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GS Paper: GS3

  • Tighter regulatory framework for NBFCs

    The Reserve Bank of India (RBI) has suggested a tougher regulatory framework for the non-banking finance companies’ (NBFC) sector to prevent the recurrence of any systemic risk to the country’s financial system.

    Try this PYQ:

    Which of the following can be said to be essentially the parts of Inclusive Governance?

    1. Permitting the Non-Banking Financial Companies to do banking
    2. Establishing effective District Planning Committees in all the districts
    3. Increasing government spending on public health
    4. Strengthening the Mid-day Meal Scheme

    Select the correct answer using the codes given below:

    (a) 1 and 2 only

    (b) 3 and 4 only

    (c) 2, 3 and 4 only

    (d) 1, 2, 3 and 4

    What are NBFCs?

    • Nonbank financial companies (NBFCs) are financial institutions that offer various banking services but do not have a banking license.
    • An NBFC in India is a company registered under the Companies Act, 1956 engaged in the business of loans and advances, acquisition of shares/stocks/bonds/debentures/securities issued by a government or local authority, or other marketable securities.
    • A non-banking institution that is a company and has principal business of receiving deposits under any scheme or arrangement in one lump sum or in installments is also an NBFC.

    What is the difference between banks & NBFCs?

    NBFCs lend and make investments and hence their activities are akin to that of banks; however, there are a few differences as given below:

    • NBFC cannot accept demand deposits
    • NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on itself
    • The deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to depositors of NBFCs, unlike in the case of banks

    What are the new RBI regulations?

    • The regulatory and supervisory framework of NBFCs will be based on a four-layered structure — the base layer (NBFC-BL), middle layer (NBFC-ML), the upper layer (NBFC-UL), and the top layer.
    • If the framework is visualized as a pyramid, at the bottom of the pyramid will be those where least regulatory intervention is warranted.
    • It can consist of NBFCs currently classified as non-systemically important NBFCs.
    • Moving up, the next layer may comprise NBFCs currently classified as systemically important NBFCs (NBFC-ND-SI), deposit-taking NBFCs (NBFC-D), HFCs, IFCs, IDFs, SPDs, and CICs.
    • The regulatory regime for this layer shall be stricter compared to the base layer.
    • The next layer may consist of NBFCs identified as ‘systemically significant’.
    • This layer will be populated by NBFCs having a large potential of systemic spill-over of risks and the ability to impact financial stability.

  • Getting it wrong on India’s level of agricultural support

    As per the OECD methodology, Indian farmers received negative support of Rs. 1.62-lakh crore in 2019, which implies that the government is taxing the farmers. But there are pitfalls in the methodology. The article explaines them.

    The issue of support given to the farmers

    • Many media reports, based on data by the Organisation for Economic Co-operation and Development (OECD), have stated that the support provided to Indian agriculture is extremely low or negative, and, therefore, net taxed.
    • The OECD has estimated that Indian farmers received negative support to the extent of minus ₹2.36-lakh crore and minus ₹1.62-lakh crore in 2010 and 2019, respectively.
    • Surprisingly, the negative support of minus ₹1.62-lakh crore as estimated by the OECD was higher than the total budgetary allocation of the Ministry of Agriculture at ₹1.09-lakh crore in 2019.

    Issues with the OECD estimates

    • Expenditure on the PM-KISAN, the National Food Security Mission, crop insurance, input subsidies such as fertilizer and electricity, are some of the measures covered under the 2019 OECD estimates.
    • However, the expenditure related to the operation of minimum support price and general services is not covered by it.
    • Despite the overall negative support, the expenditure of the Central and State governments on agriculture has increased substantially since 2000.
    • This support increased from ₹1.61-lakh crore to ₹3-lakh crore, between 2015 to 2019, registering 85% growth.
    • The massive negative market price support to the producers of different products has resulted in the total negative producer support, overshadowing the increase in the budgetary support over the years.

    Market Price Support as per OECD methodology

    • The market price support of a commodity is calculated by multiplying its total production with the gap between the domestic price and international prices in a relevant year.
    • This methodology assumes that in case there is no government intervention in the agriculture market, then the domestic and international price of a product will converge, resulting in no gap in prices.

    Why there is a focus on the price gap in OECD methodology

    • The OECD assumes government interventions lead to a gap between the international and domestic prices.
    • However, even if the government does not implement any program, the gap can still arise due to domestic and international factors.
    • Changes in supply and demand conditions in the domestic and international market due to shocks, depressed international prices due to subsidies given by other countries, among other factors, can generate a gap.

    3 Consequence of OECD’s Market Price Support methodology

    • 1) If the domestic price for a product is less than its international price, then support for that product would be negative.
    • 2) A negative market price support for a product in one year can turn into huge positive support in another year on account of the relative movement of domestic and international prices.
    • 3) Even if in a particular year, the government does not provide any additional support compared to a previous year, the level of support calculated by the OECD can change.
    • This will arise if there is a change in either the gap between the domestic price and international price for a commodity, or its production, in the two years.
    • Given the unpredictability in the inherent data, the total support can move from huge negative to huge positive.

    Concerns for India

    • For India, the negative support as a percentage of the total value of agriculture production has substantially reduced in recent years.
    • It is possible that support to Indian farmers in the near future becomes one of the highest in the world due to pitfalls in the OECD methodology.
    • This might set alarm bells ringing, particularly in the developed countries, which may aggressively question India’s support measures.

    Consider the question “As per the OECD methodology, net support provided by Indian government to its farmers is negative for the year 2019. However, India’s expenditure on agriculture is consistently rising. What explains this conundrum? What are the concerns for India in the price support method of OECD?”

    Conclusion

    Rather than being swayed by the OECD numbers suggesting negative support, farmers, policymakers, and other stakeholders need to understand the pitfalls and limitations in the underlying methodology. This will help in providing a more correct perception of the level of support to agriculture in India.

  • What is Nitrogen-Use Efficiency (NUE)?

    A group of Indian scientists have found a way to improve crops by reducing wastage of nitrogen fertilizers applied to them.

    Try this PYQ:

    Q.Which of the following adds/add nitrogen to the soil?

    1. Excretion of Urea by animals
    2. Burning of coal by man
    3. Death of vegetation

    Select the correct answer using the code given below:

    (a) 1 only

    (b) 2 and 3 only

    (c) 1 and 3 only

    (d) 1, 2, and 3

    Nitrogen-Use Efficiency

    • NUE is calculated as a ratio between nitrogen used and harvest: A higher number denotes low wastage.
    • With the efficiency on the decline, farmers use more fertiliser in the hope of raising yield. This in turn worsens NUE.
    • Crops generally use up 30 per cent of nitrogen fertilizer applied; the rest seeps into the environment, harming health and adding to climate change.
    • Researchers were able to identify phenotypes or visibly identifiable features that determine the efficiency with which cultivated rice varieties (cultivars) use nitrogen.
    • This efficiency is known as nitrogen-use efficiency (NUE).
    • Cereals consume over 69 per cent of nitrogen fertilizers in India; rice tops the list with 37 per cent, followed by wheat (24 per cent).

    Nitrogen Pollution: the reason behind

    • Agriculture leads to 70 per cent of nitrous oxide emissions in India.
    • Of this, 77 per cent is contributed by fertilizers, mostly urea, according to the Indian Nitrogen Assessment published in 2017.
    • This greenhouse gas (GHG) is 300 times more potent than carbon dioxide.
    • It has replaced methane as the second-largest component of GHG emissions from Indian agriculture in the past 15 years.

    Must read:

    [Burning Issue] Nitrogen Pollution in India

  • [pib] Exercise Kavach

    A large scale all-services exercise ‘Exercise Kavach’ will be conducted next week under the aegis of the Andaman and Nicobar Command (ANC), the only Joint Forces Command of the country.

    All-time generic question seeking ‘match the pairs’ can be asked from the news as such.  Click here for more exercises.

    Exercise Kavach

    • The tri-services exercise aims to fine-tune joint war-fighting capabilities and SOPs towards enhancing operational synergy in the Andaman Sea and Bay of Bengal.
    • This exercise would involve assets of Indian Army, Indian Navy, Indian Air Force and Indian Coast Guard.
    • The exercise involves synergized application of maritime surveillance assets, coordinated air and maritime strikes, air defence, submarine and landing operations.
    • Concurrently Joint Intelligence Surveillance and Reconnaissance (ISR) exercise involving various technical, electronic and human intelligence from three services will be conducted.
    • The ISR exercise will validate the capabilities of intelligence gathering from space, air, land and sea-based assets/ sensors, its analysis and sharing to achieve battlefield transparency.
    • It would carry out amphibious landing operations, air landed operation, helicopters-borne insertion of Special Forces from sea culminating in tactical follow-on operations on land.

  • True empowerment of the electricity consumer

    The article examines the various provisions of the Electricity (Rights of Consumers) Rules, 2020 and analyses whether or not these Rules will empower the consumers. 

    Empowering electricity consumers

    • The Electricity (Rights of Consumers) Rules, 2020 was promulgated in December to deal with the problems faced by the consumers.
    • The enactment of consumer-centric rules does spark public debate that brings the rights of consumers to the fore.
    • the Rules lay an emphasis on national minimum standards for the performance parameters of DISCOMs. without urban-rural distinction.
    • They also reiterate the need for automatically compensating consumers.

    Let’s analyse the changes introduced by the new Rule and issues with them

    Supply quality issue

    • Many States have not been able to provide quality supply, especially to rural and small electricity consumers.
    • Provisions similar to made in the new Rule already exist in the Standards of Performance (SoP) regulations of various State Electricity Regulatory Commissions (SERCs).
    • It is not because of a lack of rules or regulations that quality supply is not provided; rather, it is on account of a lack of accountability systems to enforce them.
    • Unfortunately, neither these rules nor past efforts address these accountability concerns.
    • Guarantee of round the clock supply is a provision that the Rules emphasise, which might be missing in State regulations.
    • It is difficult to enforce since the availability of power supply is inadequately monitored even at 11 kV feeders, let alone at the consumer location.
    • This highlights not only the need for implementation of existing provisions in letter and spirit but also amending them with strong accountability provisions.

    Weakening of existing provision

    • The Rules, in few cases, dilute progressive mechanisms that exist in State regulations.
    • For example, the Rules say that faulty meters should be tested within 30 days of receipt of a complaint.
    • Compared to this, regulations t in Andhra Pradesh, Bihar, and Madhya Pradesh, respectively, say that such testing needs to be conducted within seven days.
    • A similar observation can be drawn from the suggested composition of the Consumer Grievance Redressal Forum. 
    •  The Rules say that the forum — constituted to remedy complaints against DISCOMs should be headed by a senior officer of the company.
    • This is a regressive provision that would reduce the number of cases that are decided in favour of consumers.

    Lack of clarity on net-metering

    • The Rules guarantee net metering for a solar rooftop unit less than 10 kW.
    • However, there is no clarity if those above 10 kW can also avail net metering.
    • This could lead to a change in regulations in many States based on their own interpretations.
    •  The possible litigation that follows would be detrimental to investments in rooftop solar units, and would discourage medium and large consumers to opt for an environment-friendly, cost-effective option.

    Way forward

    • SERCs should assess the SoP reports of DISCOMs and revise their regulations more frequently.
    • SERCs should organise public processes to help consumers raise their concerns.
    • DISCOMs could be directed to ensure automatic metering at least at the 11 kV feeder level, making this data available online.
    • The Forum of Regulators — a central collective of SERCs — could come up with updated model SoP regulations.
    • Central agencies have taken proactive efforts to ensure regular tariff revision.
    • They could also support independent surveys and nudge State agencies to enforce existing SoP regulations.
    • The central government could disburse funds for financial assistance programmes based on audited SoP reports.

    Consider the question”What are the problems faced by the electricity consumers in India? Will the Electricity (Rights of Consumers) Rules, 2020 help consumers to deal with the existing issues?”

    Conclusion

    The governments, DISCOMs and regulators need to work jointly and demonstrate the commitment and the will power to implement existing regulations. It is not yet late to recognise this and initiate concerted efforts to truly empower consumers.

  • Digital Service Tax could be an interim solution to cyber tax conundrum

    Business models of digital companies challenge the conventional basis of taxation in which the fixed place of business formed the basis. Digital Service Tax could provide a basis to deal with the challenge. The article deals with this issue.

    Equalisation levy and issues with it

    • Equalisation levy seeks to tax payments made for online advertising services to a non-resident business by residents in India.
    • India is amongst the first to have implemented such levy.
    • It is predominantly applicable to US companies since the market for digital services is dominated by US-based firms.
    • Any company that has a permanent residence in India is excluded since it is already subject to tax in India.
    •  In March 2020, India expanded the scope of the existing equalisation levy to a range of digital services that includes e-commerce platforms.
    • Such levy can result in over-taxation since the company will not be able to claim any credit for tax paid on Indian sales.
    • Such an approach is often viewed as contrary to the ethos of international agreements.

    Issue of taxation of digital companies

    • The agenda to reform international tax law so that digital companies are taxed where economic activities are carried out was formally framed within the OECD’s base erosion and profit shifting programme.
    • Worried they might cede their right to tax incomes, many countries have either proposed or implemented a digital services tax (DST).
    • However, the proliferation of digital service taxes (DSTs) is a symptom of the changing international economic order.
    • Countries such as India which provide large markets for digital corporations seek a greater right to tax incomes.
    • The core problem that the international tax reform seeks to address is that digital corporations, unlike their brick-and-mortar counterparts, can operate in a market without a physical presence.
    • The current basis for taxing in a particular jurisdiction is a notion of fixed place of business.

    Way forward

    • To overcome the challenge, countries suggested that a new basis to tax, say, the number of users in a country.
    • The EU and India were among the advocates of this approach.
    • In 2018, India introduced the test for significant economic presence in the Income Tax Act.
    • However, the proposal of a revised nexus was not supported widely.
    • Moreover, to give effect to a new system would require bilateral renegotiation of tax treaties that supersede domestic tax laws.
    • Meanwhile, the OECD continued to work to find commonalities among a range of solutions.
    • In its current form, the solution is too complex to administer and proposes to allocate residual profit — a term that has no economic definition.
    • It would also require political consensus on multiple issues, including sensitive matters such as setting up of an alternative dispute resolution process comparable to arbitration.
    • This can increase the compliance burden.
    • The US has expressed its preference to apply this measure on a safe harbour basis, which can limit the companies to which it may be applicable.

    Consider the question “Digital corporations can operate in a market without a physical presence. The current basis for taxing in a particular jurisdiction is a notion of fixed place of business. In light of this, examine the challenges in taxing the digital companies and how India is dealing with such a challenge?” 

    Conclusion

    As countries calibrate their response to competing demands for sovereignty to tax, DST is an interim alternative outside tax treaties. It possesses the advantage of taxing incomes that currently escape tax and creates space to negotiate a final, overarching solution to this conundrum.

  • What is Section 32A of IBC?

    The Supreme Court has held that the bidders for a corporate debtor under the Insolvency and Bankruptcy Code (IBC) would be immune from any investigations being conducted either by any investigating agencies.

    Q.Examine the impact of various amendments to the Insolvency and Bankruptcy Code (IBC) and suggest further improvements in the IBC.

    Backgrounder: IBC

    • IBC was enacted on May 28, 2016, to effectively deal with insolvency and bankruptcy of corporate persons, partnership firms and individuals, in a time-bound manner.
    • It has brought about a paradigm shift in laws aimed to maximize the value of assets, providing a robust insolvency resolution framework and differentiating between impropriety and business debacle.
    • The predominant object of the Code is the resolution of the Corporate Debtor.
    • It has been amended four times to resolve problems hindering the objectives of the Code.

    What is Section 32A?

    • In cases involving property of a corporate debtor, Section 32A covers any action involving attachment, seizure, retention, or confiscation of the property of the corporate debtor as a result of such Proceedings.
    • It provides immunity to the corporate debtor and its property when there is the approval of the resolution plan resulting in the change of management of control of the corporate debtor.
    • This is subject to the successful resolution applicant being not involved in the commission of the offense.

    What were the challenges?

    • Since the IBC came into being in 2016, the implementation of the resolution plan of several big cases has been delayed because of various challenges mounted by its own agencies and regulators.
    • For example, a debt-laden company, admitted into insolvency in 2017, owes more than Rs 47,000 crore to banks and other financial institutions.
    • After a prolonged bidding battle, another won the rights to take over it with a bid of Rs 19,700 crore.
    • However, before it could move to take over, the ED/SEBI swooped in, and attached assets worth Rs 4,000 crore citing alleged fraud in a bank loan under the Prevention of Money Laundering Act (PMLA).

    Observations made by the SC

    • In its judgment, the apex court upheld the validity of Section 32.
    • It said it was important for the IBC to attract bidders who would offer reasonable and fair value for the corporate debtor to ensure the timely completion of the corporate insolvency resolution process (CIRP).
    • Such bidders, however, must also be granted protection from any misdeeds of the past since they had nothing to do with it.
    • Such protection, the court said, must also extend to the assets of a corporate debtor which will help banks clean up their books of bad loans.
    • The apex court has, however, also said that such immunity would be applicable only if there are an approved resolution plan and a change in the management control of the corporate debtor.

    Significance of SC’s intervention

    • With the Supreme Court upholding the validity of Section 32 A will give confidence to other bidders to proceed with confidence while bidding on such disputed companies and their assets.

    Must read

    [Burning Issue] Insolvency and Bankruptcy Code

  • Secured Overnight Financing Rate (SOFR)

    State Bank of India (SBI) has executed two inter-bank short term money market deals with pricing linked to SOFR (Secured Overnight Financing Rate).

    Try this PYQ:

    Q.The money multiplier in an economy increases with which one of the following?

    (a) Increase in the cash reserve ratio

    (b) Increase in the banking habit of the population

    (c) Increase in the statutory liquidity ratio

    (d) Increase in the population of the country

    What is SOFR?

    • Secured Overnight Financing Rate (SOFR) is a secured interbank overnight interest rate.
    • It is a replacement for USD LIBOR (London Inter-bank Offered Rate) that may be phased out end-2021.
    • The overnight rate is generally the interest rate that large banks use to borrow and lend from one another in the overnight market.

    Why SOFR?

    • Global regulators decided to move away from the Libor, a vital part of the financial system after it was revealed in 2012 that banks around the world manipulated it.
    • It also didn’t help that volume underlying the benchmark dried up.
    • U.K regulators set the deadline at 2021 for financial firms and investors to transition away from the Libor.

  • The threat of deepfakes

    Deepfakes creates media in which it challenges our ability to detect real from fake, it blurs the line between two. This article explains the threat associated with it.

    What are deepfakes and threat associated with it

    • Deepfakes are synthetic media (including images, audio and video) that are either manipulated or wholly generated by Artificial Intelligence.
    • AI is used for fabricating audios, videos and texts to show real people saying and doing things they never did, or creating new images and videos.
    • These are done so convincingly that it is hard to detect what is fake and what is real.
    • They are used to tarnish reputations, create mistrust, question facts, and spread propaganda.

    Legal provision in India

    • Deepfakes even have the power to threaten the electoral outcome.
    • So far, India has not enacted any specific legislation to deal with deepfakes.
    • However, there are some provisions in the Indian Penal Code that criminalise certain forms of online/social media content manipulation.
    • The Information Technology Act, 2000 covers certain cybercrimes.
    • But this law and the Information Technology Intermediary Guidelines (Amendment) Rules, 2018 are inadequate to deal with content manipulation on digital platforms.
    • The guidelines stipulate that due diligence must be observed by the intermediate companies for removal of illegal content.
    • In 2018, the government proposed rules to curtail the misuse of social networks.
    • Social media companies voluntarily agreed to take action to prevent violations during the 2019 general election.
    • The Election Commission issued instructions on social media use during election campaigns.

    How to deal with the problem of deepfakes

    • Only AI-generated tools can be effective in detection.
    • Blockchains are robust against many security threats and can be used to digitally sign and affirm the validity of a video or document.
    • Educating media users about the capabilities of AI algorithms could help.
    • Six themes identified in the workshop convened by the University of Washington and Microsoft are to dela with the deepfakes
    • 1) Deepfakes must be contextualised within the broader framework of malicious manipulated media, computational propaganda and disinformation campaigns.
    • 2) Deepfakes cause multidimensional issues which require a collaborative, multi-stakeholder response that require experts in every sector to find solutions.
    • 3) Detecting deepfakes is hard.
    • 4) Journalists need tools to scrutinise images, video and audio recordings for which they need training and resources;
    • 5) Policymakers must understand how deepfakes can threaten polity, society, economy, culture, individuals and communities.
    • 6) Any true evidence can be dismissed as fake is a major concern that needs to be addressed.

    Consider the question “What are the deepfakes and threats associated with it? How these threats can be tackled?”

    Conclusion

    In today’s world, disinformation comes in varied forms, so no single technology can resolve the problem. As deepfakes evolve, AI-backed technological tools to detect and prevent them must also evolve.

  • [pib] Exercise Desert Knight-21

    Indian Air Force and French Air and Space Force will conduct a bilateral Air exercise, Ex Desert Knight-21 at Air Force Station Jodhpur.

    All-time generic question seeking ‘match the pairs’ can be asked from the news as such.  Click here for more exercises.

    Ex. Desert Knight-21

    • The French side will participate with Rafale, Airbus A-330 Multi-Role Tanker Transport (MRTT), A-400M Tactical Transport aircraft and approximately 175 personnel.
    • The IAF aircraft participating in the exercise will include Mirage 2000, Su-30 MKI, Rafale, IL-78 Flight Refuelling Aircraft, AWACS and AEW&C aircraft.
    • The exercise marks an important milestone in the series of engagements between the two Air forces.
    • As part of Indo-French defence cooperation, Indian Air Force and French Air and Space Force have held six editions of Air Exercises named ‘Garuda’, the latest being in 2019.
    • Presently, the French detachment for Ex Desert Knight-21 is deployed in Asia as part of their ‘Skyros Deployment’ and will ferry in forces to Air Force Station Jodhpur.

    Why it is special?

    • The exercise is unique as it includes fielding of Rafale aircraft by both sides and is indicative of the growing interaction between the two premiers Air Forces.
    • It will put into practice operational experience gained across terrains and spectrums and endeavour to exchange ideas and best practices to enhance interoperability.