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  • India & NATO

    India has jettisoned many of its foreing policy shibboleths of late, however, avoiding NATO is not one of them. The article suggests engaging NATO to be in sync with the changing geopolitics.

    Why India avoided engagement with NATO in the past

    • India’s real problem is not with NATO, but with Delhi’s difficulty in thinking strategically about Europe.
    • Through the colonial era, Calcutta and Delhi viewed Europe through British eyes.
    • After Independence, Delhi tended to see Europe through the Russian lens.
    • The fall of the Berlin Wall and the collapse of the Soviet Union demanded a fresh approach to Europe.
    • But Delhi could not devote the kind of strategic attention that Europe demanded.
    • The bureaucratisation of the engagement between Delhi and Brussels and the lack of high-level political interest prevented India from taking full advantage of a re-emerging Europe.
    • In the last few years, Delhi has begun to develop an independent European framework, but has some distance to go in consolidating it.

    Ending political neglect of Europe

    • India has certainly sought to end prolonged political neglect of Europe.
    • The deepening maritime partnership with France since 2018 is an example.
    • Joining the Franco-German Alliance for Multilateralism in 2019 is another.
    • India’s first summit with Nordic nations in 2018 was a recognition that Europe is not a monolith but a continent of sub-regions.
    • India’s engagement with Central Europe’s Visegrad Four also highlighted the fact that Europe is not monolith.

    Why India should engage NATO

    • During the Cold War, India’s refusal was premised on its non-alignment.
    • That argument had little justification once the Cold War ended during 1989-91.
    • An India-NATO dialogue would simply mean having regular contact with a military alliance, most of whose members are well-established partners of India.
    • If Delhi is eager to draw a reluctant Russia into discussions on the Indo-Pacific, it makes little sense in avoiding engagement with NATO.
    • If Delhi does military exercises with China and Pakistan — under the rubric of the Shanghai Cooperation Organisation (SCO), why should talking to NATO be anathema?
    • To play any role in the Indo-Pacific, Europe and NATO need partners like India, Australia and Japan.
    • Delhi, in turn, knows that no single power can produce stability and security in the Indo-Pacific.
    • India’s enthusiasm for the Quad is a recognition of the need to build coalitions.
    • A sustained dialogue between India and NATO could facilitate productive exchanges in a range of areas, including terrorism, changing geopolitics; the evolving nature of military conflict, the role of emerging military technologies, and new military doctrines.
    • More broadly, an institutionalised engagement with NATO should make it easier for Delhi to deal with the military establishments of its 30 member states.
    • On a bilateral front, each of the members has much to offer in strengthening India’s national capabilities.

    What about Russia

    • Russia has not made a secret of its allergy to the Quad and Delhi’s growing closeness with Washington.
    • Putting NATO into that mix is unlikely to make much difference.
    • Delhi, in turn, can’t be happy with the deepening ties between Moscow and Beijing.
    • As mature states, India and Russia know they have to insulate their bilateral relationship from the larger structural trends buffeting the world today.
    • Meanwhile, both Russia and China have intensive bilateral engagement with Europe.

    Consider the question “India has to end its prolonged political neglect of Europe and engage a major European institution like NATO. In light of this, examine the factors restraining India’s engagement with the Europe.“

    Conclusion

    India’s continued reluctance to engage a major European institution like NATO will be a stunning case of strategic self-denial and we should avoid it.

  • 6th April 2021| Daily Answer Writing Enhancement

    Important Announcement:  Topics to be covered on 7th April-

    GS-1  The Freedom Struggle.

    GS-4 Attitude: content, structure, function.

    Question 1)

    Ancient Indian sculptural art is highly rich in its traditions. Trace the development ancient Indian sculpture that go back to the Indus Valley civilisation. 10 marks

     

    Question 2)

    India’s prolonged political neglect of Europe and continued reluctance to engage a major European institution like NATO needs a much-needed turnaround. In light of this, examine the factors affecting India’s engagement with Europe. 10 marks

    Question 3)

    The Union and state levies contribute to a significant part of the retail prices of petrol and diesel in India. Examine the reasons for such heavy taxation of these products and how their inclusion in GST would affect government revenues? 10 marks

    Question 4)  

    As an administrator, ethics is knowing the difference between what you have a right to do and what is right to do. Elucidate. 10 marks

    Reviews will be provided in a week. (In the order of submission- First come first serve basis). In case the answer is submitted late the review period may get extended to two weeks.

    *In case your answer is not reviewed in a week, reply to your answer saying *NOT CHECKED*. If Parth Sir’s tag is available then tag him.

    For the philosophy of AWE and payment, check  here: Click2Join

  • Understanding the issues with bond market in India

    What explains the Indian government borrowing at a higher interest rate than the interest rates for a home loan? The answer lies in the structural shortage in demand for government bonds. 

    How the government’s cost of borrowing matter

    • Interest on government debt is a transfer from taxpayers to savers who own government bonds.
    • As the government bondholders are primarily domestic, interest paid by the government is just a transfer from one hand to the other within the economy.
    • However, the government’s cost of borrowing does matter.
    • The large increase in interest costs limits the government’s ability to spend elsewhere.
    • But more importantly, this rate also affects the cost of borrowing for large parts of the economy.

    Understanding the term premium and credit spread

    • The RBI sets the repo rate, which is the short-term risk-free rate.
    • That is, the loan must be repaid in a few days and there is almost no risk of default.
    • The rate at which the government borrows is the long-term risk-free rate.
    • But the lender wants higher returns given the longer duration of the loan.
    • The difference between the repo rate and government’s borrowing cost, say on a 10-year loan, is called the term premium.
    • When a private firm takes a 10-year loan, it would have some credit risk too, which means a credit spread is added to the 10-year risk-free rate.

    Challenge posed by term premium

    • From an average rate of 73 basis points since 2011 (one basis point is one-hundredth of a per cent), and 120 basis points in 2018 and 2019, the 10-year term premium is currently 215 basis points.
    • In other words, the interest rate for a 10-year period borrowing is 2.15 per cent higher than the current repo rate.

    How this is related to dysfunction in bond market in India

    • Financial markets are forward-looking, and as the collective expression of the views of thousands of participants, efficient ones can occasionally “predict” what comes next.
    • But the Indian bond market is not one such: The view some hold, that the rise in term premium reflects future rate hikes by the monetary policy committee (MPC), is mistaken.
    • The Indian bond market is still too illiquid and not diverse enough to predict future trends.
    • Even though some pandemic-driven measures are being withdrawn, the MPC continues to be accommodative, and for several months at least, headline inflation is unlikely to force an abrupt change.
    • In any case, the spurt in yields after the budget points to the causality being fiscal instead of inflation-related.
    • But even the fiscal rationale seems weak.
    • The Centre’s tax collection for FY2020-21 has been substantially ahead of target, and state governments have also borrowed Rs 60,000 crore less than expected.
    •  Also, the14 states, accounting for three-fourths of all state deficits, have budgeted FY2021-22 deficits at 3.3 per cent, far lower than the 4 per cent average expected earlier.
    • Just these factors suggest that total bonds issued by the central and state governments should be lower than what the market had feared before the union budget was presented.
    • And yet, government borrowing costs have not returned to pre-budget levels.
    • This reflects dysfunction in the market.
    • Why else would a government be borrowing at a higher cost than a mortgage on a house?

    What is the reason for dysfunction in bond market

    • Dysfunction can be traced to residential mortgages being among the most competitive of loan categories.
    • On the other hand, there is a structural shortage in demand for government bonds.
    • In such a market where there is a structural shortage in demand the marginal buyer holds all the cards, and as any buyer would, demands higher returns.
    • Over 15 years,  the share of banks in the ownership of outstanding central government bonds has fallen from 53 per cent to 40 per cent now.
    • But no alternative buyer of size has emerged to fill the space vacated.
    • The RBI sometimes buys bonds to inject money into the economy, but of late this space has been used to buy dollars to save the rupee from appreciation.

    Solutions

    • The solution to the problem of bond market may lie in getting new types of buyers.
    • The RBI opening up direct purchases by retail investors is a step in this direction, though it may not become meaningful for a few years.
    • That leaves us with tapping foreign savings.
    • The limit on share of government bonds that foreign portfolio investors (FPIs) can buy has been raised steadily.
    • But without Indian bonds being included in global bond indices, these flows may not be meaningful, and would be volatile, as they have been over the past year.
    • To enable inclusion in bond indices, the RBI and the government have earmarked special-category bonds which are fully accessible (FAR) by foreign investors.
    • The FTSE putting India on a watch-list for “potential future inclusion” in the Emerging Markets Government Bonds Index is a step forward, and, one hopes, triggers similar actions by other index providers.

    Consider the question “How the lack of retailness in the bond market affects the cost of borrowing of the government as well as the private borrowers? Suggest the measures to deal with the issues.”

    Conclusion

    The issues with bond markets in India highlights the urgency to find new buyers for government bond as it has implications not just for the government’s own fiscal space, but also for the cost of borrowing in the economy.

  • What is the Pre-pack under Insolvency and Bankruptcy Code?

    The central government has promulgated an ordinance allowing the use of pre-packs as an insolvency resolution mechanism for MSMEs with defaults up to Rs 1 crore, under the Insolvency and Bankruptcy Code.

    Read till the end to know about the ‘Swiss Challenge’.

    What are Pre-packs?

    • A pre-pack is the resolution of the debt of a distressed company through an agreement between secured creditors and investors instead of a public bidding process.
    • This system of insolvency proceedings has become an increasingly popular mechanism for insolvency resolution in the UK and Europe over the past decade.
    • Under the pre-pack system, financial creditors will agree to terms with a potential investor and seek approval of the resolution plan from the National Company Law Tribunal (NCLT).
    • The approval of a minimum of 66 percent of financial creditors that are unrelated to the corporate debtor would be required before a resolution plan is submitted to the NCLT.
    • Further NCLTs are also required to either accept or reject any application for a pre-pack insolvency proceeding before considering a petition for a CIRP.

    Benefits of pre-packs over the CIRP

    • One of the key criticisms of the Corporate Insolvency Resolution Process (CIRP) has been the time taken for resolution.
    • One of the key reasons behind delays in the CIRPs is prolonged litigations by erstwhile promoters and potential bidders.
    • The pre-pack in contrast is limited to a maximum of 120 days with only 90 days available to the stakeholders to bring the resolution plan to the NCLT.
    • The existing management retains control in the case of pre-packs while a resolution professional takes control of the debtor as a representative of creditors in the case of CIRP.
    • This allows for minimal disruption of operations relative to a CIRP.

    What is the key motivation behind the introduction of the pre-pack?

    • Pre-packs are largely aimed at providing MSMEs with an opportunity to restructure their liabilities and start with a clean slate.
    • It provides adequate protections so that the system is not misused by firms to avoid making payments to creditors.
    • Pre-packs help corporate debtors to enter into consensual restructuring with lenders and address the entire liability side of the company.

    How are creditors protected?

    • The pre-pack also provides adequate protection to ensure the provisions were not misused by errant promoters.
    • The pre-pack mechanism allows for a swiss challenge for any resolution plans which proved less than full recovery of dues for operational creditors.
    • Under the swiss challenge mechanism, any third party would be permitted to submit a resolution plan for the distressed company and the original applicant would have to either match the improved resolution plan or forego the investment.
    • Creditors are also permitted to seek resolution plans from any third party if they are not satisfied with the resolution plan put forth by the promoter.

    Back2Basics: Swiss Challenge

    • A Swiss Challenge is a method of bidding, often used in public projects, in which an interested party initiates a proposal for a contract or the bid for a project.
    • The government then puts the details of the project out in the public and invites proposals from others interested in executing it.
    • On the receipt of these bids, the original contractor gets an opportunity to match the best bid.
    • In 2009, the Supreme Court approved this method for the award of contracts.
    • This method can be applied to projects that are taken up on a PPP basis but can also be used to supplement PPP in sectors that are not covered under the PPP framework.

  • [pib] Justice Ramana appointed as Chief Justice of India

    The President of India, in the exercise of the powers conferred by clause (2) of Article 124 of the Constitution of India, appointed Shri Justice NV Ramana, a Judge of the Supreme Court, to be the CJI.

    Chief Justice of India

    • The CJI is the chief judge of the Supreme Court of India as well as the highest-ranking officer of the Indian federal judiciary.

    Appointment

    • The Constitution of India grants power to the President to nominate, and with the advice and consent of the Parliament, appoint a chief justice, who serves until they reach the age of 65 or until removed by impeachment.
    • Earlier, it was a convention to appoint seniormost judges.
    • However, this has been broken twice. In 1973, Justice A. N. Ray was appointed superseding 3 senior judges.
    • Also, in 1977 Justice Mirza Hameedullah Beg was appointed as the chief justice superseding Justice Hans Raj Khanna.

    Qualifications

    The Indian Constitution says in Article 124 (3) that in order to be appointed as a judge in the Supreme Court of India, the person has to fit in the following criteria:

    • He/She is a citizen of India and
    • has been for at least five years a Judge of a High Court or of two or more such Courts in succession; or
    • has been for at least ten years an advocate of a High Court or of two or more such Courts in succession; or
    • is, in the opinion of the President, a distinguished jurist

    Functions

    • As head of the Supreme Court, the CJI is responsible for the allocation of cases and appointment of constitutional benches which deal with important matters of law.
    • In accordance with Article 145 of the Constitution and the Supreme Court Rules of Procedure of 1966, the chief justice allocates all work to the other judges.

    On the administrative side, the CJI carries out the following functions:

    • maintenance of the roster; appointment of court officials and general and miscellaneous matters relating to the supervision and functioning of the Supreme Court

    Try this PYQ:

    Q. Who/Which of the following is the custodian of the Constitution of India?

    (a) The President of India

    (b) The Prime Minister of India

    (c) The Lok Sabha Secretariat

    (d) The Supreme Court of India

    Removal

    • Article 124(4) of the Constitution lays down the procedure for removal of a judge of the Supreme Court which is applicable to chief justices as well.
    • Once appointed, the chief justice remains in the office until the age of 65 years. He can be removed only through a process of removal by Parliament as follows:
    • He/She can be removed by an order of the President passed after an address by each House of Parliament supported by a majority of the total membership of that House and by a majority of not less than two-thirds of the members of that House present.
    • The voting has been presented to the President in the same session for such removal on the ground of proved misbehavior or incapacity.

    About Justice Ramana

    • Justice Ramana will take over as 48th Chief Justice of India.
    • He is a first-generation lawyer, having an agricultural background, and hails from Ponnavaram Village, Krishna District in Andhra Pradesh.
    • He is an avid reader and literature enthusiast. He is passionate about Carnatic music.

    His legal career

    • He was called on to the Bar on 10.02.1983.
    • Initially, he was appointed as a Permanent Judge of Andhra Pradesh High Court on 27.06.2000. He also functioned as Acting Chief Justice of his parent High Court from 10.3.2013 to 20.5.2013.
    • He practiced in the High Court of Andhra Pradesh, Central and Andhra Pradesh Administrative Tribunals, and the Supreme Court of India.
    • He specialized in Constitutional, Civil, Labour, Service, and Election matters. He has also practiced before Inter-State River Tribunals.
    • He served as Judge of the Supreme Court of India from 17.02.2014.
    • He has also served as the Executive Chairman of the National Legal Services Authority (NALSA) since 27.11.2019.

  • [pib] Sadabahar: A mango variety that bears fruits round the year

    A farmer from Kota, Rajasthan, has developed a round-the-year dwarf variety of mango called Sadabahar, which is resistant to most major diseases and common mango disorders.

    Try this PYQ:

    Q.With reference to the Genetically Modified mustard (GM mustard) developed in India, consider the following statements:

    1. GM mustard has the genes of a soil bacterium that give the plant the property of pest-resistance to a wide variety of pests.
    2. GM mustard has the genes that allow the plant cross-pollination and hybridization.
    3. GM mustard has been developed jointly by the IARI and Punjab Agricultural University.

    Which of the statements given above is/are correct? (CSP 2018)

    (a) 1 and 3 only

    (b) 2 only

    (c) 2 and 3 only

    (d) 1, 2 and 3

    Sadabahar

    • The fruit is sweeter in taste, comparable to langra and being a dwarf variety, is suitable for kitchen gardening, high-density plantation, and can be grown in pots for some years too.
    • Besides, the flesh of the fruits, which is bourn round the year, is deep orange with a sweet taste, and the pulp has very little fiber content which differentiates it from other varieties.
    • The bountiful nutrients packed in mango are immensely good for health.
    • This variety has been verified by the National Innovation Foundation (NIF), India, an autonomous institution of the Department of Science & Technology.

  • Integrated Health Information Platform (IHIP)

    The Union Minister of Health & Family Welfare has launched the Integrated Health Information Platform (IHIP).

    About IHIP

    • The new version of IHIP will house the data entry and management for India’s disease surveillance program.
    • In addition to tracking 33 diseases now as compared to the earlier 18 diseases, it shall ensure near-real-time data in digital mode, having done away with the paper mode of working.

    Various functions

    • IHIP will provide a health information system developed for real-time, case-based information, integrated analytics, advanced visualization capability.
    • It will provide analyzed reports on mobile or other electronic devices. In addition, outbreak investigation activities can be initiated and monitored electronically.
    • It can easily be integrated with another ongoing surveillance program while having the feature of the addition of special surveillance modules.

    Unique features

    • This is the world’s biggest online disease surveillance platform.
    • It is in sync with the National Digital Health Mission and fully compatible with the other digital information systems presently being used in India.
    • The refined IHIP with automated -data will help in a big way in real-time data collection, aggregation & further analysis of data that will aid and enable evidence-based policymaking.
    • With IHIP, the collection of authentic data will become easy as it comes directly from the village/block level; the last mile from the country.
    • With its implementation, we are fast marching towards AtmaNirbhar Bharat in healthcare through the use of technology.

    Also read:

    [Burning Issue] Rolling-out of National Digital Health Mission

  • 6th April 2021 | Prelims Daily with Previous Year Questions

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  • [Burning Issue] Development Financial Institutions (DFIs)Bill

    Finance Minister has introduced the National Bank for Financing Infrastructure and Development (NaBFID) Bill 2021 in the Lok Sabha to pave way for setting up a government-owned DFI to fund infra projects.

    NaBFID Bill

    • The NaBFID Bill, 2021 was introduced in Lok Sabha on March 22, 2021.
    • The Bill seeks to establish the National Bank for Financing Infrastructure and Development (NBFID) as the principal development financial institution (DFIs) for infrastructure financing.

    Tap to read more:

    National Bank for Financing Infrastructure and Development Bill, 2021
    With inputs from PRS.

    What are DFIs?

    • The Bill describes DFI as the principal financial institution and development bank for providing and enabling infrastructure financing throughout the life cycle of the projects concerned.
    • A DFI is basically an organization, either owned by the government or charitable institutions to finance infrastructure projects that are of national importance without expecting the standard commercial return.

    Easy explanation:

    • The government wants to create jobs and it wants to do it in a way that’s sustainable.
    • One possible solution is to incentivize the private sector.
    • Because when they invest in creating large infrastructure projects, it has a ripple effect on the economy. It creates new jobs. It creates productive assets. It creates value in the long run.
    • However, these private entities won’t invest if they are strapped for cash.
    • So in a bid to free them from such constraints, the government will set up a new financing institution that will lend long term loans at quite reasonable interest rates.

    This would become the DFIs.

    DFIs: A Backgrounder

    • DFIs provide long-term credit for capital-intensive investments spread over a long period and low yielding rates of return, such as urban infrastructure, mining and heavy industry, and irrigation systems.
    • They are different from commercial banks, which mobilize short- to medium-term deposits and lend for similar maturities to avoid a maturity mismatch (a potential cause for a bank’s liquidity and solvency).

    Their inception

    • In India, the first DFI was operationalized in 1948 with the setting up of the Industrial Finance Corporation (IFCI).
    • Subsequently, India’s Industrial Credit and Investment Corporation (ICICI) was set up with the World Bank’s backing in 1955.
    • The Industrial Development Bank of India (IDBI) came into existence in 1964 to promote long-term financing for infrastructure projects and industry.

    Their disbanding

    • However, during the 1970-80s, DFI got discredited for mounting non-performing assets, allegedly caused by politically motivated lending and inadequate professionalism in assessing investment projects for economic, technical, and financial viability.
    • Due to these factors, Narsimhan Committee (1991) recommended disbanding of the DFI, and the existing DFI were converted into commercial banks.

    With the NaBFID Bill, the DFI model has made a comeback.

    Why need DFIs?

    The intent behind setting up a DFI is to provide long-term financing for infrastructure. India has since long time needed infra push due to various reasons:

    Infra boost: Infrastructure projects are complex, capital-intensive, and have long gestation periods that often pose risks to project financiers. The scale and complexity of infrastructure projects make financing a challenge.

    Banking limitations: There are difficulties in bank-led financing of infrastructure; their liability profile is not suited for financing long-term high-risk infrastructure projects.

    NPA Crisis: The surge in NPAs in the banking sector, and the need to augment financing of infrastructure for kick-starting the growth cycle have led to a renewed policy attention on setting up DFIs.

    Pandemic induced crisis: Covid-19 pandemic is impacting business and economy, globally. It has exacerbated inequality, the poverty gap, unemployment, and the economy’s slowing down. Thus, infrastructure building through DFIs can help in quick economic recovery.

    Economic boost: The government has envisaged attaining the target of becoming a USD 5 trillion economy by 2025.  However, this goal will depend on infrastructure across the country. DFI is a step in the right direction towards this goal.

    Global success stories: DFIs in China, Brazil, and Singapore has been successful in both domestic and international markets.

    Various challenges

    (1) Sources of funds

    The lack of a sustainable source of funds, however, can prove to be a serious constraint to the proposed DFIs. Subsidised credit from the government and the Reserve Bank of India (RBI) has not proved to be a sustainable source in the past.

    (2) Banking Crisis

    At the heart of this old idea coming back in a new shape is the banking crisis in India, which emerged as a consequence of banks trying to fulfill the funding requirements of infrastructure projects.

    (3) Regulatory forbearance

    There could also be need for some regulatory forbearance — the older DFIs (IDBI, ICICI) operated in an era with no regulatory norms for quite a while, save their own internal guidelines.

    Way Forward

    Overcoming finance hurdles

    • To ensure that the proposed institution is able to finance infrastructure investment, it should be allowed to raise long-term financing from domestic and external sources.
    • The DFI should be allowed to tap the pools of capital in the form of pension funds, insurance companies and mutual funds.
    • The proposed DFI should also be allowed to raise long-term financing from external markets and from multilateral financial institutions.

    Sound management structure

    • The proposed DFI needs to have a sound management structure.
    • The government’s commitment to have a professional board with 50 per cent non-executive members is a step in the right direction.

    Competency

    • The proposed DFI should be able to attract competencies such as those of investment professionals and other experts who are able to assess the project from the development standpoint and the risks involved.

    Going beyond infra

    • NABFID must also help take infrastructure beyond roads and power, because there are other crucial sectors, especially health, social and urban infrastructure (water supply, sanitation) that has more pressing needs.
    • More importantly, these sectors need the benefit of private expertise and skills more than finance.

    Ensuring Good Governance

    • While freeing a DFI from political interference or crony lending is necessary, merely having private shareholders or professional managers on board isn’t sufficient to ensure good governance.
    • This has to be backed by a robust system of external checks and balances such as supervision by RBI and proper due diligence by auditors and rating agencies.

    Ensuring Ease of Doing Business

    • In the past, ambitious highway and pipeline projects have been continually held up by local protests and land acquisition woes, retrospective taxes, and poor contract enforcement.
    • The success of DFIs is contingent on ironing out such issues and removing on-ground impediments to the ease of doing business.

    Lastly, fix the distorted demand side (grappled with twin balance sheet) before increasing supply. Any number of institutions can be launched, but cannot be expected to work miracles in a corroded system.

    Conclusion

    NABFID, with the support of the government, must go beyond being a provider of capital, to helping enable the return of private sector to infrastructure; else it could end up as just one more DFI in the financing spectrum.

    While boosting investment in the infrastructure sector is imperative for sustained growth, the need for the hour is to resolve persistent issues in the debt market that impede long-term financing flow.

    References

    National Bank for Financing Infrastructure and Development Bill, 2021

    https://www.thehindubusinessline.com/opinion/editorial/return-of-dfis/article33794397.ece

    https://www.prsindia.org/content/examining-rise-non-performing-assets-india

    https://theprint.in/ilanomics/how-modi-govt-can-make-the-reborn-development-finance-institution-a-success-this-time/624370/

    https://www.thehindubusinessline.com/opinion/the-new-dfi-must-look-beyond-financing/article34217199.ece

    https://www.livemint.com/opinion/columns/nostalgia-holds-lessons-for-new-financial-institutions-11616951998342.html

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