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  • Labour, Jobs and Employment – Harmonization of labour laws, gender gap, unemployment, etc.

    Rising unemployment is yet to receive the attention it deserves from government

    op-ed snap | Economics | Mains Paper 3: Issues relating growth and development, employment

    Context

    India’s unemployment rate in August was 8.3 per cent. This was higher than the 7 per cent recorded in July. The month-to-month variations notwithstanding, these are all very high unemployment rates.

    Why inflation gets more attention in India than unemployment?

    • Periodic Labour Force Survey (PLFS) results showed the historically high unemployment rate of 6.1 per cent for 2017-18 (July to June). It was at a 45-year high.
    • New norm at 7-8 per cent: Till then, India was used to recording an unemployment rate of around 3 per cent. 
    • Today, an unemployment rate of 7-8 per cent seems to be the norm and such levels do not seem to matter.
    • The unemployment rate is not the most important labour market indicator for a country like India.
    • Why inflation gets preference: Between inflation and unemployment, the two economic indicators conjoined theoretically by the Phillips curve, it is inflation that wields political power.
    • Inflation hurts almost the entire population.
    • Equally importantly, high inflation rates can upset financial markets that in turn exert pressure on regulators to keep inflation in control.
    • Unemployment directly impacts only the unemployed, who don’t count much.
    • Worse still, society perceives being unemployed as an individual shortcoming, and not an outcome of a macroeconomic malaise.

    What does low labour force participation rate (LFPR) indicate about the labour market in India?

    • The unemployment rate is a measure of the economy’s inability to provide jobs only for those who seek work.
    • But, in India, very often people do not look for jobs in the belief that none are available which is reflected in a low labour force participation rate (LFPR).
    • India’s LFPR is at around 40 per cent when the global rate is close to 60 per cent.
    • It is important that this belief in the futility of a job hunt is overcome by an explosive creation of new good quality formal jobs.

    Why employment rate is a useful indicator for India

    • A useful labour market metric for a country like India is the employment rate.
    • This measures the proportion of the population over 14 years of age that is employed.
    • The definition of employment needs to be changed, at present, engaging in some economic activity for just one hour in any of the past seven days is counted as employment.
    • India’s record in providing employment to its people has been abysmally poor.
    • CMIE’s definition of employment indicates that in 2016-17, only 42.8 per cent of the working-age population was employed.
    •  In the year of the pandemic, it fell to 36.5 per cent.

    Reverse migration in employment from manufacturing to low productivity employment

    • People are moving away from factories as manufacturing jobs shrink, to farms that provide shelter largely in the form of disguised unemployment.
    • It cannot be the desire of a nation to move people away from high productivity, better quality jobs in manufacturing to low productivity employment in agriculture or as gardeners or security guards in the household sector.
    • Employment opportunities need to expand in areas where labour is deployed to deliver higher productivity for enterprise and higher returns to labour.

    Way forward

    • Increase investment: A large part of the solution to this lack of adequate jobs is in increasing investments.
    • Focus on demand size: For this, the investment climate needs to be business-friendly and government interventions must shift away from supply-side support to spurring demand.

    Conclusion

    The government needs to come up with policies for generating employment opportunities and stemming the reverse migration from manufacturing jobs to low productivity employment.

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  • Industrial Sector Updates – Industrial Policy, Ease of Doing Business, etc.

    National Monetization Pipeline shows promise — and limits

    op-ed snap | Economics | Mains Paper 3: Effects Of Liberalization On The Economy, Changes In Industrial Policy and their effects on Industrial Growth

    The government of India recently announced an asset monetization plan, wherein existing public assets worth Rs 6 trillion would be monetized by leasing them out to private operators for fixed terms.

    The plan has generated a lot of print so it is worth discussing its pros and cons.

    About NMP

    • The identified assets are primarily concentrated in roads, railways, power, oil and gas, and telecoms.
    • The lease proceeds are expected to be used for new infrastructure investment which, in turn, will contribute to the government’s ambitious Rs 111 trillion infrastructure investment plan.

    Important issues raised by the plan

    [I] How much should the government expect to raise from the plan?

    Revenue Potential

    • In deciding the amount to bid for leasing rights, bidders compute the present discounted value of the annual cash flow from the asset for the duration of the lease.
    • The biggest uncertainty in this calculation surrounds the cash flow on these public assets.
    • Rates of return estimates on public capital in the US have been estimated to be upwards of 15 per cent.
    • However, this is India with its myriad uncertainties regarding pricing, bill collection, asset quality, regulatory framework as well as policy reversals.
    • Hence there is significant uncertainty regarding the revenue potential of the plan.

    [II] Is the plan likely to increase the efficiency of the economy?

    a. Efficiency of the economy

    • The NITI Aayog believes that the private sector is better at managing and operating the identified public assets than the public sector.
    • There is certainly scope for efficiency gains. However, there are significant efficiency impediments too.
    • One set of efficiency issues surrounds usage fees. A second factor related to efficiency is the effect of the plan on competition.

    b. Stressed sectors

    • The identified assets belong to core sectors of the economy spanning transport, energy and communication.
    • Sectors like telecoms and ports have already seen rising concentration of ownership in recent years.
    • An acceleration and extension of this trend to other segments of the infrastructure landscape would be seriously worrying.
    • While some of this could well be rationalized through the stipulation of rules for the allocation of leasing rights, the plan is silent on this.

    c. Financing of the lease bids

    • If bidders finance their bids using domestic savings, there is a clear opportunity cost of the plan since these savings would otherwise have been invested in alternative projects.
    • Moreover, the bidding for scarce domestic savings by prospective investors will also raise domestic interest rates which will put downward pressure on domestic private investment.
    • It would also be worth reminding ourselves that the last round of PPP-based infrastructure funding routed through banks ended up with a heap of NPAs in public sector bank balance sheets.

    Biggest flaw of the NMP

    • No clear objective: The biggest drawback of the plan is that it fails to articulate the reasons for public sector inefficiency in asset management.
    • No focus on management: If it is personnel-related, then privatizing management may be the right answer. If the inefficiency is related to constraints on pricing and bill collection, then the roots of the problem are unlikely to be addressed by leasing out their management to private operators.
    • No clear assessment of underperforming sectors: The plan document also fails to outline whether the identified brownfield assets are the public sector’s highest cash flow assets or the relatively under-performing ones.

    Better alternatives for the govt

    • The way around this is to welcome foreign investors to bid for the assets.
    • But this will require serious political will since entrenching foreign influence on Indian public assets will generate controversy.
    • On this aspect too, the announced plan is low on details.

    Way forward

    • If the private sector is indeed more efficient in running infrastructure assets, the most efficient strategy would be to lease out the worst-performing assets rather than the best performing ones.
    • The NITI Aayog would do the policy landscape a big service by following up the proposal with a white paper that addresses some of these efficiency-related issues.
    • Without that, the monetization plan, while intriguing, is incomplete.

    Conclusion

    • A monetization plan envisages the private sector paying an upfront fee to the government which the government uses for new infrastructure investment.
    • As much as private bidders finance themselves by borrowing, this amounts to the private sector borrowing and handing over the funds to the government to invest in infrastructure.
    • This could enhance efficiency in infrastructure investment only if the government faces higher interest rates in capital markets than the private sector.

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  • WTO and India

    What is Agreement on Agriculture (AoA)?

    IOCR | International Relations | Mains Paper 2: Important International Institutions

    The Agreement on Agriculture at the WTO is riddled with deep imbalances, which favour the developed countries and have tilted the rules against many developing countries, a Union Minister has said.

    Agreement on Agriculture

    • The AoA is an international treaty of the World Trade Organization.
    • It was negotiated during the Uruguay Round of the General Agreement on Tariffs and Trade, and entered into force with the establishment of the WTO on January 1, 1995.

    Three pillars of AoA

    The Agreement on Agriculture consists of three pillars—domestic support, market access, and export subsidies.

    (1) Domestic support

    • AoA divides domestic support into two categories: trade-distorting and non-trade-distorting (or minimally trade-distorting).
    • It the classification of subsidies by “boxes” depending on consequences of production and trade:
    1. Amber (most directly linked to production levels)
    2. Blue (production-limiting programs that still distort trade)
    3. Green (minimal distortion)

    (2) Market access

    • Market access refers to the reduction of tariff (or non-tariff) barriers to trade by WTO members.
    • The 1995 AoA consists of tariff reductions of:
    1. 36% average reduction – developed countries – with a minimum of 15% per-tariff line reduction in next six years.
    2. 24% average reduction – developing countries – with a minimum of 10% per-tariff line reduction in next ten years.
    • Least developed countries (LDCs) were exempt from tariff reductions, but they either had to convert non-tariff barriers to tariffs—a process called tariffication—or “bind” their tariffs, creating a ceiling that could not be increased in future.

    (3) Export subsidies

    • The AoA required developed countries to reduce export subsidies by at least 36% (by value) or by 21% (by volume) over six years.
    • For developing countries, the agreement required cuts were 24% (by value) and 14% (by volume) over ten years.

    Criticism of AoA

    • AoA has been criticized for reducing tariff protections for small farmers, a key source of income in developing countries, while simultaneously allowing rich countries to continue subsidizing agriculture at home.
    • In 2017 India and China jointly submitted a proposal to the WTO calling for the elimination – by developed countries – of the most trade-distorting form of farm subsidies,
    • They are known in WTO parlance as Aggregate Measurement of Support (AMS) or ‘Amber Box’ support as a prerequisite for consideration of other reforms in domestic support negotiations.

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  • Goods and Services Tax (GST)

    GST Council not for inclusion of Petroleum Products

    | Economics | Mains Paper 3: Infrastructure: Energy, Ports, Roads, Airports, Railways Etc.

    The Goods and Services Tax (GST) Council has decided to keep petroleum products out of the GST regime.

    Present taxation of Fuels

    • Currently, taxes on petroleum products are levied by both the Centre and the states.
    • While the Centre levies excise duty, states levy value added tax (VAT).
    • For instance, VAT on petroleum products is as high as 40% in Maharashtra, contributing over ₹25,000 crore annually.
    • By being able to levy VAT on these products, the state governments have control over their revenues.

    Impact of inclusion of fuel under GST

    • If petroleum products are included under the GST, there will be a uniform price of fuel across the country.
    • However, petroleum products coming under GST not necessarily means that taxes or prices will come down.
    • If the GST council decides to opt for a lower slab, taxes may come down.
    • At present, India has four primary GST rates – 5 percent, 12 percent, 18 percent and 28 percent.
    • Levying a standard rate of GST on petrol would mean that the prices increase dramatically in Andaman and Nicobar, but on the flip side, they would fall in Maharashtra if the cumulative rate is lower than the current rate.

    Key takeaways from States VAT

    • Among the states, Rajasthan levies the highest tax across the country keeping VAT on petrol at 36 percent, followed by Telangana at 35.2 percent.
    • Other states with more than 30 per cent VAT on petrol include Karnataka, Kerala, Assam, Andhra Pradesh, Delhi and Madhya Pradesh.
    • On diesel, the highest VAT rates are charged by states like Odisha, Telangana, Rajasthan and Chhattisgarh.
    • So far, five states, West Bengal, Rajasthan, Meghalaya, Assam and Nagaland have cut taxes on fuel this year.

    Back2Basics: Petroleum Pricing Mechanism

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  • Tiger Conservation Efforts – Project Tiger, etc.

    Pseudo-melanism in Tigers of Simlipal

    Prelims Only | Enviro & Biodiversity | Mains Paper 3: Conservation, Environmental Pollution & Degradation, Eia

    A team of scientists has resolved the genetic mystery of Simlipal’s so-called black tigers.

    What are Black Tigers?

    • Tigers have a distinctive dark stripe pattern on a light background of white or golden.
    • A rare pattern variant, distinguished by stripes that are broadened and fused together, is also observed in both wild and captive populations.
    • This is known as pseudo-melanism, which is different from true melanism, a condition characterized by unusually high deposition of melanin, a dark pigment.
    • This pseudo-melanism is linked to a single mutation in Transmembrane Aminopeptidase Q (Taqpep), a gene responsible for similar traits in other cat species.

    Where are they mostly found?

    • While truly melanistic tigers are yet to be recorded, pseudo-melanistic ones have been camera-trapped repeatedly, and only, in Simlipal, a 2,750-km tiger reserve in Odisha, since 2007.
    • Launched in 2017, the study was the first attempt to investigate the genetic basis for this unusual phenotype (appearance).

    Why they are rare?

    • Mutants are genetic variations which may occur spontaneously, but not frequently, in nature.
    • A cub gets two copies of each gene from both parents, and a recessive gene can show up only in the absence of the dominant one.
    • So, two normal-pattern tigers carrying the recessive pseudo-melanism gene will have to breed together for a one-in-four probability of giving birth to a black cub.
    • But recessive genes are rare and it is unlikely that two unrelated tigers will carry the same one and pass it on together to a cub.

    Connection with Simlipal TR

    • In an ideal tiger world, where far-ranging individuals are never short of choices for partners, that makes succession of black tigers a rarity.
    • Under exceptional circumstances, a black tiger may succeed as part of a very small population that is forced to inbreed in isolation for generations.
    • As it turned out, that is what happened at Simlipal.
    • Pseudo-melanistic tigers are also present in three zoos in India — Nandankanan (Bhubaneswar), Arignar Anna Zoological Park (Chennai) and Bhagwan Birsa Biological Park (Ranchi) — where they were born in captivity.
    • All of them have ancestral links to one individual from Simlipal.

    What about natural selection?

    • Natural selection eliminates the weakest from a gene pool, and the traits of the more successful get passed on.
    • Niche modelling, the study said, shows higher frequency of melanistic leopards in darker tropical and subtropical forests than in drier open habitats.
    • Likewise, darker coats may confer a selective advantage in both hunting and avoiding hunters in Simlipal’s tropical moist deciduous and semi-evergreen closed-canopy forest, with a relatively darker understory.

    Try this PYQ:

    Two important rivers – one with its source in Jharkhand (and known by a different name in Odisha), and another, with its source in Odisha – merge at a place only a short distance from the coast of Bay of Bengal before flowing into the sea. This is an important site of wildlife and biodiversity and a protected area.

     

    Which one of the following could be this?
    (a) Bhitarkanika
    (b) Chandipur-on-sea
    (c) Gopalpur-on-sea
    (d) Simlipal

     

    Post your answers here.

    Back2Basics: Project Tiger

    • Project Tiger is a tiger conservation program launched in April 1973 during PM Indira Gandhi’s tenure.
    • In 1970 India had only 1800 tigers and Project Tiger was launched in Jim Corbett National Park.
    • The project is administrated by the National Tiger Conservation Authority (NTCA).
    • It aims at ensuring a viable population of Bengal tigers in their natural habitats, protecting them from extinction etc.
    • Under this project the govt. has set up a Tiger Protection Force to combat poachers and funded relocation of villagers to minimize human-tiger conflicts.

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  • Foreign Policy Watch: India-SCO

    [pib] Collective Security Treaty Organization (CSTO)

    IOCR | International Relations | Mains Paper 2: International Institutions

    The Prime Minister has participated virtually in the Joint SCO (Shanghai Cooperation Organization)-CSTO Outreach Session on Afghanistan.

    What is CSTO?

    • The CSTO is a Russia-led military alliance of seven former Soviet states that was created in 2002.
    • Current CSTO members are Armenia, Belarus, Kazakhstan, Kyrgyzstan, the Russian Federation and Tajikistan. Afghanistan and Serbia hold observer status in the CSTO.
    • Its purpose is to ensure the collective defence of any member that faces external aggression.
    • It has been described by political scientists as the Eurasian counterpart of NATO, which has 29 member states, while the CSTO has just six.

    Outlined functions of CSTO

    • CSTO supports arms sales and manufacturing as well as military training and exercises, making the CSTO the most important multilateral defence organization in the former Soviet Union.
    • Beyond mutual defence, the CSTO also coordinates efforts in fighting the illegal circulation of weapons among member states and has developed law enforcement training for its members in pursuit of these aims.

    What does CSTO membership provide?

    • While CSTO membership means that member states are barred from joining other military alliances, limiting, for example, their relationship with NATO.
    • Its members receive discounts, subsidies, and other incentives to buy Russian arms, facilitating military cooperation.
    • Most importantly, membership presumes certain key security assurances – the most significant of which is deterring military aggression by third countries.
    • In the CSTO, aggression against one signatory is perceived as aggression against all.
    • It however remains unclear whether this feature works in practice.

    Back2Basics: NATO (North Atlantic Treaty Organization)

    • NATO was found in the aftermath of the Second World War.
    • Its purpose was to secure peace in Europe, to promote cooperation among its members and to guard their freedom – all of this in the context of countering the threat posed at the time by the Soviet Union.
    • It is a military alliance established by the North Atlantic Treaty (also called the Washington Treaty) of April 4, 1949.
    • It sought to create a counterweight to Soviet armies stationed in Central and Eastern Europe after World War II.
    • Its original members were Belgium, Canada, Denmark, France, Iceland, Italy, Luxembourg, the Netherlands, Norway, Portugal, the United Kingdom, and the United States.
    • NATO has spread a web of partners, namely Egypt, Israel, Sweden, Austria, Switzerland and Finland.

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  • New Species of Plants and Animals Discovered

    General Sherman: World’s largest tree

    Prelims Only | Trivia | Mains Paper 3: Awareness in various sc and tech fields

    Two wildfires in California are burning through the Sequoia National Park in the Sierra Nevada that is home to some of the largest trees in the world.

    Among these trees is the world’s largest tree popularly known as General Sherman, which firefighters are now trying to protect from the blaze.

    About General Sherman

    • The General Sherman tree is the world’s largest in terms of volume and exists in the Giant Forest sequoia grove of the national park.
    • As per recent estimates, General Sherman is about 2,200 years old.
    • It stands at a height of 275 feet (taller than the leaning tower of Pisa) and has a diameter of 36 feet at the base.
    • Even 60 feet above the base, the tree has a diameter of 17.5 feet.
    • Giant sequoia trees have existed in the national park for thousands of years and there are an estimated 2,000 such trees in the park.

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  • Coronavirus – Economic Issues

    Building a resilient economy

    op-ed snap | Economics | Mains Paper 3: Indian Economy

    Context

    To revive and sustain growth, action is needed both at the international and national levels.

    Hopes of V-shaped recovery of Indian economy

    • The National Statistical Office (NSO) had recently estimated that India’s economic growth has surged to 20.1% in the April-June quarter.
    • In its recently launched Trade and Development Report 2021, UNCTAD has estimated global growth to hit 5.3% in 2021 and growth in India to hit 7.2%.
    • According to the report, India showed strong quarterly growth of 1.9% in the first quarter of 2021, on the back of the momentum of the second half of 2020 and supported by government spending in goods and services.
    • Given the inherent fragilities, India’s growth in 2021 as a whole is estimated at 7.2%, which is one of the fastest compared to most countries in the analysis.
    • But it is still not sufficient to regain the pre-COVID-19 income level.
    • However, going forward, the economy is likely to experience a deceleration of growth to 6.7% growth in 2022.

    Ways to sustain growth

    1) Efforts at the International level

    • To revive and sustain growth, action is needed both at the international and national levels.
    • TRIPS waiver: The report strongly supports India’s proposed temporary suspension of the World Trade Organization TRIPS waiver.
    • Waiver is considered as a necessary step to enable the local manufacture of vaccines in developing countries

    2) Steps to be taken at the national level

    • Resilience: At the national level, COVID-19 has reinforced the idea that resilience is a public good and responsibility of the state.
    • It has to be delivered through a robust public sector with the resources to make the necessary investments, provide the complementary services and coordinate the multiple activities that building resilience involves.
    • Mobilising financial resources: We need a financial system that accords a more significant role to public banks, breaks up and guards against the emergence of megabanks, and exercises stronger regulatory oversight is more likely to deliver a healthier investment climate.
    • Minimum wage:  Wages are a critical source of demand and their growth can stimulate productivity and underpin a strong social contract.
    • Minimum wages and related labour legislation are needed for appropriate protection against abusive practices.
    • Policies for informal sector: Policies targeting informality are of particular importance, especially for a country like India with a large informal economy.

    Conclusion

    It is important to build a healthy, diversified economy. For this, a strong industrial policy focusing on building digital capacities is needed. A resilient economy goes beyond offering a residual category of safety nets designed to stop those left behind from falling further.

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  • Labour, Jobs and Employment – Harmonization of labour laws, gender gap, unemployment, etc.

    E-Shram

    op-ed snap | Governance | Mains Paper 2: Laws, Institutions & Bodies Constituted For The Vulnerable Sections

    The E-Shram portal has come into existence more than a decade after the passage of the Unorganized Workers’ Social Security Act in 2008.

    E-Shram

    • On August 26, 2021, the Ministry of Labour and Employment (MOLE) launched the E-Shram, the web portal for creating a National Database of Unorganized Workers (NDUW), which will be seeded with Aadhaar.
    • It seeks to register an estimated 398-400 million unorganized workers and to issue an E-Shram card.

    Better late than never move

    • It has come about even after repeated nudging by the Supreme Court of India.
    • It is the result of state apathy.
    • Had the Central and the State governments begun these legally mandated processes on time, much of the distress of lakhs of vulnerable workers would have been avoided.
    • In fact, the political class owe an ‘apology’ to informal workers.

    Issues with E-Shram

    (A) Time constraints

    • Long process: Given the gigantic nature of registering each worker, it will be a long-drawn process.
    • No gestation period: The Government has not mentioned a gestation period to assess its strategy and efficiency.
    • No hasty process: Employers are or required their workers to register even.While the Government can appeal to them, any penal measure will hurt the ease of doing business.

    (B) Pandemic hides

    • Considering the estimated 380 million workers as the universe of registration — debatable as the novel coronavirus pandemic has pushed lakhs of workers into informality.

    (C) Data security

    • Privacy: One of the vital concerns of e-portals is data security, including its potential abuse especially when it is a mega-sized database.
    • No national framework yet: There are also media reports pointing out the absence of a national architecture relating to data security.
    • Local server issues: It has been reported that in some States such as Maharashtra, the server was down for a few days.

    (D) Structural issue

    • Aadhaar seeding: Many workers will not have an Aadhaar-seeded mobile or even a smartphone. Aadhaar-seeding is a controversial issue with political overtones, especially in the North-eastern regions.
    • Eligibility: There are several issues concerning the eligibility of persons to register as well as the definitional issues.
    • Exclusion: By excluding workers covered by EPF and ESI, lakhs of contract and fixed-term contract workers will be excluded from the universe of UW. Hazardous establishments employing even a single worker will have to be covered under the ESI, which means these workers also will be excluded.
    • No benefits for the aged: The NDUW excludes millions of workers aged over 59 from its ambit, which constitutes age discrimination.

    (D) Complex identities of workers

    • Migration: Many are circular migrant workers and they quickly, even unpredictably, move from one trade to another.
    • Mixed work: Many others perform formal and informal work as some during non-office hours may belong to the gig economy, for example as an Uber taxi or a Swiggy employee. They straddle formal and informal sectors.
    • Gig workers: Even though MOLE has included gig workers in this process, it is legally unclear whether the gig/platform worker can be classified first as a worker at all.

    (E) Other impediments

    • Dependence on States: The central government will have to depend on the State governments for this project to be successful.
    • Lack of coordination: In many States, the social dialogue with the stakeholders especially is rather weak or non-existent. The success of the project depends on the involvement of a variety of stakeholders apart from trade unions.
    • Corruption: There is also the concern of corruption as middle-service agencies such as Internet providers might charge exorbitant charges to register and print the E-Shram cards.

    Benefits: No immediate carrot

    • Workers stand to gain by registration in the medium to long run.
    • But the instant benefit of accident insurance upto ₹0.2 million to registered workers is surely not an attractive carrot.
    • The main point of attraction is the benefits they stand to gain during normal and crisis-ridden periods such as the novel coronavirus pandemic now which the Government needs to disseminate properly.

    Way forward

    • E-Shram is a vital system to provide hitherto invisible workers much-needed visibility.
    • It will provide the Labour Market Citizenship Document to them.
    • The govt should go one step further for triple linkage for efficient and leakage-less delivery of all kinds of benefits and voices to workers/citizens: One-Nation-One-Ration Card (ONOR), E-Shram Card (especially bank account seeded) and the Election Commission Card.
    • Last but not least, registrations cannot be a source of exclusion of a person from receiving social assistance and benefits.

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  • Insolvency and Bankruptcy Code

    Government sets up ‘bad bank’ to clear the NPA mess

    | Economics | Mains Paper 3: Indian Economy

    Paving the way for a major clean-up of bad loans in the banking system, the Union Cabinet has cleared a ₹30,600-crore guarantee programme for securities to be issued by the newly incorporated ‘bad bank’ for taking over and resolving non-performing assets (NPAs) amounting to ₹2 lakh crore.

    What is a Bad Bank?

    • A bad bank conveys the impression that it will function as a bank but has bad assets to start with.
    • Technically, it is an asset reconstruction company (ARC) or an asset management company that takes over the bad loans of commercial banks, manages them and finally recovers the money over a period of time.
    • Such a bank is not involved in lending and taking deposits, but helps commercial banks clean up their balance sheets and resolve bad loans.
    • The takeover of bad loans is normally below the book value of the loan and the bad bank tries to recover as much as possible subsequently.

    Bad Banks to be established

    • The NARCL-IDRCL structure is the new bad bank.
    • The National Asset Reconstruction Company Limited (NARCL) has already been incorporated under the Companies Act.
    • It will acquire stressed assets worth about Rs 2 lakh crore from various commercial banks in different phases.
    • Another entity — India Debt Resolution Company Ltd (IDRCL), which has also been set up — will then try to sell the stressed assets in the market.

    How will the NARCL-IDRCL work?

    • The NARCL will first purchase bad loans from banks.
    • It will pay 15% of the agreed price in cash and the remaining 85% will be in the form of “Security Receipts”.
    • When the assets are sold, with the help of IDRCL, , the commercial banks will be paid back the rest.
    • If the bad bank is unable to sell the bad loan, or has to sell it at a loss, then the government guarantee will be invoked.
    • The difference between what the commercial bank was supposed to get and what the bad bank was able to raise will be paid from the Rs 30,600 crore that has been provided by the government.

    Will a bad bank resolve matters?

    • From the perspective of a commercial bank saddled with high NPA levels, it will help.
    • That’s because such a bank will get rid of all its toxic assets, which were eating up its profits, in one quick move.
    • When the recovery money is paid back, it will further improve the bank’s position.
    • Meanwhile, it can start lending again.

    Why do we need a bad bank?

    • The idea gained currency during Rajan’s tenure as RBI Governor.
    • The RBI had then initiated an asset quality review (AQR) of banks and found that several banks had suppressed or hidden bad loans to show a healthy balance sheet.
    • However, the idea remained on paper amid lack of consensus on the efficacy of such an institution.
    • ARCs have not made any impact in resolving bad loans due to many procedural issues.
    • While commercial banks resume lending, the so-called bad bank, or a bank of bad loans, would try to sell these “assets” in the market.

    Good about the bad banks

    • The problem of NPAs continues in the banking sector, especially among the weaker banks.
    • The bad bank concept is in some ways similar to an ARC but is funded by the government initially, with banks and other investors co-investing in due course.
    • The presence of the government is seen as a means to speed up the clean-up process.
    • Many other countries had set up institutional mechanisms such as the Troubled Asset Relief Programme (TARP) in the US to deal with a problem of stress in the financial system.

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