth of the preceding three years is applied.
So, what are the estimates for 2020-21 GVA?
- Considering these four groups together, a GVA growth of 2.9% is estimated for 2020-21.
- Realising this requires strong policy support, particularly for the manufacturing sector which has a weight of 17.4%.
- It is also based on the assumption that the Indian economy may move on to positive growth after the first quarter.
- In the first quarter, GVA growth will be negative.
Policy support for the growth
- Monetary policy initiatives undertaken so far include a reduction in the repo rate to 4.4%, the reverse repo rate to 3.75%, and cash reserve ratio to 3%.
- The Reserve Bank of India has also opened several special financing facilities.
- These measures need to be supplemented by an appropriate fiscal stimulus.
- Cash-constrained central and State governments have taken expenditure reducing measures by announcing freezing of enhancements of dearness allowance and dearness relief.
- This may result in savings of ₹37,000 crore for the Centre and about ₹82,000 crore for the States, together amounting to 6% of GDP.
- There is also talk of substantially reducing non-salary defence expenditure.
- With lower petroleum prices, fertilizer and petroleum subsidies may be reduced.
- These expenditure cuts are contemplated to keep the fiscal deficit under some control.
Fiscal stimulus and fiscal deficit
- Fiscal stimulus can be of three types:
- 1) Relief expenditure for protecting the poor and the marginalised.
- 2) Demand-supporting expenditure for increasing personal disposable incomes or government’s purchases of goods and services, including expanded health-care expenditure imposed by the novel coronavirus, and,
- 3) Bailouts for industry and financial institutions.
- The Centre had earlier announced a relief package of ₹1.7-lakh crore.
- The Centre’s budgeted fiscal deficit of 3.5% of GDP may have to be enhanced substantially to 1) make up for the shortfall in budgeted revenues; 2) account for a lower than projected nominal GDP for 2020-21, 3) provide for a stimulus.
- Thus, the Centre’s fiscal deficit may increase to 6.0% of GDP.
- Expenditure on the construction of hospitals, roads and other infrastructure and purchase of health-related equipment and medicines require prioritisation.
- These expenditures will have high multiplier effects.
- Similar initiatives may be undertaken by the State governments which may also enhance their combined fiscal deficit to about 0% of GDP to account for 3.0% of GDP under their respective Fiscal Responsibility Legislation/Law and to provide for the shortfall in their revenues and some stimulus.
Challenges
- Financing of the fiscal deficit poses a major challenge this year.
- On the demand side, the Central (6.0%) and State governments (4.0%) and Central and State public sector undertakings (3.5%).
- These together present a total public sector borrowing requirement (PSBR) of 13.5% of GDP.
- Against this, the total available resources may at best be 9.5% of GDP.
- The gap of 4.0% points of GDP may result in increased cost of borrowing for the Central and State governments.
Consider the question, “Examine the sector-wise damage caused to the economy due to Covid-19 pandemic. What were the fiscal and monetary measures taken to mitigate the damage and challenges faced by the government in meeting the required revenue demands.”
Conclusion
The gap in requirement of resources and availability may be bridged by enhancing net capital inflows including borrowing from abroad and by monetising some part of the Centre’s deficit. The monetisation of debt can at best be a one-time effort. This cannot become a general practice.
Back2Basics: What is GVA?
- GVA it is a measure of total output and income in the economy.
- It provides the rupee value for the amount of goods and services produced in an economy after deducting the cost of inputs and raw materials that have gone into the production of those goods and services.
- It also gives sector-specific picture like what is the growth in an area, industry or sector of an economy.
- While GVA gives a picture of the state of economic activity from the producers’ side or supply side, the GDP gives the picture from the consumers’ side or demand perspective.
- Both measures need not match because of the difference in treatment of net taxes.
- GDP = GVA + taxes on products – subsidies on products
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: Not much.
Mains level: Paper 2- Changing global order presents opportunities for India.
The world is going through a transition phase. We are experiencing the rise of new powers and the decline of the old. India has to navigate its path through this changing order keeping its interests in mind. The double opportunity in current scenario for India is explained in the article. To know more about it, continue reading.
The changing global stage
- The world today is fragmenting and slowing down economically.
- Asia-Pacific is the new economic and political centre of the world with the rise of China, India and other powers — Indonesia, South Korea, Iran, Vietnam.
- Rapid shifts in the balance of power in the region have led to arms races and the US’s “America First” attitude has led to rising uncertainty.
- China-U.S. strategic contention is growing, uninhibited so far by their economic co-dependence.
- As China seeks primacy in a world so far dominated by the U.S., the world faces a destabilising power transition which may or may not be completed.
What should India’s response be to the new situation?
Alliance with the US?
- Many experts advocate that India should enter into an alliance with the U.S in the wake of rising China.
- But India is much greater and more resilient than these people think.
- Also, the aim of foreign and security policies of India has been the pursuit of strategic autonomy for India.
- Thus, in the present situation, India should retain the above initiative and not get entangled in others’ quarrels. (i.e. the US-China quarrel)
- Also, India should focus on pursuing its own national interest in this disorganized and uncertain world by creative diplomacy and flexibility.
- An alliance seems to be exactly the wrong answer.
China challenge
- One way to handle China could be to see whether the two countries can evolve a new modus vivendi.
- This new modus vivendi shall replace the one that was formalised in the 1988 Rajiv Gandhi visit.
- The old framework is no longer working and the signs of stress in the relationship are everywhere.
- The more India rises, the more it must expect Chinese opposition.
- So, India will have to work with other powers to ensure that its interests are protected in the neighbourhood, the region and the world.
- The complexity of India-China relations suggests there is a scope for new modus vivendi.
- This would require a high-level strategic dialogue between the two sides about their core interests, red lines, differences and areas of convergence.
What India can do to keep the region multi-polar?
- As U.S. is withdrawing from the world, it will no longer be the upholder of international, economic and political order.
- There is uncertainty over how the US will choose to deal with China.
- India must work with other powers to ensure that this region stays multi-polar and that China behaves responsibly.
Double opportunity for India
- 1. Opportunity in the US-China contention
- US-China contention will continue in future. Hence, both China and the U.S. will look to put other conflicts (eg: conflicts with India on trade or border issue) and tensions on the back burner.
- This effect is already perceptible in the Wuhan meeting between China’s President Xi Jinping and Mr. Modi in early 2018.
- And the apparent truce and dialing back of rhetoric by both India and China.
- 2. Opportunity to Change national security Structures
- Today, India is more dependent on the outside world than ever before.
- It relies on the world for energy, technology, essential goods like fertilizer and coal, commodities, access to markets, and capital.
- Adding the new security agenda and the contested global commons in outer and cyberspace and the high seas to India’s traditional state-centred security concerns gives India a sense of insecurity.
- So, India needs to adapt to the changes and avoid imitating China.
Consider the question-“The global order is experiencing geopolitical churn, new powers are rising and older are staring at the decline. In such a scenario, examine the opportunities India can explore in the context of the US-China contention”.
Conclusion
India risks missing the bus to becoming a developed country if it continues business and politics as usual. The most important improvement that India needs to make concerns its national security structures and their work — introducing flexibility into India’s thinking and India’s structures. For change is the only certainty in life.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: Not much.
Mains level: Paper 2- Adoption of technology by judiciary in its functioning.
COVID pandemic has been changing many aspects of our life and forcing us to innovate or embrace the novel changes. The judiciary is not immune to this change. This article advocates for the adoption and popularization of online court. But there were several attempts at the adoption of technology in the working of courts even before the pandemic. Time has now come to its adoption on a wider scale.
Three types of courts in our justice delivery system
- First, conventional courts located in court complexes where judges, lawyers and litigants are physically present.
- Second, online courts where the judge is physically present in the courtroom but the lawyer or litigant is not.
- This is the present arrangement, except that now the courtroom is the residential office of the judge, due to the lockdown.
- Third, virtual courts where there is no judge, lawyer or litigant and a computer takes a decision based on the inputs of the litigant.
Pilot project with Tihar Jail
- The pilot was for dealing with routine remand cases of prisoners.
- The procedure postulated prisoners being produced in court, not physically but through video conferencing (VC), hence an online court.
- The pilot project started tentatively with some hiccups but proved to be a success.
- Now several courts have adopted the online process with varying degrees of commitment.
District courts and High Courts’ adoption of online route
- A few district judges have taken a step forward and recorded the statement of parties in cases of divorce by mutual consent.
- As of now, several such cases, including those involving NRIs, are dealt with through VC in online courts.
- Punjab and Haryana judges have gone even further ahead. The online courts record the expert evidence of doctors from PGIMER through VC.
- This has freed the doctors from time-consuming trips to the courts and has resulted in savings of several crores for the exchequer.
- A determined and concerted effort is necessary to popularise online courts at the district level.
- Some high court judges in Delhi and Punjab and Haryana have completely dispensed with paper.
- In these high courts, everything is on a soft copy, through e-Filing and scanned documents.
- Lawyers and judges have made necessary adjustments to the new regime and the cases are conveniently heard and decided in “paperless courts”.
- A few other high courts initiated similar steps, but have yet to institutionalise “paperless courts”.
What are the problems?
- Unfamiliarity with the medium of communication is the major issue. Judges are simply not used to consciously facing a camera generally and in particular while hearing a case.
- Similarly, lawyers find it difficult to comfortably argue while seated.
- Body language, facial expressions, the tone and tenor, both of the judge and the lawyer, make for important signals and clues which cannot be captured in VC.
- Some technical problems in conducting online hearings have also surfaced. The bandwidth is not adequate or stable enough.
- The picture sometimes breaks or gets frozen and the voice often cracks.
- Consultations are also a problem. Lawyers occasionally need to consult their client or the instructing advocate; judges also need to consult each other during a hearing.
- Attention needs to be paid to these real-time issues otherwise lawyers will harbour misgivings about a fair hearing.
- The chairman of the Bar Council of India has voiced a concern that 90 per cent of the lawyers are not computer literate or tech-savvy.
eCourts Project: A virtual court
- A virtual court is a unique contribution of the eCourts Project.
- A pilot virtual court was launched in August 2018 in Delhi for traffic offences and it has been a great success.
- Virtual courts have been successfully tried out in Delhi, Haryana, Maharashtra and Tamil Nadu.
- A virtual court is a simple programme through which a person can find out if a challan has been issued to him or her through a search facility.
- If a challan has been issued, the details are available online and the person may plead guilty or not guilty.
- On a guilty plea, the minimum fine is imposed and on a not-guilty plea, the case is electronically transferred to the traffic court for trial.
- At the end of the day, a judge reviews the cases and disposes of them electronically depending on the option exercised.
- One judge is all it takes to manage the virtual court for Delhi or an entire state.
- With the launch of virtual courts, the daily footfalls to the courts have drastically reduced and thousands have pleaded guilty and paid the fine electronically.
Potential of the virtual courts
- The virtual court system has the potential of being upscaled and other petty offences attracting a fine such as delayed payments of local taxes or compoundable offences can also be dealt with by virtual courts.
- This will ease the burden on conventional courts and therefore must be strongly encouraged.
Consider the question- “Covid-19 pandemic has been forcing judiciary for faster adoption of technology. Discuss the issues and advantages of the adoption of technology such as video conferencing by the judiciary”
Conclusion
Post lockdown, justice delivery will certainly undergo a transformation. And judges, lawyers and litigants will need to adapt to the new normal. Several countries and courts have made adjustments not only for the period of the pandemic or lockdown but also for the future. We should certainly not be left behind but must also make a roadmap to meet the challenge.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: Not much.
Mains level: Paper 3- Transforming military
The COVID blaze caused economic disruption and now even the military is feeling the heat. The military is grappling with multiple issues like freezing of fresh capital acquisition and delay in procurement. But this could also be considered as an opportunity to transform the Indian military. 4 areas where this transformation could start are discussed in this article. Read to know more.
The difference in approaches to security
- Pakistan’s approach: Pakistan stagnates in an existential-threat-based and India-centric approach to national security.
- What is China’s approach? China’s expansive global strategy and unbridled capability-based development surge have overcome the dangers of direct competition with the US.
- It has closed the gap through an “indirect approach to international security”.
- This indirect approach looks at building on strengths in areas such as cyberspace, non-contact warfare, economic and diplomatic coercion.
So, what should be India’s approach to security?
- Strategic guidelines for India’s must shift from a threat-based methodology to a multi-disciplinary capability.
- An outcome-based orientation to fit with the nation’s power aspirations.
4 most critical means to kick-start the transformation:
1. Creation of indigenous defence capability
- Doing this without brushing away the short and medium-term requirement of selective imports will be the key to a calibrated march to self-sufficiency.
2. Leadership
- India’s military leadership is very hierarchical and sequential in its approach.
- However, this same leadership has superb operational skills and possesses a quick understanding of technology, tactics, techniques and procedures.
- Consequently, strategic leaders need to be identified and their transition towards becoming more than mere executors of operational plans and campaigns needs to be enabled.
- Multi-disciplinary thinking, lateral assimilation and a world-view are among the specific skill-sets that need to be nurtured.
3. Training and Education
- Training and education form the next two silos in the process of transformation.
- The US example: Several military officers at the colonel level — fresh out of war colleges and the university environment where they spend a year of education (not training) — are posted at the Pentagon and NATO HQ.
- Here, they work alongside civilians, politicians, lawmakers, not forgetting their own joint leadership.
- In such an environment, it is not difficult to mark, train and recognise talent in ways that go beyond the mere rank structure.
- It is high time India goes down that road because even though economic globalisation may be on hold for a while post-COVID-19, there is going to be a flattening of the world from a security perspective.
- There will be common threats that would need to be fought jointly by nations.
- The three pre-requisites in these silos will be an amalgam of 1)service-centric and joint operations expertise, 2) operational acumen in a global environment, and 3) broad-based education that develops intellectual capital.
- Training in the Indian military is top-notch and needs a little tweaking to help officers and men understand the rules of engagement in a Volatile, Uncertain, Complex and Ambiguous (VUCA) world.
- It is diversified education at all levels of leadership that is a weak area.
4. Jointness and integration
- Finally, the silo of jointness and integration without losing identities and compromising competencies is an outcome that needs to be chased down with focus and determination.
Consider the question based on the issues discussed in the article “Strategic guidelines for India’s security managers must shift from a threat-based methodology to a multi-disciplinary capability and outcome-based orientation to fit with the nation’s power aspirations. Based on some expert committee reports, discuss the ways which the Indian military follow to achieve the transformation to satisfy the nation’s power aspirations.”
Conclusion
Some difficulties caused to the military due to COVID pandemic should be considered as an opportunity. It should be an opportunity to evolve a transformational culture in the Indian military. This should be based on clear political guidelines driven by existing and futuristic capabilities, expected strategic outcomes and anticipated strategic challenges.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: Perpetual bonds.
Mains level: Paper 3- What are the option available with the government to raise the money to fight the covid pandemic?
The government is exploring ways to raise money to deal with the destruction caused by COVID pandemic. One of the suggestion is the monetisation of fiscal deficit. But this article looks into an alternative approach of issuing bonds based on the idea of Consol bond issued by the British government during WW 2. So, how much amount needs to be raised? and why a perpetual bond like Consol bond is a suitable option for India? Read to know!
A gathering financial storm
- India projected a deficit of ₹7.96-lakh crore in the Budget before the pandemic.
- Adding to the above concern: 1) Off-balance sheet borrowings of 1% of GDP. 2) The overly excessive target of ₹2.1 lakh crore through disinvestments.
- Thus, financial deficit number is set to grow by a wide margin owing to corona crisis.
- There will be revenue shrinkage from the coming depression that will most certainly be accompanied by a lack of appetite for disinvestment.
Need for stimulus package and measures taken by the RBI
- In addition to the expenditure that was planned, the government has to spend anywhere between ₹5-lakh crore and ₹6-lakh crore as a stimulus package.
- The stimulus provided by the government so far and recent announcements by the Reserve Bank of India (RBI) achieved little.
- All the RBI’s schemes are contingent on the availability of risk capital, the market for which has completely collapsed.
- The government and the RBI have tried several times to increase lending to below investment grade micro, small and medium enterprises, but have come up short each time.
- Furthermore, while the 60% increase in ways and means limits for States is a welcome move, many States have already asked for doubling the limits due to the shortages in indirect taxation collections from Goods and Services Tax, fuel and liquor.
- The government and the central bank need to understand that half measures will do more harm than good.
What is the Consol Bond?
- Consol bond is a form of British government bond that has no maturity and that pays a fixed coupon.
- Consols are basically rare examples of actual perpetual bonds.
- The bonds were issued in 1917 as the government sought to raise more money to finance the ongoing cost of the First World War.
So, why bond like Consol Bonds is a good option for India?
- There is no denying the fact that the traditional option of monetising the deficit by having the central bank buy government bonds is one worth pursuing.
- Citizens’ active participation is ensured in Consol Bond type alternative.
- Furthermore, with the fall of real estate and given the lack of safe havens outside of gold, the bond would offer a dual benefit as a risk-free investment for retail investors.
- When instrumented, it would be issued by the central government on a perpetual basis with a right to call it back when it seems fit.
- An attractive coupon rate for the bond or tax rebates could also be an incentive for investors.
- The government can consider a phased redemption of these bonds after the economy is put back on a path of high growth.
The solution of bond offered here could be a valuable addition in points to the answer to the question which asks about the ways to raise money. Consider the question, “Economic devastation caused by the COVID pandemic has forced the government to explore the various ways to raise the money. Discuss the options available with the government and issues associated with the options.”
Conclusion
Politicians and epidemiologists across the world have used the word “war” to describe the situation the world is currently in. So, to raise the money to fight this war against Covid-19, we can take the cue from past and issue bond based on the Consol bond.
Back2Basics: What is fiscal deficit?
- A fiscal deficit is a shortfall in a government’s income compared with its spending.
- The government that has a fiscal deficit is spending beyond its means.
- A fiscal deficit is calculated as a percentage of gross domestic product (GDP).
- There can be different types of deficit in a budget depending upon the types of receipts and expenditure we take into consideration. Accordingly, there are three concepts of the deficit, namely-
- Revenue deficit = Total revenue expenditure – Total revenue receipts.
- Fiscal deficit = Total expenditure – Total receipts excluding borrowings.
- Primary deficit = Fiscal deficit-Interest payments.
- Primary deficit shows how much government borrowing is going to meet expenses other than interest payments.
- Thus, zero primary deficits mean that the government has to resort to borrowing only to make interest payments.
- To know the amount of borrowing on account of current expenditure over revenue, we need to calculate the primary deficit.
- Thus, the primary deficit is equal to fiscal deficit less interest payments.
Perpetual Bonds
- A perpetual bond, also known as a “consol bond” or “prep,” is fixed income security with no maturity date.
- This type of bond is often considered a type of equity, rather than debt. One major drawback to these types of bonds is that they are not redeemable.
- However, the major benefit of them is that they pay a steady stream of interest payments forever.
- Perpetual bonds exist within a small niche of the bond market.
- This is mainly due to the fact that there are very few entities that are safe enough for investors to invest in a bond where the principal will never be repaid.
- AT-1 bonds which were recently in news due to YES bank failure is an example of a perpetual bond.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: Fiscal deficit.
Mains level: Paper 3- Stimulus package to tackle the covid-19 impact.
There are many suggestions and expectations around the stimulus package deal to revive the economy crippled post corona pandemic. While everyone agrees over the need of stimulus but there are several opinions and suggestion around the various aspects of the package like size, time, source of revenue etc. But we must be mindful of the pitfalls and constraints while thinking about the stimulus package. So, what are the suggestion and expectation and what are the limitations? Read to know!
1. Supply-side constraints on stimulus
- It is argued that a fiscal stimulus package has to follow the timeline.
- But you cannot ‘stimulate’ an economy during a supply-side lockdown.
- And that there are ‘announcement effects’ — both good and bad — that go with the stimulus.
- So, any ‘good stimulus’ can only come into effect post lockdown and extensive consultations are on with everyone for that.
2. What should be the size of the stimulus package?
- While thinking about the stimulus, we cannot forget that government revenues too will be seriously hit.
- The government revenue will be hit by 2-3% of GDP, given that disinvestment target itself is 1% of GDP and the realisation is likely to be close to zero in the current financial year.
- So, the effective fiscal deficit is going to be somewhere around 7.5 % if you take into account all the off-balance sheet borrowings.
- The U.S. government has set aside $2 trillion for bailouts or 9% of its GDP.
- India’s starting point is going to be at around 7.5% of GDP fiscal deficit, then how much more can we afford on top of that?
- On top of this is all the ‘merit expenditure’ on health and direct income support to the poor cannot be reduced.
- Can we still formulate a stimulus package comprising 10% of GDP, to be footed by the Central government alone?
Monetising the deficit and debt-to-GDP ratio
- From 1947 to 1997, the Central government always routinely monetised its deficit, without leading to high rates of inflation, much less hyperinflation.
- The Fiscal Responsibility and Budget Management (FRBM) limits are hardly a success and routinely all governments have broken the barrier.
- Other countries with huge debt-to-GDP ratios like Japan (>200%) and U.S. (125%) get away with barely a rap on the knuckles.
- But India is pulled up for minor slippages on a 70% debt-GDP ratio.
3. Should we pay attention to needs and forget about affordability?
- Some have argued that bailouts should be based on need and not affordability.
- Can printing money be a solution out of this situation?
- Possible dangers of printing money: The currency could plunge, inflation soar high and rating agencies could downgrade us to junk.
- So, shouldn’t there be a more nuanced approach to what constitutes a ‘good’ stimulus?
4. The problem of low credit flow despite high liquidity
- There is a lot of liquidity in the economy, but limited credit is flowing due to anaemic lending.
- Thus, another mantra being espoused is that bank managers should be incentivised to lend and the government should indemnify loans given during this period.
- This could well lead to bogus companies springing up overnight to grab the stimulus in collusion with banks.
- The government owes about ₹1 lakh crore on tax refunds and also had promised to make up for any difference to the States, if the GST did not grow by 14% per annum.
- This is the time for it to transfer this to the States as a grant, for one year, to offset the revenue loss to States.
5. Should we go to the IMF?
- There is talk of going to the International Monetary Fund (IMF).
- Do we really need the IMF’s bailout which comes with conditions when there is no foreign exchange crisis for financing rupee expenditure?
- Moreover, there is a perceived global stigma attached to doing so.
- Won’t the conditionality-led cure be worse than the disease?
Consider the following question based on the issue “Economic crises accentuate the role of governments. Covid-19 has not been different. In light of the above statement, discuss the various issues that the government faced while coming up with a stimulus package to revive the economy. What are the sources of revenue to be tapped by the government?”
Conclusion
Fate is what happens to us. Destiny is what we make in spite of our fate. India’s destiny appears relatively safe, if we cast the mind’s eye around the globe. Lifting the lockdown will be the first step towards a good stimulus and one does need to un-handcuff a billion people to save their lives too.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: 73rd and 74th Constitutional Amendments
Mains level: Paper 2- Need for strengthening the panchayat raj institutions in the letter and spirit enshrined in the Constitution.
The article brings to the fore untapped potential held by the panchayats and municipalities. However, there is a need for devolution in letter and spirit by the states to tap this potential. The article explains how the panchayats and municipalities could contribute effectively in the fight against Covid-19.
Cooperative federalism amid COVID-19
- An unintended but welcome consequence of the struggle against COVID-19 is that the “confrontational federalism” is on the decline with the revival of “cooperative federalism”.
- There is a realisation that there is no way the COVID-19 situation can be tackled except through a measure of cooperation between the Centre and the states.
- Consultative process: The Centre is offering flexibility to states to adopt guidelines to their respective circumstances and states are accepting guidelines from the Centre.
- A principal reason for Kerala’s amazing performance in “flattening the curve” is their robust system of effective devolution. Such devolution helped the Kudumbashree programme to function in association with the panchayats.
The concept of 3 tier devolution: Centre-State-Panchayats
- Article 243G provides that state legislatures “may, by law, endow the Panchayats with such powers and authority as may be necessary to enable them to function as institutions of self-government”.
- This means state governments cannot and must not treat panchayats as extensions of the state government but as “institutions of (local) self-government”.
- The logic of “cooperative federalism” is that states must function not as implementation arms of the central government but as autonomous units within the federation.
- By the same logic panchayats too must be conceived not as an extension of state governments but as “units of self-government”.
- It is thus that panchayats need to be brought into the three-tier devolution system envisaged in the Constitution: Centre-State-Panchayats (and municipalities).
How could devolution help in the fight against Covid-19?
- In line with the rising cooperation between the Centre and the states, the focus should be on further devolution in keeping with the constitutional obligations under the 73rd and 74th amendments.
- The starting point could best be Entry 23 of the Eleventh Schedule that reads, “Health, sanitation, including hospitals, primary health centres and dispensaries”
- Entry 23 is among the list of 29 subjects illustratively set out for devolution to the panchayats, subject to conformity legislation being enacted by state legislatures.
- All state legislation has included this subject for devolution.
- Therefore, empowering the panchayats in this regard with functions, finances and functionaries is now a statutory obligation under state law under Article 243G.
- With the migrant workers returning to their native villages, it is important to fully involve village panchayats and municipalities as “institutions of self-government” – 243W in the anti-COVID-19 campaign.
- Entry 28 of the Eleventh Schedule mentions the “public distribution system” as among the subjects for devolution.
- There are many other entries in the Schedule that are relevant to this exercise.
- There is an army of 32 lakh elected representatives in the panchayats and about two lakh more in the municipalities to contribute in the fight against Covid-19.
- Well over a third of them, some 10-12 lakh, are drawn from the Scheduled Castes and Tribes and, therefore, in touch with the most destitute in every village and town.
- There are some 14 lakh women who have established themselves by election as village leaders.
- Imagine a constructive role such women can play as “front-line workers” in the battle against the coronavirus.
- The most important requirement is planning to receive the migrant labour influx.
- Last-mile delivery can only be comprehensively ensured by empowered panchayats and municipalities reporting to their respective gram sabhas and ward sabhas mandated under Articles 243 A and 243 S.
- Planning for withstanding the ingress of COVID-19 requires the full deployment of the mechanisms for district planning envisaged in Article 243 ZD.
Consider the question asked by the UPSC in 2018-“Assess the importance of the Panchayat system in India as a part of local government. Apart from government grants, what sources the Panchayat can look out for financing developmental projects?”
Conclusion
As the cooperative federalism underlines India’s fight against Covid-19, devolution to the third tier –panchayats and municipalities would give a much needed fillip to the fight against Covid-19.
Back2Basics: 73rd and 74th Amendments
- 73rd and 74th Constitutional Amendments were passed by Parliament in December, 1992.
- Through these amendments local self-governance was introduced in rural and urban India.
- The Acts came into force as the Constitution (73rd Amendment) Act, 1992 on April 24, 1993 and the Constitution (74th Amendment) Act, 1992 on June 1, 1993.
- These amendments added two new parts to the Constitution, namely, 73rd Amendment added Part IX titled “The Panchayats” and 74th Amendment added Part IXA titled “The Municipalities”.
- The Local bodies–‘Panchayats’ and ‘Municipalities’ came under Part IX and IXA of the Constitution after 43 years of India becoming a republic.
Salient Features
- Basic units of democratic system-Gram Sabhas (villages) and Ward Committees (Municipalities) comprising all the adult members registered as voters.
- Three-tier system of panchayats at village, intermediate block/taluk/mandal and district levels except in States with population is below 20 lakhs (Article 243B).
- Seats at all levels to be filled by direct elections [Article 243C (2)].
- Seats reserved for Scheduled Castes (SCs) and Scheduled Tribes (STs) and chairpersons of the Panchayats at all levels also shall be reserved for SCs and STs in proportion to their population.
- One-third of the total number of seats to be reserved for women. Onethird of the seats reserved for SCs and STs also reserved for women. One-third offices of chairpersons at all levels reserved for women (Article 243D)
- Uniform five year term and elections to constitute new bodies to be completed before the expiry of the term. In the event of dissolution, elections compulsorily within six months (Article 243E).
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: Provision of biofuels policy 2018
Mains level: Paper 3- Trade offs involved in making fuels from food grains.
The article discusses the recent decision of the government to make alcohol from rice. The move was bound to trigger the debate over food security of the country with a population ravaged by hunger and poverty. While the 2009 biofuel policy had stressed the use of non-food resources, the 2018 updated policy allowed using excess grains. We all want to make a shift towards a green economy but is this the right time? Let’s find out.
What decisions did the government take?
- The National Biofuel Coordination Committee (NBCC) chaired by the Union Minister of Petroleum and Natural Gas decided to use “surplus” rice available with the Food Corporation of India (FCI) for conversion to ethanol.
- The objective is to make alcohol-based hand-sanitisers and for the blending of ethanol with petrol.
- This decision is not only audacious but also an affront to the millions of people who are deeply affected by food insecurity.
The food question
- In 2009, the National Policy on Biofuels stressed on the use of non-food resources to avoid a possible conflict between food and fuel.
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Take the US’s example: In 2018-19, an astounding 37.6 per cent of the corn produced in the US is used for making ethanol.
- In addition to cereals, oilseed crops like rapeseed, soybean and sunflower were used for biofuel production.
- Rise in food prices: Such diversion of food crops to produce biofuel was considered one of the reasons for the rise in food prices globally.
What should be India’s strategy in this debate?
- There is rampant poverty, hunger, and malnutrition in India.
- India’s position in the Global Hunger Index has slipped nine places, ranking 102 among the 117 countries in 2019.
- The National Family Health Survey (NFHS-4) 2015-16, found that 38.4 per cent of children under five years are “stunted” (height for age) and 21 per cent are “wasted” (low weight for height).
- In fact, over a period of 10 years, wasting has increased from 19.8 per cent in NFHS-3 to 21 per cent in NFHS-4.
The dictums of 2018 Policy
- The 2018 National Policy on Biofuels had a target of 20 per cent blending of ethanol in petrol and 5 per cent blending of biodiesel in diesel by 2030.
- This was to be achieved by increasing production using second-generation bio-refineries and developing new feedstock for biofuels.
- It allowed the production of ethanol from damaged food grains like wheat and broken rice, which are unfit for human consumption.
- The new policy allowed the use of excess food grain for ethanol in a bounty crop year, if endorsed by the Union Ministry of Agriculture.
Possible dangers
- The quantity of rice from which ethanol will be produced has not been announced, nor do we know the price at which such rice will be sold by the FCI.
- About 85 per cent of rice is Kharif crop, heavily dependent on monsoon.
- Despite the prediction of a normal monsoon, What happens if the monsoon predictions go wrong? Will we be able to import grain?
- Less damaged grains: Despite the commonly held belief of a lakh of tonnes of rotting grains, the FCI’s storage practices are actually quite good.
- Damaged grains as a percentage of total quantity issued by the FCI has been just about 0.01 per cent to 0.04 per cent in the last five years.
- Hardly any ethanol can be made from such a small amount of damaged grains.
- Making ethanol from sound quality grains deprives food to humans as well as livestock.
- At the time when uncertainties are looming large, it is imperative that food security and food price stability be given the highest priority.
Way forward
- Ethanol can be produced from other ingredients such as B and C heavy molasses, sugar, sugar syrup, and sugarcane juice.
- Ethanol has also been blessed with a low GST and enjoys relaxed conditions for inter-state movement if used for blending with petrol.
- Since the economy faces a bleak prospect due to the impact of COVID-19, the government should first use the food grains to meet the requirement of about 10 to 20 crore people without ration cards.
The UPSC could ask a question on the following lines “Diverting food grains for making fuels has always been a contentious issue from the food security angle. At the same time reducing India’s dependence on import for fuels is as much a serious concern. The National Policy on Biofuels-2018 sought to strike the balance between the two. Critically analyse the various provisions of National Policy on Biofuels-2018 which were different from 2009 policy.”
Conclusion
The government must ensure the food safety of the country first and if it still has surplus rice, it must facilitate export to friendly countries which are suffering an adverse impact of COVID-19 on their economies.
Back2Basics: Generations of biofuels
- There are three types of biofuels: 1st, 2nd and 3rd generation biofuels.
- They are characterized by their sources of biomass, their limitations as a renewable source of energy, and their technological progress.
- The main drawback of 1st generation biofuels is that they come from biomass that is also a food source.
- This presents a problem when there is not enough food to feed everyone.
- 2nd generation biofuels come from non-food biomass, but still compete with food production for land use.
- Finally, 3rd generation biofuels present the best possibility for alternative fuel because they don’t compete with food.
- However, there are still some challenges in making them economically feasible.
Important Provision of ‘National Policy on Biofuels, 2018
- The government aims at increasing the utilization of biofuels in the energy and transportation sectors of the country by promoting the production of biofuels from domestic feedstock in the coming decade through this policy.
- Larger goals such as the adoption of green fuels, national energy security, fighting climate change, generating employment, etc. would be facilitated through this policy. Along with that, technological advancements in the field of biofuels will also be encouraged.
- MNRE has set an indicative target of 20% blending of ethanol in petrol and 5% blending of biodiesel in diesel to be achieved by 2030.
- The percentage of the same currently stands at around 2% for petrol and less than 0.1% for diesel.
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