[op-ed snap] Slippery slope

Mains Paper 3 : issues relating to planning, mobilization of resources |

Note4Students

From UPSC perspective, the following things are important :

Prelims level : NBFC

Mains level : Crisis of NBFC institutions


CONTEXT

NBFC crisis could accentuate contagion risk in the financial sector. Cabinet committee on investment and growth must address it.

Background

  • The woes of non-banking finance companies and housing finance companies continue to reverberate through the financial system.
  • A few days ago, Dewan Housing Finance Corporation defaulted on its interest obligations. Its short-term rating has been cut to default.

Crisis in NBFC sector

  • Financial conditions have worsened with spreads of NBFC bonds rising significantly in the recent past.
  • At one level, the argument can be made that lenders are re-evaluating their risk.
  • That the market is discriminating between the better-rated NBFCs and those whose balance sheets appear problematic.
  • And, that an intervention at this stage will create problems of moral hazard. But, there is genuine concern that the DHFL default can “accentuate contagion risk in the financial sector”, as noted by the investment house CLSA in a note.
  • This needs to be addressed.

A solution to this problem

  • A possible solution is for the RBI to open a special borrowing window to provide liquidity to NBFCs/HFCs.
  • As was done during the financial crisis of 2008, the central bank, under sections 17 and 18 of the RBI act, can provide short term liquidity to NBFCs, till financial conditions normalise.
  • But, the RBI doesn’t seem inclined towards this route, presumably because it will be difficult to differentiate between NBFCs.
  • It could also nudge banks to increase their lending to NBFCs.

Steps taken by RBI

  • To this effect, it has already eased norms for maintaining risk weights on bank lending to NBFCs.
  • Further easing of systemic liquidity could boost flows to NBFCs.

Challenges

  • The question is will risk-averse banks lend?
  • Part of the problem is that the difficulty in differentiating between illiquid NBFCs from those that are insolvent.
  • To address this, some have advocated for an asset quality review to reveal the true state of NBFCs’ books.
  • While this will address issues of information asymmetry, such a move may end up prolonging the crisis.
  • Perhaps, the RBI could identify systemically important NBFCs and backstop them through banks.

Conclusion

But the larger issue of resolution of financial firms remains. Situations such as the current one warrant swift resolution so that problems remain contained. Perhaps, the newly formed cabinet committee on investment and growth could contemplate bringing back the FRDI bill, with modifications to address contentious issues like the bail-in clause and deposit insurance.

Banking Sector Reforms

[op-ed snap] The only mantra

Mains Paper 3 : Indian Economy |

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Nothing Much

Mains level : Resolution of underlying economic challenges should be the foremost agenda.


CONTEXT

India’s problem is not unemployment — this has bounced in the low and narrow range of 4-7 per cent for 50 years — but employed poverty. Our traditional labour market shock absorbers — farm employment and self-employment — are dying because kids born after 1991 are unaccepting of self-exploitation and recognise the wage premiums, identity, dignity, soft skills, apprenticeship effect, and financial inclusion of formal jobs.

1.Poor Formalisation –

India’s 6.3 crore enterprises only convert to 12 lakh GST registrants, 10 lakh provident fund payers, and 19,500 companies with a paid up capital of Rs 10 crore or more because of our regulatory cholesterol — 58,000-plus compliances, 3000-plus filing, and 5000-plus changes every year.

2. Facilitating ease of business –

We need massive ease-of-doing business that rationalises (cuts down ministries, compliances, and filings), simplifies (adopts a universal enterprise number and one labour code) and digitises (adopts a paperless, presenceless and cashless process for all employer compliance by shifting from uploads to websites to an API architecture with straight-through-processing).

3. Reverse payroll wedge

  • India’s labour laws have an insane reverse payroll wedge — employers are forced to deduct 40 per cent-plus of gross wages from chithi waali salary (gross wages) for employees with monthly wages up to Rs 25,000.
  • Yet, haath waali salary (net wages) are only 9 per cent lower for employees with monthly wages above Rs 25,000.
  • This wedge murders formalisation and confiscates property from the poor; all wages belong to employees in a cost-to-company world.

Need of competition to fix  Reverse payroll wedge

  • Fixing this wedge needs competition; EPFO is the world’s most expensive government securities mutual fund (300-plus basis points for administration fees) and Employees’ State Insurance (ESI) is the world’s most expensive health insurance programme (less than 50 per cent of contributions are paid out as benefits).
  • The reform agenda is clear — employee contribution must be made optional, employees must choose who handles their employer contributions, and social security programme fees must be capped to their costs.
  • One driver of 20 million new social security payers has been the Pradhan Mantri Rojgar Protsahan Yojna — this partial reimbursement to employers for incremental low-wage employees has incentivised social security enrolment, is easy to verify, and hard to fudge and should be extended for a fixed period of three years.

4.Challenges before skill development

  • Our skill development system faces the difficult trinity of cost, quality and quantity combining with challenging changes to the world of education.
  • In a world where Google knows everything, knowing is not as important as lifelong learning and hard skills become a necessary but not sufficient condition for the wage premium.

Lack of Apprenticeships –

Apprenticeships are the future of learning, yet India only has 5 lakh apprentices instead of 1.5 crore (if we use Germany’s number of 2.7 per cent of the labour force).

Ways to improve Apprenticeship –

  • Changes could include merging the two central government initiatives, Regional Directorates Of Apprenticeship Training (RDAT) and Board of Apprentice Training (BOAT), operate effective online matching platforms and reinforcing the regulatory legitimacy of apprenticeships as classrooms to overcome the trust deficit with employers.
  • Most importantly, we must enable degree-linked apprentices (skill universities await clearance for linking apprentices to degrees via distance and online delivery).
  • There must also be a focus on financialisation reform and sustainable competition.
  • Fairly-priced capital catalyses formalisation, yet India’s credit to GDP ratio is 50 per cent (rich countries are at 100 per cent). Sadly, Arunachal Pradesh is at one per cent and Bihar is 17 per cent.
  • Lowering our cost of money has begun but sustainably targeting a higher credit to GDP ratio needs more bank licences, fixing the governance at nationalised banks, blunting the asset liability mismatch at NBFCs (some irrationally funded 30 per cent of their balance sheet with commercial paper) and restoring the sanctity of the 270-day IBC bankruptcy deadline.
  • More Indian enterprises need formal financial credit — capital investment and working capital availability drive productivity — without replicating the rash lending between 2008 and 2014 that gave us Rs 14 lakh crore worth of bad loans. 

6.Labour as a state subject

We should consider making labour a state subject and must continue the decentralisation of funds, functions and functionaries to states while simultaneously creating accountability, capabilities and resources in city governance.

Conclusion

The 67 per cent-plus turnout in our recent election not only reflect the invisible threads that hold India together but capture an aspiration that breaks with India’s economic past. This dua needs policy to pray to the one god of formal jobs.

Economic Indicators-GDP, FD,etc

RBI revises stressed asset resolution norms

Mains Paper 3 : Indian Economy |

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Not Much

Mains level : Steps for stressed asset resolution



News

  • The RBI has released revised set of norms on stressed asset resolution which are substantially less stringent from the previous one.

Inter-Creditor Agreement (ICA)

  • The inter-creditor agreement is aimed at the resolution of loan accounts with a size of ₹50 crore and above that are under the control of a group of lenders.
  • It is part of the Sashakt plan approved by the government to address the problem of resolving bad loans.
  • The lenders may also choose to initiate legal proceedings for insolvency or recovery as per the news circular.
  • If the RP is to be implemented, lenders have been asked to enter into an inter-creditor agreement (ICA), within the review period, to provide for ground rules for finalization and implementation of the RP.
  • The ICA shall provide that any decision agreed by lenders representing 75% by value of total outstanding credit facilities (fund-based as well as non-fund based) and 60% of lenders by number shall be binding upon all the lenders.
  • The RP will have to implement within 180 days from the end of review period.

Review Period

  • The new circular asked lenders to undertake a prima facie review of the borrower account within 30 days from a default, which is termed as review period.
  • During this review period, lenders may decide on the resolution strategy, including the nature of the resolution plan (RP), the approach for implementation of the RP etc.
  • The review period shall commence not later than the date of the this circular for loans above Rs. 2000 crore; January 1 ,2020 for loans above Rs. 1,500 crore to Rs. 2,000 crore.

What if Resolution Plan delayed?

  • There is a disincentive for banks if they delay implementing a viable resolution plan.
  • In case the plan is not implemented within 180 days from the end of review period, banks have to make additional provision of 20% and another 15% if the plan is not implemented within 365 days from the start of the review period.
  • The additional provisions would be reversed if resolution is pursued under Insolvency and Bankruptcy Code (IBC).
NPA Crisis

[op-ed snap] Welfare policy and Modi 2.0

Mains Paper 2 : Health & Education |

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Nothing Much

Mains level : Instead of launching new schems focus should be on strengthening existing infrastructure.


CONTEXT

Housing, sanitation, gas connections (Ujjwala), direct benefit transfers (DBT), income support (PM-Kisan) — contrary to early indications, the Narendra Modi government’s first term proved to be far more welfarist than was expected of a government that campaigned on the slogan of minimum government.

Analysis of welfare projects

1.Technology and bureaucracy

  •  Early in its tenure, the government embraced Aadhaar and DBT with gusto. And in its last few months, it began the transition to basic income support through PM-Kisan.
  • Underlying this approach is the assumption that technology can substitute for an incompetent and corrupt welfare bureaucracy.
  • Moving money directly to beneficiary accounts removes bureaucratic layers and tightens monitoring, thus improving efficiency and curbing corruption.

The flaw in design –

  • But recent studies show that rather than reducing bureaucracy, getting the DBT architecture right requires significant bureaucratic intervention. From opening accounts to promoting financial literacy and facilitating bank transactions, local bureaucrats are critical to DBT.
  • Getting the DBT architecture right requires bureaucrats to engage citizens and coordinate across departments — a skill that Indian bureaucrats simply do not posses.

Examples from other countries –

Countries like Brazil and Mexico have invested in large cadres of social workers at the local government level to do just this.

Way ahead

  • Building a competent welfare bureaucracy,-The success of welfare programmes in Modi 2.0 will depend on willingness to recognise that building a competent welfare bureaucracy, even if its only task is to move money, will require empowering local governments with skills and resources.
  • Challenges with Digitised welfare systems
  • Digitised efficiency risks casting citizens as passive recipients of government largesse rather than active claimants of rights.
  • Digitised welfare systems genuinely risk closing off spaces for citizens to complain, protest and demand accountability when rights are denied.

Case study –  Consider the many documented instances of using coercive threats (cutting ration and electricity) to meet Swachh Bharat goals. This is not to argue against administrative efficiency, rather to highlight risks that need resolution.

2. Analysis of Ayushman Bharat

Second, with Ayushman Bharat, Modi 1.0 took a significant step towards engineering an architectural shift in India’s welfare system, away from direct provisioning (government running hospitals and schools) towards financing citizens (through income support and health insurance) and regulating private providers.

Challenges

  • But can a state that struggles with routine tasks regulate a sector as complex as healthcare?
  • Consider this. In the United States, medicare employs 6,000 staff to cover 44 million beneficiaries who handle insurance audits, pricing, and anti-trust cases.
  • The staffing requirement, at equivalent levels in Uttar Pradesh alone, would amount to 10,000 employees.

Strengthening health care infrastructure –

  • Importantly, in a sector like health where predatory practices are rife, well-functioning government hospitals are a necessary check and balance. Regulation cannot be a substitute for investing in public systems.
  • Ayushman Bharat must be complemented with a concerted focus on strengthening public hospitals.

3. Balance in Centre-state relations

This multiplicity of central schemes has served to entrench a silo-driven, one-size-fits-all approach that is inefficient as it fails to capture state-specific needs.

Way Ahead to balance centre state relation

  • But, sensible rationalisation needs a coherent framework.
  • The World Bank’s social protection analysis calls for developing a national social protection strategy with a core basket of schemes that states can adapt to their needs.
  • Greater flexibility to states was also recommended by the Niti Aayog’s chief ministers sub committee report in 2016.
  • Implementing these recommendations will require a radical shift in the role of the central government away from designing and controlling schemes to strategic thinking and supporting states.
  • There are obvious trade-offs with administrative efficiency from centralised schemes that will need to be negotiated.

4. Education Policy

  • Finally, no government can afford to ignore India’s learning crisis.
  • Yet this was one of the most under-prioritised areas in Modi 1.0’s welfare agenda.
  • The newly-released national education policy emphasises the urgent need to ensure all students achieve foundational literacy and numeracy.
  • This needs to be adopted and implemented in mission mode.

Conclusion

The difficult task of building a high quality, 21stcentury welfare state awaits Modi 2.0. India doesn’t need new schemes, rather it needs consolidation and balancing between competing welfare strategies. Getting this right will require significant investments in state capacity. This is the welfare challenge for Modi 2.0.

Health Sector – UHC, National Health Policy, Family Planning, Health Insurance, etc.

SEBI, MCA sign pact for more data scrutiny

Mains Paper 2 : Ministries & Departments Of The Government |

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Not Much

Mains level : Curbing corporate frauds


News

  • The Securities and Exchange Board of India (SEBI) and the Ministry of Corporate Affairs (MCA) signed a MoU to facilitate seamless sharing of data and information for carrying out scrutiny, inspection, investigation and prosecution.

A move for data scrutiny

  • The MCA has the database of all registered firms while SEBI only regulates listed entities that may have unlisted subsidiaries, with the MCA having access to all the data of such unlisted entities.
  • The MoU comes in the wake of increasing need for surveillance in the context of corporate frauds affecting important sectors of the economy.
  • As the private sector plays an increasingly vital role in economic growth, the need for a robust corporate governance mechanism becomes the need of the hour.

Impact of the MoU

  • Incidentally, there is already a protocol of sharing of data between the capital markets regulator Ministry and, in many cases; the regulator has also sent its orders against various entities to the MCA for further action.
  • The MoU will facilitate the sharing of data and information between the regulator and the MCA on an automatic and regular basis.
  • It will enable sharing of specific information such as details of suspended companies, delisted firms, shareholding pattern from the SEBI and financial statements filed with the Registrar by corporates, returns of allotment of shares and audit reports relating to corporates.
  • The MoU will ensure that both the MCA and the SEBI have seamless linkage for regulatory purposes.
  • In addition to regular exchange of data, the two will also exchange with each other, on request, any available information for scrutiny, inspection, investigation and prosecution.
  • A Data Exchange Steering Group will meet periodically to review the data exchange status.
Capital Markets: Challenges and Developments

New START Policy

Mains Paper 2 : Effect Of Policies & Politics Of World On India'S Interests |

Note4Students

From UPSC perspective, the following things are important :

Prelims level : New START pact

Mains level : Read the attached story


News

  • Russian has warned to US to withdraw the Obama-era nuclear weapons pact New START due to the US disinterest in its renewal.

New START pact

  • The New Strategic Arms Reduction Treaty (New START) pact limits the number of deployed nuclear warheads, missiles and bombers and is due to expire in 2021 unless renewed.
  • The treaty limits the US and Russia to a maximum of 1,550 deployed nuclear warheads and 700 deployed missiles and bombers, well below Cold War caps.
  • It was signed in 2010 by former US President Barack Obama and then-Russian President Dmitry Medvedev.
  • It is one of the key controls on superpower deployment of nuclear weapons.
  • If it falls, it will be the second nuclear weapons treaty to collapse under the leadership of US President Donald Trump.
  • In February, US withdrew from the 1987 Intermediate-Range Nuclear Forces Treaty (INF), accusing Moscow of violating the agreement.
Foreign Policy Watch: India-United States

US asks for social media details of most visa applicants

Mains Paper 2 : Effect Of Policies & Politics Of World On India'S Interests |

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Not Much

Mains level : Changing visa norms by US and its implication on Indians


News

  • The US government on updated visa application forms to require nearly all applicants to provide their social media usernames, email addresses, and phone numbers for the past five years.
  • The requirement to provide the additional information is in line with the Trump administration’s decision to ensure more stringent screening of potential immigrants and visitors to the US.

Stringent screening of visa applicants

  • More than a million non-immigrant and immigrant US visas are given to Indians every year.
  • In 2018, 28,073 Indians were issued American immigrant visas, the vast majority of which passed through the “family preference” process.
  • Since 2009, the biggest jump in the number of Indian immigrants to the US — almost 20% — was seen during 2014-2015.
  • But after reaching a peak of 31,360 in 2016, the numbers of immigrant visas issued to Indians dropped in 2017.
  • In 2018, the US issued 10,06,802 nonimmigrant visas to Indians, the third largest national group behind the Chinese and Mexicans, and amounting to a little over 11% of total nonimmigrant visa issuances.

How the new policy will work?

  • The change affects the nonimmigrant visa online application form (DS-160), the paper back-up nonimmigrant visa application (DS-156), and the online immigrant visa application form (DS-260).
  • Applicants will be expected to choose from 20 online platforms, including Facebook, Flickr, Google+, Instagram, LinkedIn, Myspace, Pinterest, Reddit, Tumblr, Twitter, Vine and YouTube, and provide their usernames on the platforms.
  • Among the social media platforms based outside the United States on the list are Tencent Weibo, Twoo, and Youku.

Why the change

  • Trump administration is trying to improve screening processes to protect US citizens, while supporting legitimate travel to the United States.
  • The statement clarified that consular officers will not request user passwords and that the information will be used to determine if the applicant is eligible for a visa under existing US law.
  • Collecting this additional information from visa applicants will strengthen the process for vetting applicants and confirming their identity.

Concerns over the move

  • Social media is an intricate map of its users’ contacts, associations, habits and preferences.
  • Full information on accounts will give the US government access to a visa applicant’s pictures, locations, birthdays, anniversaries, friendships, relationships and a whole trove of personal data.
  • The sweeping surveillance potential of the new regulations could discourage a wide range of visa applicants.
  • Research shows that this kind of monitoring has chilling effects, meaning that people are less likely to speak freely and connect with each other in online communities that are now essential to modern life.
Foreign Policy Watch: India-United States

EBPG quota

Mains Paper 2 : Laws, Institutions & Bodies Constituted For The Vulnerable Sections |

Note4Students

From UPSC perspective, the following things are important :

Prelims level : EBPG Quota

Mains level : Reservations


News

EBPG Reservation

  • The Haryana government has withdrawn its quotas of posts kept reserved under the Economically Backward Persons in General Category (EBPG) and Backward Class (Block-C) in government jobs and state-run educational institutions.
  • The six castes – Jats, Jat Sikhs, Muslim Jats, Tyagis, Rors and Bishnois – that were included in backward class (Block-C) category were the beneficiaries of the scheme.

Why such move?

  • EBPG quota was withdrawn in view of reservation provided under the Economic Weaker Section (EWS) by the central government.
  • Since EWS reservation has come into effect, there was no requirement to continue with reservation of EBPG and such reservation is hereby withdrawn.
Minority Issues – Dalits, OBC, Reservations, etc.