The Union Cabinet has approved of the term of the Commission constituted under Article 340 of the Constitution to examine the issue of Sub-categorization within Other Backward Classes (OBCs) in the Central List.
What is the Sub-categorization of OBCs?
OBCs are granted 27% reservation in jobs and education under the central government.
In September 20202, a Constitution Bench of the Supreme Court reopened the legal debate on the sub-categorization of SCs and STs for reservations.
The debate arises out of the perception that only a few affluent communities among over 2,600 included in the Central List of OBCs have secured a major part of this 27% reservation.
Need for sub-categorization
The argument for sub-categorization — or creating categories within OBCs for reservation — is that it would ensure “equitable distribution” of representation among all OBC communities.
To examine this, the Rohini Commission was constituted on October 2, 2017.
At that time, it was given 12 weeks to submit its report but has been given several extensions since, the latest one being the 10th.
Before the Rohini Commission was set up, the Centre had granted constitutional status to the National Commission for Backward Classes (NCBC).
Why so many extensions are being given?
In process of preparing the sub-categorized central list of OBCs, the Commission has noted several ambiguities in the list as it stands now.
The Commission is of the opinion that these have to be clarified/rectified before the sub-categorised central list is prepared.
A hurdle for the Commission has been the absence of data for the population of various communities to compare with their representation in jobs and admissions.
Many groups of OBCs have been demanding enumeration of OBCs in the Census.
Back2Basics: Article 340
Article 340 of the Indian Constitution lays down conditions for the appointment of a Commission to investigate the conditions of the backward classes.
The President may by order appoint a Commission consisting of such persons as he thinks fit to investigate the conditions of socially and educationally backward classes within the territory of India.
The Union Cabinet has approved the continuation of the Centrally Sponsored Scheme (CSS) for the Development of Infrastructure Facilities for Judiciary. It also approved the decision to support the Gram Nyayalayas by proving recurring and non-recurring grants for a period of 5 years with a total outlay of Rs 50 crores.
About the Scheme
A Centrally Sponsored Scheme (CSS) for Development of Infrastructure Facilities for Judiciary has been in operation since 1993-94.
Adequacy of judicial infrastructure is critical for the reduction of pendency and backlog of cases in Courts.
The primary responsibility of infrastructure development for the subordinate judiciary rests with the State Governments.
The present proposal provides for additional activities like the construction of lawyer halls, toilets complexes and digital computer rooms.
This will add to the convenience of lawyers and litigants besides reducing the digital divide.
Why such a move?
Adequacy of judicial infrastructure is critical for the reduction of pendency and backlog of cases in Courts.
Several courts are still functioning in rented premises with insufficient space and some in dilapidated conditions without basic amenities.
Well-equipped judicial infrastructure facilitates the administration of justice in a manner that allows easy access and timely delivery of justice to all.
What is Gram Nyayalayas Scheme?
Gram Nyayalayas were established for speedy and easy access to the justice system in the rural areas across the country.
The Gram Nyayalayas Act came into force on October 2, 2009.
In terms of Section 3(1) of the Act, it is for the State Governments to establish Gram Nyayalayas in consultation with the respective High Courts.
The Act authorizes Gram Nyayalaya to hold a mobile court outside its headquarters.
Some major reasons behind the non-enforcement include financial constraints, the reluctance of lawyers, police and other government officials.
Features of the Gram Nyayalayas
Gram Nyayalaya is established generally at headquarter of every Panchayat at the intermediate level or a group of contiguous panchayat in a district where there is no panchayat at an intermediate level.
The Gram Nyayalayas are presided over by a Nyayadhikari, who will have the same power, enjoy the same salary and benefits of a Judicial Magistrate of First Class.
Such Nyayadhikari is to be appointed by the State Government in consultation with the respective High Court.
Jurisdiction
A Gram Nyayalaya have jurisdiction over an area specified by a notification by the State Government in consultation with the respective High Court.
The Court can function as a mobile court at any place within the jurisdiction of such Gram Nyayalaya, after giving wide publicity to that regard.
The Gram Nyayalayas have both civil and criminal jurisdiction over the offences and nature of suits specified in the First, Second and Third schedule of the Act.
The pecuniary jurisdiction of the Nyayalayas are fixed by the respective High Courts.
Appeals in criminal matter can be made to the Sessions Court in the respective jurisdiction and in civil matters to the District Court within a period of one month from the date of judgment.
Trials
Gram Nyayalayas can follow special procedures in civil matters, in a manner it deem just and reasonable in the interest of justice.
Civil suits are proceeded on a day-to-day basis, with limited adjournments and are to be disposed of within a period of six months from the date of institution of the suit.
In execution of a decree, the Court can allow special procedures following rules of natural justice.
Gram Nyayalayas allow for conciliation of the dispute and settlement of the same in the first instance.
They have been given the power to accept certain evidence which would otherwise not be acceptable under the Indian Evidence Act.
But the quest for sustained higher growth has been elusive for India for the last five years. The pandemic seems to make it more elusive.
The magnitude of contraction in the economy
There is nothing encouraging in the provisional estimates of annual national income (2020-21), released by the National Statistical Office.
The agriculture sector continued its impressive growth performance, reiterating that it still remains as the vital sector of the economy, especially at times of crisis.
The manufacturing sector continued its subdued growth performance, failing to emerge as the growth driver.
The contraction in trade (-18.2%), construction (-8.6%), mining (-8.5%) and manufacturing (-7.2%) is a matter of concern as these sectors account for the bulk of low-skilled jobs.
Gross Domestic Product (GDP) at Constant (2011-12) Prices in Q4 of 2020-21 is showing a growth of 1.6%.
The magnitude of contraction in the economy and the policy responses towards it raises an important issue of growth prospects for the next year.
Contextualising the current growth rates in terms of following three macroeconomic data would provide us a better perspective on growth recovery.
1) Rising unemployment
The unemployment data released by the Centre for Monitoring Indian Economy (CMIE) says, that in May 2021, India’s labour participation rate at 40 per cent was the same as it was in April 2021.
But, the unemployment rate shot up to 11.9 per cent from 8 per cent in April.
A stable labour participation rate combined with a higher unemployment rate implies a loss of jobs and a fall in the employment rate.
The employment rate fell to 35.3 per cent in May 2021 from 36.8 per cent in April 2021.
According to CMIE, over 15 million jobs were lost in May 2021.
May 2021 was therefore a particularly stressful month on the jobs front.
Takeaway
Employment and aggregate demand in an economy are related via the channel of disposable incomes of workers.
Aggregate demand and output growth have a positive correlation.
Hence, the prospects of growth revival in the next year look bleak at the moment and from employment perspective.
2) Low business confidence
It is the second important data point that needs to examined.
Business confidence index (BCI), from the survey by the industry body FICCI, plummeted to 51.5 from 74.2 in the previous round.
The survey also highlights the weak demand conditions in the economy.
Compounding this is the uncertainty arising out of the imposition of localised curbs due to the second wave of infections and a muddled vaccine policy in the country.
3) Low PMI
Manufacturing Purchasing Managers’ Index (PMI) has slipped to a 10-month low indicating that the manufacturing sector is showing signs of strain with growth projections being revised lower.
Both BCI and PMI slipping down indicates that the overall optimism towards 2021-22 is low, which could impact investments and cause further job losses.
Why focusing on supply-side will not work
Since last year, the policy responses have been to rely on credit easing, focusing more on supply side measures.
This policy stance is unlikely to prop up growth for three reasons.
First, the bulk of the policy measures, including the most recent, are supply side measures and not on the demand side.
Second, large parts of all the stimulus packages announced till now would work only in the medium term.
Third, the use of credit backstops as the main plank of policy has limits compared to any direct measure on the demand side as this could result in poor growth performance if private investments do not pick up.
Further, the credit easing approach would take a longer time to multiply incomes as lending involves a lender’s discretion and borrower’s obligation.
Way forward
Growth recovery depends on demand recovery.
The combined increase in exports of April and May 2021 is over 12% indicating that global demand rebound is much faster than the domestic demand.
What needs to be addressed immediately is the crisis of low domestic demand.
A tight-fisted fiscal policy approach comes at a time when conventional fiscal stimulus packages might not be enough as supply side issues arising out of episodic lockdowns need to be addressed simultaneously.
Focusing on short-term magnified growth rates resting on low bases might be erroneous, as income levels matter more than growth rates at this juncture.
Conclusion
India needs a sharp revival of demand for which higher per capita incomes are necessary.
India has a nearly 34-year window of opportunity to leverage its human resources and realize its growth potential before a phase of demographic burden sets in. This period will coincide with another important part of India’s growth story: the pursuit of high-income status. Too many countries have failed to make the leap from the middle-income to high-income group, afflicted by a malady now commonly referred to as ‘the middle-income trap’.
What is the middle-income trap?
The “middle-income trap” is a theory of economic development in which a country lost its competitive edge in the export of manufactured goods because of rising wages.
The wages rise to the point that the growth potential of that country is exhausted before it attains the innovative capability needed to boost productivity and compete with developed countries.
The countries caught in the Middle Income Trap are unable to compete with low-income, low-wage economies in manufactured exports and with advanced economies in high-skill innovations.
The middle-income trap is associated with a relatively sustained growth slowdown with both direct effects (e.g. income losses) as well as indirect effects (e.g. social conflicts).
Fuelled by the global slowdown, many countries, particularly in South East Asia, Africa and Latin America currently face the predicament of the Middle-income trap.
This has impeded their transition from middle income to high income.
What is the basis for the categorization of countries?
World Bank has used the 2018 data of gross national income (GNI) per capita to categorize countries into the following four categories:
Category
Real Per-Capita Income* (2016)
Low-Income Countries (LICs)
Less than 5% of the US.
Lower Middle-Income Countries (LMICs)
About 5-15% of the US
Upper Middle-Income Countries (UMICs)
About 15-35% of the US.
High-Income Countries (HICs)
All those above that line – including some above US’ level.
Why do Countries fall into the Middle Income Trap?
Inability to shift growth strategies: If a country cannot make a timely transition from resource-driven growth, with low-cost labor and capital, to productivity-driven growth, it might find itself trapped in the middle-income zone.
Lower export potential: Traditional exports cannot be as easily expanded as before because wages are higher and cost competitiveness declines. Middle-income countries also face varying levels of access to product and financial markets and diverse social, economic and environmental vulnerabilities.
Skewed income distribution & stagnation in middle-class population: Wealth inequality and the hierarchical distribution of income in developing countries is a downward drag on domestic demand, which results in stagnation. It slows down the upward mobility of families that are at lower levels, into the middle class that is prepared to pay more for quality and differentiated products.
Recurring boom-bust cycles & pro-cyclical lending: Many middle-income countries in Latin America have been through cycles of growth based on credit extended during commodity booms, followed by crisis, and then recovery. This stop–go cycle has prevented them from becoming advanced economies despite enjoying many periods of fast growth. This is in sharp contrast with successful countries in East Asia—Japan, Hong Kong, Taiwan, Singapore, and South Korea that have been able to sustain high growth over some 50 years.
India’s Case
In 1960, India was a low-income country with per capita income around 6% of the US. However India attained status of lower middle income in 2008 with per capita income of about 12% of the US.
But the growth has occurred with limited transfer of labor resources to high productivity and dynamic sectors, despite relatively modest agricultural growth.
Thus, the late converger stall risk remains for India too.
Why India might get caught in a middle-income trap?
(1) Backlash against globalization:
Hyper globalization (benefited the China, South Korea & Japan) led to a backlash in the advanced countries, as seen through increasing protectionism & lowering World Trade-GDP ratios since 2011.
This means that similar trading opportunities may no longer be available for the middle-income countries.
(2) Thwarted Structural Transformation:
The manufacturing sector is identified as a critically important sector for ensuring transformation. Successful development requires two kinds of structural transformations:
a shift of resources from low productivity to high productivity sectors; and
a larger share of resources devoted to sectors that have the potential for rapid productivity growth.
However, in late economies like India, ‘premature deindustrialization’ (tendency for manufacturing to peak at lower levels of activity and earlier in the development process) is a major cause of concern.
Also, there is a negative share of good growth over time along with weakening of the positive correlation between growth and good growth.
There are various outliers to the convergence process in this regard like India and China. China’s good growth persists and India’s share of the same declined.
(3) Human Capital Regression:
Human capital frontier for the new structural transformation has shifted further away making the transformation costlier.
This is because the new advances in technology not only require skilled human capital, but also demands them to learn continually.
As opposed to these requirements, there is a wider educational attainment gap and skill deficit between lower income countries and advanced economies.
If this gap persists or widens, the kind of transformation enjoyed by the early convergers might prove more difficult for late convergers.
This gap is highly stark for India given its absolute Learning Poverty Count between 40-50% and Learning Poverty Gap is about 25% for reading and a little lower for math.
(4) Climate change-induced Agricultural Stress:
Agricultural productivity is crucial both for feeding people and for ensuring human capital moves from agriculture to modern sectors.
The agricultural growth rates of richer countries have been consistently greater than for developing countries in each time period.
With climate change, weather extremities have become a recurrent phenomenon. This is, in particular, a threat to India where agriculture is heavily dependent on precipitation.
Fall in private consumption, muted rise in fixed investment and sluggish exports have led to a slowdown in the economy and increase India’s vulnerability to the middle-income trap.
Learning Poverty Count- measures the number of children who do not meet the basic learning benchmark. Learning Poverty Gap- Takes into account how far each student is from the benchmark.
Avoiding the Middle Income Trap
In 1960, India was a low-income country with per capita income around 6% of the US. However, India attained the status of lower middle income in 2008 with per capita income of about 12% of the US.
But, the growth has occurred with limited transfer of labor resources to high productivity and dynamic sectors, despite relatively modest agricultural growth.
Thus, the risk of getting trapped in a middle-income zone remains.
To avoid becoming trapped without a viable high-growth strategy, India needs to:
(1) Transitioning from diversification to specialization in production:
Specialization allowed the middle-income Asian countries to reap economies of scale and offset the cost of disadvantages associated with higher wages (E.g. Electronics industry in South Korea).
High levels of investment in new technologies and innovation-conducive policies are two overarching requirements to ensure specialized production.
Developing good social-safety nets and skill-retraining programs can ease the restructuring process that accompanies specialization.
(2) Shifting to productivity-led growth:
Total factor-productivity growth requires major changes in education, from primary & secondary schooling to tertiary education so that workers adept new skills as per the demands of the markets.
Creating such knowledge economy requires long term planning and investment.
Middle-income countries need better access to technologies, research, and innovation, and also better management practices.
That requires redesigning development strategies and gradually shifting to higher-value-added sectors with a focus on innovative, sustainable and inclusive growth.
(3) Opportunities for professional talent:
To attract and retain a critical mass of professional talent that is becoming more internationally mobile, India must develop safe & livable cities that provide attractive lifestyles to professionals.
(4) Addressing barriers to effective competition:
There is a need to address rigidities that can arise from bankruptcy laws, stringent tax regulations, limited enforcement of IP regulations, imperfect information, discrimination etc.
(5) Decentralized economic management:
Greater powers should be vested in local governments, address the insufficiency of judges in lower courts, etc. to ensure speedier decision making.
(6) Sustaining macroeconomic stability:
Flexible fiscal framework that limited deficits and debt, and a flexible exchange rate mechanism backed up by a credible inflation-targeting monetary policy could help sustain long periods of growth.
Effective restructuring, regulating, and supervising of the financial sector must be ensured so that the present NPA crisis can be effectively handled.
(7) Changing orientation of social programs:
Social programs should target the middle class as well as poorer sections of society.
Ramping up domestic demand is also important—an expanding middle class can use its increasing purchasing power to buy high-quality, innovative products and help drive growth.
Inequality is a barrier to the broadening of the demand base in an economy.
This could be achieved through initiatives like low-cost housing for first-time homebuyers in cities, programs to ensure that recent graduates get suitable employment opportunities, etc.
Way forward
Rapidly improving human capital–– healthy individuals, including all women, with the basic education to continually learn and adapt––will be key to sustaining India’s dynamic growth trajectory.
Rapidly improving agricultural productivity––against the headwinds of climate change and water scarcity––will be another key to achieving good growth and hence sustainable growth.
And, of course, the hyper globalization backlash in advanced countries, over which India has little control, must recede to create a favorable external climate to sustain rapid growth.
There is no Late Converger Stall, as yet, but it would be wise to act to head it off.
In 2026, there will be the challenge of addressing the conflict between the democratic principles and the federal principles, when there will be a reallocation of Lok Sabha seats. India needs to reimagine the current federal compact to address the challenges to federalism.
Population freeze for Lok Sabha seats
Since 1976, seats in the Lok Sabha have reflected the 1971 census and have not taken into account changes in the population.
The primary reason for this has been unequal population growth among States.
India’s most highly developed and prosperous States have been successful at family planning, while the poorer States continue to expand.
The freeze was thus a chance to ensure that India’s most successful States are not punished politically for their success.
Therefore, the Indian Constitution may face an unprecedented crisis in 2026 when there will be a dramatic change in the composition of the Lok Sabha.
Challenge of balancing the principle of democracy and federalism
As Article 1 of the Indian Constitution says, India is a Union of States.
However, the history of the linguistic reorganisation of States in 1956, and subsequent movements for Statehood afterwards demonstrates that States are distinct associative communities, within the federal structure of the Indian Union.
In a democratic set-up, all citizens are equal and are thus entitled to equal representation in governance.
But this would imply that bigger States are likely to dominate the national conversation over smaller States.
This leads us to an inherent contradiction between the principles of democracy and federalism when federal units are unequalin size, population and economics.
The small States fear that they would get a smaller share of the pie economically, a much reduced say in national issues, and be irrelevant in the political governance of the country.
How the US Constitution addresses the concerns of small states
When the Americans adopted their Constitution, they protected smaller States in four ways.
First, national powers over the States were limited.
Second, each State regardless of size had two seats in the Senate, giving smaller States an outsized role in national governance.
Third, Presidents are elected by electoral votes, which means they must win States rather than the total national population.
Fourth, the slave-owning states were allowed to count the slaves for purposes of representation, with each slave being counted as three-fifths of a person.
This essential structure remains the bedrock of the American Constitution today.
How Indian Constitution deals with the issue?
India’s quasi-federal structure has always been sui generis.
Our founders knew that India’s diversity made federalism inevitable, but, fearing separatist tendencies among States that had never been a single political unit, they also created a strong centre.
However, the 1956 reorganisation of States on linguistic lines was a popular recognition of federal principles and yet did not result in separatist tendencies.
Since then, new States within the Union have been created in response to the demands of people for greater autonomy.
Way forward on addressing the challenges to federalism
There is an urgent need to reimagine our national compact.
Following are the components of such a new balance that need to be fine-tuned to Indian realities.
Give more powers to States: The powers of States vis-à-vis the Centre contained in the Lists and in the provisions dealing with altering boundaries of States must be increased to assuage the fear of smaller States that they will be dominated by bigger ones.
More localised decision-making is bound to increase national prosperity.
Indeed, this was the entire goal of the creation of Panchayat governance through the 73rd and 74th Amendments to the Constitution.
Expand the role of Rajya Sabha: The role and composition of the Rajya Sabha, our House of States, must be expanded.
This would allow smaller States a kind of brake over national majoritarian politics that adversely impact them.
Consent of all states on financial redistribution: Constitutional change and the change in financial redistribution between the States must require the consent of all or nearly all States.
Constitutional provisions dealing with language and religion must also be inviolate.
Break the bigger States: Serious thought must be given to breaking up the biggest States into smaller units that will not by themselves dominate the national conversation.
Conclusion
The unity of India is, of course, the fundamental premise underlying this discussion; but this unity does not depend on an overbearing Centre for its survival.
GS-1 The Freedom Struggle — its various stages and important contributors/contributions from different parts of the country.
GS-2 India and its neighborhood- relations. Bilateral, regional and global groupings and agreements involving India and/or affecting India’s interests.
GS-3 Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment. GS-4 Attitude: content, structure, function; its influence and relation with thought and behaviour; moral and political attitudes; social influence and persuasion
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While the regulators have taken giant strides to enhance board independence in India, one significant conundrum persists about appoint and removal process of the independent directors.
How appointment and removal process affects the independence of independent directors?
Independent directors are appointed just like other directors through shareholder voting by a simple majority.
This confers a significant power in the hands of significant shareholders to handpick the independents.
In case of family-owned companies, it is not uncommon to appoint “friendly” independent directors.
As for public sector undertakings, there is a demonstrable affiliation between independent directors and the ruling political parties.
Dual Approval System: Way forward
The above trends suggest that unless independent directors owe their allegiance to the shareholder body as a whole, independence is likely to remain largely in form and not function.
In its consultation paper, SEBI proposed a “dual approval” system.
Under this system, the appointment of an independent director required the satisfaction of two conditions:
First, the approval by a majority of all shareholders.
Second, the approval of a “majority of the minority”, namely the approval of shareholders other than the promoters.
SEBI recommended the same “dual approval” system for the removal of independent directors as well.
SEBI drew inspiration from Israel and the premium-listed segment of the United Kingdom, which confers greater power to minority shareholders in installing or dethroning independent directors.
SEBI has not yet made any mention of implementing the dual approval system.
Issues with Dual Approval System
The first issue is that it militates against the majority rule principle that is intrinsic in a corporate democracy.
While understandable, that is hardly an immutable rule as corporate law does make exceptions in cases involving oppression of minority shareholders.
The second concern is that placing too much power in the hands of minority shareholders would be counterproductive, as it could result in a tyranny of the minority.
However, the dual approval system instead represents the best of both worlds. It does not negate the promoter’s involvement in the process of appointing or removing independent directors.
Only consensus candidates would end up becoming independent directors.
The third issue is one of shareholder apathy: Will minority shareholders be motivated to exercise an informed and meaningful choice?
Minority shareholders tend to be passive when they are unable to influence the outcome of shareholding voting.
However, where they do have a significant say, like in the “majority of the minority” process, they are likely to be more active in exercising their franchise.
Consider the question “How far has the provision of appointing independent directors to safeguard the interest of minority shareholders succeeded in its objectives? Suggest the changes to improve the challenges faced by the independent directors.”
Conclusion
In all, the appointment and removal system continues to undermine the independence and efficacy of corporate boards. The SEBI needs to implement the dual approval system at the earliest.
