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Subject: Economics

  • Possibility of global recession?

    recession

    Context

    • There have recently been growing concerns about the global economy slipping into recession. These concerns were primarily triggered by the contraction of the US economy, observed in the first half of 2022. Negative growth in two consecutive quarters is commonly but not officially used as an indication of recession.

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    Background: Status of the US economy

    • First and second quarter of 2022: As reported by the Bureau of Economic Analysis (BEA), the US real Gross Domestic Product (GDP adjusted for inflation) decreased at an annual rate of 1.6 per cent and 0.6 per cent in the first and second quarters of 2022, respectively.
    • Third quarter: In the third quarter, however, the US economy grew by 3.2 per cent, signalling a significant recovery.
    • Fourth quarter: The latest BEA advance estimates show that the US real GDP increased at an annual rate of 2.9 per cent in the fourth quarter.
    • Expansion of US economy a positive sign: Despite the slight decrease from the third quarter, the continued expansion of the US economy at the end of 2022 marks a positive sign, soothing concerns about a recession in 2023.

    recession

    Economic recovery of the US economy

    • Positive growth in fourth quarter: The positive growth in the fourth quarter can primarily be attributed to consumer spending, which increased by an annualised rate of 2.1 per cent, and private inventory investment that showed an upturn in 2022. Although a significant decline from the 5.9 per cent increase in 2021, the difference accounts for the enthused post-Covid economic recovery in 2021.
    • The US labour market continues to remain robust: The unemployment rate was recorded at a low of 3.5 per cent in December 2022, matching the pre-pandemic levels. Also, the total non-farm payroll employment increased by 2,23,000 in December, exceeding the Dow Jones estimate of 2,00,000.
    • Inflation has eased: While the labour market remains tight, US inflation has eased in the last few months. Consumer prices fell 0.1 per cent in December the largest month-over-month decrease since April 2020, due to reductions in motor vehicle and gasoline prices.
    • Layoffs not yet translated into rise in jobless claims: Although not a perfect association, the decline in jobless claims in January shows that the mass layoffs in recent weeks, particularly in the tech sector, have not yet translated into a rise in claims, suggesting the possibility of finding new jobs.
    • The reopening of China’s borders can have positive implications for the global economy: As China resumes its economic activities to pre-Covid levels by boosting growth, domestic consumption is expected to increase significantly. With the ease of trans-border movement and eventual increase in exports of consumer and industrial goods, global trade is expected to strengthen as well.

    recession

    What is Recession?

    • A recession is a significant decline in economic activity that lasts for months or even years.
    • Experts declare a recession when a nation’s economy experiences negative GDP, rising levels of unemployment, falling retail sales, and contracting measures of income and manufacturing for an extended period of time.
    • Recessions are considered an unavoidable part of the business cycle or the regular cadence of expansion and contraction that occurs in a nation’s economy.

    Possibility of a global recession

    • Elevated inflation continues to be a cause for global concern: Despite the fall in consumer prices, the headline CPI for the US showed an annual increase of 6.5 per cent in December 2022. In spite of the slow-paced increase in headline CPI, persistent elevation in core inflation excluding food and energy continues to be a major issue across economies.
    • Interest Rate Hikes on the Horizon: Consequently, the central banks are expected to continue with interest rate hikes in the coming months. On an annualised level, the CPI inflation in Australia also jumped to 7.8 per cent in the 2022 fourth quarter, increasing the likelihood of respective interest rate hikes as well.
    • China’s Impact on Commodity Prices: Moreover, an increase in China’s demand for goods post-reopening could drive up commodity prices, thereby creating an inflationary impact. For instance, China’s increased demand for natural gas would mean more competition with the European market, leading to higher commodity prices that can put further inflationary pressures on Europeans already dealing with high energy bills.
    • Higher borrowing costs: Rising interest rates would incur even higher borrowing costs that could dampen consumer spending. While sectors sensitive to high borrowing costs such as housing and construction have slowed down significantly.

    recession

    Conclusion

    • Among the positive signs are the continued expansion of the US economy and the reopening of China’s borders. Rising inflation remains a cause for global concern. However, prevalence of mixed signals suggests that the onset and depth of a global recession in 2023 are not certain.

    Mains question

    Q. Highlight the current situation of global economies. Discuss if there’s a global recession in 2023?

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  • Process to set up 16th Finance Commission set to kick off soon

    The Centre will soon kick off the process to set up the Sixteenth Finance Commission, with the Finance Ministry likely to notify the terms of reference.

    What is the Finance Commission?

    • The Finance Commission (FC) was established by the President of India in 1951 under Article 280 of the Indian Constitution.
    • It was formed to define the financial relations between the central government of India and the individual state governments.
    • The Finance Commission (Miscellaneous Provisions) Act, 1951 additionally defines the terms of qualification, appointment and disqualification, the term, eligibility and powers of the Finance Commission.
    • As per the Constitution, the FC is appointed every five years and consists of a chairman and four other members.
    • Since the institution of the First FC, stark changes in the macroeconomic situation of the Indian economy have led to major changes in the FC’s recommendations over the years.

    Constitutional Provisions

    Several provisions to bridge the fiscal gap between the Centre and the States were already enshrined in the Constitution of India, including Article 268, which facilitates levy of duties by the Centre but equips the States to collect and retain the same.

    Article 280 of the Indian Constitution defines the scope of the commission:

    1. Who will constitute: The President will constitute a finance commission within two years from the commencement of the Constitution and thereafter at the end of every fifth year or earlier, as the deemed necessary by him/her, which shall include a chairman and four other members.
    2. Qualifications: Parliament may by law determine the requisite qualifications for appointment as members of the commission and the procedure of selection.
    3. Terms of references: The commission is constituted to make recommendations to the president about the distribution of the net proceeds of taxes between the Union and States and also the allocation of the same among the States themselves. It is also under the ambit of the finance commission to define the financial relations between the Union and the States. They also deal with the devolution of unplanned revenue resources.

    Important functions

    • Devolution of taxes: Distribution of net proceeds of taxes between Center and the States, to be divided as per their respective contributions to the taxes.
    • Grants-in-aid: Determine factors governing Grants-in-Aid to the states and the magnitude of the same.
    • Augment states fund: To make recommendations to the president as to the measures needed to augment the Fund of a State to supplement the resources of the panchayats and municipalities in the state on the basis of the recommendations made by the finance committee of the state.
    • Any financial function: Any other matter related to it by the president in the interest of sound finance.

    Members of the Finance Commission

    • The Finance Commission (Miscellaneous Provisions) Act, 1951 was passed to give a structured format to the finance commission and to bring it to par with world standards.
    • It laid down rules for the qualification and disqualification of members of the commission, and for their appointment, term, eligibility and powers.
    • The Chairman of a finance commission is selected from people with experience of public affairs. The other four members are selected from people who:
    1. Are, or have been, or are qualified, as judges of a high court,
    2. Have knowledge of government finances or accounts, or
    3. Have had experience in administration and financial expertise; or
    4. Have special knowledge of economics

    Key challenges for 16th FC

    • Overlap with GST council: A key new challenge for the 16th FC would be the co-existence of another permanent constitutional body, the GST Council.
    • Conflict of interest: The GST Council’s decisions on tax rate changes could alter the revenue calculations made by the Commission for sharing fiscal resources.
    • Feasibility of recommendations: Centre usually takes the Commission’s recommendations on States’ share of tax devolution and the trajectory for fiscal targets into account, and ignores most other suggestions.

    Major outstanding recommendations

    • Creating a Fiscal Council: The 15th FC has suggested creating a Fiscal Council where Centre and States collectively work out India’s macro-fiscal management challenges, but the government has signalled there is no need for it, he pointed out.
    • Creating a non-lapsable fund for internal security: The centre accepted to set up a non-lapsable fund for internal security and defense ‘in principle’, its implementation still has to be worked out.

     

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  • Layoff and the conditions for retrenchment

    Layoff

    Context

    • Last year, around 1,60,000 workers in the tech industry were laid off globally. In contrast, in just this month alone some 60,000 tech workers have been laid off till now. On the back of a gloomy global economic outlook and prospects of a possible recession, tech firms across the world from US-based giants like Alphabet, Amazon and Meta to early-stage startups have engaged in large-scale retrenchments.

    What is means by Lay-Off?

    • A layoff is the temporary or permanent termination of employment by an employer for reasons unrelated to the employee’s performance.
    • Employees may be laid off when companies aim to cut costs, due to a decline in demand for their products or services, seasonal closure, or during an economic downturn.
    • When laid off, employees lose all wages and company benefits but qualify for unemployment insurance or compensation (typically in USA).

    Inflation after strong recovery of the global economy: Two factors

    • Outpaced demand: Buoyed by extraordinary pandemic relief support to households, aggregate demand in advanced economies outpaced supply.
    • Supply chain disruption as a result of Russia- Ukraine war: the armed conflict between Russia and Ukraine caused supply-chain disruptions, leading to global inflationary pressures for food and fuel. In response, the US Federal Reserve has rapidly hiked rates.

    Layoff

    Layoff drive in India

    • Lay-offs in India: As multinational firms seek to cut their payroll figures worldwide, this lay-off drive has made its way to India as well.
    • Impact on Indian workers: Indian workers, including expatriates and local employees, in both the traditional IT sector and the tech-based startup sector have been affected.
    • Slowdown in funding in 2022: Despite a strong start, funding in India began to slow down in 2022, with third-quarter funding falling to a two-year low.
    • Rising interest rates and cost of capital: Rising interest rates have meant that the cost of capital has increased and venture capitalists have to be more selective about how they deploy funds in this funding winter.
    • Restructuring and cost-cutting for Indian tech startups: Indian tech startups are under pressure to cut costs and restructure their businesses in search for profitability. As a result, startups, including unicorns have engaged in broad-based retrenchments.

    Retrenchment conditions according to Industrial Disputes Act

    • One month notice with reasons is must: Employers must give a one-month notice with reasons for retrenchment to workers who have been in continuous service for at least a year.
    • Must provide compensation: Employers must give retrenchment compensation.
    • Notice shall be served: A notice in the prescribed manner must be served on the appropriate government.
    • Principle of last come first go shall be followed: Employers must follow the principle of last come, first go while retrenching employees.

    Layoff

    Concerns for contract workers

    • Employers often skirt legal requirements by asking for voluntary resignations to remain outside the scope of retrenchment provisions.
    • In any case, these mandates only apply to non-managerial employees; managerial employees are governed by their employment contracts.
    • There are no similar protections available to gig or contract workers.

    Conclusion

    • Even as India seeks to lead a digital and technologically-driven world, it is important to note that the tech sector is not immune to harsh macroeconomic realities. It is crucial for the government and private sector to work together to mitigate the impact of layoffs on workers and to ensure that the industry continues to grow and create opportunities for all.

    Mains question

    Q. Layoffs have been frequently reported in the news recently. In this context, briefly explain the term layoffs and discuss the factors contributing to them? Highlight the impact of layoffs in India.

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  • National IPR Policy: Discussing the rights of all the stakeholders

    IPR

    Context

    • In May 2016, the then Department of Industrial Policy and Promotion (now known as the Department for Promotion of Industry and Internal Trade) under the Ministry of Commerce released the 32-page National IPR Policy. The overall purpose of this document was to spell out the government’s comprehensive vision for the IPR ecosystem in the country towards shaping a more innovative and creative Bharat.

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    What is a Patent?

    • A patent is an exclusive set of rights granted for an invention, which may be a product or process that provides a new way of doing something or offers a new technical solution to a problem.

    Know the basics: Intellectual Property rights (IPR)

    • IPR refers to the legal rights that protect an individual’s or company’s creations and inventions (such as inventions, literature, music, and symbols) from being used or copied by others without permission.
    • IP is protected in law by, for example, patents, copyright and trademarks, which enable people to earn recognition or financial benefit from what they invent or create.
    • By striking the right balance between the interests of innovators and the wider public interest, the IP system aims to foster an environment in which creativity and innovation can flourish.

    Three important objectives of National IPR policy document

    • Strong and effective IPR laws: Under the head Legal and Legislative Framework, the goal was to have strong and effective IPR laws, which balance the interests of right owners with larger public interest.
    • Modernise and strengthen IPR administration: Under Administration and Management, the objective was to modernise and strengthen service-oriented IPR administration; and
    • Strengthening adjudicatory mechanism: Under Enforcement and Adjudication, the focus was to strengthen the enforcement and adjudicatory mechanisms for combating IPR infringements.

    IPR

    Changes in IPR ecosystem so far

    • Structural and legislative changes: Over the last six years, the IPR ecosystem in this country has witnessed both structural and legislative changes.
    • Intellectual Property Appellate Board (IPAB): IPAB was dissolved in April 2021 as part of tribunal reforms, and its jurisdiction was re-transferred to high courts.
    • Dedicated IP Division: This was followed by the establishment of dedicated IP benches the IP Division by the Delhi High Court, arguably the country’s leading court on the IPR front, for speedier disposal of IPR disputes.
    • IP friendly environment: Such measures, one presumes, are intended to convey to investors and innovators that Bharat is an IP-savvy and even IP-friendly jurisdiction without compromising on national interest and public health commitments.
    • For instance: This is evident from the very same National IPR Policy which, among other things, expressly recognises the contribution of the Indian pharmaceutical sector in enabling access to affordable medicines globally and its transformation to being the pharmacy of the world.

    IPR

    What are the concerns?

    • Patent-friendliness, rather patentee-friendliness: It appears that the patent establishment of the country has drawn a very different message it has gone on an overdrive to prove its patent-friendliness, rather patentee-friendliness, in the pharmaceutical sector at the expense of public health and national interest respectively.
    • Evergreening of patents on critical drugs: Evergreening patents on drugs which relate to treatment of diabetes, cancers, cardiovascular diseases and other serious conditions continue to be granted to pharmaceutical innovator companies by the Indian Patent Office.
    • Enforcements at the expense of statutory rights: Worse, they are regularly enforced through courts at the expense of the statutory rights of generic manufacturers and to the detriment of patients.
    • Unavailability of affordable drugs: The delayed entry of generic versions of off-patent drugs affects adversely the availability of affordable medicines to patients in a lower middle-income country such as Bharat where most middle-class families and below are only a hospital-visit away from dipping into their hard-earned savings.

    Way ahead

    • It must be understood that IP legislations such as the Patents Act do not exist for the sole benefit of IP right owners.
    • Patent bargain is in which the society is expected to benefit from dynamic innovation-based competition between market players.
    • Clearly, there are four stakeholders under the Patents Act the society, government, patentees and their competitors.
    • Each of these stakeholders has rights under the statute which makes all of them right owners.
    • To interpret, apply and enforce the Act to the exclusive benefit of patentees, and that too evergreening patentees, is to abridge and reduce to a naught the legitimate rights of other stakeholders, leading to sub-optimal and worse, anti-competitive market outcomes.

    Conclusion

    • It is one thing to operate under the understandable belief that Bharat needs to add layers to its IPR ecosystem to attract investment. However, it is entirely another to equate IPR-sensitivity with a pro-patentee position at the expense of public health obligations and long-term national interest. Make in India must be reconciled with Atmanirbhar Bharat, and in the event of conflict between the two, the latter must prevail for Bharat to retain its position as the pharmacy of the world.

    Mains question

    Q. What is Intellectual property rights? Discuss the changes taken place in India’s IPR ecosystem so far and highlight the concerns.

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  • Domestic Goat as a Drug Factory

    goat

    India’s domestic goats have attracted the attention of biotechnology companies wishing to produce therapeutic proteins in bulk.

    Domestication of Goats

    • The domestic goat (Capra hircus) is a familiar presence in the rural landscape of India and in many developing countries.
    • The goat has played an important economic role in human communities from the time it was domesticated about 10,000 years ago.
    • It has even been argued that the domestication of goats was an important step in mankind’s shift from a hunting-gathering lifestyle to agricultural settlements.

    Various breeds found in India

    • The Food and Agriculture Organisation (FAO) estimates that the world has 830 million goats belonging to about 1,000 breeds.
    • India has 150 million from over 20 prominent breeds including-
    1. Marwari: Rajasthan has the most number of goats — the Marwari goat found here is hardy and well-adapted to the climate of deserts.
    2. Osmanabadi: Another hardy breed, found in the dry regions of Maharashtra, Telangana and North Karnataka is the Osmanabadi.
    3. Malabari: Also called Tellicherry of North Kerala, it is a prolific breed with low-fat meat, and shares these traits with the beetal goat of Punjab.
    4. Black Bengal goat: The east Indian Black Bengal goat is a vital contributor to the livelihoods of the rural poor of Bangladesh. It contributes over 20 million square feet of skin and hides to the world’s demands for leather goods, from fire-fighters gloves to fashionable handbags.
    5. Jamunapari: These goats from Uttar Pradesh were favoured as they yield 300 kg of milk during eight months of lactation. Once in England, the Jamunapari was bred with local breeds to produce the Anglo-Nubian, a champion producer of high-fat milk.

    Why are goats significant for farmers?

    • Goats have a quick generation time of about two years.
    • General benefits of goat milk out-powers the high-fat buffalo milk.
    • As many farmers lack the space or funds to rear cattle, the goat is rightly called “the poor man’s cow”.
    • There are no specific fodder requirements for goat. It can feed even on the neem leaves.

    Significance in therapeutics: Antithrombin production

    • Goats have attracted the attention of biotechnology companies wishing to produce therapeutic proteins in bulk.
    • The first success came with ATryn, the trade name for a goat-produced antithrombin III molecule.
    • Antithrombin keeps the blood free from clots, and its deficiency (usually inherited) can lead to serious complications such as pulmonary embolisms.
    • Affected individuals need antithrombin injections twice a week, usually purified from donated blood.
    • Recently, the monoclonal antibody cetuximab, which has been approved by the FDA as an anti-cancer drug against certain lung cancers, has also been produced in cloned goat lines.

    Why is it a significant development?

    • Transgenic goats carrying a copy of the human antithrombin gene have cells in their mammary glands that release this protein into milk.
    • It has been claimed that one goat could produce antithrombin equivalent to what was obtained from 90,000 units of human blood.
    • Large quantities can be made this way (10 grams per litre of milk).

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  • China plus one (C+1) strategy and advantage for India

    China

    Context

    • In January 2023, India surpassed China to become the world’s most populous country with a population count of approximately 1.417 billion as against China’s 1.412 billion, as estimated by the World Population Review (WPR). This creates both opportunities and challenges for India.

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    The global turmoil and China as enablers of the Indian growth story

    • There are three factors that have enabled the Indian growth story.
    • Overdependence on specific economies: If the pandemic had had one crucial lesson for the global economy, it must be reducing the overdependence on China-specific Global Value Chains (GVCs). As is evident from the pandemic, the subsequent Ukraine-Russia war or the recent disastrous COVID-19 surge in China the overdependence on specific economies is bound to have cascading effects on the world economy because of the macroeconomic shocks they produce.
    • Glocalised models of economic partnerships: Countries now strive to strike the right balance between globalisation and localisation, through bilateral and multilateral platforms characterised by leveraging sub-regional comparative advantages. To a large extent, these emerging forms of glocalised models are also based on controlling Beijing’s political and economic prowess in the Indo-Pacific and beyond, where India plays an active role.
    • Use of technology: There is no doubt that the pandemic has provided an uptick in the use of technology ranging from the provision of social security payments at the grassroots to government-level conferences.

    China

    China plus one (C+1) strategy

    • The US-China trade war and the pandemic-induced supply chain disruptions emanating from China have indeed paved the way for many western corporates to consider a China Plus One (C+1) strategy.
    • The strategy would entail diversifying investments from China to other countries, to mitigate the economic and geopolitical risks associated with the former.
    • While many also hail Vietnam as another economy to be in the race of attracting investments fleeing China, India could be the potential frontrunner in the C+1 game.

    China

    Why makes India to surge ahead in C+1?

    • India’s economic advancement: India has a demographic advantage over China, with a larger percentage of its population under 30. This young population is expected to drive consumption, savings, and investments, leading to India’s goal of a multi-trillion dollar economy.
    • Low cost of labour is an advantage: India has a low cost of labor and other forms of capital, making production costs lower and increasing competitiveness in international markets. India’s labor cost is also half that of Vietnam, making it a strong player in electronics and semiconductor manufacturing.
    • India’s heavy infrastructure investment: A heavy investment in physical infrastructure through the National Infrastructure Pipeline (NIP) is expected to reduce costs in manufacturing sectors and cut transportation time and costs by 20%. This is in contrast to China, where multiple companies handle different parts of the transportation process, increasing costs
    • India’s conducive business environment: Recent policy interventions in India such as the Production Linked Incentive (PLI) scheme, tax reforms, liberalization of FDI policies, setting up of land pools and organizing business summits have helped attract investments to the domestic economy. These efforts, driven by the Make in India initiative, have also been supported by efforts to promote competitive federalism and reduce transaction costs of doing business.
    • India’s digital advantage: India’s high internet penetration at 43% allows for digital skilling initiatives to bring returns across various economic sectors, particularly services. A combination of home-grown technologies and greater access to Google and Facebook, which are banned in China, gives Indian youth a digital edge.
    • As English is the second language provides ease of communication: the prevalence of the English language skill set in the young Indian populace undoubtedly puts India ahead of China. As English is the second official language in the Indian states, it provides business executives with ease of communication in conducting business with North American and European clients.
    • Well balanced economic partnerships: India’s economic partnerships are characterized by utilizing sub-regional comparative advantages and controlling Beijing’s political and economic power in the Indo-Pacific. India’s decision to not join the RCEP in 2020 to protect its domestic market and curb trade deficits sends a strong signal of its disassociation with Beijing in trade partnerships. The CEPA signed with the UAE in 2022 is expected to increase two-way trade to $100 billion in five years by opening access for Indian exporters to Arab and African markets.
    • Dynamic Indian diplomacy: India has strengthened its economy through diplomatic partnerships and trade agreements, such as the QUAD, I2U2, and agreements with Australia, Canada, the European Union, and African countries. These partnerships have provided Indian businesses with greater access to finance, technology, and new markets. As India assumes the presidency of the G20 and the Shanghai Cooperation Organization this year, it is well-positioned to navigate changing globalisation trends and be a strong voice for the Global South.
    • Most important is the large domestic market: India’s large domestic market with a population of 1.3 billion and increasing incomes at 6.9 percent per annum offers a competitive alternative to China’s massive domestic market. With a population base of 98 million, Vietnam’s market is much smaller in comparison.

    China

    Conclusion

    • Indian economy that has risen from the ashes like a phoenix after a year of negative growth caused by the pandemic-led lockdown. India’s 74th Republic Day, therefore, should not merely mark a remembrance of the past or a celebration of adoption of the world’s largest and most comprehensive constitution, but should also be a celebration of the dazzling future of a roaring economy that will show light to a dreary world.

    Mains question

    Q. What is China plus one (C+1) strategy? Discuss why it is said that India will surge ahead in C+1?

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  • New T+1 Settlement Cycle comes into effect

    settlement

    After China, India will become the second country in the world to start the ‘trade-plus-one’ (T+1) settlement cycle in top-listed securities today.

    What’s the T+1 settlement plan?

    • The T+1 settlement cycle means that trade-related settlements must be done within a day, or 24 hours, of the completion of a transaction.
    • For example, under T+1, if a customer bought shares on Wednesday, they would be credited to the customer’s demat account on Thursday.
    • This is different from T+2, where they will be settled on Friday.
    • As many as 256 large-cap and top mid-cap stocks, including Nifty and Sensex stocks, will come under the T+1 settlement from Friday.

    What was the earlier settlement system?

    • Until 2001, stock markets had a weekly settlement system.
    • The markets then moved to a rolling settlement system of T+3, and then to T+2 in 2003.
    • In 2020, Sebi deferred the plan to halve the trade settlement cycle to one day (T+1) following opposition from foreign investors.

    What are the benefits of T+1?

    • T+1 system brings operational efficiency, faster fund remittances, share delivery, and ease for stock market participants.
    • In the T+1 format, if an investor sells a share, she will get the money within a day, and the buyer will get the shares in her demat account also within a day.
    • The shorter trade settlement cycle augurs well for the Indian equity markets from a liquidity perspective.
    • This will also help investors in reducing the overall capital requirements with the margins getting released on T+1 day, and in getting the funds in the bank account within 24 hours of the sale of shares.
    • The shift will boost operational efficiency as the rolling of funds and stocks will be faster.

    Issues with T+1 system

    • T+1 is being implemented despite opposition from foreign investors.
    • The United States, United Kingdom and Eurozone markets are yet to move to the T+1 system.

    Why are foreign investors opposed?

    • Foreign investors have some operational issues as they operate from different geographies.
    • Among the issues raised by them were time zone differences, information flow processes, and foreign exchange problems.
    • Foreign investors said they would also find it difficult to hedge their net India exposure in dollar terms at the end of the day under the T+1 system.

     

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  • What ails the Ken-Betwa River Link Project?

    ken-betwa

    The Steering Committee of the Ken-Betwa Link Project (KBLP) held its third meeting in New Delhi.

    What is the Ken Betwa Link Project?

    • The Ken-Betwa Link Project is the first project under the National Perspective Plan for the interlinking of rivers.
    • Under this project, water from the Ken River will be transferred to the Betwa river.
    • Both these rivers are tributaries of the river Yamuna.

    The Project has two phases:

    • Under Phase-I, one of the components — Daudhan dam complex and its appurtenances like Low Level Tunnel, High Level Tunnel, Ken-Betwa link canal and Power houses — will be completed.
    • While in the Phase-II, three components — Lower Orr dam, Bina complex project and Kotha barrage — will be constructed.

    Utility of the Project

    • Irrigation: The project is slated to irrigate 10.62 lakh hectares annually, provide drinking water supply to 62 lakh people and generate 103 MW of hydropower and 27 MW of solar power.
    • Water supply: The project will be of immense benefit to the water-starved Bundelkhand region, spread across Madhya Pradesh and Uttar Pradesh.
    • Agricultural boost: The project is expected to boost socio-economic prosperity in the backward Bundelkhand region on account of increased agricultural activities and employment generation.
    • Addressing Rural Distress: It would also help in arresting distress migration from this region.

    Ecological issues with the project

    • The government’s plan is based on a ‘surplus and deficit’ model that have little basis in science.
    • There may not even be enough water in the Ken, a non-perennial river, to meet the projected needs of the Betwa – forget the needs of the Bundelkhand region.
    • UP and MP could not agree on how water would be shared, particularly in the non-monsoonal months.
    • The project plans to create a high reservoir-dam on the Ken River in the Panna National Park and Tiger Reserve for the KBLP.
    • Downstream of the national park lies the Ken Gharial Sanctuary, created to protect the critically endangered Gangetic gharial (Gavialis gangeticus).

    What are the legal problems?

    • Approval by the Standing Committee of the National Board for Wildlife to the Ken-Betwa link Project has not been proved.
    • This is necessary for the improvement and better management of the wildlife therein as provided in Section 35(6) of the Wildlife (Protection) Act, 1972.

    Issues with the projects

    • Migration: It will lead to massive displacement of people
    • Topography change: Since the Ganga basin topography is flat, building dams would not substantially add to river flows.
    • Inundation: The transfer of such enormous amounts of water will inundate forests and land for reservoirs.
    • Seismic hazards: The weight of billions of liters of water can have seismic implications in the Himalayan region.
    • Financial expense: River inter-linking is an expensive business from building the link canals to the monitoring and maintenance of infrastructure.
    • Political will: Implementation of the project not only needs a huge financial capital but also political support both is scarce commodities as of now.
    • Consensus building for land acquisition: Another important issue is building consensus among states and Land acquisition.
    • Ecological feasibility: Once the project is implemented it would lead to large-scale displacement of people and animals.

    Criticisms of such projects

    • Bad Science: Such projects are built on bad science and an outdated understanding of water systems and water management.
    • Human determinism: Such projects go in contravention with natural process thereby generating more scope for threat than any opportunity.

    Way forward

    • Due diligence: Expert scrutiny during the project-approval stage are cornerstones of sound environmental governance.
    • Independent hydrological study: of these rivers is necessary.

    Conclusion

    • No developmental project should destroy the ecology of remnant fragile ecosystems and an important tiger habitat in the country.
    • Destructive impact of the proposed dam on the flow of water into and outside of this sanctuary should be immediately clear, as also its violation of the requirement under the Act for a sanctuary

     

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  • Insolvency and Bankruptcy Code 2016 (IBC)

    Insolvency

    Context

    • The introduction of the Insolvency and Bankruptcy Code (IBC) in 2016 brought about a structural change in the resolution architecture in the country. However, despite its promise, the IBC, in its functioning, has fallen short of expectations. Last week, the Ministry of Corporate Affairs invited comments on a fresh set of changes it is considering to bring about in the Code. This is a welcome step.

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    What is Insolvency?

    • Simply speaking, insolvency is a financial state of being one that is reached when you are unable to pay off your debts on time.
    • Insolvency is essentially the state of being that prompts one to file for bankruptcy. An entity a person, family, or company becomes insolvent when it cannot pay its lenders back on time.

    Insolvency

    What is Bankruptcy?

    • Bankruptcy, on the other hand, is a legal process that serves the purpose of resolving the issue of insolvency.
    • Bankruptcy is a legal declaration of one’s inability to pay off debts. When one files for bankruptcy, one obliges to pay off what is owed with help from the government.

    What is the Insolvency and Bankruptcy Code 2016 (IBC)?

    • The IBC was enacted in 2016 to simplify insolvency and bankruptcy proceedings, safeguard interests of all stakeholders (the firm, employees, debtors and especially creditors), and resolve non-performing assets.
    • From a ‘debtor in possession’ regime, it was a shift to a ‘creditor in control’ one.
    • IBC provides for a time-bound process for resolving insolvencies.
    • The Insolvency and Bankruptcy Board of India (IBBI) is the regulator implementing the code and overseeing the functioning of stakeholders.

    Why the IBC introduced?

    • Increasing Non-Performing Assets: In 2016, at a time when India’s Non-Performing Assets and debt defaults were piling up, and older loan recovery mechanisms were performing badly, the IBC was introduced to overhaul the corporate distress resolution regime in India.
    • Time bound mechanism: To consolidate previously available laws to create a time bound mechanism with a creditor­ in­ control model as opposed to the debtor ­in ­possession system.
    • Two positive outcomes: When insolvency is triggered under the IBC, there can be just two outcomes: resolution or liquidation. liquidation means the process of winding up a corporation or incorporated entity

    Insolvency

    What are the shortcomings in the code’s functioning?

    • Timelines are not followed: Realizations of creditors have been lower than expectations, and the strict timelines prescribed in the Code for resolving cases have not been adhered to.
    • Less realizable value: According to the most recent data, the total realisable value in cases resolved till September 2022 stood at only 30.8 per cent of the admitted claims.
    • Average time is rising: The data also shows that 64 per cent of the ongoing cases have crossed 270 days. In fact, as per reports, the average time taken for cases to be resolved has risen, driven in part by more time being spent on associated litigation.

    Insolvency

    Proposals to address the shortcomings

    • Removing ambiguity and bringing the predictability: The changes aim to reduce the time for admitting cases and streamline the process by pushing for greater reliance on data with Information Utilities. Considering the delays in admitting cases, and the implications of recent judicial interventions, this proposal seeks to remove ambiguity, and bring about predictability in the process.
    • Extending the pre-packed resolution to other firms: It has also been proposed that the pre-packaged insolvency resolution process that was introduced for micro, small and medium enterprises now be extended to other firms as well. While such a proposal should be appealing, so far very few cases have been admitted under this.
    • A clear distinction between the real estate projects: A distinction is now being made between a particular real estate project and the larger corporate entity. The government’s rationale for doing so is that this could allow the corporate entity to continue on other projects, while the stressed project can be tackled separately.
    • Changes to the manner in which proceeds will be distributed: Creditors will receive proceeds up to the liquidation value in line with the priority as prescribed under section 53 of the Code, and any surplus over such liquidation value will be rateably distributed between all creditors in the ratio of their unsatisfied claims.

    Conclusion

    • Attempts to improve IBC’s functioning are welcome. But some of the proposals need more careful examination. Changes to the Code should, after all, be driven by the objective of improving its functioning, and outcomes. This should be done keeping in mind the incentive structures of all stakeholders.

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  • RBI says no Foreign Investment cap on Sovereign Green Bonds

    green bond

    The sovereign green bonds issued by the Indian government will not have any restrictions on foreign investment, the Reserve Bank of India (RBI) said.

    What are Sovereign Green Bonds?

    • A bond is an instrument to raise debt.
    • Since 2007, a market for bonds specifically self-labeled or designated as ‘green’ has emerged.
    • This label differentiates a green bond from a regular bond, which signifies a commitment to exclusively use funds raised to finance or re-finance “green” projects, assets, or business activities.
    • When these bonds carry guarantees related to the repayment of principal and payment of interest by the sovereign or the government, they are called sovereign green bonds (SGrB).

    How are the projects for green bonds selected?

    • A project is classified “green” on the basis of four key principles. These include-
    1. Encouraging energy efficiency in resource utilisation
    2. Reducing carbon emissions and greenhouse gases
    3. Promoting climate resilience and
    4. Improving natural ecosystems and biodiversity, especially in accordance with SDG (Sustainable Development Goals).

    When is the first sovereign green bond likely to be issued? 

    • In her Budget speech early this year, Finance Minister announced that sovereign green bonds will be issued for mobilising resources for green infrastructure.
    • The proceeds will be deployed in public sector projects that help in reducing the carbon intensity of the economy.
    • These green bonds would be available in 5-year and 10-year tenure.

    How are they different from conventional government bonds?

    • Government bonds or government securities (G-Secs) are normally categorised into two — Treasury Bills and dated or long-term securities.
    • These bonds carry coupon rates and are tradable in the securities market.
    • SGrB is one form of dated security. It will have a tenor and interest rate.
    • Money raised through SGrB is part of overall government borrowing.

    Who are likely to be the buyers of these bonds? 

    • Both domestic and international investors are expected to be interested in SGrB.
    • However, one thinking is foreign investors may be slightly hesitant due to currency risk.

     

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