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GS Paper: GS3

  • Need for a Bad Bank

    The idea of setting up a bad bank often comes up for debate, especially when stress in the banking sector is projected to rise in the near term.

    Practice question for mains:

    Q. What is a Bad Bank? Discuss how it can rescue the covid induced bad loans in India.

    COVID induced NPAs

    • Several economists and agencies project a recession in the Indian economy this year, due to the adverse effects of Covid-19 on economic activity.
    • This will hit the banking and financial sector in particular, as a slump in earnings of companies and individuals could lead to a jump in NPAs, reversing the early trends.
    • Various analysts suggest that in a couple of years, the proportion of stressed assets in the banking system could jump to as high as 18 per cent from around 11 per cent at present.
    • To tackle this upcoming challenge, the banking industry has proposed the setting up of a government-backed bad bank.

    What is the Bad Bank?

    • A bad bank is a bank set up to buy the bad loans and other illiquid holdings of another financial institution.
    • The entity holding significant NPAs will sell these holdings to the bad bank at market price.
    • By transferring such assets to the bad bank, the original institution may clear its balance sheet—although it will still be forced to take write-downs.
    • A bad bank structure may also assume the risky assets of a group of financial institutions, instead of a single bank.

    What is the recent proposal of a bad bank?

    • The banking sector, led by the Indian Banks Association (IBA), had in May submitted a proposal for setting up a bad bank to the finance ministry and the RBI.
    • The IBA proposed for having equity contribution from the government and the banks.
    • This was based on an idea proposed by a panel on faster resolution of stressed assets in public sector banks headed by former PNB Chairman Sunil Mehta.
    • This panel had proposed an asset management company (AMC), ‘Sashakt India Asset Management’, for resolving large bad loans two years ago.
    • There were talks about creating a bad bank in 2018 too, but it never took shape.

    What kind of NPA spike is expected during this outbreak?

    • The impact of Covid-19 and the associated policy response is likely to result in an additional Rs 1,67,000 crore of debt from the top 500 debt-heavy private sector borrowers turning delinquent between FY21 and FY22.
    • Given that 11.57 per cent of the outstanding debt is already stressed, the proportion of stressed debt is likely to increase to 18.21 per cent of the outstanding quantum.

    What is the government’s view over Bad Banks?

    • While the finance ministry has not formally submitted its view on the proposal, senior officials have indicated that it is not keen to infuse equity capital into a bad bank.
    • The government’s view is that bad loan resolution should happen in a market-led way, as there are many asset reconstruction companies already operating in the private space.
    • The government has significantly capitalized state-owned banks in recent years and pursued consolidation in the PSU banking space.
    • In the last three financial years, the government has infused equity of Rs 2.65 lakh crore into state-owned banks.
    • These steps, along with insolvency resolution under the IBC, are seen as adequate to tackle the challenge of bad loans.

    What is the RBI view?

    • The RBI has so far never come out favourably about the creation of a bad bank with other commercial banks as main promoters.
    • Former RBI Governor Raghuram Rajan had opposed the idea of setting up a bad bank with a majority stake by banks, arguing it would solve nothing.
    • Rajan argued that a government-funded bad bank would just shift loans “from one government pocket (the public sector banks) to another (the bad bank) and did not see how it would improve matters”.
    • Indeed, if the bad bank were in the public sector, the reluctance to act would merely be shifted to the bad bank.
    • Alternatively, if the bad bank were to be in the private sector, the reluctance of public sector banks to sell loans to the bad bank at a significant haircut would still prevail.

    Alternatives to a bad bank

    • Many experts argue that the enactment of IBC has reduced the need for having a bad bank, as a transparent and open process is available for all lenders to attempt insolvency resolution.
    • The view is that an IBC-led resolution, or sale of bad loans to ARCs already existing, is a better approach to tackle the NPA problem rather than a government-funded bad bank.

    Former RBI Deputy Governor Viral Acharya has proposed two models:

    1) Private Asset Management Company

    • The first model is a Private Asset Management Company (PAMC) which would be suitable for sectors where the stress is such that assets are likely to have economic value in the short run, with moderate levels of debt forgiveness.

    2) Setting up National Asset Management Company (NAMC)

    • The second model is a NAMC for sectors where the problem is not just of excess capacity, but possibly also of economically unviable assets in the short- to medium-term, such as in the power sector.
    • The NAMC would raise debt for its financing needs, keep a minority equity stake for the government, and bring in asset managers such as ARCs and private equity to manage and turn around the assets.

  • Lithium Nucleosynthesis in Stars

    A forty-year-old puzzle regarding the production of lithium in stars has been solved by Indian researchers.

    Try this question from CSP 2013:

    Q.Consider the following phenomena:

    1. Size of the sun at dusk
    2. Colour of the sun at dawn
    3. Moon being visible at dawn
    4. Twinkle of stars in the sky
    5. Polestar being visible in the sky

    Which of the above are optical illusions?

    (a) 1, 2 and 3

    (b) 3, 4 and 5

    (c) 1, 2 and 4

    (d) 2, 3 and 5

    Lithium nucleosynthesis in Stars

    • Stars, as per known mechanisms of evolution, actually destroy lithium as they evolve into red giants.
    • Planets were known to have more lithium than their stars — as is the case with the Earth-Sun pair.
    • However, leading to a contradiction, some stars were found that were lithium-rich.
    • The new work by an Indian researcher shows that when stars grow beyond their Red Giant stage into what is known as the Red Clump stage, they produce lithium.
    • This is known as a Helium Flash and this is what enriches them with lithium.

    Studying lithium-rich stars

    • About 40 years ago, a few large stars were spotted that were lithium-rich.
    • This was followed by further discoveries of lithium-rich stars, and that posed a puzzle — if stars do not produce lithium, how do some stars develop to become lithium-rich.
    • The planet engulfment theory was quite popular. For example, Earth-like planets may increase the star’s lithium content when they plunge into [their] star’s atmosphere when the latter become Red Giants.

    Findings of the Indian research

    • Indian researchers have been working on this puzzle for nearly 20 years to devise a method of measuring lithium content using low-resolution spectra in a large number of stars.
    • The study demonstrated that lithium abundance enhancement among low mass giant stars is common.
    • Until now, it was believed that only about 1% of giants are lithium-rich.
    • Secondly, the team has shown that as the star evolves beyond the Red Giant stage, and before it reaches the Red Clump stage, there is a helium flash which produces an abundance of lithium.

    Back2Basics: Lithium

    • Lithium is a chemical element with the symbol Li and atomic number 3. It is a soft, silvery-white alkali metal. Under standard conditions, it is the lightest metal and the lightest solid element.
    • S light element commonly used today in communication device technology, it has an interesting story.
    • It was first produced in the Big Bang, around 13.7 billion years ago when the universe came into being, along with other elements.
    • While the abundance of other elements grew millions of times, the present abundance of lithium in the universe is only four times the original [Big Bang] value. It is actually destroyed in the stars.
    • The Sun, for instance, has about a factor of 100 lower amount of lithium than the Earth.

  • What is Equalization Levy?

    The government is not considering extending the deadline for payment of Equalization Levy by non-resident e-commerce players, even though a majority of them are yet to deposit the first instalment of the tax.

    Try this MCQ:

    Q.The Equalization Levy sometimes seen in news is related to:

    a) E-commerce

    b) Air Travel

    c) Imports Substitution

    d) None of these

    What is Equalization Levy?

    • Equalization Levy was introduced in India in 2016, with the intention of taxing the digital transactions i.e. the income accruing to foreign e-commerce companies from India.
    • It is aimed at taxing business to business transactions.

    The following services are currently covered under the EL:

    1. Online advertisement;
    2. Any provision for digital advertising space or facilities/ service for the purpose of online advertisement;

    Applicability

    Equalization Levy is a direct tax, which is withheld at the time of payment by the service recipient. The two conditions to be met to be liable to the levy:

    • The payment should be made to a non-resident service provider;
    • The annual payment made to one service provider exceeds Rs. 1,00,000 in one financial year.

    Why it was introduced in India?

    • Over the last decade, IT has gone through an exponential expansion phase in India and globally.
    • This has led to an increase in the supply and procurement of digital services.
    • Consequently, this has given rise to various new business models, where there is a heavy reliance on digital and telecommunication networks.
    • As a result, the new business models have come with a set of new tax challenges in terms of nexus, characterization and valuation of data and user contribution.
    • To bring in clarity in this regard, the government introduced in the Budget 2016, the equalization levy.

  • [pib] Central Sector Scheme: Agriculture Infrastructure Fund

    The Union Cabinet has given its approval to a new pan India Central Sector Scheme-Agriculture Infrastructure Fund (CSS-AIF).

    Try this question from CSP 2018:

    Q.Increase in absolute and per capita real GNP does not connote a higher level of economic development, if:

    (a) Industrial output fails to keep pace with agriculture output.

    (b) Agriculture output fails to keep pace with industrial output.

    (c) Poverty and unemployment increase.

    (d) Imports grow faster than exports.

    Agriculture Infrastructure Fund

    • AIF aims to provide a medium – long term debt financing facility for investment in viable projects for post-harvest management Infrastructure and community farming assets through interest subvention and financial support.
    • Under the scheme, Rs. One Lakh Crore will be provided by banks and financial institutions as loans.
    • The beneficiaries will include Primary Agricultural Credit Societies (PACS), Marketing Cooperative Societies, Farmer Producers Organizations (FPOs), SHGs, Farmers etc among others.
    • The moratorium for repayment under this financing facility may vary subject to a minimum of 6 months and maximum of 2 years.

    Management of AIF

    • Agri Infra fund will be managed and monitored through an online Management Information System (MIS) platform.
    • The National, State and District level Monitoring Committees will be set up to ensure real-time monitoring and effective feedback.
    • The duration of the Scheme shall be from FY2020 to FY2029 (10 years).

    Benefits of the scheme

    • The Project by way of facilitating formal credit to farm and farm processing-based activities is expected to create numerous job opportunities in rural areas.
    • It will enable all the qualified entities to apply for a loan under the fund.

  • What India should do to get its energy transition right

    The article analyses the problems renewable energy faces in India and suggests the pathways to overcome these challenges.

    India’s commitments and goals

    • India has committed in the 2015 Paris Agreement to reduce GHG emissions intensity by 33-35% below 2005 levels.
    • It also committed to achieve 40% of installed electric power capacity from non-fossil sources by 2030.
    • At the UN General Assembly in 2019, we announced a target of 450 GW of renewable energy (RE) by 2030.

    Let’s look into CEA study

    • The optimal electricity mix study of the Central Electricity Authority (CEA), estimated 430 GW non-hydro renewables (280 GW solar + 140 GW wind + 10 GW bio) by 2030.
    • Study put thermal capacity at 266 GW by 2030.
    • So, it puts the percentage of non-fossil fuel (RE + hydro + nuclear) in installed capacity by 2030 at 64%.
    • Which is much higher than India’s Paris commitment.

    Coal contradiction

    • The target for coal production at 1.5 billion tonnes, which was set in 2015, has been reinforced recently to be achieved by 2024.
    • Privatisation of coal mining and recent auctions have given a meaningful thrust to this.
    • Looked at the target set for renewable energy, targets for cola production convey contradictory signals.
    • The targeted coal production of 1.5 billion tonnes, even by 2030, would mean thermal generation capacity could double over the current 223 GW.
    • In that case, even with targeted RE capacity, we will not achieve our emissions intensity Paris commitment.
    • Can a global green champion announce doubling its coal production in five years?

    Problems with Renewables

    1. Policy Issues

    • Solar deployment has seen policy challenges both from Centre and states, these include-
    • Continuous changes in duty structure.
    • Renegotiation of PPAs.
    • Curtailment of solar power.
    • Extremely delayed payments in some states.
    • Policy flip-flops on open access and net metering.
    • Delays by state agencies and regulators.
    • Land possession difficulties.
    • Transmission roadblocks even in solar parks.

    2. Solar cell manufacturing constraints

    • Our capacity for cell manufacture is 3 GW, though workable capacity is actually around 2 GW.
    • Domestically manufactured cells are more expensive and less efficient.
    • There is little upgrade in a rapidly changing world of technology.
    •  90% of cells and 80% modules are imported largely from China or Chinese companies elsewhere.
    • Wafer imports are 100% as we don’t manufacture ingots/wafers.
    • For every GW with an average cost of Rs 5,000 crore in 2019, more than half goes to China.

    3. Storage constraints

    •  Hydro pump storage is limited in quantity and there will be an issue of costs.
    • The other project is a solar-wind hybrid with batteries installed after a few years.
    • Neither intends to meet peak power demand or even the baseload.
    • Forecasts suggest lowering of battery costs by 50% by 2030.
    • It makes sense to wait before we go for large-scale storage.

    Manufacturing domestically

    • 1) At the least plan to make 5 GW of ingot/wafer manufacturing capacity urgently.
    • We may require electricity supply at about Rs 3 per unit, and dedicated power plants.
    • The risk of technology obsolescence would need to be factored in.
    • Policy, fiscal and financial support prescriptions should aim at creating globally competitive industry.
    • 2) We need to develop batteries suitable for extreme Indian weather conditions but globally benchmarked.
    • This demands a mission approach, getting our best people and institutions together, properly funded and tasked to get a battery out in the next three years.
    • 3) We must also simultaneously launch a hydrogen mission—target heavy vehicle mobility through fuel cells.
    • It may become a solution for RE storage, too.

    The issue of supply-demand mismatch

    • In the last two decades, we have been overestimating demand and increasing supply.
    • Our demand projections for 2030 are wildly high.
    • PLF in 2018-19 was 60.30, declining to 56.08 in 2019-20 and hovering around 50% with the Covid-19 impact.
    • Even the latest CEA review of ‘optimal’ mix talks of thermal PLF of 59% in 2030!
    • This is inefficient and costly.
    • Thermal PLF must be taken to over 80%.

    The suggested pathways

    • 1. Build thermal capacity as per CEA estimates and quickly. None after 2030. Retire inefficient plants. Plan for miner rehabilitation.
    • 2. Accelerate RE after 2030 with storage. Aim for 10 GW solar and 5 GW wind annually.
    • 3. Develop 5-10 GW ingot/wafer manufacturing capacity urgently and diversify import sources even at some extra cost.
    • 4. Develop a battery for Indian conditions in three years; full battery manufacturing in India in five years.
    • 5. Revisit the manner of solar generation. Prioritise decentralised and solar agriculture.
    • 6. Plan for hydrogen economy with pilot projects and dedicated highways for long and heavy haul traffic.
    • 7. Put a strong energy demand management system into place with much stronger energy efficiency and the conservation movement.

    Consider the question “Central Electricity Authority finalised the optimal electricity mix study recently setting the targets for the future. Examine the constraints that expansion of solar energy faces and suggest the pathways to overcome the challenges.”

    Conclusion

    Embracing the RE will help India economically and strategically. It will also help it achieve its targets in its fight against climate change.

    Back2Basics: Central Electricity Authority

    • Central Electricity Authority (CEA) is an organization originally constituted under Section 3(1) of the repealed Electricity (Supply) Act, 1948, since substituted by Section 70 of the Electricity Act, 2003.
    • It was established as a part-time body in 1951 and made a full-time body in 1975.
    • The functions and duties of CEA are delineated under Section 73 of the Electricity Act, 2003

    Plant Load Factor (PLF)

    • Plant Load Factor (PLF) is the ratio of average power generated by the plant to the maximum power that could have been generated for a given time period.

    Original Op-ed

    https://www.financialexpress.com/opinion/what-india-should-do-to-get-its-energy-transition-right/2016648/

  • Species in news: Golden Birdwing

    A Himalayan butterfly named golden birdwing is now India’s largest recorded butterfly.

    Try this MCQ:

    Q.The Himalayan Golden Birdwing recently seen in news is a:

    a)Biggest butterfly

    b)Smallest avian specie

    c)Biggest freshwater fish

    d)Honeybee

    Golden Birdwing

    • A Himalayan butterfly named golden birdwing is now India’s largest, a record the southern birdwing held for 88 years.
    • The male golden birdwing is much smaller at 106 mm.
    • With a wingspan of 194 mm, the female of the species is marginally larger than the southern birdwing (190 mm) that Brigadier William Harry Evans, a British military officer and lepidopterist, recorded in 1932.
    • It was an individual of the southern birdwing which was then treated as a subspecies of the common birdwing.

    Other butterflies in news

    • The Malabar Banded Peacock or the Buddha Mayoori which was recently declared the ‘State Butterfly’ of Kerala will have a dedicated butterfly park in Kochi.
    • Tamil Nadu has also recently declared Tamil Yeoman (Cirrochroa Thais)as its state butterfly to symbolise its rich natural and cultural heritage, in a move aimed at boosting the conservation efforts of the attractive insects.
    • Other states to have state butterflies are Maharashtra (Blue Mormon), Uttarakhand (Common peacock), Karnataka (Southern birdwings).

  • World Drug Report: India in top five list

    According to the latest World Drug Report of the United Nations Office on Drugs and Crime (UNODC), the fourth highest seizure of opium in 2018 was reported from India, after Iran, Afghanistan and Pakistan.

    Drug seizures in India and neighbourhood

    • The maximum of 644 tonnes of opium was seized in Iran, followed by 27 tonnes in Afghanistan and 19 tonnes in Pakistan.
    • In India, the figure stood at four tonnes in 2018.

    Heroin

    • Heroin is manufactured from the morphine extracted from the seed pod of opium poppy plants.
    • Iran reported the highest seizure of heroin (25 tonnes), followed by Turkey, United States, China, Pakistan and Afghanistan.
    • India was at the 12th position in the world.

    Global pattern

    • 97% of the total global production of opium in the past five years came from only three countries.
    • About 84% of the total opium was produced in Afghanistan, from where it is supplied to neighbouring countries, Europe, west Asia, south Asia and Africa.
    • From Myanmar, which accounts for 7% of the global opium production, and Laos, where 1% of the opium is produced, it is supplied to east and south-east Asia and Oceania.
    • Mexico accounts for 6% of the global opium production, while Colombia and Guatemala account for less than 1% of global production.

    Some other details

    • The report said that the global area under opium poppy cultivation declined for the second year in a row in 2019.
    • It went down by 17% in 2018 and by 30% in 2019.
    • Despite the decline in cultivation, opium production remained stable in 2019, with higher yields reported in the main opium production areas.
    • Quantities of seized opiates remained concentrated in Asia, notably in south-west Asia (70%).
    • Asia is host to more than 90% of global illicit opium production.
    • Also, it is the world’s largest consumption market for opiates and also accounts for almost 80% of all opiates seized worldwide in 2018.

    Consider the question asked in 2018 “India’s proximity to two of the world’s biggest illicit opium-growing states has enhanced her internal security concerns. Explain the linkages between drug trafficking and other illicit activities such as gunrunning, money laundering and human trafficking. What countermeasures should be taken to prevent the same?”

  • Railways to become Net Zero Carbon Emission Mass Transport by 2030

    A new dawn ushers on Indian Railways as it endeavors to be self-reliant for its energy needs as directed by the Prime Minister and solarise railway stations by utilizing its vacant lands for Renewable Energy (RE) projects.

    Moving towards ‘Net Zero’ Carbon Emission Railways

    • The Ministry of Railways has decided to install solar power plants on its vacant unused lands on mega-scale.
    • The use of solar power will accelerate the mission to achieve a conversion of Indian Railways to ‘Net Zero’ Carbon Emission Railway.
    • Railway Energy Management Company Ltd. (REMCL) is working to further proliferate the use of solar energy on mega scale.
    • It has already floated tenders for 2 GW of solar projects for Indian Railways to be installed on unutilised railway lands.

    Projects along operational railway lines

    • Indian Railways is also adopting an innovative concept of installation of solar projects along operational railway lines.
    • This will help in preventing encroachment, enhancing the speed and safety of trains and reduction of infrastructure costs due to direct injection of solar power into the traction network.
    • With these mega initiatives, Indian Railways is leading India’s fight against climate challenge.
    • These are significant steps towards meeting its ambitious goal of being a net zero carbon emissions organisation and meeting India’s Intended Nationally Determined Contributions (INDC) targets.

     

  • Agreement for Emergency Response Programme for MSME

    The World Bank and the Government of India signed the $750 million agreement for the MSME Emergency Response Programme to support increased flow of finance into the hands of micro, small, and medium enterprises (MSMEs), severely impacted by the COVID-19 crisis.

    How will the agreement protect the MSME sector

    1. Unlocking liquidity

    • The Government is focused on ensuring that the abundant financial sector liquidity available flow to NBFCs and that banks.
    • Banks and NBFCs have turned extremely risk-averse.
    • This project will support the Government in providing targeted guarantees to incentivize NBFCs.
    • Project will also support banks to continue lending to viable MSMEs to help sustain them through the crisis.
    • It will be achieved by de-risking lending from banks and Non-Banking Financial Companies (NBFCs) to MSMEs.
    • This derisking will be done through a range of instruments, including credit guarantees.

    2. Strengthening NBFCs and SFBs

    • Improving the funding capacity of the NBFCs and Small Finance Bank (SFBs), will help them respond to the urgent and varied needs of the MSMEs.
    • This will include supporting government’s refinance facility for NBFCs.
    • In parallel, the IFC is also providing direct support to SFBs through loans and equity.

    3. Enabling financial innovation

    • Only about 8 percent of MSMEs are served by formal credit channels.
    • The program will incentivize and mainstream the use of fintech and digital financial services in MSME lending and payments.
    • Digital platforms will play an important role by enabling lenders, suppliers, and buyers to reach firms faster and at a lower cost.
    • The digital platform will be helpful especially to small enterprises who currently may not have access to the formal channels.

  • Explaining Lithium increase in the Universe

    In a study recently published in Nature Astronomy scientists from Indian Institute of Astrophysics (IIA) along with their international collaborators have provided a robust observational evidence for the first time that Li production is common among low mass Sun-like stars during their He-core burning phase.

    Importance of lithium in our life

    • Light inflammable, metal lithium (Li) has brought about transformation in modern communication devices and transportation.
    • A great deal of today’s technology is powered by lithium in its various shades [remember Li-ion battery!].
    • But where does the element come from?
    • The origin of much of the Li can be traced to a single event, the Big-Bang that happened about 13.7 Billion years ago, from which the present-day Universe was also born.

    Why lithium was thought to be different?

    • Li content in the physical Universe has increased by about a factor of four over the life of the Universe.
    • However, the rest of the elements carbon, nitrogen, oxygen, iron, nickel and so on which grew about a million times over the lifetime of the Universe.
    • Li, however, understood to be an exemption!
    • Current understanding is that lithium in stars like our Sun only gets destroyed over their lifetime.
    • As a matter of fact, the composition of all the elements in the Sun and the Earth is similar.
    • But, the measured content of Li in the Sun is a factor of 100 lower than that of the Earth, though both are known to have formed together.

    So, what the new finding suggests?

    • This discovery challenges the long-held idea that stars only destroy lithium during their lifetime.
    • It implies that the Sun itself will manufacture lithium in the future.
    • This is not predicted by models, indicating that there is some physical process missing in stellar theory.
    • Further, the authors identified “He flash”.
    • “He flash” is an on-set of He-ignition at the star’s core via violent eruption at the end of the star’s core hydrogen-burning phase, as the source of Li production.
    • Our Sun will reach this phase in about 6-7 billion years.