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GS Paper: Indian Economy

  • Why India must bargain hard on G7 tax reforms

    The article deals with the issue of global minimum tax and how it matters to India in the changing digital landscape where data is the new oil.

    Two pillars of global taxation reforms endorsed

    • In the just-concluded G7 summit in the UK, the leaders endorsed the global taxation reforms premised on two pillars.
    • One, that the multinational companies with at least a 10 per cent profit margin pay tax in countries where they operate and that would be 20 per cent of any profit above the 10 per cent margin.
    • Two, a global minimum tax rate that envisages that multinational companies pay a tax of at least 15 per cent in each country they operate.

    How companies monetise data

    • The concept of tax on electronic transmission of data across borders was expressly prohibited under multiple WTO declarations.
    • However, in the changed digital landscape, multinational corporations are mining big data, which has economic value, but not paying their fair share of taxes.
    •  Many of these tech firms provide their product for free to users, and based on user engagements, create a detailed profile of the user that would be used to sell ad space to the clients.

    Efforts to find solution to tax avoidance

    • The Union government had rightly introduced an equalisation levy at 2 per cent, targeted at non-resident e-commerce operators with a turnover greater than Rs 2 crore in the Union budget of 2020.
    • India had an equalisation levy since 2016, initially at 6 per cent on specified services like online advertisement or provision of digital advertising space and was levied on non-resident firms, deducted by the payer.
    • In the case of the amended equalisation levy, the responsibility lay with the operator and was applicable to earnings that have been made by selling advertisements based on the data collected within the country.
    • The member-states of the OECD have been trying to find a solution to tax avoidance by multinational corporations under the Base Erosion and Profit Shifting Project since 2015.
    • OECD had built a model around two pillars on which the G7 position has been announced.

    Way forward for India

    • India has to stand its ground.
    • With the largest user base for Facebook, WhatsApp and YouTube, India will not be adequately compensated by the above two steps in global minimum tax.
    • The government must also pass the Personal Data Protection Bill 2019 quickly so that provisions for data localisation, requiring Indian data to be stored and processed in the country are in place.
    •  This could be the ideal way to force tech firms to correctly evaluate the revenue generated from our sovereign data and thus tax it.

    Consider the question “As the world moves towards the global taxation reforms, what are the factors India needs to consider? Also, mention the previous efforts made to find the solution to tax avoidance by the multinational companies.”

    Conclusion

    India must negotiate hard to come to an equitable position on the global tax and avoid as it harbours the largest user base of the social media companies.

  • Embracing cryptocurrency

    As India struggles to come up with an appropriate approach towards cryptocurrencies, the growing trend of the adoption of cryptocurrencies across the world offers a lesson.

    Rising global trend of embracing cryptocurrencies

    • El Salvador became the first country in the world to adopt bitcoin as legal tender.
    • The U.K. has classified cryptocurrency as property.
    • The U.K. has sought to regulate the functioning of crypto-businesses while still imposing some restrictions to protect the interests of investors.
    • On the other hand, while there is no exact legal classification of cryptocurrency in Singapore, there is now a legal framework for cryptocurrency trading.
    • In the U.S., the open approach taken by the authorities has resulted in the trade in cryptocurrency being both taxed and appropriately regulated.

    India’s approach

    • Between 2013 and 2018, the government’s response to the rise of virtual currencies was cautionary, alerting users to the potential risks posed by cryptocurrency transactions.
    • Instead of developing a regulatory framework to address these issues, the Reserve Bank of India (RBI), in April 2018, effectively imposed a ban on cryptocurrency trading.
    • This ban was overturned by the Supreme Court in 2020.
    • The court reasoned that there were alternative regulatory measures short of an outright ban through which the RBI could have achieved its objective of curbing the risks associated with cryptocurrency trading.
    • India’s next move lies in the draft Cryptocurrency and Regulation of Official Digital Currency Bill, 2021.
    • The draft Bill proposes to criminalise all private cryptocurrencies while also laying down the regulatory framework for an RBI-backed digital currency. 

    What should be India’s approach?

    • The global regulatory attitude towards cryptocurrencies offers valuable insights into the alternative ways to achieve balanced regulation.
    •  In India, the absence of an existing legal classification of cryptocurrency should not be the impetus to prohibit its use.
    • The government should use this as an opportunity to allow private individuals the freedom to harness a powerful new technology with appropriate regulatory standards.

    Consider the question “As India finds itself at a crossroads of prohibition and regulation in its tryst with cryptocurrencies, globally, the inclination towards permissive regulation recognises the freedom of choice given to people. In light of this, examine the advantages and concerns with the cryptocurrencies and suggest the approach India should adopt towards the cryptocurrencies.”

    Conclusion

    Regulations to avoid the pitfall and not the outright ban is the right way towards the cryptocurrencies.

  • Why companies are adopting sustainable business models?

    The article discusses the three undercurrents that are pushing companies to adopt more sustainable business models.

    Demand for sustainable business practices

    • Companies across the world are facing pressure to adopt sustainable business practices.
    • In a global first, a judicial court in the Netherlands has invoked the principles of human rights obligations of companies to rule that the Royal Dutch Shell will have to further accelerate its targeted reduction in greenhouse gas (GHG) emission.
    •  The shareholders of Chevron forced upon the management a resolution to set strict emission targets from the products that it sells.
    • The German cabinet approved a law that requires all coal-fired plants to close down much earlier than the target date set only eighteen months ago.
    • In India, the SEBI came out with a new set of Business Responsibility and Sustainability Reporting (BRSR).
    • BRSR will be mandatory for the top 1,000 companies from the next year.

    Three factors driving the change

    1) Investors’ pull

    • Workers saving for their pension do not want their investments to go to companies whose tailings-dam can burst and cause hundreds of death in Brazil.
    • Investors also realise the long-term business risk of companies if sustainability isn’t a focus.

    2) Governments’/regulators’ push

    • In 2021, the US announced that it will cut emissions by over 50% by 2030.
    • Japan has almost doubled its 2030 targets.
    • The UK has now announced a target to cut 40-45% by the same time, from the earlier goal of a 30%-cut.
    • China has announced that its emissions will peak by 2030, and by 2060, it would have net zero emissions.
    • India is expected by the global community to announce net-zero by 2050.
    • All of these have huge implications not only for hydrocarbon companies but across multiple sectors.
    • Banking regulators are asking banks to include climate in the risk assessment of the companies they lend to.
    • Insurance and pension regulators are raising similar questions in their sector.

    3) Measurement/reporting

    • When sustainability debates picked up, many organisations like CDP, CDSB, PRI, GRI, TCFD, IMP, IIRC, SASB, etc, sprang up to fulfill the need for sustainability reporting.
    • Often, these worked at cross purposes and in competition with each other, leading to ‘greenwashing’ and other malpractices and creating confusion in the minds of investors.
    • But, the realisation that the investors need a set of comparable and verifiable reporting formats has gathered momentum in the past one year.
    • The last excuse to avoid focus on sustainable business practices will also wither away.

    Consider the question “Financial capital is just one of the multiple capitals a successful company must possess. This brings sustainability into the focus. In light of this, discuss the factors that are forcing the companies to factor in the sustainability in their business models.”

    Conclusion

    The decades-old debate on environmental damage and sustainability is now reaching a decisive phase. Companies need to factor in the sustainability aspect in their profit calculus to remain relevant in changing world.

    Source:

    https://www.financialexpress.com/opinion/the-sustainability-heat-on-companies/2268494/

  • Issues with special treatment of states with higher contribution to GST pool

    The article highlights the issues with the demand for special treatment of states with higher contribution to GST pool.

    Debate on GST

    • The issue of GST concessions on COVID relief has brought into focus the structural flaws in the GST structure.
    • In this process, the structure and design of GST — essentially a tax on consumption — is being questioned.
    • The issue of  “rich” states versus “poor” ones, the decision-making process in the GST Council, and the representation of various states in the Council have also come into the focus.

    Why States should be treated equally in GST Council

    1) Consensus on GST

    • The structure and design of GST and its basic features, as enshrined in the 101st Constitution Amendment Act, were unanimously adopted and endorsed by Parliament.
    • The broader and finer points of the law, were thoroughly discussed and debated and recommended by the GST Council after a complete consensus.
    • These were further debated and approved by not only Parliament but also by each of the state legislatures.
    • There was complete consensus even on the issue of delegated legislation — something unheard of in a federal environment.

    2) Equality of all states

    • In this process of consensus building, no state was accorded even the slightest of special privilege.
    • That is why the consensus surrounding GST was unprecedented whether in India or any other federation.
    • Therefore, arguing for special treatment of some states is a dangerous idea, particularly in governance, and more so in a welfare state.
    • For, this would open the gates for elitist arguments such as special rights for bigger taxpayers, unequal voting rights in elections and preferential treatment for a select few.

    3) Issues with greater contribution to GST revenue pool

    • It is not correct to argue that the GST collected in a state represents the revenue of that particular state for, under the GST mechanism, the tax deposited by a taxpayer in a state is a function of largely the value of supplies made by such taxpayer.
    • Approximately 50 per cent at the aggregate level and much higher at the state level of such values are of an inter-state nature.
    • In other words, most supplies made from any producing state are consumed elsewhere and the revenue in such a situation naturally and rightfully accrues to the destination state.

    4) No transfers based on a formula

    • It is equally fallacious to argue that under GST, most of the revenue is collected by the Union and is transferred to the states on the basis of some formula.
    • The quantum of IGST revenue that is settled to any state is directly related to the returns filed in that state and the cross utilisation of credit exhibited in such returns; part of this settlement also comprises tax on supplies destined to that state, as exhibited in the returns of such suppliers.
    • There is no “formula” as such for “transfer” of revenue collected by the Centre. Instead, such “transfers” are directly relatable to the consumption (whether intermediate or final) in any state.

    5) Locational or geographical advantage

    • There is another dimension to the higher revenue collection in a few states.
    • One may note that such states enjoy locational or geographical advantages, being mostly coastal and immensely suited to the needs of trade and distribution as also manufacturing.
    • Also, the disadvantage to such states on account of lower availability of certain vital minerals like coal and iron ore was undone by the principle of freight equalisation resorted to in the years following Independence.
    • This contributed, in no small measure, to the development of such states.

    6) Unequal transfers of Central receipts

    • The argument of unequal transfers of central receipts also does not hold water, either in India or in any other federation.
    • As is well known, such transfers are intended for correcting horizontal fiscal imbalances in a federation.

    Conclusion

    We should thus concentrate on carrying forward the glorious traditions of perhaps the only institution of co-operative federalism that we have been able to build so far.

  • Consumer Confidence Survey (CCS) by the RBI

    The highlights of the Consumer Confidence Survey (CCS) were recently released by the RBI pointing to some all-time lows.

    Consumer Confidence Survey (CCS)

    • The RBI conducts this survey every couple of months by asking households in 13 major cities — such as Ahmedabad, Bhopal, Guwahati, Patna, Thiruvananthapuram — about their current perceptions and future expectations on a variety of economic variables.
    • These variables include the general economic situation, employment scenario, overall price situation, own income and spending levels.
    • Based on these specific responses, the RBI constructs two indices: the Current Situation Index (CSI) and the Future Expectations Index (FEI).
    • The main variables of the survey are- Economic situation, Employment, Price Level, Income and Spending.
    • The CSI maps how people view their current situation (on income, employment etc.) vis a vis a year ago. The FEI maps how people expect the situation to be (on the same variables) a year from now.
    • By looking at the two variables as well as their past performance, one can learn a lot about how Indians have seen themselves fairing over the years.

    Why does it matter?

    • The CCS is a survey that indicates how optimistic or pessimistic consumers are regarding their expected financial situation.
    • If the consumers are optimistic, spending will be more, whereas if they are not so confident, then their poor consumption pattern may lead to recession.

    What was the main finding?

    • As Chart 1 shows, the CSI has fallen to an all-time low of 48.5 in May.
    • An index value of 100 is crucial here, as it distinguishes between positive and negative sentiment.
    • At 48.5, the current consumer sentiment is more than 50 points adrift from being neutral — the farthest it has ever been. It is important to note that even a year ago, the CSI had hit an all-time low.
    • The FEI moved to the pessimistic territory for the second time since the onset of the pandemic.

    What are the factors responsible for pulling down the CSI and FEI respectively?

    • The RBI states that CSI is being pulled down because of falling consumer sentiments on the “general economic situation” and “employment” scenario.
    • So, on the “general economic situation”, RBI finds that there has been a largely secular decline in both current consumer sentiment and future expectations since PM Modi’s re-election in 2019.
    • What is equally worse is that more people expect the employment situation to worsen a year from now — that is why the one year ahead expectation line is below the zero marks.

    Big takeaways

    • These data layout the tricky challenge facing the Indian economy.
    • If the government’s strategy for fast economic growth — expecting the private sector to lead India out of this trough by investing in new capacities — is to succeed, then consumer spending (especially on non-essentials) has to go up sharply.
    • But for that to happen, household incomes have to go up; and for that to happen, the employment prospects have to brighten; and for that to happen, again, companies have to invest in new capacities.

  • 7 Years of UPA Government vs 7 Years of NDA Government

    The article compares the performance of the present government under Prime Minister Modi with the first seven years of the Manmohan Singh government on various fronts.

    Context

    The current government completed seven years at the Centre recently. It is time to reflect and look back at its performance on basic economic parameters over the last seven years. It may also be interesting to compare and see how it fared vis-à-vis the first seven years of UPA government (2004-05 to 2010-11) under Manmohan Singh.

    Analysing the progress by studying key economic indicator

    1)  GDP growth

    • One of the key economic parameters is GDP growth.
    • It is not the most perfect one, as it does not capture specifically the impact on the poor, or on inequality.
    • But higher GDP growth is considered central to economic performance as it enlarges the size of the economic pie.
    • The average annual rate of growth of GDP under the Modi government so far has been just 4.8 per cent compared to 8.4 per cent during the first seven years of the Manmohan Singh government.
    • If this continues as business as usual, the dream of a $5 trillion economy by 2024-25 is not likely to be achieved.

    2) Inflation

    • The Modi government scores much better on the inflation front with CPI (rural and urban combined) rising at 4.8 per cent per annum.
    • It is well within the tolerance limits of RBI’s targeted inflation band and also much lower than 7.8 per cent during the first seven years of the Manmohan Singh government.

    3) Forex reserves

    • Also, at macro level, foreign exchange reserves provide resilience to the economy against any external shocks.
    • On this score too, the Modi government fares quite well with forex reserves rising from $313 billion on May 23, 2014 to $593 billion on May 21, 2021.

    4) Food and agriculture

    • It engages the largest share of the workforce in the economy and matters most to poorer segments.
    • On the agri-front, both governments recorded an annual average growth of 3.5 per cent during their respective first seven years.
    • However, on the food and fertiliser subsidy front, the Modi government broke all records in FY21, by spending Rs 6.52 lakh crore and accumulating grain stocks exceeding 100 million tonnes in May end, 2021.
    • One area in which the Modi government performed very poorly is agri-exports.
    • In 2013-14 agri-exports had crossed $43 billion while during all the seven years of the Modi government agri-exports remained below this mark of $43 billion.
    • Sluggish agri-exports with rising output put downward pressure on food prices.
    • It helped contain CPI inflation, but subdued farmers’ incomes.

    5) Infrastructure development

    • The Modi government has done better in power generation by increasing it from 720 billion units per annum to 1,280 billion units per annum.
    • Similarly, road construction too has been at least 30 per cent faster under the Modi government.

    6) Social sector

    • Based on an international definition of extreme poverty (2011 PPP of $ 1.9 per capita per day), the World Bank estimated India’s extreme poverty in 2015 to be about 13.4 per cent, down from 21.6 per cent in FY 2011-12.
    • Even the incidence of multidimensional poverty hovered around 28 per cent in 2015-16.
    • Three key indicators can be used to assess performance on this front:
    • One, average annual person days generated under MGNREGA in the first five years since this programme started under the UPA in 2006-07 to 2010-11, which was 200 crore, and under Modi government it improved to 230 crore.
    • Two, average annual number of houses completed under the Indira Awaas Yojana and PM Awaas Yojana-Gramin, which improved from 21 lakhs to 30 lakhs per annum.
    • Three, open defecation free (ODF) which was only 38.7 per cent on October 2, 2014 and shot up to 100 per cent by October 2, 2019, as per government records.

    Conclusion

    The current government has turned out to be more welfare-oriented than reformist in revving up GDP growth. How long this welfare approach is sustainable without enlarging the size of GDP pie is an open question.

  • Need to deal with distortions built into GST

    The article highlights the issues with the one state one vote system adopted in the GST Council decision making.

    Context

    The Goods and Services Tax (GST) Council in India is still engaged in a discussion on whether life-saving and hard-to-come-by products should be taxed. Such delay in decision-making can largely be explained by the distorted design and incentive structure of the GST itself.

    Imbalance in collection and distribution of taxes

    • The taxes collected under GST are accumulated by the Union government and a portion is transferred back to each state under a formula.
    • As is the case with most federal countries, there is a large imbalance in the collection and distribution of taxes between states.
    • this holds true also for income accrued to, and distributed, from the GST pool.
    • Four states — Maharashtra, Tamil Nadu, Karnataka, and Gujarat contribute nearly as much as the remaining 27 states combined.
    • Most federal countries exhibit this characteristic where a few large, rich, provinces or states contribute disproportionately.

    Variation in dependence of States on transfers from the Union government

    • Only about 30 per cent of the overall revenue of the states mentioned above — Maharashtra, Tamil Nadu, Gujarat, and Karnataka — comes from the Union government.
    • But for the remaining 27 states, roughly 60 per cent of their revenues are obtained through transfers from the Union government.
    • For the smaller Northeastern states, these transfers from the Union government constitute 80-90 per cent of their total revenues.
    •  In effect, the states that contribute the most to the GST pool are the least dependent on transfers from the Union government while the ones that contribute the least are the most dependent.

    Two problems in net-transfers in India

    1) One-sided transfers

    •  In almost every federal union, net-transfers work to reduce differences in development between states over time.
    • However, Over the last 25 years or so, net transfers have become increasingly one-sided in India.
    • That is, the quantum of net-transfers diminishes, as states become more equal through such transfers.
    • But in India, the opposite has occurred.

    2) Indirect taxes and cess

    • The Union government of the last seven years has greatly exacerbated this problem through two actions.
    • First, it has reconstructed the composition of taxation away from the fair and progressive channel of direct taxation towards the inherently regressive and unfair channel of indirect taxes.
    • Second, the Union has shifted a large proportion of taxation roughly 18 per cent of its overall revenues into cesses, a special form of taxes that remain outside the GST pool and hence do not have to be shared with the states.
    • Since 2014, cess revenues grew 21 per cent every year leading to a doubling in terms of its share of GDP.

    Implications of these two problems for fiscal federalism

    • The combined effect of these problems is that all states (collectively) get a lower share of overall revenues.
    • Individual states face an ever-increasing disparity in the ratio of funds received from the Union as a proportion of taxes collected by the Union from that state.
    • This is an affront to fiscal federalism and an assault on “cooperative federalism”.

    Issue of ‘one state one vote’ system

    • States that are more dependent on transfers from the Union want to maximise GST collections while states that are less dependent can afford to be more sensitive to citizens’ concerns.
    • The case of taxes on Covid products is perhaps the starkest instance of such differences.
    • Most large states are ready to forego this tax revenue for humanitarian considerations.
    • But 19 states representing the remaining 30 per cent of the population seem keen to continue to levy GST on Covid products.
    •  These are mostly smaller states.
    • Given the smaller population of such states, the adverse impact of Covid taxes will be minimal for them.
    • But they will reap the benefits of additional revenues from GST on Covid products levied on the much larger populations of the bigger states.

    Conclusion

    When direct tax policy decisions are legislated by Parliament, which has proportional representation from states according to their size of the population, indirect tax policy decisions should not be subject to one state one vote system.

  • Enabling financial inclusion

    The article takes an overview of the progress made by India in the financial inclusion and role played by JAM trinity in it.

    What is financial inclusion?

    Financial inclusion is defined as the availability and equality of opportunities to access financial services. It refers to a process by which individuals and businesses can access appropriate, affordable, and timely financial products and services. These include banking, loan, equity, and insurance products.

    Growing adoption of digital payment in India

    • India overtook China to register the highest number of countrywide digital payments.
    • Real-time transactions crossed 25 billion, much higher than China’s 15 billion in 2020, as per the report of ACI Worldwide.
    • The report also stated that digital payments in India are set to account for 71.7 per cent of all payments by volume by the year 2025.
    • The digital payment boom is indicative of a larger paradigm shift in the ease of access to financial services.

    What are the contributing factors

    • More and more people, across all strata, are adopting digital payments as it is convenient, safe and limits exposure.
    • It is also a result of the nudges and diligent policy and technology frameworks created by the central government in the last few years.
    • By building the Jan-Dhan-Aadhar-Mobile (JAM) and Universal Payment Interface (UPI) platform, the government has been creating the ground for greater financial inclusion.

    Significance of JAM trinity

    • While Jan Dhan was the first pillar of the ambitious JAM trinity, Aadhaar card seeding and bank account linkages to mobile numbers have empowered people in hitherto unimagined ways.
    • The JAM trinity has helped people know their account status, receive scholarships and fellowships, get fertiliser and LPG subsidy, disability pensions and farm income support — directly into their accounts.
    • The trinity also helped eliminate middlemen, frauds, and leakages due to corruption.
    • In the past one year alone, Rs 4.3 lakh crore was transferred, in over 477 crore transactions under 319 schemes.
    • With an estimated saving of Rs 1.8 lakh crore, the success of DBT is a big thumbs up for the central government.
    • The aid that reached people during the pandemic under the PM Garib Kalyan package is indicative of the success of the government’s financial inclusion and digitisation efforts.

    Conclusion

    The unmissable digital and financial revolution that has been unleashed is hard to miss for anyone. The digital journey, however, is long and one hopes to see the positive trends sustaining given their transformative impact on the lives of Indians.

  • Government Securities Acquisition Programme (GSAP 2.0)

    In a bid to infuse more liquidity in the market, the Reserve Bank of India (RBI) has announced undertake Government Securities Acquisition Program (G-SAP) 2.0 during the second quarter of FY22 and conduct secondary market purchase operations of Rs 1.20 lakh crore.

    Answer this PYQ in the comment box:

    Q.Consider the following statements:

    1. The Reserve Bank of India manages and services the Government of India Securities but not any State Government Securities.
    2. Treasury bills are issued by the Government of India and there are no treasury bills issued by the State Governments.
    3. Treasury bills offer are issued at a discount from the par value.

    Which of the statements given above is/are correct?

    (a) 1 and 2 only

    (b) 3 Only

    (c) 2 and 3 only

    (d) 1, 2 and 3

    What are Government Securities?

    • These are debt instruments issued by the government to borrow money.
    • The two key categories are:
    1. Treasury bills (T-Bills) – short-term instruments which mature in 91 days, 182 days, or 364 days, and
    2. Dated securities – long-term instruments, which mature anywhere between 5 years and 40 years

    Note: T-Bills are issued only by the central government, and the interest on them is determined by market forces.

    Why G-Secs?

    • Like bank fixed deposits, g-secs are not tax-free.
    • They are generally considered the safest form of investment because they are backed by the government. So, the risk of default is almost nil.
    • However, they are not completely risk-free, since they are subject to fluctuations in interest rates.
    • Bank fixed deposits, on the other hand, are guaranteed only to the extent of Rs 5 lakh by the Deposit Insurance and Credit Guarantee Corporation (DICGC).

  • RBI supervision of Cooperative Banks

    Maharashtra government has approved a plan to set up a task force to prepare an action plan against a recent change in the law that has brought cooperative banks under the supervision of the Reserve Bank of India (RBI).

    What are Cooperative Banks?

    • Co-operative banks are financial entities established on a cooperative basis and belonging to their members.
    • This means that the customers of a cooperative bank are also its owners.
    • These banks provide a wide range of regular banking and financial services. However, there are some points where they differ from other banks.
    • They came into being with the aim to promote saving and investment habits among people, especially in rural parts of the country.

    Structure of co-operative banks in India

    • Broadly, cooperative banks in India are divided into two categories – urban and rural.
    • Rural cooperative credit institutions could either be short-term or long-term in nature.
    • Further, short-term cooperative credit institutions are further sub-divided into State Co-operative Banks, District Central Co-operative Banks, Primary Agricultural Credit Societies.
    • Meanwhile, the long-term institutions are either State Cooperative Agriculture and Rural Development Banks (SCARDBs) or Primary Cooperative Agriculture and Rural Development Banks (PCARDBs).
    • On the other hand, Urban Co-operative Banks (UBBs) are either scheduled or non-scheduled.

    Who oversees these banks?

    • In India, cooperative banks are registered under the States Cooperative Societies Act.
    • They also come under the regulatory ambit of the Reserve Bank of India (RBI) under two laws, namely, the Banking Regulations Act, 1949, and the Banking Laws (Co-operative Societies) Act, 1955.
    • They were brought under the RBI’s watch in 1966, a move that brought the problem of dual regulation along with it.

    Now answer this PYQ in the comment box:

    Q.Consider the following statements:

    1. In terms of short-term credit delivery to the agriculture sector, District Central Cooperative Banks (DCCB) delivers more credit in comparison to Scheduled Commercial Banks and Regional Rural Banks.
    2. One of the most important functions of DCCBs is to provide funds to the Primary Agricultural Credit Societies.

    Which of the statements given above is / are correct?

    (a) 1 only

    (b) 2 only

    (c) Both 1 and 2

    (d) Neither 1 nor 2

    How has The Banking Regulation Act been amended?

    • Cooperative banks have long been under dual regulation by the state Registrar of Societies and the RBI.
    • As a result, these banks have escaped scrutiny despite failures and frauds.
    • The changes to The Banking Regulation Act approved by Parliament in September 2020, brought cooperative banks under the direct supervision of the RBI.

    Changes brought

    • The amended law has given RBI the power to supersede the board of directors of cooperative banks after consultations with the concerned state government.
    • Earlier, it could issue such directions only to multi-state cooperative banks.
    • Also, urban cooperative banks will now be treated on a par with commercial banks.
    • And a cooperative bank can, with prior approval of the RBI, issue equity shares, preference shares, or special shares to its members or to any other person residing within its area of operation, by way of public issue or private placements.
    • It can also issue unsecured debentures or bonds with a maturity of not less than 10 years.
    • This essentially means non-members can become shareholders of the bank, and this will allow the RBI to merge failing banks quickly.

    What triggered the need for the changes in the law?

    • India has some 1,540 urban cooperative banks, with a depositor base of 8.6 crore and deposits of at least Rs 5 lakh crore.
    • Finance Minister told Lok Sabha last year that the financial status of at least 277 urban cooperative banks was weak, and around 105 cooperative banks were unable to meet the minimum regulatory capital requirement.
    • According to RBI’s latest financial stability report, the gross non-performing asset ratio of urban cooperative banks deteriorated from 9.89 percent in March 2020 to 10.36 percent in September 2020.
    • Not only do these banks have high levels of bad loans, they also have a small capital base — something that the changes in the law have tried to address by allowing these banks to issue shares with RBI’s approval.
    • Political interference in staff appointments is also a problem with these banks, which has added to inefficiencies.