Author: CD Staff

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Let’s talk about what’s happening in the aviation sector:

1. Quite a lot flights are not taking off
2. Staff are striking,
3. Luggage is not being loaded or are going missing,
4. Pilots don’t want to fly
5. Airports want airlines to cut capacity but airlines won’t oblige
6. Queues are long and passengers are suffering

India’s ailing Aviation Sector

• It is facing a unique crisis a crisis of credibility and safety.  Let me show you some recent headlines to start with.
• The windshield of a go air flight cracks mid-air, two go air flights suffer engine snags, a flight could not take off because of a dog on the runway.
• A bird was found in the cockpit of an Air India Express cruising at 37 000 feet.
• One flight suffered an engine snag another noticed smoke in the cabin.

India’s Aviation Industry: A backgrounder

• India is the world’s third largest aviation sector it is home to more than 150 million flyers every year.
• There are 15 airlines, two more will soon be operational and more than a million flights land and take off from India every year.
• The country has 137 airports and dreams of adding 100 more according to airbus.  India’s domestic air traffic will grow five times in the next two decades.
• Nearly 90% of the aviation traffic is domestic and low-cost carriers account for nearly 70% of the domestic seats.
• The average domestic fare has fallen by more than 70% since 2005.

Why are India’s airlines suffering so many technical glitches?

• Why are there so many emergency landings you must have heard of the DGCA or the directorate general of civil aviation it is the government body that’s responsible for airline safety issues the dgca is blaming these snags on staff shortage.
• Every flight is inspected and certified before take-off.
• Aircraft maintenance engineers they’re called AME aircraft maintenance engineers.
• This malfunction is happening because of a shortage of engineers.

Who’s responsible for the shortage?

• You see a lot of airlines have outsourced engineering to whom the likes of Air India engineering which is still owned by the government of India then there is Artworks Max Aerospace group gmr, spice jet technique.
• Some of these companies are short of staff and this staff shortage is risking lives.

Reasons behind the Crisis

• In the past years, aviation was one sector that was shining in terms of double-digit growth in passenger traffic for many years.
• However, that too is currently seeing complications, reflecting the adverse growth in the general economy.
• It should be noted that the aviation sector is a very high multiplier of both economic growth and employment and any downturn would affect the economy itself.
• However, airlines are currently in a financial mess.

(1) Pandemic incurred losses

• Indian airlines and airports incurred financial losses worth Rs 22,400 crore in the last financial year amid the coronavirus pandemic, according to official data.
• Besides, 75 per cent of Airports Authority of India-operated airports are incurring losses. Also, AAI’s revenue came down to Rs 889 crore during April-June this year.

(2) High fuel prices and taxes

• As far as the domestic sector is concerned, airlines work at a huge disadvantage as they are burdened by high taxes and levies at one end and high Air Turbine Fuel (ATF) prices on the other.
• The ideal cost of ATF should not exceed beyond 25% of the total operating cost.  
• A central excise imposition of 14% and sales tax levied by the state governments on ATF can be as high as 30%.
• Attempts to bring ATF under GST and cutting it down to 12% have not been accepted by the GST Council.

(3) Rupee depreciation

• Any deterioration of the exchange rate of rupees to the US dollar also causes adverse impacts on the profits of the airlines.
• Deterioration of international fuel prices also plays a role.
• Due to this toxic mix, the operational cost in the domestic sector remains high.

(4) Economics of tickets fare

• Due to the large order of planes, the total capacity of seats is increasing, leading to the increasing need to fill up the growing availability of seats.
• Thus, airline ticket prices are decided by algorithms that change fares based on several factors like past bookings, remaining capacity, average demand per route, probability of selling more seats later etc.
• This computer-based dynamic pricing system causes passengers acute distress during holidays/festivals or calamities when price sharply increase.

(5) Airport and aircraft maintenance

• The Airports Authority of India (AAI) is the custodian of all civil airports in India.
• While a dozen airports are profitable, the rest are cross-subsided by AAI.
• Airport improvement involves not just upgrading the terminals, but also the runway, navigational aid and equipment needed for the safety and security.
• The AAI is currently leasing out bigger airports on a long-term basis.
• However, the lessee company is selected based on the highest percentage of revenue it can share with the AAI.
• The Delhi International Airport share 46% of its revenue while Mumbai is a little less. The newly privatized airports are even higher.

(6) Skill shortage

• Although India has the world’s second-largest population, the aviation industry faces a severe shortage of skilled workforce.
• The low-quality training institutes are not training the necessary engineers, technicians and other professionals to meet the demand of this sector.
• These are the reasons behind aircraft maintenance engineers.

(7) Disproportionate workforce

• While some airlines like Air India have surplus manpower, some like IndiGo are suffering from manpower shortage.
• In fact, the surplus manpower of Air India is one of the major causes of its financial crisis.

(8) Congestions at airports

• India’s major airports suffer from congestion of passengers and limited runways.
• For instance, Mumbai Airport, which is a single runway airport handles over 900 flights each day on an average.
• That is approximately 38 to 40 flights each hour.
• Thus, congestion leads to delay in operations and a decrease in the operational efficiency of both airlines and airports.

Impact of such incidences

• These incidences are hurting India’s image in recent weeks.
• Several Indian flights had to make emergency landings abroad, even in Pakistan.
• Now India and Pakistan don’t have an aviation agreement the two countries, do not have direct flights and they don’t see eye to eye we know that.
• What about India, the world began questioning India’s aviation sector. The repeated technical snags are making headlines in West Asia in the UK.
• This raises concerns about flight safety in India and Indian carriers.

Another aspect: Ambitious UDAN Scheme

• The Ude Desh Ka Aam Nagrik (UDAN) scheme is a low-cost flying scheme launched with the aim of taking flying to the masses.
• The first flight under UDAN was launched by the PM in April 2017.
• It is also known as the regional connectivity scheme (RCS) as it seeks to improve air connectivity to tier-2 and tier-3 cities through revival of unused and underused airports.

Working of the Scheme

• Airlines are awarded routes under the programme through a bidding process and are required to offer airfares at the rate of ₹2,500 per hour of flight.
• At least 50% of the total seats on an aircraft have to be offered at cheaper rates.
• In order to enable airlines to offer affordable fares they are given a subsidy from the govt. for a period of three years.

Present status

• A total of nine rounds of bidding have taken place since January 2017.
• The Ministry of Civil Aviation has set a target of operationalizing as many as 100 unserved and underserved airports and starting at least 1,000 RCS routes by 2024.
• So far, the Airports Authority of India (AAI) has awarded 948 routes under UDAN, of which 403 routes have taken off that connect 65 airports.
• Out of the total 28 seaplane routes connecting 14 water aerodromes, only two have commenced.

Issues with the UDAN

• Discontinuance: In reality, some of the routes launched have been discontinued as most of the routes awarded under UDAN are not active.
• On-paper Ambitions: UDAN was expanded to provide improved connectivity to hilly regions and islands through helicopters and seaplanes. However, they mostly remain on paper.
• The reasons include:

1. Failure to set up airports or heliports due to lack of availability of land
2. Airlines unable to start flights on routes awarded to them or finding the routes difficult to sustain
3. Adverse impact of the COVID-19 pandemic

Various challenges

• Lack of funds: Many small airlines await infusion of funds, to be able to undertake maintenance of aircraft, pay rentals to lessors, give salaries to its staff, etc.
• Maintenance issue: Many players don’t have more than one or two planes and they are often poorly maintained. New planes are too expensive for these smaller players.
• Availability of pilots: Often, they also have problems with the availability of pilots and are forced to hire foreign pilots which costs them a lot of money and makes the business unviable.
• Competition: Only those routes that have been bagged by bigger domestic players such as IndiGo and SpiceJet have seen a better success rate.

Way forward

• Aviation is a critical component of the nation’s transportation sector and plays a pivotal role in economic growth and employment generation.
• Aviation could be a major growth engine to make India a $5 trillion economy by 2024.
• The government should look into the aviation sector holistically, as a part of the economy as it is going to play a crucial role in economic development and is no more a sector of the privileged class only.
• The current model of taxation of the civil aviation industry appears unsustainable.
• Therefore, fuel taxes should be brought under the GST to reduce the operation cost of the airlines.
• This sector has shown the indomitable spirit- never hesitant to be in the frontline by ensuring the safe movement of people and essential cargo during the nation’s fight against the pandemic.
• Some leeway at the right time will safeguard aviation to catch up the growth trajectory faster.

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Context

• China is witnessing one of the most challenging economic crisis in its history.
• The real estate market which accounts for nearly 30% of its GDP has come crashing down in the past 1 year.
• Property sales plummeted by 72%, 1000s of people are protesting in 86 cities, and now there is a banking crisis where banks have started freezing the accounts of the Depositors.
• In its heaviest crackdown on depositors, it has deployed tanks against the protesters. 

And in spite of all this trouble, experts say that this is the just beginning of one of the worst economic crises that is followed in China!!  The question is-

Chinese Evergrande Crisis: A backgrounder

What is Evergrande?

• Evergrande is a Real Estate company which currently owns more than 1,300 projects in more than 280 cities across China.
• The broader Evergrande Group now encompasses far more than just real estate development.
• Its businesses range from wealth management, making electric cars and food and drink manufacturing.
• It even owns one of country’s biggest football teams – Guangzhou FC.

What is the crisis?

• Chinese property giant Evergrande, whose liabilities exceed $300bn (£228bn), failed to meet interest payments to international investors.
• That prompted Fitch, an agency that rates companies’ financial risk, to declare Evergrande in default.
• The crisis has spooked investors who fear contagion across China’s property and banking sectors.
• Fitch, whose risk ratings are closely followed by major investors seeking to deploy billions of dollars, said it contacted Evergrande about the non-payment but received no response.

How did it land itself in trouble?

• Evergrande expanded aggressively to become one of China’s biggest companies by borrowing more than $300bn.
• Last year, Beijing brought in new rules to control the amount owed by big real estate developers.
• The new measures led Evergrande to offer its properties at major discounts to ensure money was coming in to keep the business afloat.
• Now, it is struggling to meet the interest payments on its debts.
• This uncertainty has seen Evergrande’s share price tumble by almost 90% over the last year.

Why would it matter if Evergrande collapses?

There are several reasons why Evergrande’s problems are serious.

• Loss of public money: Many people bought property from Evergrande even before building work began. They have paid deposits and could potentially lose that money if it goes bust.
• Loss to investors: There are also the companies that do business with Evergrande. Firms including construction and design firms and materials suppliers are at risk of incurring major losses, which could force them into bankruptcy.

Economic impact on China

• Huge dependence on a single company: Evergrande is an enormous company embedded across China’s financial system and economy, which relies heavily on the property for growth and jobs.
• Credit crunch in the economy: If Evergrande defaults, banks and other lenders may be forced to lend less. This could lead to what is known as a credit crunch, when companies struggle to borrow money at affordable rates.
• Withdrawal of foreign investments: Companies that can’t borrow find it difficult to grow, and in some cases are unable to continue operating. This may also unnerve foreign investors, who could see China as a less attractive place.
• Snowball effect on debts: In theory, a collapse could chase investors away from other publicly traded developers, setting off a chain of defaults.
• Rise in unemployment: A collapse could also undermine the economic activity and jobs created by Evergrande and its downstream suppliers.
• Visible bankruptcy: Cash is so short the company this summer started paying some suppliers with unfinished apartments instead of money.  

Why Chinese people are fuming over the streets?

• Many investors have expressed concerns about the Chinese government’s lack of communication about its plans.  
• Continued absence of a clear message from Beijing is posing notable downside risk to growth.
• Given wide use of property as collateral for loans to companies and local governments, a deep and widespread drop in prices, however unlikely, could threaten the financial system.
• To head off further damage, the government faces the challenge of ensuring customers get the homes they bought.

What is China’s government doing to prevent a crisis?

• The government of the province, where Evergrande is based, said that at the company’s request it would dispatch a working group to help Evergrande manage its risks and maintain normal operations.
• China’s central bank said it supported the decision to step in and would cooperate, while banking and securities regulators said they would work together to maintain the health of the broader property market.
• Chinese authorities had earlier asked local governments to prepare to step in—only at the last minute—if Evergrande fails to manage its affairs in an orderly fashion.
• This approach signals Beijing’s reluctance to bail out the debt-saddled property developer while bracing to cushion any economic or social fallout.

What exactly went wrong with the Real estate market in China?

There were two immediate triggers that precipitated the crisis at Evergrande.

• Chinese regulators, as part of a widespread crackdown on sectors such as the digital economy and education, kicked off probes into the high borrowings of property developers.
• To counter that, Evergrande tried selling off some of its business.
• But a progressive slowing down of China’s property market and tapering demand for new houses crimped cash flows.
• These two factors combined to precipitate the cash crunch at Evergrande.

Three red lines In August 2020, in an effort to better manage the heavily leveraged sector, Chinese regulators introduced rules dubbed the “three red lines” to limit borrowing of real estate firms. The three red lines mandate that developers maintain: 1. A debt-to-asset ratio of 70% or lower, 2. A 100% cap on net debt to equity, 3. Enough cash on hand to satisfy short-term borrowing, debts, and liabilities.

Why is the world worrying?

A collapsing property market in China has triggered alarm bells across the world.

(1) Future of manufacturing

• It is still the manufacturing hub of the world and if its economy falters, countries around the globe would suffer from slower and more expensive exports.
• Contract electronics and semiconductor manufacturing, where China is a global leader, had already stalled various sectors such as auto, consumer electronics and more due to Covid-induced supply bottlenecks.
• This would only go up further in an economic crisis.

(2) Future of BRI Projects

• China is also the global creditor of the developing world. Developing countries dependent on China for infrastructure projects, would be hard-hit.
• The Xi-government has sponsored numerous projects under the Belt and Road Initiative.
• Currently, BRI projects are valued at over $1 trillion across 139 countries around the globe. These building sites, highways, power generation plants and so on could be left unfinished.

(3) Disburse of finances

• China’s extended property boom that started in the mid-1990s has now ensured that nearly three quarters of the country’s household wealth is locked up in housing.
• An impending collapse at the biggest real estate company could have a serious knock-on effect on the entire economy.
• It could drag down growth and potentially setting off a cascading impact that could singe the global commodities and financial markets.

Impact on India

• India’s buoyant iron ore exports, much of which is headed to China, could also see an impact if the twin crises in China triggers an extended slowdown in the Chinese real estate market.
• In India’s stock markets, the metals segment, which has been surging since the start of the year and appeared to show signs of overheating.
• Analysts view this more as a short-term correction, but there could be an extended impact if the crisis in China were to remain unresolved.
• And there could potentially be a sustained impact on global growth prospects, dampening the nascent recovery that is underway in markets such as India.

Why global sentiments now are against China?

• Aggressive expansion: In recent years, China has expanded its diplomatic and economic relationships through aggressive means.
• Covertness of BRI: It has been positioning itself as a donor of much-needed public goods through it’s the Belt and Road Initiative.
• As China’s influence has grown, so have the number of countries concerned with its:
• Lack of economic reciprocity
• Dominant technological policies
• Coercive foreign policy practices, and
• Regional military ambitions
• In Asia, where strong economic ties with China are critical to development, Beijing has still managed to drum up resentment for its unyielding position on territorial claims in the South China Sea.
• Criticism of Chinese policies, both at home and abroad, has revealed the grittier side of Beijing’s diplomacy.
• The coronavirus has only further highlighted this dynamic.

Will China collapse?

What do incidences say?

• Freezing of bank accounts: Some Chinese banks have responded by seizing purchasers’ savings deposits, claiming they are really ‘mortgage investment products.’
• Putting tanks over protestors: This has sparked open protests outside some banks, leading to the government surrounding the banks with tanks.

However, there is not going to be a financial crash in China. Why?

That’s because the government controls the financial levers of power:

1. The central bank,
2. The big four state-owned commercial banks which are the largest banks in the world (who lends Pakistan always)
3. The so-called ‘bad banks,’ which absorb bad loans
4. Big asset managers

Hence we can say that China is too big to collapse.

How can China achieve this?

Ans. Socialistic Autocracy

• The government can order the big four banks to exchange defaulted loans for equity stakes and forget them.
• It can tell the central bank, the People’s Bank of China, to do whatever it takes.
• It can tell state-owned asset managers and pension funds to buy shares and bonds to prop up prices and to fund companies.
• It can tell the state bad banks to buy bad debt from commercial banks.
• It can get local governments to take up the property projects to completion.
• So a financial crisis is ruled out because the state controls the banking system.

What are the lessons India needs to learn from the Chinese economic Crisis?

• What we need to learn from this Chinese crisis is that investment instruments driven by mindless social norms will often cost both the people and the economy heavily.
• In this case the Chinese definition of a well-seeded person got a ton of debt piled up for the Chinese people in spite of the sky high prices.
• In our case in India the same thing happened with fixed deposits (FDs) because we outright considered FDs to be safe because of the social norm without understanding inflation.
• Similarly the mindless purchase of gold is now hindering our economy so take a step back and assess whether your instruments are backed by calculated strategy or just mindless social norms.
• The Indian real-estate sector has been stagnant.
• If companies in the sector are to be believed, this has primarily been because of high interest rates. But what is basically holding back people are high home prices.
• We need homes in a price range of ₹10-15 lakh for real estate to become a major contributor to economic growth, like it has been in the Chinese case.

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One should not be surprised that the democratic system of administration was not new to India. Ever since ancient times, India had it and she lost it. We all have read about “Kingdoms, Kings and Early Republic” through NCERT since our preparation began.

Context

• In Maharashtra, recently splits in the ruling party led to the fall of a tripartite government which had acclaimed dynast and popular leaders.
• Most political parties in India were no doubt dynastic, i.e. the future leader is almost always a family member of the present party leader (no doubt they are anyhow ousted with the present regime in India).
• This however highlights huge vacuum in intra-party discipline and coherence of ideologies.
• Thus the character of any India’s political institution or party system is a result of its political culture.

Today’s debate is – Is India being held back due to a lack of democracy in its political parties? Or does the freedom to start a new political party compensate for this defect?

Point of discussion

• In India, there is no real movement toward the democratization of parties.
• The selection of candidates, Chief Ministers and office-bearers of party units is usually left to the discretion of a handful of leaders who take decisions behind closed doors.

“It is not that India did not know what is Democracy,” Dr.B.R.Ambedkar, the Chairman of the Drafting Committee told the Constituent Assembly while presenting the final draft of the Constitution, “There was a time when India was studded with republics, and even where there were Mahajanpada monarchies, they were either elected or limited. They were never absolute. It is not that India did not know Parliaments or Parliamentary procedures. A study of the Buddhist Bhikshu Sanghas discloses that not only there were Parliaments- for the Sanghas were nothing but Parliaments- but the Sanghas knew and observed all the rules of Parliamentary Procedure known to modern times.”

Constituent Assembly Debates

Political Parties in India: A Backgrounder

• A party system is a concept in comparative political science concerning the system of government by political parties in a democratic country.
• In India, there is a multi-party system in place, with the number of parties at the national level fluctuating.
• Furthermore, India has a diverse range of political parties, including left, centrist, and right-wing parties, as well as communal and non-communal parties.

Features of Political Parties in India

The key features of the Indian Party system are:

1. Ideology base
2. Multi-Party System
3. Pre-poll Alliances
4. Coalition System
5. Opposition’s Multi-Party Character

Issues with Political Parties in India

• Lack of proper organisation: Another feature of the Indian party system is its lack of structure. Political parties live and die by their organization.
• Groupism inside India’s party structure: In India, groupism is a major problem for every political party. This shatters a party’s cohesiveness, causing it to split into several factions. Ex. INC, NCP, TMC.
• Extra-constitutional ways of gaining power: Political parties do not hesitate to utilize uncertain measures to gain political power in addition to legitimate means. Ex. Resort Politics
• Populist tendencies: In India, it is well noticed that political parties turn to populist politics in order to gain power. They take unfair advantage of people’s emotions and compulsions, promote populist slogans, and mislead the public. Ex. Temple reconstruction movements
• Lack of discipline among party members:  It has been observed that members of various political parties are unconcerned about party discipline, preferring instead to sling dirt at one another. Ex. Undue political statements
• Communal characteristics: The people of India are influenced by caste and religion, and they have a strong sense of allegiance to their caste and religion. Ex. Political party in Hyderabad.
• Criminalization of politics: Leaders are valued for their capacity to attract crowds and raise funds as elections become more and more expensive.

Why are tainted candidates inducted by political parties?

• Innocent until proven guilty maxim: The other reason offered by political parties is summarised by the maxim of Indian law, which is that any accused is innocent until proven guilty.
• Popularity: Such candidates with serious records seem to do well despite their public image, largely due to their ability to finance their own elections and bring substantive resources to their respective parties.
• Prospected victory: The logic of a candidate with criminal charges doing better for the cause of people of is another flawed argument.
• Destabilizing other electors: Others do not seek to punish these candidates in instances where they are in contest with other candidates with similar records.
• Vested interests: Some voters tend to view such candidates through a narrow prism: of being able to represent their interests by hook or by crook.

Why voice for democracy within?

• Dynastic politics: Many political parties in India has charges of dynastic politics irrespective of the political insights of the person who inherits the legacy.
• Opaque appointments:  Although election of the party president cannot be the sole criteria for judging intraparty democracy, political parties view the matter only through the procedure of electing the chiefs.
• Dominants: The party head positions are mostly influenced by some external forces which have larger say in finance and caste (or) religion.
• Personality cult: There is a tendency of hero worship in people and many times a leader takes over the party and builds his own coterie, ending all forms of intra-party democracy.
• Centralised power: Most parties are subservient to one supreme leader or a charismatic personality.   Such leaders are valued for their capacity to attract crowds and raise funds as elections become more and more expensive.
• Lack of institutionalization: Most of political parties still refuse to lay down settled and predictable procedures for almost everything they do, from the selection of candidates to the framing of a manifesto.

How this impacted election has mandates?

• Weaker opposition: In India, strong and well-organized opposition is required for parliamentary democracy to succeed, yet it does not exist.
• Non-coherence: There are several national and regional political parties performing the role of opposition at the moment, both at the national and state levels, but they are not unified on many political topics and do not have a uniform agenda.
• Electoral autocracy: India is often accused to be a flawed democracy on accounts of its alleged far-right-wing political government. There has been increased pressure on human rights groups, intimidation of journalists and activists, and a spate of attacks, especially against Muslims.
• Against public aspirations: People vote for fulfilling their demands and put much effort with aspirations that a stable government would be at their behest to resolve their issues.
• Unstable government: This point needs no explanation. We have largely seen the perils of poor decision-making of politicians due to a lack of consensus among the allies.

Even Monarchies were either elected or limited but never absolute Bhakti or hero-worship sure road to dictatorship, says Dr.Ambedkar

A critical evaluation

• Political parties have become oligarchies: India’s success in consolidating a democratic system of government has paradoxically forestalled pressure for party reform.  .
• One person diktat rules the parties: Most parties are subservient to one supreme leader who can impose his/her offspring on the party, and even electoral defeat does not loosen their control or hold over the party.
• Election manifesto is nowhere relevant post-election: Political parties with the exception of the Left parties still refuse to lay down settled and predictable procedures for almost everything they do, from the selection of candidates to the framing of a manifesto.
• Party reform is a pressing one in India: While many argue that intraparty democracy is essential to sustain broader political democracy, this is not a panacea for the numerous problems facing parties.
• Vague system is the status-quo:  The biggest weakness of parties is that they are leader-centric and most leaders are unwilling to institutionalize the procedures.
• Diktat of the party high-command actually rules a govt.: As a rule, strong leaders rarely support institutionalization because it constrains their discretion and personal power.  
• Partisan mobilization of the left-liberals: There is a major challenge facing the party system by party activity driven by partisan mobilisation lies at the root of much of the schism and disruption of Indian politics today. Ex. Leftists frequently meeting the Chinese.
• Sake of electioneering and winning never ends: Another aspect is the reduction of party organisations into election-winning machines. This has become the only role a party envisages for itself.
• Lack of political will persists: If party funds are raised and controlled centrally, this weakens the State units and rank and file vis-à-vis the central leadership on a range of issues including leadership selection and nominations for elections.

Need for imbibing democracy

• Ensuring equal opportunity: The absence of intra-party democracy adversely impacts the constitutional right of all citizens to equal political opportunity to participate in politics and contest elections.
• Less factionalism: A leader with strong grassroot connection would not be side-lined. This will allow less factionalism and division of parties thereby ensuring a stable govt in power.
• Popular representation: A transparent party structure with transparent processes will allow proper ticket distribution and candidate selection.  The selection would not be based on the whims of a few powerful leaders in the party but will represent the choice of the larger party.
• Accountability of the legislators: A democratic party will be accountable to its party members, for they will lose elections in the next cycle for their shortcomings.
• Decentralising power: Every political party has State and local body units, an election at each level will allow creation of power centres at different levels. This will allow decentralisation of power and the decision making will take place at the ground level.
• Legal loopholes: Currently, there is no express provision for internal democratic regulation of political parties in India except political defection. The ECI’s power to require parties to hold regular internal elections for office bearers, and candidate selection is compromised in the absence of any penal provisions.

How to attain internal democracy within parties?

• Internal elections: It shall be the duty of the political party to take appropriate steps to ensure holding of elections at all levels. The political party shall hold elections in an unpartisan ways by their ‘karyakartas’.
• Strengthening Anti-defection Law: The Anti-Defection Act of 1985 requires the party legislators to act according to the party whip which is decided by the diktats of the highest party leadership. One way to democratise political parties is to promote intra-party dissent.
• Limited reservations: Seats can be reserved for women and members of the backward community including minorities.
• Empowering ECI: The ECI shall be competent to inquire into allegations of non-compliance of any of the provisions requiring elections.
• Social audit and penal provisions: ECI should have the penal power to deregister a party until free and fair elections in the party are conducted.
• Encouraging new generation of leaders: For long, there is a widespread impression created that lot of good people shy away from politics. It is therefore necessary that this impression be changed and efficient people brought into political arena.

Way forward

• The 170th report of the Law Commission of India on reform of electoral laws, dedicated an entire chapter on the necessity of providing laws relating to internal democracy within parties.
• It observed that a political party which does not respect democratic principles in its internal working cannot be expected to respect those principles in the governance of the country.
• The National Commission for Review of Working of Constitution states that there should be comprehensive legislation regulating the registration and functioning of political parties or alliances of parties in India.
• The Administrative Reforms Commission II (ARC), 2008 Ethics and Governance Report pointed out that corruption is caused by over-centralization.

Conclusion

• Politics is inseparable from political parties as they are the prime instruments for the execution of democracy in the country.
• We must emphasize our PM’s call for a debate on internal democracy in political parties.
• It is imperative that political parties open their eyes to growing calls for electoral political reforms and take steps towards bringing in intra-party democracy.

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Context

• The Reserve Bank of India has announced an arrangement for the country’s traders to settle imports and exports in rupees.
• This move is aimed at promoting growth of global trade with emphasis on exports from India and to support the increasing interest of the global trading community in the Indian Rupee.

Background: Russia-Ukraine War

• India is a trade deficit country, meaning it imports more than it exports.
• This forces the country to maintain large forex reserves since world trade still occurs in US dollars.
• This is not the first time that the RBI has allowed international trade in rupees – the sanctions on Iran a few years ago resulted in the two countries trading in rupees instead of dollars.
• The Russia-Ukraine war and the subsequent sanctions have provided RBI with another opportunity to push for trading in rupees.

US Dollar: The Global Currency

• The U.S. dollar has been the world’s dominant currency since the end of World War II.
• Roughly half of the international trade, international loans, and global debt securities are denominated in USD.
• The USD became the official reserve currency of the world in 1944. The decision was made by a delegation from 44 Allied countries called the Bretton Woods Agreement.
• Despite the challenges faced by the US economy due to fiscal and external deficits of the 1980s, the dollar’s share of global reserves remained steady and reserves even grew as time progressed.
• The dominance of the dollar is backed by strong and highly credible institutions, deep markets and the fact that it is freely convertible.
• Almost 40% of the world’s debt is issued in dollars. As a result, foreign banks need a lot of dollars to conduct business. This became evident during the 2008 financial crisis.

 What is the Rupee Settlement System?

• Banks acting as authorized dealers for such transactions would have to take prior approval from the regulator to facilitate this.
• All exports and imports under the invoicing arrangement may be denominated and invoiced in Rupee.
• Exchange rate between the currencies of the two trading partner countries may be market determined.
• Exporters and importers can now use a Special Vostro Account linked to the correspondent bank of the partner country for receipts and payments denominated in rupees.
• These accounts can be used for payments for projects and investments, import or export advance flow management, and investment in Treasury Bills subject to Foreign Exchange Management Act, 1999 (FEMA).
• Also, the bank guarantee, setting-off export receivables, advance against exports, use of surplus balance, approval process, documentation, etc., related aspects would be covered under FEMA rules.

Nostro and Vostro Accounts: Nostro and vostro are terms used to describe the same bank account; the terms are used when one bank has another bank’s money on deposit.They are used to differentiate between the two sets of accounting records kept by each bank.Nostro comes from the Latin word for “ours,” as in “our money that is on deposit at your bank.”Vostro means “yours,” as in “your money that is on deposit at our bank.”

Why such a move?

• Trade facilitation: This will also facilitate trade with countries like Russia which are facing sanctions.
• FOREX savings: India imports more than it exports so the country will also save foreign currency under the new arrangement.
• Rupee appreciation: The rupee is at a historic low against the dollar. It will also help stabilize rupee.
• Mitigating war impact: Payments had become a pain point for exporters immediately after the Russia-Ukraine war broke out, especially after Russia was cut off from the SWIFT payment gateway.
• Convertibility easing: We see this as a first step towards 100% convertibility of rupee.
• Energy security: It will also help buy discounted crude oil from Russia, which now accounts for 10% of all imported crude.
• Export promotion: As such, the new mechanism will help India promote its exports.

Which countries would prefer this system?

• War mongering Russia: For now, it looks like trade settlements in rupee will be limited to countries like Russia and Iran who are facing sanctions from the West
• Bankrupt Sri Lanka: SL is going through economic turmoil and India has been consistently extending lines of credit to SL.
• Immediate neighbors: Other countries may include immediate neighbors of India.

Rupees over Dollars: Why countries would prefer Rupees?

• At a very simplistic level, this is like two Indians deciding to use an alternative mode of exchange that they have come up with, instead of using rupees.
• In other terms, this is similar to the barter system.
• The main reason for countries to want to trade with India in rupees is this:

1. USD has been going through a phase of strength against most currencies in the world
2. Strong USD performance has essentially made imports expensive for most countries
3. Sri Lanka, which is going through one of its worst economic crises in decades, is a glaring example of a country in which the economy has come to a halt due to a drastic fall in forex reserves

• While the Sri Lankan Rupee has declined over 83 percent against the US Dollar, its fall against the Indian Rupee has been lower at 70 percent.
• So instead of paying 83 percent more to make purchases in USD, Sri Lanka can pay in Indian Rupees and save some money.

Challenges

• Trade surplus countries’ preference: The question that RBI and the Indian government will have to answer is this – why would countries with a trade surplus with India want to trade in rupees?
• Negative trade balance: China had a $73-billion trade surplus with India in 2021-22 – that is, Indian imports from China exceeded its exports to China by $73 billion.
• Idle money lying useless: If China were to trade with India in rupees, it would have Indian rupees worth $73 billion (about ₹5.77 lakh crore) sitting idle in its Rupee Vostro accounts in an Indian bank.
• Few countries interested: Countries whose exports to India are more than imports, will not be too enthusiastic to trade in rupees, especially if the difference is huge as in the case of China.

Way forward

• In a multipolar world where Free Trade Agreements (FTAs) are frequent, undermining the dollar’s dominance seems prominent.
• This has been the dream of governments that have looked uneasily at US global primacy, and formed coalitions.
• It is predicted that the sanctions against Russia has foreshadowed the decline of the dollar as the reserve currency.

Conclusion

• No doubt! This move wouldn’t kill the dollar.
• A currency’s dominance depends on demand of the currency and India would need to export stuff to create that demand.
• If all the nations in the world stop using dollars only then it would fall.

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Context

• The RBI recently released a very important document about the economy of the States of India.
• Some of our Indian states have been managing their finances so bad that these states could be heading towards the same state as Sri Lanka’s economy!
• And we all know what’s happening in Sri Lanka right now!
• The worst part is that if this continues for a long time, the entire country of India will lose money and could face another economic crisis!

Questions raised:

• Why is this RBI document comparing Indian states to the economic crisis in Sri Lanka?
• How are these states doing the same mistakes as the Sri Lankan government?
• And most importantly as citizens of India what are pointers that you need to keep eye on before you cast your vote for the so-called leaders of India?

Crumbling state finances:

How can we arrive at this conclusion?

(1) Debt-GSDP Ratio

• Punjab, Rajasthan, Kerala, West Bengal, Bihar, Andhra Pradesh, Jharkhand, Madhya Pradesh, Uttar Pradesh and Haryana turn out to be the states with the highest debt burden.
• Highest debt-GSDP ratio in FY22 are Punjab (53.3%), Rajasthan (39.8%), West Bengal (38.8%), Kerala (38.3%) and Andhra Pradesh (37.6%).
• All these states receive revenue deficit grants from the Centre.
• What exacerbated the debt-GSDP ratio was that while numerator (liabilities) rose sharply, the denominator (nominal GDP) fell sharply.

(2) Fiscal Deficit

• The Fiscal Responsibility and Budget Management (FRBM) Act, 2005 prescribes the ceiling for debt to GSDP ratio at 25 per cent.
• Eight out of the 15 states studied here, exceed the prescribed limit in FY22.
• Odisha was a clear outlier with a 15.79 per cent Debt-GSDP ratio.
• States like Tamil Nadu and Karnataka were marginally higher than the mandated limit. 

(3) Fiscal deficit to GSDP

• Large borrowing by some States is due to the sharp expansion in their fiscal deficits, much beyond the mandated level.
• Bihar recorded highest fiscal deficit to GSDP ratio at 11.30 per cent as per FY22 revised estimates followed by Rajasthan (5.2 per cent), Punjab (4.60 per cent) and Uttar Pradesh (4.27 per cent).

(4) Interest cover

• High borrowings or fiscal deficit-GDP ratio is not something to be worried about as long as the States have adequate revenue surplus to fund them.
• This can be gauged by looking at the interest cover as measured by the revenue receipts of the State divided by its interest payment.
• For instance, Bihar had the highest fiscal deficit as a percentage of GSDP, however, the state has adequate revenue receipts to cover its interest burden, with interest cover of 11.3.
• Odisha topped the list with highest interest coverage ratio since it has been diligently lowering its borrowing as well as the resultant interest burden.
• Punjab, Haryana, West Bengal, Tamil Nadu and Kerala appear weak going by this metric with interest cover under 6 times. 

(5) Increase in Market Borrowings

• Most States increased their market borrowing during the pandemic as their fiscal deficits expanded.
• Tamil Nadu topped the list of states with highest gross market borrowings in both FY21 and FY22.
• But not all states were on a borrowing spree.
• Odisha stayed away from market borrowing through state development loans (SDLs) in FY22.

(6) Revenue buoyancy

• Revenue buoyancy of States has already been affected since the Goods and Services Tax (GST) came in and states’ ability to raise taxes has come down.
• Interest payments, salaries and pensions fall under the committed expenditure of State governments.
• This committed expenditure of Kerala and Tamil Nadu accounts for 71 per cent and 67 per cent of their budgeted revenue receipts respectively in FY23. 
• A larger proportion of the budget allocated for committed expenditure items limits the state’s flexibility to decide on other expenditure priorities such as developmental schemes and capital outlay.

(7) Dependency on Centre

• Own tax revenue of Haryana, Kerala and Andhra Pradesh constitutes about half of their total revenue collections.
• The major source of revenue of other States is Central transfers.
• Within own tax revenue, States’ goods and services tax (SGST), States’ excise duties and sales tax are the major sources of revenue

(8) Poor capital outlay

• High revenue expenditure results in poor spending quality, as reflected in their high revenue spending to capital outlay ratios.
• Capital outlay is the money spent on acquiring assets while revenue expenditure indicates daily operations expenses like salaries and pensions.

What factors led to the financial vulnerabilities of Indian states?

(1) Pandemic

• The prolonged COVID crisis has worsened fiscal positions of governments around the world as reflected in mounting debt levels.
• The sustainability of public debt at national and sub-national levels has again assumed centre-stage as the dominant fiscal risk.
• In particular, the pandemic has taken a heavy toll on finances of states in India.

(2) Freebie Politics

(3) DISCOM sector distress and payment crisis

• The power sector accounts for much of the financial burden of state governments in India, both in terms of subsidies and contingent liabilities.
• Illustratively, many state governments provide subsidies, artificially depressing the cost of electricity for the farm sector and a section of the household sector.
• Despite various financial restructuring measures17, the performance of the DISCOMs has remained weak, with their losses surpassing the pre-UDAY level of 0.4 per cent of GDP.

(4) Pension expenditure

• The government’s fiscal burden in providing a safety net to the elderly could rise to as much as 4.1% of the GDP by 2030 from 2.2% at present, a report by global analytical company Crisil has said.
• Currently, the central government spends 3-3.4% of GDP on education and just over 1% of GDP on medical and public health, water supply and sanitation.
• This is an ever-increasing challenge, as the old live longer, and demographic transitions reduce the number of young to pay for the old.
• Many states are opting out of New Pension Scheme (NPS) to the old pension scheme which is a huge burden on the exchequer.

A rational analysis

(1) Certain necessary expenditures cannot be avoided

• States often try and provide some kind of relief to voters.
• We can certainly be in favour of expanding, for example, the MGNREGA type of spending and subsidy in the form of food ration schemes.
• These go a long way in increasing the productive capacity of the population. So, they’re not just freebies.
• They build a healthier and a stronger workforce, which is a necessary part of any growth strategy.
• That is similar to a State spending on education or health.

(2) Certain election promises create dysfunctions

• There are obviously cases where State governments have gone astray and have gone into providing all sorts of freebies or gifts.
• But when it comes to simply giving away loan waivers, we cannot go in favour of these because they have undesired consequences such as destroying the whole credit culture.
• It blurs the very basic question as to why is it that a large majority of the farming community is getting into a debt trap repeatedly.

(3) Non-essentiality of welfare expenditure

• We know about free electricity that is being given in various States to rural communities.
• This has sometimes led to disastrous consequences in terms of the declining water table, wastage of electricity and various other things.
• There are nuances to the issue, and one will have to get into those nuances to take a final call on whether a certain welfare spending is necessary or not.

(4) Necessary expenditures/ merit freebies

• Some people have been questioning subsidies going into education, such as for laptops and other things.
• Some of them have now become necessities for increasing productivity, knowledge, skills, and various other things.
• So, we need a more nuanced understanding of the issue.

Way forward

• Fiscal discipline: The state governments must restrict their revenue expenses by cutting down expenditure on non-merit goods in the near term.
• Stabilize debt levels: In the medium term, these states need to put efforts toward stabilising debt levels.
• Power sector reforms: Further, large-scale reforms in the power distribution sector would enable the DISCOMs to reduce losses and make them financially sustainable and operationally efficient.
• Focus on capital creation: In the long term, increasing the share of capital outlays in the total expenditure will help create long-term assets, generate revenue and boost operational efficiency.
• Risk testing: State governments need to conduct fiscal risk analyses and stress test their debt profiles regularly to be able to put in place provisioning to manage fiscal risks efficiently.