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  • India’s challenge in dealing with international criticism

    Tweets by international celebrities in support of farmers’ protests and the government’s response to it have brought focus the issue of international scrutiny of India’s policies. The article analyses this issue.

    Issue of external criticism of India

    • Recently, India has been at the receiving end of international criticism over its dealing with the farmers’ protests against recently passed farm laws.
    • But neither the negative international scrutiny nor the Indian nationalist rejection of it are new.
    • Mobilising nationalist sentiment and evoking territorial sovereignty in fending off external criticism have been consistent themes in the conduct of independent India’s foreign policy.
    • The intensity of international scrutiny has varied over time and space, but they are unlikely to ever disappear.
    • As India becomes more connected to the world, there will be more global interest in its internal dynamics.
    • At the same time, like all rising powers, India will push back against demands that it must always measure up to external expectations.

    Why the Western criticism matters

    • Western power to turn sensible sentiments on democracy and human rights into consistent policies is rather limited.
    • Also, the issue of human rights has never been the sole factor shaping US foreign policy towards other nations.
    • But there is no denying that the Western power to create problems is real.
    • There are also implications of needless political arguments with the US over your domestic politics.
    • Asian realists also know that it is not difficult to neutralise Western liberal critics by emphasising engagement with others that might have commercial and security interests.

    Dealing with the criticism in the U.S. Congress

    • In the early 1990s, passing resolutions against India on Punjab and Kashmir in the US Congress was routine.
    • But once Delhi began to engage with US Congress and explained the complexity of the issues involved, the tide began to turn.
    • The Indian diaspora helped by reaching out to their representatives and pressing them to reconsider their positions.
    • Within a decade, supporters of separatism in Punjab and Kashmir could not even move the resolutions in the US Congress.

    Domestic polarisation and role of diaspora in international criticism

    • India’s problem is not with external criticism, India’s real challenge is the deepening domestic political divide.
    • India’s internal conflicts have inevitably enveloped the diaspora.
    • Sections of the diaspora that are opposed to Indian policies are actively mobilising the political class in their adopted countries to raise the voice against India.
    • They are also building wider coalitions to put the Indian government on the mat.
    • If the diaspora in the past helped India overcome some difficult problems with the US, it is the counter mobilisation of the diaspora that is shaping the western criticism of India.

    Way forward

    • The government’s ability to overcome external criticism depends on rebuilding the national consensus on key policies and healing the multiple social rifts.
    • Without a visible and sincere political effort to promote unity at home, internal divisions will get worse and make India more vulnerable to external meddling.

    Consider the question “Recently, India has been at the receiving end of the international criticism for its internal issues. What are the reasons for such criticism? Suggest the strategy to deal with such criticisms.” 

    Conclusion

    India’s own experience with Sri Lanka and Nepal underlines how hard it is to persuade other societies to accept Delhi’s preferences on the rights of minorities and federalism. In the end, democracy and pluralism can never be foreigner’s gifts. The struggle to construct and preserve democracies remains an internal one.

  • Foreign Policy Watch: India-Myanmar

    India’s Myanmar dilemma

    The coup in Myanmar poses several challenges for India. For one, it poses a dilemma in India’s dealing with Myanmar’s military. Also, it has implications for the Rohingya issue and containing the insurgency in north-east India.

    Implications of the coup in Myanmar

    1) Political realignment and role of Aung San Suu Kyi

    • Threat of sanctions from the United States and the West in the wake of the recent coup could lead to unique political realignments in Myanmar.
    • As a result, the international community may not have any alternatives than Aung San Suu Kyi when it comes to pursuing the restoration of democracy in the country.
    • The democratic credentials of Aung San Suu Kyi, remain deeply diminished today due to her justification of the ill-treatment meted out to the Rohingya,
    • Yet the recent events have brought her right back into the centre of the international community’s political calculations in Myanmar.

    2) Implications for Rohingya issus

    • International community will have to condone the government’s past actions against the Rohingya in order to highlight Suu Kyi as an anchor of democracy in Myanmar.
    • The case against Myanmar’s conduct during her government’s tenure at the International Court of Justice (ICJ) will most likely be put on the backburner.
    • Increasing global support for Ms. Suu Kyi could potentially negative consequences for the persecuted Rohingya.

    3) China factor

    • In the short run, the coup stands to hurt the interests of China, India and even the rest of the international community, all of whom were able to do business with Myanmar in their own unique ways.
    • For China, the coup has complicated its larger regional economic plans in Myanmar.
    • However, the international community’s sharp reactions will likely force the Tatmadaw (Myanmar’s military) to turn to China.
    • International sanctions are unlikely to have a major impact on the country’s largely inward-looking junta and its Generals.
    • However, it Generals would still expect Beijing to give them
    • For China, the coup has complicated its larger regional economic plans in Myanmar.
    • On the positive side for Beijing, decisive western sanctions will force the military to get closer to China.
    • To that extent, China will be its biggest beneficiary of the February coup by default.

    India’s dilemma

    • India faces the most challenging dilemma on how to respond to the military coup in Myanmar.
    • The dual power centres of the military and the civilian government that existed in Naypyitaw until recently, suited India.
    • While India’s national interests clearly lie in dealing with whoever is in power in Myanmar, India would find it difficult to openly support the junta given the strong western and American stance.
    • On the other hand, it can ill-afford to offend the junta by actively seeking a restoration of democracy there.
    • While Ms. Suu Kyi was getting cozy with Beijing, it was the Myanmar military that had been more circumspect.

    India’s concerns

    • While a friendless Myanmar junta getting closer to China is a real worry for New Delhi, there are other concerns too.
    • For one, Myanmar’s military played a helpful role in helping India contain the north-eastern insurgencies.
    • Equally important is the issue of providing succour to the Rohingya in the wake of the military coup in Myanmar.

    Consider the question “Developments in Myanmar have several implications for the regional geopolitics. In light of this, examine the challenges India faces from the development in Myanmar.”

    Conclusion

    India is left with very few clear policy options. And yet, it must continue to maintain relations with the government in power in Myanmar while discreetly pushing for political reconciliation in the country. In the meantime, the focus must be on improving trade, connectivity, and security links between the two sides.

  • Human Rights Issues

    US moves to rejoin UN Human Rights Council

    The Biden administration is set to reengage with the much-maligned UN Human Rights Council that former Donald Trump withdrew from almost three years ago.

    Try this PYQ:

    Q.Consider the following:

    1. Right to education.
    2. Right to equal access to public service.
    3. Right to food.

    Which of the above is/are Human Right/Human Rights under “Universal Declaration of Human Rights”?

    (a) 1 and 2 only

    (b) Only 1

    (c) 1, 2 and 3

    (d) Only 3

    Why did the US pulled-out earlier?

    • Trump pulled out of the world body’s main human rights agency in 2018 due to its disproportionate focus on Israel.
    • Israel had received by far the largest number of critical council resolutions against any country.
    • The Trump administration took issue with the body’s membership, which currently includes China, Cuba, Eritrea, Russia and Venezuela, all of which have been accused of human rights abuses.

    About UN Human Rights Council

    • The UNHRC describes itself as “an inter-governmental body within the UN system responsible for strengthening the promotion and protection of human rights around the globe.
    • It addresses situations of human rights violations and make recommendations on them.
    • The first session took place from June 19-30, 2006, three months after the Council was created by UN General Assembly Resolution 60/251 on March 15 that year.
    • The UNHRC has the ability to discuss all thematic human rights issues and situations that require its attention throughout the year.
    • The HRC replaced the former United Nations Commission on Human Rights (UNCHR).

    HRC Meetings

    • The Human Rights Council holds no fewer than three regular sessions a year, for a total of at least 10 weeks.
    • The meetings take place for four weeks in March, for three weeks in June, and for another three weeks in September.
    • The sessions are held at the UN Office in Geneva, Switzerland.
    • If one-third of the Member States so request, the HRC can decide at any time to hold a special session to address human rights violations and emergencies.

    Membership

    • The Council is made up of 47 UN Member States, which are elected by the UNGA through a direct and secret ballot.
    • The General Assembly takes into account the contribution of the candidate states to the promotion and protection of human rights, as well as their voluntary pledges and commitments in this regard.
    • Members of the Council serve for a period of three years and are not eligible for immediate re-election after serving two consecutive terms.
    • As of January 1, 2019, 114 UN Member States have served on the HRC. Both India and Pakistan are on this list.
    • The HRC has a Bureau of one President and four Vice-Presidents, representing the five regional groups. They serve for a year, in accordance with the Council’s annual cycle.

    Seat distribution

    • African States: 13 seats
    • Asia-Pacific States: 13 seats
    • Latin American and Caribbean States: 8 seats
    • Western European and other States: 7 seats
    • Eastern European States: 6 seats
  • Prevention of Insults to National Honour Act

    Police have booked several under The Prevention of Insults to National Honour Act, 1971, for the alleged insult of the National Flag in farmers protest on Republic Day.

    Prevention of Insults to National Honour Act

    • The law, enacted on December 23, 1971, penalizes the desecration of or insult to Indian national symbols, such as the National Flag, the Constitution, the National Anthem, and the Indian map, as well as contempt of the Constitution of India.
    • Section 2 of the Act deals with insults to Indian National Flag and Constitution of India.

    Do you know?

    Article 51 ‘A’ contained in Part IV A i.e. Fundamental Duties asks:

    To abide by the constitution and respect its ideals and institutions, the National Flag and the National Anthem in clause (a).

    Other provisions

    • Section 3.22 of The Flag Code of India, 2002 deals with laws, practices and conventions that apply to the display of the national flag.
    • Section 3.58 says: On occasions of State/Military/Central Paramilitary Forces funerals, the flag shall be draped over the bier or coffin with the saffron towards the head of the bier or coffin.
    • The Flag shall not be lowered into the grave or burnt in the pyre.

    Try this PYQ:

    Q.The national motto of India, ‘Satyameva Jayate’ inscribed below the Emblem of India is taken from:

    (a) Katha Upanishad

    (b) Chandogya Upanishad

    (c) Aitareya Upanishad

    (d) Mundaka Upanishad

    Use of flag in funerals

    • The flag can only be used during a funeral if it is accorded the status of a state funeral.
    • Apart from police and armed forces, state funerals are held when people who are holding or have held the office of President, Vice-President, PM, Cabinet Minister, or state CM pass away.
    • The status of a state funeral can be accorded in case of death of people not belonging to the armed forces, police or the above-mentioned categories by the state government.
    • Then too, the national flag can be used.
  • Nuclear Energy

    Einsteinium: the mysterious element named after Albert Einstein

    The University of California has reported some of the properties of element 99 in the periodic table called “Einsteinium”, named after Albert Einstein.

    Try this PYQ:

    Q.The known forces of nature can be divided into four classes, viz, gravity, electromagnetism, weak nuclear force and strong nuclear force.

    With reference to them, which one of the following statements is not correct? (CSP 2012)

    (a) Gravity is the strongest of the four

    (b) Electromagnetism act only on particles with an electric charge

    (c) Weak nuclear force causes radioactivity

    (d) Strong nuclear force holds protons and neutrons inside the nuclear of an atom.

    Einsteinium

    • It was discovered in 1952 in the debris of the first hydrogen bomb (the detonation of a thermonuclear device called “Ivy Mike” in the Pacific Ocean).
    • Since its discovery, scientists have not been able to perform a lot of experiments with it because it is difficult to create and is highly radioactive.
    • Therefore, very little is known about this element.
    • With this new study published in the journal Nature last week, for the first time researchers have been able to characterize some of the properties of the element.

    The discovery of the element

    • Ivy Mike was detonated on November 1, 1952, as part of a test at a remote island location called Elugelab on the Eniwetok Atoll in the South Pacific.
    • The blast produced an explosion that was about 500 times more destructive than the explosion that occurred at Nagasaki.
    • Subsequently, the fallout material from this explosion was sent to Berkeley in California for analysis which identified over 200 atoms of the new element.

    Properties of the element

    • Einsteinium has a half-life of 20 days.
    • Because of its high radioactivity and short half-life of all einsteinium isotopes, even if the element was present on Earth during its formation, it has most certainly decayed.
    • This is the reason that it cannot be found in nature and needs to be manufactured using very precise and intense processes.
    • Therefore, so far, the element has been produced in very small quantities and its usage is limited except for the purposes of scientific research.
    • The element is also not visible to the naked eye and after it was discovered, it took over nine years to manufacture enough of it so that it could be seen with the naked eye.
  • Air Pollution

    [pib] Scheme for Management of Crop Residues

    The Scheme on ‘Promotion of Agricultural Mechanization for In-Situ Management of Crop Residue in the States of Punjab, Haryana, Uttar Pradesh and NCT of Delhi’ has been extended for the year 2021-22.

    We can cite the example of this scheme for crop residue management as an effective solution against stubble burning.

    Management of Crop Residues

    • In pursuance this, a central sector scheme (100% funded by centre) was launched in 2018 Budget to support the efforts of the governments of Haryana, Punjab, Uttar Pradesh and the NCT of Delhi to address air pollution.
    • It aimed to subsidize the machinery required for in-situ management of crop residue.

    Various objectives of the scheme:

    • Protecting the environment from air pollution and preventing loss of nutrients and soil micro-organisms caused by burning of crop residue;
    • Promoting in-situ management of crop residue by retention and incorporation into the soil through the use of appropriate mechanization inputs and
    • Creating awareness among stakeholders for effective utilization and management of crop residue

    Outcomes of the scheme

    • The residue burning events in 2020 in Punjab, Haryana and UP together have reduced by -30% as compared to 2016.
    • In Punjab the reduction is -22.7%, Haryana – 63.8% and UP – 52.01%.
  • Indian Navy Updates

    [pib] Malabar Naval Exercises

    The 24th edition of Malabar maritime exercise, hosted by Indian Navy in 2020, witnessed the participation by Indian Navy, United States Navy, Japan Maritime Self Defence Force and Royal Australian Navy.

    Such news is nothing but the repetitive chunk that occurs every year with few or no new developments. Still, they are significant for the sake of information as Australia has joined it after several apprehensions.

     Question can be expected in CAPF, CDS or AFCAT exams.

    About Ex. Malabar

    • Exercise Malabar is a trilateral naval exercise involving the US, Japan and India as permanent partners.
    • This year Australia has joined as a permanent partner.
    • Originally begun in 1992 as a bilateral exercise between India and the United States, Japan became a permanent partner in 2015.
    • Past non-permanent participants are Australia and Singapore.
    • The annual Malabar series began in 1992 and includes diverse activities, ranging from fighter combat operations from aircraft carriers through Maritime Interdiction Operations Exercises.

    Significance of Australia’s inclusion

    • Earlier, India had concerns that it would give the appearance of a “quadrilateral military alliance” aimed at China.
    • Now both look forward to the cooperation in the ‘Indo-Pacific’ and the strengthening of defence ties.
    • This has led to a convergence of mutual interest in many areas for a better understanding of regional and global issues.
    • Both are expected to conclude the long-pending Mutual Logistics Support Agreement (MLSA) as part of measures to elevate the strategic partnership.
  • Government Budgets

    Infrastructure push now, fiscal consolidation later

    The Budget will aid the growth in the aftermath of the pandemic, however, concerns remain over the fiscal deficit.

    Concerns about fiscal deficit

    • The Budget, taken as a whole, has provided reasonable stimulus to growth through a change in the composition of expenditure and other measures to improve the climate for investment.
    • But concerns remain about fiscal deficit.

    High expenditure growth

    • Proposed growth in central expenditure, both in 2020-21 Revised Estimates (RE) and in 2021-22 Budget Estimates (BE), indicates the extent of contemplated fiscal stimulus.
    • For reaching the projected 2020-21 RE levels, the growth required in the last quarter of the current fiscal year over the corresponding period of the previous year appear extraordinary.
    • This involves transferring on to the Budget, the accumulated food subsidies amounting to ₹2,54,600 crore given to the Food Corporation of India through National Small Savings Fund (NSSF) loans.
    • The balance of subsidies amounting to ₹1,68,018 crore would be the food subsidy pertaining to 2020-21 (RE).
    • This is a desirable change towards transparency.
    • Taking revenue expenditure figures as budgeted and adjusting for the NSSF-accumulated food subsidy amount, the growth is 6.7% in revenue expenditure in 2021-22 (BE) over 2020-21(RE).
    • A good part of expenditure for the last quarter of 2020-21 may also pertain to clearing unpaid dues of various stakeholders including the private sector, autonomous bodies and government-aided institutions.
    • Clearing these payments is desirable and would add to demand.
    • The main expenditure push comes through a budgeted growth of 26.2% in capital expenditure in 2021-22.
    •  Relative to GDP, capital expenditure is expected to increase from 1.6% in 2019-20 to 2.3% in 2020-21 RE and 2.5% in 2021-22 BE, signalling a significant change in priority.

    Increase in receipts

    • Significant increases are planned in non-tax revenues and non-debt capital receipts.
    • This increase is mainly predicated on higher dividends from non-departmental undertakings and spectrum sales.
    • From a contraction of 35.6% in 2020-21 (RE), non-tax revenues are budgeted to grow by 15.4% in 2021-22.
    • In the case of non-debt capital receipts, mainly covering disinvestment, a budgeted growth of 304.3% in 2021-22 stands in contrast with the contraction of 32.2% in 2020-21 (RE).
    • Disinvestment initiatives have so far yielded minimal results.
    • Budgeted increase in the Centre’s gross tax revenues is dependent on nominal GDP growth of 14.4%, with a buoyancy of 1.6 for direct taxes and 0.8 for indirect taxes. 

    Steps towards asset monetisation

    • An important initiative pertains to the launching of a National Monetisation Pipeline.
    • The time lags involved in starting yielding revenue remain unpredictable because of various potential disputes and claims involving government-owned land.
    • A transparent auction process needs to be set up to facilitate suitable price discovery.

    Other institutional initiatives

    • The Budget includes central government’s share to the National Infrastructure Pipeline.
    • However, success of the infrastructure expansion plan would depend on other stakeholders of the pipeline playing their due role.
    • The Budget also proposes setting up of a Development Finance Institution (DFI), to serve as a catalyst for facilitating infrastructure investment.
    • The DFI would have an initial capital of ₹20,000 crore.
    • In order to manage non-performing assets of public sector banks, there is a proposal to set up an Asset Reconstruction Company (ARC) and an Asset Management Company (AMC).
    • Much depends upon the fine-tuning the operations of these institutions.

    Finance Commission’s recommendations

    • In the action taken report, the Union government has accepted the recommended vertical share of 41% for the States in the shareable pool of central taxes.
    • The government has accepted the Fifteenth Finance Commission’s recommendation for revenue deficit grants, local body grants and disaster-related grants.
    • The scope of revenue deficit grants has been extended to cover 17 States in the initial years.
    • The determination of these grants is not based on equalisation principle although some norms have been used in the assessment exercise.
    • However, the government has put on hold the consideration of State-specific and sector-specific grants including performance-based incentives.
    • The substantive issue pertains to the mode of transfers in terms of general-purpose unconditional transfers against specific purpose and conditional transfers.
    • States had shown a preference for the former mode and it is for this reason that the 14th Finance Commission had raised the States’ share from 32% to 42%.
    • The reduction from 42% to 41% is only on account of the consideration of 28 States excluding Jammu and Kashmir because of its new status.
    • The imposition of cesses which are almost permanent has reduced the shareable pool.
    • In fact, the States’ share in the Centre’s gross tax revenues is only 30% in 2021-22 (BE).

    Way forward

    • The Fifteenth Finance Commission has also proposed a revised fiscal consolidation road map for the Centre and States.
    • The Fifteenth Finance Commission has recommended the setting up of a High-Powered Intergovernmental Group to re-examine the fiscal responsibility legislations of the Centre and States.
    • Giving up the prudential norms will be a wrong lesson to learn from the crisis.
    • The issue of debt sustainability can be certainly re-examined by taking into account the evolving profiles of debt, interest payments, and primary deficits relative to GDP.

    Conclusion

    Fiscal deficit must be related to household savings in financial assets and the interest payments to revenue receipts. It should not be forgotten that in fiscal 2021-22, interest payments to total revenue receipts will be 45.3%, pre-empting a significant proportion of revenue receipts. We must be conscious of the burden of the rising stock of debt.

  • Government Budgets

    Making Budget work

    The article deals with the marked departures in this year’s Budget and the challenges in realising the changes.

    Three paradigm shifts from past in this the Budget

    1)Increased infrastructure spending

    • The main theme of the budget is a big thrust on infrastructure spending and public investment.
    • If the budgeted numbers are realised, capex would have grown from 1.6 per cent of GDP pre-COVID to 2.5 per cent in two years.
    • With India’s investment/GDP ratio falling by 5 percentage points over the last decade, a sustained public investment push — with its large multiplicative effects — is a much-needed impetus to reinvigorate growth and create jobs.

    Implications of increased spending

    • The certainty sustained public investment is likely to crowdin private investment.
    • The certainty of investment-led employment that is likely to reduce household precautionary savings.
    • However, higher capex spend is being paid for by disinvestment and privatisation.
    • Effectively, non-core public-sector assets that don’t generate positive externalities — and, in fact, potentially distort the sectors they compete in — are expected to be replaced with much-needed physical and social infrastructure.
    • This newly created physical and social infrastructure emanate positive externalities and necessarily suffer from under-provisioning by the private sector.
    • If successfully executed — this will not be a case of selling the family silver to pay a credit card bill.
    • Instead, it will be akin to a productivity-enhancing asset swap on the public sector’s balance sheet.

    2) Shift in the way for financing infrastructure

    • In stark contrast to the PPP model, infrastructure will now be financed off public sector balance sheets and, once operational and viable, will be monetised so as to recycle proceeds into the next project.
    • In theory, this is the appropriate division of public-private risk sharing.
    • It combines the public sector’s ability to better mitigate upstream risk while taking advantage of the glut of global liquidity potentially attracted to downstream projects.

    3) Shift is towards more conservative and transparent fiscal accounting

    • There has been much focus on bringing the Food Corporation of India (FCI) liabilities back on the budget.
    • Less appreciated is the conservatism with which tax revenues have been budgeted for.
    • Revised estimates peg this year’s gross taxes at 9.9 per cent of GDP.
    • But for that to happen, taxes, net of excise, will need to contract by 20 per cent in the last quarter.
    • So it’s very likely gross taxes will end up 0.5 per cent of GDP higher this year.
    • Not only is this a welcome departure from the past when revenues were consistently over-budgeted, but it sets the base for next year.
    • With nominal GDP expected to grow in double digits, it’s likely taxes, net of excise, will experience a higher-than-unitary-elasticity to growth, especially given the increased formalisation that COVID has spawned.
    • Tax collections are, therefore, likely to exceed budgeted levels in 2021-22.
    • It behooves a very uncertain macroeconomic environment and creates some buffer if crude prices keep rising or other revenues don’t materialise.
    • Credible accounting over time will bring down risk premia in bond yields, and paradoxically generate a stimulative impulse.

    Three challenges in realising these changes

    1) Execution challenge

    • The budget’s impact on shaping the macroeconomic narrative will depend on the speed and efficacy of simultaneously building and selling public assets.
    • It will be important, for instance, to front-load disinvestment and strategic sales to take advantage of buoyant equity markets before global central banks become more cautious.
    • With debt likely to rise to almost 90 per cent of GDP this year, it’s now incumbent on all stakeholders to consistently deliver the 10 per cent nominal GDP growth that’s needed to first stabilise debt at these levels and then bring it down.
    • Viewed from this lens, it is a budget where execution is vital.

    2) Withdrawal of the policy support at appropriate time

    • While fiscal policy is being appropriately counter-cyclical at the moment, it must be equally nimble in the other direction.
    • When the recovery gets more entrenched, policy support should be withdrawn with equal speed and alacrity.

    3) Role of monetary policy

    • With fiscal policy playing a primary role, monetary policy must slowly take a back seat.
    • The combination of a more relaxed fiscal path and domestic private sector savings normalising after the COVID surge could result in equilibrium bond market yields rising [fall in the price of bond] — but that is a cost worth incurring for a meaningful public investment push.
    • In the near term, the RBI may focus on ensuring this new equilibrium is reached in a non-disruptive manner.
    • Given the current slack in the economy, it’s understandable if fiscal and monetary are temporarily complementary.
    • But as confidence in the recovery grows, fiscal and monetary must quickly become substitutes — with the RBI progressively normalising liquidity to wardoff financial stability and fiscal dominance concerns — so as to safeguard macroeconomic stability.

    Consider the question “This year’s Budget marked many departures from the past Budgets. However, there are several challenges in realising these departures. What are such departures and identify the challenges in realising them?”

    Conclusion

    The budget must be commended for embarking on important paradigm shifts. But its success, and in turn the sustainability of India’s recovery, will now come down squarely to policy execution and coordination.

     

  • Insolvency and Bankruptcy Code

    IBC as an enabler

    The article analyses whether or not the Insolvency and Bankruptcy Code is delivering on its objectives.

    Criticism of IBC

    • The Insolvency and Bankruptcy Code (IBC), 2016 was enacted to resolve the stress of companies.
    • However, the corporate insolvency resolution process (CIRP)  has been criticised as it rescues only about 25 per cent of companies and leads to liquidation for the rest.

    Is IBC delivering on its mandate

    Let’s analyse how Insolvency and Bankruptcy Code (IBC) 2016 is working towards value maximising outcomes.

    1) It enables the market to attempt to resolve

    • The CIRP enables the market to attempt to resolve stress through a resolution plan whereby the company survives.
    • When it concludes that there is no feasible resolution plan to rescue the company, the company proceeds for liquidation.
    • The market usually rescues a viable company and liquidates an unviable one.
    • There are quite a few companies which have negligible assets and/or are defunct when they enter CIRP.
    • Many of these are beyond rescue for a variety of reasons, including creative destruction, and their continuation is a cost to the economy.
    • In such cases, the code enables liquidation to release available resources to alternate uses.
    • It is welcome, as it releases the assets as well as the entrepreneur stuck up in an unviable company, which is a key objective of the code.

    2) Look at the total asset value not the number of companies

    • In terms of absolute numbers, 25 per cent of companies were rescued and 75 per cent proceeded for liquidation.
    • In value terms, however, 75 per cent of the assets were rescued and 25 per cent of assets proceeded for liquidation.
    • Of the companies sent for liquidation, 75 per cent were either sick or defunct, and of the companies rescued, 25 per cent were either sick or defunct.

    3) Look at the overall impact, not just final numbers

    • Third, the stress that a company suffers is like an illness which can be treated by a variety of options.
    • Normally, recovery is better if diagnosis and treatment start early.
    • Likewise, the health of the company deteriorates if the resolution process is delayed.
    • The percentage of rescue at this later stage may not be significant.
    • The credible threat of CIRP that a company may change hands has redefined the debtor-creditor relationship.
    • Faced with the possibility of the CIRP, a debtor makes all-out efforts to prevent the stress, or resolve it much before it translates into a default, or settles the default.
    • Even after an application is filed, a debtor continues efforts to resolve the financial stress midway through settlement, review, mediation, or withdrawal to avoid the consequences of CIRP.
    • The number of companies that recover before filing the application as a percentage of those that get starts the insolvency process would give the fair idea about the efficacy of the IBC.

    Consider the question “The IBC has often been criticised for liquidating the companies rather than rescuing them. Do you agree with this criticism? Give reasons in support of your argument.”

    Conclusion

    Liquidation or rescue is an outcome of the market forces; the law is only an enabler giving choices and nudging a company towards value maximising outcomes. The “invisible hands” of the market works towards the best outcome, which we should respect and accept.

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