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  • Contention over South China Sea

    Places in news: Paracel Islands

    A US destroyer sailed near the disputed Paracel Islands in the South China Sea, drawing an angry reaction from Beijing, which said its military had “driven away” the ship.

    About Paracel Islands

    • The Paracel Islands, also known as the Xisha Islands and the Hoang Sa Archipelago are a disputed archipelago in the South China Sea.
    • The archipelago includes about 130 small coral islands and reefs, most grouped into the northeast Amphitrite Group or the western Crescent Group.

    What is the South China Sea Dispute?

    • It is a dispute over territory and sovereignty over ocean areas, and the Paracels and the Spratlys – two island chains claimed in whole or in part by a number of countries.
    • China, Vietnam, the Philippines, Taiwan, Malaysia, and Brunei all have competing claims.
    • Alongside the fully-fledged islands, there are dozens of rocky outcrops, atolls, sandbanks, and reefs, such as the Scarborough Shoal.
    • China claims by far the largest portion of territory – an area defined by the “nine-dash line” which stretches hundreds of miles south and east from its most southerly province of Hainan.
    • Beijing says its right to the area goes hundreds of centuries to when the Paracel and Spratly island chains were regarded as integral parts of the Chinese nation.
    • It showed the two island groups falling entirely within its territory. Those claims are mirrored by Taiwan.

    Spat over Chinese claims

    • China has backed its expansive claims with island-building and naval patrols.
    • The US says it does not take sides in territorial disputes but has sent military ships and planes near disputed islands, calling them “freedom of navigation” operations to ensure access to key shipping and air routes.
    • Both sides have accused each other of “militarizing” the South China Sea.
    • There are fears that the area is becoming a flashpoint, with potentially serious global consequences.

     

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  • Trade Sector Updates – Falling Exports, TIES, MEIS, Foreign Trade Policy, etc.

    India & FTA

    Context

    In recent months, India has signed trade agreements with Australia and UAE. n the last week of June, New Delhi began talks for a similar agreement with the EU.

    How FTA with EU could help India

    • India’s successful sectors like textiles, pharmaceuticals and leather could benefit from these deliberations, which would also be keenly watched by representatives of the services and renewable energy sectors.
    • A successful free trade agreement (FTA) with the EU could help India to expand its footfall in markets such as Poland, Portugal, Greece, the Czech Republic and Romania, where the country’s exports registered double-digit annual growth rates in the last decade.

    So, what are the factors India need to consider while signing FTA

    1] Impact of tariff on domestic industry:

    • It has been observed that when India is an importer, the preferential tariffs that accrue as a result of trade agreements are significantly lower than the rates charged from countries given Most Favoured Nation (MFN) status by India.
    • But when the partner country is the importer, preferential tariffs on Indian goods, in most cases, are closer to the MFN tariffs.
    • As a result, Indian exporters do not get the same returns as their counterparts in the partner countries.
    • India’s trade with South Korea is a case in point.
    • Before entering into a trade agreement care should, therefore, be taken to ensure that the domestic industry is not made to compete on unequal terms with the partner countries.

    2] Adherence to the rules of origin

    • The India-UAE Comprehensive Economic Partnership Agreement sets a good example.
    • It includes a strong clause on the rules of origin.
    • Forty per cent value addition or substantial processing of up to 40 per cent in the exporting country is required to qualify for lower tariffs.
    • Rules of origin have been a bone of contention in most Indian trade agreements.
    • (CAROTAR, 2020): In 2020, the country notified the Customs (Administration of Rules of Origin under Trade Agreements) Rules (CAROTAR, 2020), which require a basic level of due diligence from the importer.

    3] Including the offset clauses

    • “Offset clauses” — where the exporter is obliged to undertake activities that directly benefit the importing country’s economy — should be built into trade agreements, especially for technology intensive sectors.

    4] Emergency action plan

    •  In February 2020, the US made India ineligible for claims under GSP, America’s oldest preferential trade scheme.
    • The US Trade Representative’s Office deemed India as a developed country and suspended beneficial treatment under the GSP.
    • A contingency plan should be in place to tackle such situations.

    5] Inclusion of sunset clause

    • India should also take a cue from the US-Mexico-Canada Agreement, to incorporate a “sunset” clause in trade agreements.
    • The pact between the three North American nations provides for periodic reviews and the agreement is slated to end automatically in 16 years unless the countries renegotiate it.

    6] Parity between services and merchandise

    • India should negotiate for parity between services and merchandise.
    • Low trade in services: India’s trade in services is low, and its overall score in the OECD’s Services Trade Restrictiveness Index (STRI) exceeds the world average.
    • It is especially high in legal and accounting services due to the licencing requirements in both these segments.
    • Expansion in banking and financial services: There is also significant room for expansion of trade in the banking and financial services industry.

    Conclusion

    A well-crafted trade agreement could help India enhance its share in global trade and help attain the government’s target of making the country a $5-trillion economy.

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    Back2Basics: CAROTAR Rules

    • Importers will have to do their due diligence to ensure that imported goods meet the prescribed ‘rules of origin’ provisions.
    • This is the essential availing concessional rate of customs duty under free trade agreements (FTAs).
    • A list of minimum information, which the importer is required to possess, has also been provided in the rules along with general guidance.
    • Also, an importer would now have to enter certain origin related information in the Bill of Entry, as available in the Certificate of Origin.

    Why need CAROTAR?

    • CAROTAR 2020 supplements the existing operational certification procedures prescribed under different trade agreements.
    • India has inked FTAs with several countries, including Japan, South Korea and ASEAN members.
    • Under such agreements, two trading partners significantly reduce or eliminate import/customs duties on the maximum number of goods traded between them.
    • The new rules will assist customs authorities in the smooth clearance of legitimate imports under FTAs.
  • Climate Change Negotiations – UNFCCC, COP, Other Conventions and Protocols

    Bonn meet

    Context

    From June 6-16, representatives from more than 100 countries descended on Bonn to hold preliminary discussions on what could be the final communiqué at the conclusion of COP27, to be held at Sharm-el-Sheikh later this year.

    Key takeaways from the discussion

    • Centred on climate finance: Discussions were centred around climate finance and there was hardly any convergence of issues.
    • No convergence: The developed and developing countries or for that matter, big polluters and small polluters, were speaking from the ends of the spectrum with no meeting ground.
    • Focus on adaptation and mitigation: Much of the discussion was around “loss and damage”, which was being experienced by many of the smaller countries, especially with big coastlines, due to rising river levels, loss of agricultural productivity, loss of livelihoods, etc.
    • The idea to provide assistance for “loss and damage” was opposed by the US and the EU.
    • Need for alternative funding: The Green Climate Fund is considered too cumbersome and the process too lengthy.
    • Hence, the need for an alternate funding route was imperative.
    • It was argued that one needs to look into this issue right now and provide financial assistance to cope with it.
    • This brings into focus the debate between adaptation and mitigation.
    • The demand of the developing countries for a provision of climate finance at a scale much higher than $100 billion a year fell on deaf ears.
    • Incidentally, the figure of $100 billion was arrived at arbitrarily and that too way back in 2009.

    Mitigation Vs Adaptation debate

    • More funding directed toward mitigation: It is generally felt that whatever funding has come for climate change issues has mostly been directed towards mitigation.
    • This is primarily because mitigation projects have a cost-benefit analysis and, therefore, it is easy to lend money because you can get it back through interest payments.
    • Cost-benefit analysis: This is primarily because mitigation projects have a cost-benefit analysis and, therefore, it is easy to lend money because you can get it back through interest payments.
    • Mitigation would mean, for example, setting up solar generation units to avoid carbon footprint.
    • Cost-benefit analysis is difficult for adaptation projects, which would be in the form of grants.

    Actions needed to limit the temperature rise to 1.5 degree Celsius

    • 2.4°C by NDC: The Nationally Determined Contributions (NDCs), as on date, are good enough to limit temperature rise to 2.4 degrees centigrade, provided all the targets are met.
    • 1.8°C with net-zero commitment: In addition, if countries also meet their net-zero commitments by 2050, the temperature rise will still be around 1.8 degrees centigrade.
    • 1.5°C:  To limit the temperature rise to 1.5 degrees centigrade, emissions will have to be cut down by half by 2030.
    • The Alliance of Small Island States (AOSIS) expressed the view that to be more meaningful, the aim should be to reduce emissions by 20 per cent by 2025 itself.
    • The logic is that the next round of NDCs is due only in 2025 and by that time, it would be too late to formulate a plan that is achievable by 2030.

    Issue of using remaining carbon space

    • The use of the remaining carbon space available to limit temperature rise to 1.5 degrees centigrade, a highly contentious issue, was also discussed in Bonn.
    • The US resisted being labelled as a “big emitter” and was not willing to take responsibility for its historical emissions.
    • There is no single estimate of how much carbon space is really available as on date, but broad indications are that at the given emissions rate, it would be roughly 10 years.
    • The raging debate is how to distribute this available space equitably amongst countries, which would mean that someone has to take the burden of stiffer targets.
    • What the US wanted other big emitters like China and India take on greater responsibilities for cutting down emissions.
    • However, the like-minded group of developing countries (LMDCs) — which included China, India, Saudi Arabia and the Arab countries — were opposed to this.

    Conclusion

    If there was any hope that discussions at Bonn would provide an acceptable draft, which could be taken forward during COP27, it was misplaced.

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    Back2Basics: The Paris Agreement

    • The Paris Agreement is a legally binding international treaty on climate change. It was adopted by 196 Parties at COP 21 in Paris, on 12 December 2015 and entered into force on 4 November 2016.
    • Its goal is to limit global warming to well below 2, preferably to 1.5 degrees Celsius, compared to pre-industrial levels.
    • To achieve this long-term temperature goal, countries aim to reach global peaking of greenhouse gas emissions as soon as possible to achieve a climate-neutral world by mid-century.
    • It is a landmark process because, for the first time, a binding agreement brings all nations into a common cause to undertake ambitious efforts to combat climate change and adapt to its effects.
    • Implementation of the Paris Agreement requires economic and social transformation, based on the best available science.
    • The Agreement works on a 5- year cycle of increasingly ambitious climate action carried out by countries.
    • By 2020, countries submit their plans for climate action known as nationally determined contributions (NDCs).

    NDCs

    • In their NDCs, countries communicate actions they will take to reduce their Greenhouse Gas emissions in order to reach the goals of the Paris Agreement.
    • Countries also communicate in the NDCs actions they will take to build resilience to adapt to the impacts of rising temperatures.
  • Judicial Reforms

    Bail Law and Supreme Court call for Reform

    The Supreme Court underlined the pressing need for reform in the law related to bail and called on the government to consider framing a special legislation on the lines of the law in the United Kingdom.

    What is Bail?

    • Bail is the conditional release of a defendant with the promise to appear in court when required.
    • The term also means the security that is deposited in order to secure the release of the accused.

    Types of Bail in India

    • Depending upon the sage of the criminal matter, there are commonly three types of bail in India:
    1. Regular bail: A regular bail is generally granted to a person who has been arrested or is in police custody. A bail application can be filed for the regular bail under section 437 and 439 of CrPC.
    2. Interim bail: This type of bail is granted for a short period of time and it is granted before the hearing for the grant of regular bail or anticipatory bail.
    3. Anticipatory bail: Anticipatory bail is granted under section 438 of CrPC either by session court or High Court. An application for the grant of anticipatory bail can be filed by the person who discerns that he may be arrested by the police for a non-bailable offense.

    Conditions for Grant of Bail in Bailable Offences

    • Section 436 of the Code of Criminal Procedure, 1973, lays down that a person accused of a bailable offense under IPC can be granted bail if:
    1. There are sufficient reasons to believe that the accused has not committed the offence.
    2. There is sufficient reason to conduct a further inquiry in the matter.
    3. The person is not accused of any offence punishable with death, life imprisonment or imprisonment up to 10 years.

    Conditions for Grant of Bail in Non-Bailable Offences

    • Section 437 of Code of Criminal Procedure, 1973 lays down that the accused does not have the right to apply for bail in non-bailable offences.
    • It is discretion of the court to grant bail in case of non-bailable offences if:
    1. The accused is a woman or a child, bail can be granted in a non-bailable offence.
    2. There is a lack of evidence then bail in non-Bailable offenses can be granted.
    3. There is a delay in lodging FIR by the complainant, bail may be granted.
    4. The accused is gravely sick.

    What is the recent ruling about?

    • The Supreme Court underlined that arrest is a draconian measure that needs to be used sparingly.
    • The ruling is essentially a reiteration of several crucial principles of criminal procedure.

    Why bail needs reform?

    • Huge pendency of undertrials: Referring to the state of jails in the country, where over two-thirds lodged are undertrials,
    • Indiscriminate arrests: Of this category of prisoners, majority may not even be required to be arrested despite registration of a cognizable offense, being charged with offenses punishable for seven years or less.
    • Disadvantageous for some sections: They are not only poor and illiterate but also would include women. Thus, there is a culture of offense being inherited by many of them.
    • Colonial legacy: Theoretically, the court also linked the idea of indiscriminate arrests to magistrates ignoring the rule of “bail, not jail” to a colonial mindset.

    What is the law on bail?

    • The CrPC does not define the word bail but only categories offences under the Indian Penal Code as ‘bailable’ and ‘non-bailable’.
    • The CrPC empowers magistrates to grant bail for bailable offences as a matter of right.
    • This would involve release on furnishing a bail bond, without or without security.

    And what is the UK law?

    • The Bail Act of the United Kingdom, 1976, prescribes the procedure for granting bail.
    • A key feature is that one of the aims of the legislation is “reducing the size of the inmate population”.
    • The law also has provisions for ensuring legal aid for defendants.
    • The Act recognises a “general right” to be granted bail.

    What has the Supreme Court held on reforms?

    The court’s ruling is in the form of guidelines, and it also draws the line on certain procedural issues for the police and judiciary:

    • Separate law on Bail: The court underlined that the CrPC, despite amendments since Independence, largely retains its original structure as drafted by a colonial power over its subjects.
    • Uniform exercise of discretionary powers: It also highlighted that magistrates do not necessarily
    • Avoid indiscriminate arrests: The SC also directed all state governments and Union Territories to facilitate standing orders to comply with the orders and avoid indiscriminate arrests.

     

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  • Child Rights – POSCO, Child Labour Laws, NAPC, etc.

    Child labour in India

    The Centre does not have any data on child labour in the country and a reason for this is the drying up of budgetary provisions meant for the National Child Labour Project (NCLP).

    What is Child Labour?

    • The term “child labour” is often defined as work that deprives children of their childhood, their potential and their dignity, and that is harmful to physical and mental development.
    • It refers to work that:
    1. is mentally, physically, socially or morally dangerous and harmful to children; and/or
    2. interferes with their schooling by: depriving them of the opportunity to attend school; obliging them to leave school prematurely; or requiring them to attempt to combine school attendance with excessively long and heavy work.

    National Child Labour Project (NCLP)

    • The NCLP Scheme is a Central Sector Scheme under the Ministry of Labour.
    • Under this Scheme the District Project Societies (DPS) are set up at the district level under the Chairmanship of the Collector/District Magistrate to oversee the implementation of the project.
    • Under this Scheme, the children in the age group of 9-14 years are withdrawn from work and put into NCLP Special Training Centres.
    • They are provided with bridge education, vocational training, mid-day meal, stipend, health care etc. before being mainstreamed into formal education system.
    • The children in the age group of 5-8 years are directly linked to the formal education system through a close coordination with the Sarva Shiksha Abhiyan.
    • A dedicated online portal named PENCiL (Platform for Effective Enforcement for No Child Labour) is developed for better monitoring and implementation.

    Why in news now?

    • No ministry had any data regarding the status of child labour in our country.
    • The NCLP’s schools for child labourers work for three to four years and they have also more or less stopped functioning due to scarcity of funds.
    • Education Ministry also does not have a mechanism to find out the number of children engaged in child labour.

    Grave concerns of the issue

    • This is a serious situation.
    • It is for the first time that a parliamentary panel is engaged in a detailed examination of the national policy on child labour.
    • Though we have legislation, the Child Labour (Prohibition and Regulation) Act, since 1986 the menace of child labour is continue unchecked.

    Various provisions against Child Labour

    • Article 23 of the Indian Constitution states that any type of forced labour is prohibited.
    • Article 24 states that a child under 14 years cannot be employed to perform any hazardous work.
    • Article 39 states that “the health and strength of workers, men and women, and the tender age of children are not abused”.
    • The Child Labour Act (Prohibition and Regulation) 1986 prohibits children under the age of 14 years to be working in hazardous industries and processes.

     

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  • Modern Indian History-Events and Personalities

    In news: National Emblem of India

    A day after the National Emblem cast on top of the under-construction Parliament unveiled, controversy has erupted over its aggressive posture.

    National Emblem of India

    • On 26 January 1950, a representation of the Lion Capital of Ashoka placed above the motto, Satyameva Jayate, was adopted as the State Emblem of India.
    • The emblem is an adaptation of the Lion Capital of Ashoka, an ancient sculpture dating back to 280 BCE during the reign of the Maurya Empire.
    • It was originally made of Chunar sandstone.
    • The statue is a three-dimensional emblem showing four lions.

    Features of the emblem

    • The actual Sarnath capital features four Asiatic lions standing back to back, symbolizing power, courage, confidence, and pride, mounted on a circular base.
    • At the bottom is a horse and a bull, and at its center is a Dharma chakra.
    • The abacus is girded with a frieze of sculptures in high relief of The Lion of the North,
    • The Horse of the West, The Bull of the South, and The Elephant of the East, separated by intervening wheels, over a lotus in full bloom, exemplify the fountainhead of life and creative inspiration.
    • Carved from a single block of sandstone, the polished capital is crowned by the Wheel of the Law.

    Historical significance

    • One of the Buddha’s names is ‘Shakya Simha’, meaning ‘Lion of the Shakyas’.
    • The Buddha’s first sermon at Sarnath was known as the ‘Simhanada’ (Lion roar) of the Buddha.

     

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  • International Space Agencies – Missions and Discoveries

    James Webb Space Telescope

    NASA has unveiled images from the James Webb Space Telescope, the largest and most powerful orbital observatory ever launched.

    What is the image about?

    • NASA released a deep field photo of a distant galaxy cluster, SMACS 0723, revealing the most detailed glimpse of the early universe recorded to date.
    • The collection also included fresh images of another galaxy cluster known as Stephan’s Quintet, first discovered in 1877.

    James Webb Space Telescope

    • JWST is a joint NASA–ESA–CSA space telescope that is planned to succeed the Hubble Space Telescope as NASA’s flagship astrophysics mission
    • It is the most powerful space telescope ever built.
    • It will enable a broad range of investigations across the fields of astronomy and cosmology, including observing some of the most distant events and objects in the universe,
    • It would help understand events such as the formation of the first galaxies, and detailed atmospheric characterization of potentially habitable exoplanets.

    Its significance

    • Some have called JSWT the “telescope that ate astronomy.”
    • It is said to look back in time to the Dark Ages of the universe.

    What does the ‘Dark Ages’ of the universe mean?

    • Evidence shows that the universe started with an event called the Big Bang 13.8 billion years ago, which left it in an ultra-hot, ultra-dense state.
    • The universe immediately began expanding and cooling after the Big Bang.
    • One second after the Big Bang, the universe was a hundred trillion miles across with an average temperature of an incredible 18 billion F (10 billion C).
    • Around 400,000 years after the Big Bang, the universe was 10 million light-years across and the temperature had cooled to 5,500 F (3,000 C).
    • Throughout this time, space was filled with a smooth soup of high-energy particles, radiation, hydrogen and helium.
    • There was no structure. As the expanding universe became bigger and colder, the soup thinned out and everything faded to black.

    This was the start of what astronomers call the Dark Ages of the universe.

    How will JWST study this?

    Ans. Looking for the first light

    • The Dark Ages ended when gravity formed the first stars and galaxies that eventually began to emit the first light.
    • Astronomers aim to study this fascinating and important era of the universe, but detecting first light is incredibly challenging.
    • Compared to massive, bright galaxies of today, the first objects were very small and due to the constant expansion of the universe, they’re now tens of billions of light years away from Earth.
    • Also, the earliest stars were surrounded by gas left over from their formation and this gas acted like fog that absorbed most of the light.
    • It took several hundred million years for radiation to blast away the fog. This early light is very faint by the time it gets to Earth.

     

     

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  • New Species of Plants and Animals Discovered

    Species in news: Kannimara Teak

    The legendary Kannimara teak of the Parambikulam Tiger Reserve is still growing in height and girth.

    What is the news?

    • Over the last five years, the centuries-old teak has grown by 1.85 metres in height and 9 cm in girth.
    • This might be one of the largest and oldest teak tree in the world.

    Kannimara teak

    • Worshipped by the tribes of Parambikulam, the Kannimara teak remains a flagship of the tiger reserve offering a spectacular view to visitors.
    • For the tribespeople of Parambikulam, it is still a ‘virgin tree’.
    • That was why they named it Kannimara (meaning virgin tree).
    • The tribal legend has it that the tree had bled when people tried to cut it.
    • So they protected it and started worshipping the tree by offering annual pujas.
    • The Kannimara tree had won the Union government’s Mahavriksha Puraskar in its first year of introduction in 1994.

     

     

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  • Anti Defection Law

    Reasons for splits and switches in political parties

    Context

    In Maharashtra, recently, and in Madhya Pradesh, a while ago, splits in the ruling party and a subsequent realignment of legislators inaugurated new governments.

    Challenges to the effectiveness of anti-defection law

    • Splits and switches are commonplace in legislatures across the globe, and India has witnessed at least three distinct waves.
    • The first wave occurred towards the latter half of the 1960s when challengers to the Congress attempted to displace it in the States.
    • An attempt to end defections: The next phase was inaugurated with an attempt to end the free movement and regulate the behaviour of legislators through the anti-defection law.
    • Law incentivise collective defection: While the law discouraged individual movement, it incentivised a collective movement of legislators since it laid down specific numbers to legitimise and validate party switches.
    • Defeating the purpose: When legislators switch in groups, the costs are shared, and the move also appears less opportunistic, which in many ways defeats the purpose of the legislation.
    • The third phase was inaugurated in 2014 when already-dominant parties began to use splits and switches to weaken and destroy their competitors.
    • Therefore, the current phase is bizarre when compared to the past because dominant parties appear to be actively cheering splits and shifts and having no respect for the basic rules of the game.
    • The anti-defection law and control of institutions are now weaponised by dominant parties to intervene in the internal working of Opposition parties, and sometimes make and break them.
    • Furthermore, legislators are switching support even if it does not count to the making or maintenance of governments.

    Argument against the split

    • Violation of trust: Switchers violate the trust relationship with their constituents as voters get something other than what they bargained for.
    • Difficulty in ensuring accountability: Assuming voters vote for parties and not candidates, the argument is that uncohesive parties make it difficult for voters to draw definitive lines of responsibility.
    • Consequently, it is difficult for voters to hold party governments accountable for their actions during elections.

    Why do legislators split and switch parties?

    • Changes and transformation in parties: While we keep track of party system change, we ignore the point that the component parts, parties which make up the system, too change and transform.
    • Parties constantly adapt new modes to sustain and find success for themselves.
    • Our popular image of a party is that of the classical mass party, which rises from societal movements and is essentially internally democratic.
    • This is what even the Election Commission of India imagines a party should be since many of its guidelines lay stress on the ‘democratic spirit’ and the need for transparency and participation in internal decision-making.
    • Centralised structure: Today’s parties are centralised vote-getting machines which primarily work to ensure the return of political leaders to office.
    • Focus on getting votes: Mass inputs and ideas do not matter, and it is the central leadership that counts. All party activities begin and end with elections.
    • Since parties are mainly concerned with electoral success, anyone who enjoys the confidence of the top leadership and can help increase the seat share is likely to get a ticket.
    • Dominance of financial power: Moreover, we now know that parties prefer candidates who bring in their own money, fund other candidates and raise resources for the party. All this puts the party on the ground in the shade.
    • Closeness of parties to state: the most significant change is that parties are more closely aligned with the state rather than civil society.
    • Parties as a source of services: Parties exchange material and psychological rewards, and goods and services the state provides for electoral advantage.
    • Voters also see parties as a supplier of services.
    • This connection pushes legislators and parties to be in government or at least close to the government.
    • On the supply side, the party on the ground no longer calls the shots; parties are election vehicles and a supplier of services. The party bond exists only as long as it ensures success for the legislator
    •  On the demand side, the voter does not appear to have any problem, as long as “services” are available.

    Conclusion

    Splits and switches are not seen as objectionable by legislators and are not punished by voters as well. Legislators will, therefore, be willing to do anything if the benefits exceed the costs.

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  • NPA Crisis

    Bank frauds

    Context

    The biggest banking scam in India has come to the forefront; in this case, DHFL has hoodwinked a consortium of banks driven by the Union Bank of India to the tune of ₹35,000 crore through financial misrepresentation.

    How scams affect economy

    • The banking system of any country is the backbone of its economy.
    • Excessive losses to banks affect every person in the country because the amounts deposited in banks belong to the citizens of the country.
    • The NPAs that banks incur are mainly due to bad loans and scams.
    • The data by the RBI also show that one of the fundamental problems in the way of the development of banking in India is on account of rising bank scams and the costs consequently forced on the framework.
    • Strangely, as in a Global Banking Fraud survey (KPMG), the issue is not just for India alone; it is a worldwide issue.

    Reasons for scams

    •  Frauds in the banking industry can be grouped under four classifications: ‘Management’, ‘Outsider’, ‘Insider’ and ‘Insider and Outsider’ (jointly).
    • Operational failures: All scams, whether interior or outside, are results of operational failures.
    • Limited asset monitoring: Research by Deloitte has shown that limited asset monitoring after disbursement (38%) was the foremost reason behind stressed assets and insufficient due diligence before disbursement (21%) was among the major factors for these NPAs.
    • Poor bank corporate governance: A study by the Indian Institute of Management Bangalore has shown that poor bank corporate governance is the cause behind rising bank scams and NPAs.

    The problems of high NPA

    • In a Financial Stability Report released by the RBI in December 2021, there is a projection of the gross NPAs of banks rising from 6.9% in September 2021 to 8.1% of total assets by September 2022 (under a baseline scenario) and to 9.5% under a severe stress scenario.
    • A high NPA also reduces the net interest margin of banks besides increasing their operating cost; these banks meet this cost by increasing the convenience fee from their small customers on a day-to-day basis.

    Suggestions

    • Banks have to exercise due diligence and caution while offering funds.
    • Regulation and control of CAs: The regulation and the control of chartered accountants is a very important step to reduce non-performing assets of banks.
    • Banks should be cautious while lending to Indian companies that have taken huge loans abroad.
    • Tightening audit system: There is also an urgent need to tighten the internal and external audit systems of banks.
    • Fast rotation of employees: The fast rotation of employees of a bank’s loan department is very important.
    • Public sector banks should set up an internal rating agency for rigorous evaluation of large projects before sanctioning loans.
    • Effective MIS: Further, there is a need to implement an effective Management Information System (MIS) to monitor early warning signals about business projects.
    • CIBIL score of the borrower: The CIBIL score of the borrower (formerly the Credit Information Bureau (India) Limited) should be evaluated by the bank concerned and RBI officials.
    • Use of AI: Financial fraud can be reduced to a great extent by the use of artificial intelligence (AI) to monitor financial transactions.
    • Improve loan recovery process: Rather than having to continuously write off the bad loans of large corporates, India has to improve its loan recovery processes and establish an early warning system in the post-disbursement phase.
    • Risk assessment: Banks need to carry out fraud risk assessments every quarter.
    • Only establishment of National Asset Reconstruction Company Ltd. (NARCL) or the ‘bad bank’ is not a real solution.
    • These measures can help only after a loan is bad but not the process of a loan going bad.

    Conclusion

    While the Government of India and the RBI have taken several measures to try and resolve the issue of scams in the banking industry, the fact is that there is still a long way to go.

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