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GS Paper: Indian Economy

  • Atmanirbhar Abhiyan Package

    The article examines the various aspects of the recently announced Atmanirbhar Bharat Abhiyaan (ANBA). But before digging deeper into the ANBA the author ruminates over India’s growth (GDP) story. Reasons for India’s failure to deliver on the economic empowerment are also examined. In the end, the relation between the free economies and the welfare states is examined.

    The good and the bad of India’s GDP story

    • India crossed the UK two years ago, France last year, and will cross Germany and Japan in the next five years. (In terms of nominal GDP)
    • That will leave only America and China ahead of us.
    • But India’s per capita GDP story is on a different track.
    • We once equalled Korea (1960) and China (1997) but today there are 138 countries ahead of us.
    • The COVID-19 lockdown and the stories of pain inflicted on migrant workers exposes how per capita GDP is more important for our citizens than total GDP.

    A take on Economic empowerment

    • Ramchandra Guha, in his book- Gandhi: The Years that Changed India, suggests that while other patriots had used Swaraj to signify national independence, Gandhiji made India aware of its true or original meaning, Swa-Raj, or self rule- both political and economic.
    • Our collective political Swaraj hasn’t always translated into individual economic Swa-Raj because of inadequate formalisation, industrialisation, urbanisation, financialisation, and skilling.

    Atmanirbhar Bharat Abhiyaan(ANBA) – A step towards Swaraj

    • The Atmanirbhar Bharat Abhiyaan (ANBA) policy announcements are important moves in meeting Gandhiji’s vision of individual self-reliance and recognising poverty as the worst form of violence.
    • ANBA targets avoiding unemployment becoming hunger and illiquidity becoming insolvency.
    • The agriculture package of Rs 1.63 lakh crore included farm-gate and aggregation point infrastructure, fisheries, animal husbandries, and others like animal vaccination, micro food enterprises.
    • The non-bank liquidity package of Rs 5.94 lakh crore included MSMEs, NBFCs, MFIs, housing finance companies, power discoms, and others (PF, tax relief).
    • The migrant and farmer package of Rs 3.16 lakh crore included concessional credit via kisan credit card, farmer working capital, affordable housing, and others (food, street vendors, microloans).
    • The welfare and health package of Rs 1.85 lakh crore included women and pensioner benefits, MNREGA, emergency health response, and others like food, financial security.
    • RBI’s liquidity measures of Rs 5.24 lakh crore included two phases of targeted long-term repo operations, CRR cut, marginal standing facility limit increase, refinancing facilities, and mutual fund special liquidity facility.
    • The reform to the Essential Commodities Act, APMCs and contract farming directly impact prosperity as 45 per cent of our agricultural labour force generates only 14 per cent of GDP.

    How ANBA maintained fiscal health?

    • ANBA is also important for what it is not. It’s not fiscal profligacy-i.e. the government is spending with due care for fiscal deficit figures.
    • Total spending may be higher if the loans for which government has stated to stand as a guarantor turns NPAs (for ex. MSMEs loans).
    • But for now, it marginally raises our already difficult fiscal deficit.
    • It’s not an institutional assault — RBI’s role in ANBA keeps it away from the political minefield that the US Federal Reserve has entered.
    • The US Fed is buying the bonds sold by corporations (i.e. Fed is spending itself) while the RBI has only lent the money to banks.
    • There is a recognition that RBI has lending powers, not spending powers.
    • It’s not a mindless public sector expansion: The end of monopolies (public sector monopoly) and new public-private partnership opportunities signal pragmatism and efficiency targeting.
    • It’s not waiting for potential COVID upsides: it makes us worthy if risky global just-in-time supply chains get replaced by resilient just-in-case diversification.
    • It’s not shutting off India from the world i.e. Atmanirbhar is not isolationist policy.
    • It creates new openness to ideas, investment, and trade.

    What is on agenda for ANBA 2.0?

    • The unfinished agenda for ANBA 2.0 includes following-
    • Civil service reform-the steel frame has become a steel cage.
    • Government reform-Delhi doesn’t need 57 ministries and 250 people with Secretary rank.
    • Financial reform-sustainably raising credit to GDP ratio from 50 per cent to 100 per cent.
    • Urban reform-having 100 cities with more than a million people rather than 52.
    • Education reform-our current regulator confuses university buildings with building universities.
    • Skill reform-our apprentice regulations are holding back employers and universities.
    • Labour reform-our capital is handicapped without labour and labour is handicapped without capital.

    Welfare state and free economies

    • A modern state is a welfare state with formal private jobs.
    • The idealisation of Scandinavian social democracies forgets that their dense social security nets are underwritten by remarkably free economies.
    • The World Bank Ease of Doing Business scale ranks Denmark third, Norway seventh, and Sweden 12th of 190 countries.
    • Despite — or thanks to — America’s capitalism, its central government spends 37 per cent of GDP while India’s spends 14 per cent.
    • And its ferocious fiscal pandemic response involves $3 trillion government borrowing in the next three months.
    • People suggest the US can sustain its welfare state because it has the world’s reserve currency.
    • But America can afford its welfare state because of the productivity of its cities, companies and citizens. Consider the following-
    • New York’s GDP equals Russia with 6 per cent of the people and 0.00005 per cent of the land.
    • The $4.5 trillion revenue of its 25 largest companies is more than Germany’s GDP.
    • Its per capita income is $55,000.
    • India’s welfare state does not lack intentions but lacks resources.
    • No amount of CSR, philanthropy, or government borrowing can provide the resources for the care of our weak, vulnerable, and unlucky that will flow from more productive cities, firms, and citizens.
    • This is what ANBA hopes to achieve.

    Consider the question “Far from being an isolationist, Atmanirbhar Bharat Abhiyan seeks to make India a welfare state with more productive cities, firms and citizens. Comment.”

    Conclusion

    India missed the manufacturing export train that China boarded but another may be coming.  Policy reform is not the solving of a sum but the painting of a picture — 90 days after the lockdown ends, we need ANBA 2.0 to finish the job.

    Back2Basics: Just in time inventory

    • The just-in-time (JIT) inventory system is a management strategy that aligns raw-material orders from suppliers directly with production schedules.
    • Companies employ this inventory strategy to increase efficiency and decrease waste by receiving goods only as they need them for the production process, which reduces inventory costs.
    • This method requires producers to forecast demand accurately.

    Just in case inventory

    • Just in case (JIC) is an inventory strategy in which companies keep large inventories on hand.
    • This type of inventory management strategy aims to minimize the probability that a product will sell out of stock.
    • The company that utilizes this strategy likely has a hard time predicting consumer demand or experiences large surges in demand at unpredictable times.
    • A company practicing this strategy essentially incurs higher inventory holding costs in return for a reduction in the number of sales lost due to sold-out inventory.

  • Tale of two crises: Global Financial Crisis (GFC) and Corona Financial Crisis (CFC)

    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.

  • How the economic package will play out for MSMEs?

    Recently, a stimulus package worth 20 lakh crore was announced by the government. How effective will these measures prove for the MSMEs? How the liquidity issue plaguing the NBFCs is sought to be solved? Finally, what are the issues with the package? All such question are dwelled upon here!

    Why ensuring flow of credit is important?

    • While assessing policy measures during the lockdown there are two over-arching principles one must keep in mind
    • One, the flow of funds will slow down with economic activity.
    • Two, firms do not go bankrupt because of insolvency, but because of lack of access to funds also called liquidity.
    • World over policymakers are pulling out all stops to make sure that the flow of credit continues.
    • Of the Rs 20-lakh-crore economic support announced by the Prime Minister on May 12, we have details for about Rs 16 lakh crore.
    • Monetary and financial interventions taken by the government and the RBI to provide credit to those who need it make up more than 90 per cent of it.

    Limited impact of RBI’s measures

    • Most of the measures announced by the RBI earlier have not had the desired effect.
    • The quantum of cheap funds being made available being more or less the same as the increase in the amount being deposited in the RBI every night by banks.
    •  Just reducing the cost of funds (i.e. lower Repo rate and LTRO) had no impact on the volume and cost of the credit they provided.
    • This happened due to the heightened risk aversion in banks.

    So, how government sought to address this problem?

    • The series of measures announced to provide credit support to the micro, small and medium enterprises (MSMEs) attempts to address this gap.
    • For MSMEs that have been servicing their loans so far new loans up to 20 per cent of the current outstanding credit will be fully backstopped by the government.
    • That is, if there is a default, the government will pay the bank.(i.e. act as a backstop).
    • So, how backstop by the government could help?
    • The move could lead to immediate credit creation, as guarantees are available only for loans extended in the next six months.
    • Also, the lenders have zero risk, and the borrowers are most likely stressed and would want these funds.
    • It is possible if not likely that firms will use these loans to just pay interest and cover losses.
    • But if so, that in a way is the purpose of this scheme — the government absorbing losses upfront rather than the likely larger lost taxes and potential bank bailouts if there is a bankruptcy.
    • For the government, the costs of this guarantee would be spread over several years, with at most 10 per cent incurred in this fiscal year.

    Move to provide liquidity to NBFCs

    • The two schemes together, targeting to provide Rs 75,000 crore of liquidity to non-banking finance companies (NBFCs), may be a bit less successful.
    • The special purpose vehicle that is to provide liquidity to NBFCs provides funds for three months at a time, may succeed in addressing problems like an NBFC defaulting due to lack of liquidity.
    • But it may not suffice to get them to grow.
    • The partial credit guarantee given to banks’ loans to NBFCs may be more effective for a subset of NBFCs.
    • But as it is only available to public sector banks, it would depend on their willingness and ability to extend new loans.

    Fund to provide equity for MSMEs

    • The Rs 50,000 crore fund to provide equity for MSMEs, with a corpus of Rs 10,000 crore being provided by the government, which would then be leveraged, is an interesting initiative.
    • Losses incurred in the current lockdown are depleting risk capital.
    • Replenishing if not growing that is paramount to restoring India’s growth potential.
    • While global as well as local private equity and venture capital funds would continue to explore and invest in smaller firms, such a fund can scale up the funds availability significantly.

    Issues with the package

    • The natural limitation of the policy interventions thus far is that they only affect enterprises in the formal sector and in agriculture.
    • The problems in informal non-agricultural enterprises may stay unaddressed, and remain an impediment on growth.
    • While less than 10 per cent of the announcements thus far has been the fiscal cost.
    • One senses a fiscal caution in government measures that is overdone, and could hurt more than it helps. (avoiding direct expenditure)

    Stability: of bond market and value of rupee

    • Two things minimised the volatility in the bond market: 1) pre-announcing the additional bond issuance for the year 2) giving an implicit assurance that additional deficits would be financed separately.
    • Even though that potentially means the RBI purchasing government bonds, the rupee has been remarkably stable.
    • There was fear that fiscal spending financed by the central bank would be frowned upon and drive currency weakness.

    Consider the question-“MSME sector forms the backbone of Indian economy. List challenges it faces in present times. Critically analyse whether the current stimulus package is suitable to boost growth in this sector.”

    Conclusion

    The road ahead remains unclear, but it is likely that the economic damage is already much larger than the measures undertaken so far. A continued focus on reforms and on sustaining India’s growth potential will be critical in preventing macroeconomic instability.

    Back2Basics: The two schemes announced for NBFCs

    • The FM announced a Rs 30,000-crore liquidity scheme for NBFCs.
    • The government will buy debt papers by NBCs, MFIs and HFCs.
    • The buying of papers will be fully guaranteed by the government of India.
    • Under this scheme investment will be made in both primary and secondary market transactions in investment-grade debt paper ofNBFCs/HFCs/MFIs.
    • The move is seen providing liquidity support for NBFCs and mutual funds and create confidence in the market.
    • The FM also announced Rs 45,000 crore partial credit guarantee scheme (PCGS) 2.0 for NBFCs.
    • Existing PCGS scheme will be extended to cover borrowings such as primary issuance of bonds/ CPs of such entities.
    • The first 20 per cent of loss will be borne by the government of India.

    50000 Crore fund for MSMEs

    • Finance Minister Nirmala Sitharaman announced Rs 50,000-crore equity infusion through Fund of Funds for MSMEs.
    •  The Fund of Funds will be set up with a corpus of Rs 10,000 crore.
    • The Fund of Funds will be operated through a mother fund and a few daughter funds.
    • The fund structure will help leverage Rs 50,000 crore at daughter-fund levels.
    • This will help MSMEs expand size as well as capacity.
    • It will encourage MSMEs to get listed on the main board of stock exchanges, the government said.
    • Based on the recommendations of UK Sinha Committee, the Fund of Funds was first announced in the Union Budget on February 1, 2020.
    • An investment of Rs. 10,000 crore was proposed in the Budget for the scheme.

     

  • What self-reliant economy means?

    ‘Atma-nirbhar’ has become a buzzword after PM Modi mentioned it in his speech. This article analyses the policy statement announced by the PM that focuses on self-reliance of the country in the future.  So, what exactly the term self-reliance could include? what are the areas in which India is dependent on other economies? Read the article to know more about these issues.

    Policy statement of 1991

    • In 1991, only four policy statements were made —the end of licence-permit Raj, steep cuts in fiscal deficit and tariffs,  and devaluation of the Rupee.
    • With four policy measures, the economy was pulled out of a crisis and placed on a new growth path.
    • The key to 1991 was the political articulation of a vision that went beyond platitudes.

    What is there in the PM’s vision statement?

    • The PM’s vision statement had four elements.
    • First, a step up in public spending and investment, aimed at promoting the welfare and raising the investment rate.
    • Second, policy reforms aimed at making the domestic economy more globally competitive.
    • Third, a long-term structural shift making the economy more “self-reliant” and less dependent on the world economy.
    • The fourth wheel of this new growth engine will be Lockdown Model 4 that is to be announced in a few days.

     Commitment of political leadership: key to spending and investment

    • Increased public spending will certainly boost demand and generate employment in the short term and add to infrastructure capacity in the medium term.
    • Policy reform, including changes in land, labour and other policies, could yield results in the medium term.
    • But for now, investors will wait and watch to test the sincerity and efficiency of governments at the Centre and in the states.
    • They will wait to see how the various policy steps being announced by the FM get implemented — how quickly and how efficiently.
    • The government can meet with success if investors, consumers and other economic agents believe in the commitment of the political leadership and the capability of the administration to deliver.

    Focus on the self-reliance

    • PM has said that his version of self-reliance does not imply isolationism and inward-orientation.
    • His version of self-reliance will inject greater self-confidence in the people by reducing the country’s dependence on other nations.
    • Theotonio Dos Santos, defined dependence as a situation in which a country’s economy is “conditioned by the development and expansion of another economy”. 
    • He said that to be self-reliant the growth process of an economy “should not become dominated or dependent on another economy”.

    So, on which economies is India excessively dependent?

    • 1. The oil-exporting economies.
    • Oil and gas account for a bulk of India’s imports.
    • Whatever new sources of energy India may tap in the foreseeable future, it will remain import-dependent for energy.
    • Fortunately, for India, the global crude oil and gas markets are likely to remain buyers’ markets for some time to come.
    • 2. Dependence on foreign exchange.
    • Second is the dependence on foreign exchange inflows both in the form of remittances, mainly from the Gulf and the US, and financial flows into capital markets.
    • It is not clear how the new Modi strategy of self-reliance proposes to deal with this dependence.
    • If anything, India is seeking more FDI and external debt.
    • 3. Defence equipment.
    • The third dependence is on imported defence equipment, mainly from Russia, the US, Israel and France.
    • 4. Electronic and pharmaceuticals.
    • Fourth, import dependence in electronic goods and pharmaceuticals, mainly from China.
    • Thus far, government policy does not address these dependencies.
    • The immediate focus of PM’s self-reliance seems to be China.

    How to turn import dependence into import power?

    • Post-Deng Xiaoping China established long ago that for a large economy, it is possible to be both self-reliant and globalised at the same time.
    • Trade in itself does not create dependence if a country is able to grow both exports and imports.
    • China has demonstrated the geo-economic power of both exports and imports by making trade partners dependent on it on both counts.
    • When China refuses to buy wine and beef from Australia, it is using its import power, not demonstrating its import dependence.
    • If an economy is willing to live without those imports or can substitute them with domestic production, then it is not badly hurt.

    So, what are the lessons for India?

    • It is export dependence that can make even a large economy vulnerable.
    • It is China’s dependence on US markets that President Donald Trump has aimed to reduce by waging a trade war.
    • India has never had such export dependence on any one country.
    • Indian government’s hope that multinational companies exiting China will relocate to India can only make India more export-dependent since these MNCs aim to sell globally.
    • Making India less dependent on China cannot be the only measure of self-reliance.

    Consider the question “For India, it is not trading dependence that makes India vulnerable but the inadequacy of its human capital. Comment”

    Conclusion

    For India to be truly self-reliant and self-confident, public investment in education, human capability and research and development has to increase.

  • Changing labour laws not a solution

    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.

  • A plan to revive the broken economy

    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.

  • JDY or NREGA card: What is better option for cash transfers?

    JAM Trinity is one of the flagship policy of the government. In times of COVID crisis, this article highlights some limits of JAM trinity. Issues of inclusion error, exclusion error and even problem of transparency with JAM accounts are discussed. The NREGA cards instead of Jan Dhan account is suggested as the better option. Why is it so? Read to know more…

    High hopes from JAM

    • The original formulation, in 2015, mentioned two possible forms of the JAM trinity: mobile banking and post office payments.
    • The second option never made much progress.
    • So, Aadhaar-enabled mobile banking became the supreme goal.
    • In January 2017, NITI Aayog CEO Amitabh Kant predicted the imminent demise of all cash-transfer paraphernalia other than mobiles.
    • These hopes reached new heights as the JAM project latched on to another flourishing narrative, universal basic income (UBI).
    • If you want to make cash transfers to everyone, what better platform can you have than Aadhaar, India’s unique biometric ID, doubling up as a permanent financial address?

    Corona crisis belied the hopes from JAM

    • In the early days of the crisis, JAM was often invoked sometimes along with UBI as a possible tool of emergency relief.
    • But when the time actually came to make cash transfers to the poor, JAM turned out to be of little use.
    • The JAM had not gone beyond some fancy digital-payment systems for the privileged.
    • Poor people were still running from pillar to post to collect their meagre benefits from old-fashioned bank accounts.
    • Some also use the services of “business correspondents”, but those have little to do with JAM.
    • Sure enough, long bank queues and related hardships started to emerge, especially in rural areas where the density of banks is relatively low.
    • In a Dalberg survey conducted last month in 10 states, only 25% of poor households reported that it was “easy” to access cash benefits.

    NREGA job Cards: A better option than Jan Dhan Account

    • The lead cash-relief measure in the national relief package consists of monthly transfers of ₹500 to women’s JDY accounts.
    • But is that a good idea?
    • Let’s compare women’s JDY accounts with another possible basis for cash transfers, at least in rural areas: the list of households that have a National Rural Employment Guarantee Act (NREGA) job card.
    • The numbers of accounts are roughly comparable: about 14 crore for NREGA job cards, and 12 crore or so for women’s JDY accounts in rural and semi-urban.

    JDY approach fares poorly on the following 3 counts

    1. Lack of transparency and clarity

    • JDY accounts are a mighty mess – the NREGA job-cards list is far more transparent and well-organised. 
    • During the frantic initial JDY wave, in 2014-15, banks opened JDY accounts en masse to meet the targets. Banking norms were not followed always.
    • Later on, a large proportion of JDY accounts – 40% in March 2017, down to 19% in January 2020– went “dormant” as customers were unable or unwilling to use them.

    2. Large exclusion error

    • The cash transfers to women’s JDY accounts are likely to involve large exclusion errors.
    • According to a recent Yale study, less than half of poor adult women have a JDY account, an even lower proportion, 21%, know that they have a JDY account.
    • The NREGA job-card list is likely to have much better coverage of poor households.
    • The natural complementarity between NREGA and social security pensions covering more than four crore persons under the National Social Assistance Programme alone would further help to reduce exclusion errors.

    3. Large inclusion error

    • Inclusion errors are also likely to be larger in the JDY approach.
    • Job cards are meant for rural workers, JDY accounts are for everyone.
    • National Election Studies 2019 data show that JDY beneficiaries tend to be better-off than NREGA beneficiaries. ( and still, they would get benefits i.e. inclusion error)
    • Earlier survey data suggest that the probability of having a JDY account is more or less the same for poor and non-poor households.

    Comparison on reliability basis

    • There have been significant issues e.g. delayed, rejected, blocked or diverted payments with NREGA payments, often related to Aadhaar.
    • But then, numerous “direct benefit transfer” schemes –social security pensions, scholarships, maternity benefits, among others have faced similar problems, also reflected in official transaction data.
    • Both the Aadhaar Payment Bridge System(APBS) and the Aadhaar-enabled Payment System (AePS) are shot through with technical glitches.
    • Transfers to women’s JDY accounts are unlikely to be more reliable than transfers to job-card holders.

    Cash in hand option

    • As far as effective payment is concerned, there is a further argument in favour of the NREGA job-cards list.
    • Unlike JDY accounts, it lends itself to the “cash-in-hand” method on-the-spot payment in cash, instead of bank payments as a possible fallback.
    • The reason is that the job-cards list is a transparent, recursive household list with village and gram panchayat identifiers, while the list of JDY accounts is an opaque list of individual bank accounts.
    • Cash-in-hand may seem like the antithesis of JAM, but this option may become important in the near future if the banking system comes under further stress.
    • There are precedents of effective use of the cash-in-hand method, notably in Odisha for pension payments, and in various states for NREGA wage payments.
    • Several states including Andhra Pradesh, Odisha and Tamil Nadu have already resorted to cash-in-hand for relief payments during the lockdown.

    Consider the question, ” The need for financial inclusion is far more in times of corona crisis. Discuss opportunities and challenges with respect to policies like JAM trinity during corona pandemic. Suggest other alternatives for such transfers.”

    Conclusion

    There is nothing compelling about the use of women’s JDY accounts for cash relief. In fact, it is a bit of a shot in the dark. The government do well to consider other options for further relief majors, including a switch to the NREGA job-cards list in rural areas.

  • [pib] Atmanirbhar Bharat Abhiyan (Self-reliant India Mission)

    The PM has announced the Atma-nirbhar Bharat Abhiyan (or Self-reliant India Mission) and said that in the days to come the government would unveil the details of an economic package — worth Rs 20 lakh crore or 10% of India’s GDP in 2019-20 — aimed towards achieving this mission.

    Try a question:

    ‘Doubling Farmer’s Income’ and ‘USD 5 trillion economy’  seems more like slogans today in wake of COVID pandemic. Comment on the statement with keeping in view the Atmanirbhar Bharat Abhiyan of the government.

    Atmanirbhar Bharat: With a special package

    • PM has announced a special economic package and gave a clarion call for Self-reliant India.
    • The package will provide a much-needed boost towards achieving self-reliance.
    • This package, taken together with earlier announcements by the government during COVID crisis and decisions taken by RBI, is to the tune of Rs 20 lakh crore, which is equivalent to almost 10% of India’s GDP.
    • The package will also focus on land, labour, liquidity and laws. It will cater to various sections including cottage industry, MSMEs, labourers, middle class, and industries, among others.

    Five pillars of a self-reliant India

    PM iterated that a self-reliant India will stand on five pillars viz.

    1) Economy, which brings in quantum jump and not incremental change

    2) Infrastructure, which should become the identity of India

    3) System, based on 21st-century technology-driven arrangements

    4) Vibrant Demography, which is our source of energy for a self-reliant India and

    5) Demand, whereby the strength of our demand and supply chain should be utilized to full capacity

    Is this a new package?

    • The PM did not give the details, but he specified that this calculation of Rs 20 lakh crore includes what the government has already announced and the steps taken by the RBI.
    • This means the total amount of additional money — that is over and above what the government would have spent even in the absence of a Covid crisis — will not be Rs 20 lakh crore.
    • It would be substantially less.

    Why?

    • That’s because the PM has included the actions of RBI, India’s central bank, as part of the government’s “fiscal” package, even though only the government controls the fiscal policy and not the RBI (which controls the ‘monetary’ policy).
    • Government expenditure and RBI’s actions are neither the same nor can they be added in this manner.

    What did the RBI provide earlier?

    • A rough estimate suggests that the RBI’s decisions have provided additional liquidity of Rs 5-6 lakh crore since the start of the Covid-19 crisis.
    • Add this to the Rs 1.7 lakh crore of the first fiscal relief package announced by the Centre on March 26. Together, the two already account for 40 per cent of the Rs 20-lakh crore package.
    • That leaves an effective amount of Rs 12 lakh crore.
    • However, if the government is including RBI’s liquidity decisions in the calculation, then the actual fresh spending by the government could be considerably lower than Rs 12 lakh crore.
    • That’s because RBI has been coming out with long term bond-buying operations (long term repo operation or LTRO, to infuse liquidity into the banking system) worth Rs 1 lakh crore at a time.
    • If for argument’s sake, RBI comes out with another LTRO of Rs 1 lakh crore, then the overall fiscal help falls by the same amount.

    Why shouldn’t RBI’s package be included in the overall package?

    • That is because direct expenditure by a government — either by way of wage subsidy or direct benefit transfer or any, immediately and necessarily stimulates the economy.
    • In other words, that money necessarily reaches the people — either as someone’s salary or someone’s purchase.
    • But credit easing by the RBI — that is, making more money available to the banks so that they can lend to the broader economy — is not like government expenditure.
    • That’s because, especially in times of crisis, banks may take that money from RBI and elsewhere and, instead of lending it, park it back with the RBI.

    Back2Basics: Long Term Repo Operations (LTRO)

    • The LTRO is a tool under which the RBI provides 1-3 year money to banks at the prevailing repo rate, accepting government securities with matching or higher tenure as the collateral.
    • Funds through LTRO are provided at the repo rate.
    • But usually, loans with higher maturity period (here like 1 year and 3 years) will have a higher interest rate compared to short term (repo) loans.
    • According to the RBI, the LTRO scheme will be in addition to the existing Liquidity Adjustment Facility (LAF) and the Marginal Standing Facility (MSF) operations.
    • The LAF and MSF are the two sets of liquidity operations by the RBI with the LAF having a number of tools like repo, reverse repo, term repo etc.

    What are Repo and Reverse Repo rates?

    • The repo rate is the rate at which the RBI lends money to the banking system (or banks) for short durations.
    • The reverse repo rate is the rate at which banks can park their money with the RBI.
    • With both kinds of the repo, which is short for repurchase agreement, transactions happen via bonds — one party sells bonds to the other with the promise to buy them back (or repurchase them) at a later specified date.
    • In a growing economy, commercial banks need funds to lend to businesses.
    • One source of funds for such lending is the money they receive from common people who maintain savings deposits with the banks. Repo is another option.

  • Shift in the US trade politics 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.

  • New approach to economic revival: SNAP

    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?

    1. 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.
    2. 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.
    3. Information utilities (IUs) will be established to collect, collate and disseminate financial information to facilitate insolvency resolution.
    4. The National Company Law Tribunal (NCLT) will adjudicate insolvency resolution for companies.  The Debt Recovery Tribunal (DRT) will adjudicate insolvency resolution for individuals.
    5. The Insolvency and Bankruptcy Board of India will be set up to regulate functioning of IPs, IPAs and IUs.