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Subject: Economics

  • Issues with treating mineral sale proceeds as revenue or income

    The rate at which we are extracting mineral and spending the proceeds from it without consideration for the future generation needs a rethink. The article deals with this issue.

    The principle of Intergenerational Equity

    • We cannot compromise the ability of future generations to meet their needs, and this is reflected in the aim for the sustainable economy.
    • The principle of Intergenerational Equity would make it imperative for us to ensure future generations inherit at least as much as we did.
    • If we are successful in abiding by intergenerational equity, our children will be at least as well off as we are.

    Issues with our mineral policy

    • India’s National Mineral Policy 2019 states: “natural resources, including minerals, are a shared inheritance where the state is the trustee on behalf of the people to ensure that future generations receive the benefit of inheritance.”
    • The extraction of oil, gas, and minerals is effectively the sale of this inheritance.
    • Unfortunately, governments everywhere treat the mineral sale proceeds as revenue or income which is basically a sale of inherited wealth.
    • This results in governments selling minerals at prices significantly lower than what they are worth, driven by lobbying, political donations, and corruption.

    Error in accounting

    • Proceeds received by the government are treated as “revenue” and spent.
    • This is just not sustainable.
    • There is growing empirical evidence of large losses in mining from around the world.
    • There is also growing evidence from the International Monetary Fund that many governments of resource-rich nations face declining public sector net worth, i.e., their governments are becoming poorer.
    • Due to the high profits involved, the extractors are keen to extract as quickly as possible and move on.
    • More mining would make a bad situation significantly worse.
    • The Government Accounting Standards Advisory Board needs to correct this error in the standards for public sector accounting and reporting for mineral wealth.

    Way forward

    • If we extract and sell our mineral wealth, the explicit objective must be to achieve zero loss in value; the state as trustee must capture the full economic rent.
    • Any loss is a loss to all of us and our future generations, and makes some rich; that is patently unfair.
    • India’s National Mineral Policy 2019 says: “State Governments will endeavor to ensure that the full value of the extracted minerals is received by the State.”
    • Like Norway, the entire mineral sale proceeds must be saved in a Future Generations Fund.
    • The Future Generations Fund could be passively invested through the National Pension Scheme framework.
    • The real income of a fund of this nature may be distributed only as a citizens’ dividend, equally to all as owners.
    • For the Indian economy, this is sustainable — capital has been maintained; the savings rate would rise, making available more long-term domestic capital; it diversifies risk while likely improving returns.

    Consider the question “What are the issues with our mining policies? Suggest the changes to make it more sustainable.”

    Conclusion

    Through these changes, let us be the generation that changes the course of history for the better, not the one that consumed the planet.

  • Balance sheet of a Bad Bank

    The idea of setting up a bad bank to resolve the growing problem of non-performing assets (NPAs), or loans on which borrowers have defaulted, is back on the table.

    Q.What is Bad Bank? Discuss how it is different from an Asset Reconstruction Company (ARC)?

    Why in news?

    • Commercial banks are set to witness a spike in NPAs, or bad loans, in the wake of the contraction in the economy as a result of the pandemic.
    • Hence the RBI recently agreed to look at the proposal for the creation of a bad bank.
    • This is in the response to a six-month moratorium it has announced to tackle the economic slowdown.

    What is a Bad Bank?

    • A bad bank conveys the impression that it will function as a bank but has bad assets to start with.
    • Technically, it is an asset reconstruction company (ARC) or an asset management company that takes over the bad loans of commercial banks, manages them and finally recovers the money over a period of time.
    • Such bank is not involved in lending and taking deposits, but helps commercial banks clean up their balance sheets and resolve bad loans.
    • The takeover of bad loans is normally below the book value of the loan and the bad bank tries to recover as much as possible subsequently.

    Global examples of Bad Bank

    • US-based BNY Mellon Bank created the first bad bank in 1988, after which the concept has been implemented in other countries including Sweden, Finland, France and Germany.
    • However, resolution agencies or ARCs set up as banks, which originate or guarantee to lend, have ended up turning into reckless lenders in some countries.

    Do we need a bad bank?

    • The idea gained currency during Rajan’s tenure as RBI Governor.
    • The RBI had then initiated an asset quality review (AQR) of banks and found that several banks had suppressed or hidden bad loans to show a healthy balance sheet.
    • However, the idea remained on paper amid lack of consensus on the efficacy of such an institution.
    • ARCs have not made any impact in resolving bad loans due to many procedural issues.

    What is the stand of the RBI and government?

    • While the RBI did not show much enthusiasm about a bad bank all these years, there are signs that it can look at the idea now.
    • Experts, however, argue that it would be better to limit the objective of these asset management companies to the orderly resolution of stressed assets, followed by a graceful exit.

    Key suggestions

    Former RBI Dy. Governor Acharya suggested two models to solve the problem of stressed assets.

    1. The first is a private asset management company (PAMC), which is said to be suitable for stressed sectors where the assets are likely to have an economic value in the short run, with moderate levels of debt forgiveness.
    2. The second model is the National Asset Management Company (NAMC), which would be necessary for sectors where the problem is not just one of excess capacity but possibly also of economically unviable assets in the short to medium terms.

    Good about the bad banks

    • The problem of NPAs continues in the banking sector, especially among the weaker banks.
    • The bad bank concept is in some ways similar to an ARC but is funded by the government initially, with banks and other investors co-investing in due course.
    • The presence of the government is seen as a means to speed up the clean-up process.
    • Many other countries had set up institutional mechanisms such as the Troubled Asset Relief Programme (TARP) in the US to deal with a problem of stress in the financial system.

    Pandemic and the NPAs

    • Bad loans in the system are expected to balloon in the wake of contraction in the economy and the problems being faced by many sectors.
    • The RBI noted in its recent Financial Stability Report that the gross NPAs of the banking sector is expected to shoot up to 13.5% of advances by September 2021, from 7.5% in September 2020.
    • The report warned that if the macroeconomic environment worsens into a severe stress scenario, the ratio may escalate to 14.8%.

  • Why Financial boom at a time of economic stagnation?

    Divergence in the financial sector and the overall economy

    • India’s major secondary stock market, the Sensex has been found tracking an upward path, from 40,817 on January 8, 2020, to 48,569 a year later, on January 8, 2021.
    • The trend indicates that GDP in India has been subdued while the financial sector has continued moving up.
    • This paradox has been found to be replicated in other developing as well as advanced economies.
    • These include the major emerging economies such as Brazil and Argentina along with advanced economies such as the United States and the United Kingdom.
    •  It remains an open question whether this paradox can sustain itself.
    • If this cannot sustain, it poses risk for those having large exposures in the financial market and also for the economy as a whole.

    Let’s understand the financial flows beyond the real economy

    • Finance as above, having no counterpart in the productive sector, was identified, first by Karl Marx, as fictitious capital.
    • Earnings from fictitious capital include interests, dividends, and capital gains as well as profits on derivatives.
    • All the above come in the category of unearned or rentier capital.
    • Financial assets, sold with capital gains at higher prices, are met with a rising rather than with the usual declines in demand.
    • Evidently, possibilities of accumulating assets turn even brighter with the high-value assets (used as collaterals), fetching credit for further business.
    • As for the stock prices, which reflect the stream of dividends over time discounted by interest rates, lower rates can help pitch stock prices higher.
    • Cuts in interest rates are often preferred as tools under mainstream prescriptions limiting expansionary policies, which evidently helps stock prices.
    • A journey as above for the financial circuit continues, is subject to market confidence.

    Role of state

    • To look at how finance has attained its present status we need to look at the evolving alliances between finance and the ruling state.
    • The path started with the financial deregulation in the late-1990s when banks were allowed to profit by dealing with securities and with the emergence of hedging devices such as futures and options in the market.
    • It also reflects the rise of non-bank financial institutions as well as shadow banks operating beyond regulations even at cost for the regular banks which had large exposures to the non-banks.
    • The state’s close proximity to big finance is also evident in the revamping of downhill finance, even with bailouts in the name of restoring financial stability.
    • It speaks even more of the pro-finance stance of the government in the neglect of upswings in the financial sector despite the continuing downslides in the real economy.

    Consider the question “What explains the apparent paradox in the India economy with evident divergence in its booming financial sector and subdued economy. What are the risks involved in such situations? Suggest the measures to deal with such situations.

    Conclusion

    Catastrophes, that comes with the sudden collapse of confidence in the financial sector, highlight the need for alternative policies on the part of the state as well as a bit of caution on part of individual investors — in a bid to usher in a sustainable and equitable path of growth for the economy as a whole.

     

  • Changes needed in India’s agri-food policy

    Basic parameters to design optimal agri-food policy

    • UN population projections (2019) indicate that India is likely to be the most populous country by 2027.
    • By 2030, the country is likely to have almost 600 million people living in urban areas, who would need safe food.
    • Indian agriculture has an average holding size of 1.08 hectares (2015-16 data) while engaging 42 percent of the country’s workforce.
    • Cultivable land and water for agriculture are limited and already under severe pressure.

    What should be the basic features of agri-policy

    • 1) It should be able to produce enough food, feed, and fibre for its large population.
    • 2) It should do so in a manner that protects the environment — soil, water, air, and biodiversity and achieves higher production with global competitiveness.
    • 3) It should enable seamless movement of food, keeping marketing costs low, save on food losses in supply chains and provide safe and fresh food to consumers.
    • 4) Consumers should get safe and nutritious food at affordable prices.

    Need to change from sub-optimal to optimal policies

    • Free electricity and highly subsidized fertilizers, especially urea, are damaging groundwater levels, especially in the Green Revolution states.
    • Sugar and wheat are being produced at prices higher than global prices, and these crops can’t be exported unless they are heavily subsidized.
    • Excessive stocks of wheat and rice with the Food Corporation of India (FCI) are putting pressure on the agency’s finances.
    • Rice remains globally competitive, but it should be remembered that in exporting rice we are also exporting massive amounts of precious water — almost 25-30 billion cubic meters, annually.
    • This is the water that is pumped for rice cultivation, enabled by the subsidized power supply.
    • In the marketing segment also, for most of our agri-commodities, our costs remain high compared to several other developing countries due to poor logistics, low investments in supply lines, and high margins of intermediaries.
    • All these are signs of sub-optimal agri-food policies.

    Policy changes required: On the production level

    • Green Revolution states of Punjab, Haryana, and western Uttar Pradesh require crop diversification.
    • This can be done by switching from the highly subsidized input price policy (power, water, fertilizers) and MSP/FRP policy for paddy, wheat, and sugarcane, to more income support policies linked to saving water, soil, and air quality.
    • The Agri-marketing segment is also in the need of reforms especially with respect to bringing about efficiency in agri-marketing and lowering transaction costs.
    • It is believed that developing countries should invest at least one percent of their agri-GDP in agri-R&D and extension.
    • India invests about half.
    • It needs to double with commensurate accountability of R&D organizations, especially the ICAR and state agriculture universities to deliver.

    Policy changes required: On the consumption level

    • The biggest challenge for the next 10 years is that of malnutrition, especially amongst children.
    • The public distribution of food, through PDS, that relies on rice and wheat, and that too at more than 90 percent subsidy over costs of procurement, stocking, and distribution, is not helping much.
    • It is increasing the finances of FCI, whose borrowings have touched Rs 3 lakh crore.
    • To address that, beneficiaries of subsidized rice and wheat need to be given a choice to opt for cash equivalent to MSP plus 25 percent.
    • The FCI adds about 40 percent cost over the MSP while procuring, storing, and distributing food.
    • This cash option will save some money and also lead to supplies of more diversified and nutritious food to the beneficiaries.

    Consider the question “What are the issues with India’s agri-food policies? Suggest the changes in agri-food policies so as to make them optimal.

    Conclusion

    What we need is to set agri-food policies on a demand-driven approach, protecting sustainability and efficiency in production and marketing, and giving consumers more choices for nutritious food at affordable prices.

  • Bank Investment Company (BIC)

    Banks, especially the Public Sector Banks have to play an important role in the pandemic afflicted economy. With that aim, the government has been envisaging the Bank Investment Company (BIC) for the improvement of PSB governance. The article discusses the issues with the BIC.

    Background of the BIC

    • Recent reports suggest that the upcoming budget may include proposals for a Bank Investment Company (BIC), anchoring the government’s shareholding in its banks.
    • The BIC was proposed by the P J Nayak Committee constituted by the RBI in 2014 to examine governance at public and private sector banks.
    • The committee had offered two options — privatisation or a complete overhaul of bank governance.
    • The overhaul of bank governance is envisaged in the form of a gradual disassociation of the government from the operations, management and governance of PSBs.
    • The BIC is a welcome step in as much as it signals the government’s intent to pursue reforms to improve the governance and performance of PSBs.

    Concerns with the BIC

    • The ownership and governance of the BIC itself will be crucial.
    • BIC will need to be allowed to garner the requisite talent and expertise and operate with freedom.
    • In the absence of this, it would merely add another layer while preserving the status quo.
    • The less than encouraging experience of the Banks Board Bureau (BBB) that was to precede the BIC is instructive.

    Why BBB failed to achieve its objectives

    • The BBB was set up in 2016 to advise on the selection and appointment of senior board members and management.
    • However, in practice, the BBB’s advice has not always been heeded to, and appointments have not always been made on time.
    • The BBB, as originally conceived, was to consist of three senior bankers.
    • However, it was expanded to include representatives from the RBI and the government.
    • The BBB was also originally envisaged by the committee as a temporary arrangement.
    • However, no further steps have been forthcoming after its establishment.

    Way forward for BIC

    • The government would need to ensure the necessary freedom for the BIC to operate while circumscribing its own role.
    • The ultimate success of these reforms will depend on how the government disassociates itself and empowers the BIC.
    • The objectives of the BIC would have to be clearly defined too.
    • If capital raising is one of the goals, the structure of a holding company — with a portfolio of comparatively better performing and non-performing banks — to attract investments must be assessed.
    • In this regard, the RBI has reportedly, in the past, expressed reservations on the BIC structure being a potential challenge for investors to assess the relative risks, returns and performance of the banks.
    • This raises the question of whether privatisation would not be a better alternative, particularly as the transition of the government from an owner to a pure financial investor in its banks is likely to take time.

    Conclusion

    Given these concerns, privatisation may be a better alternative. The budget could signal this intent by announcing the first step — the repeal of the Bank Nationalisation Acts and the State Bank of India Act.

  • India’s trade with China falls at five-year low

    India’s trade with China last year fell to the lowest since 2017, with the trade imbalance declining to a five-year low on the back of a slump in India’s imports from China.

    Try this PYQ:

    Q.Among the following, which one is the largest exporter of rice in the world in the last five years? (CSP 2019)

    (a) China

    (b) India

    (c) Myanmar

    (d) Vietnam

    India-China Trade

    • Two-way trade in 2020 reached $87.6 billion, down by 5.6%, according to new figures from China’s General Administration of Customs (GAC).
    • India’s imports from China accounted for $66.7 billion, declining by 10.8% year-on-year and the lowest figure since 2016.
    • It, however, rose to the highest figure on record, for the first time crossing the $20 billion-mark and growing 16% last year to $20.86 billion.

    What constitutes India’s import from China?

    • While there was no immediate break-up of the data in 2020, India’s biggest import in 2019 was electrical machinery and equipment, worth $20.17 billion.
    • Other major imports in 2019 were organic chemicals ($8.39 billion) and fertilizers ($1.67 billion), while India’s top exports were iron ore, organic chemicals, cotton and unfinished diamonds.

    India’s exports to China

    • The past 12 months saw a surge in demand for iron ore in China with a slew of new infrastructure projects aimed at reviving growth after the COVID-19 slump.
    • China’s total iron ore imports were up 9.5 per cent in 2020.

    A friction-induced low

    • The trade deficit, a source of friction between India and China, declined to a five year-low of $45.8 billion, the lowest since 2015.
    • Whether 2020 is an exception or marks a turn away from the recent pattern of India’s trade with China remains to be seen.
    • While India’s imports from China declined, so did India’s imports overall with a slump in domestic demand last year.
    • There is, as yet, no evidence to suggest India has replaced its import dependence on China by either sourcing those goods elsewhere or manufacturing them at home.

  • Recapitalization of state-owned banks: Privatization should do it

    The article suggest the approach to deal with the problems banking in India faces.

    Banking sector under stress

    • Along with the other sectors, pandemic dealt a severe blow to the banking sector.
    • Stress tests reported in the Financial Stability Report (FSR) indicate that the low ratio of capital to risk-adjusted-assets (CRAR) is likely to decline further.
    • To revive the economy and resume sustained high growth, bold structural reforms will have to be combined with strong fiscal and monetary measures.

    Declining credit growth: monetary challenge

    • India’s credit-to-gross domestic product ratio is around 51%.
    • 51% not too low compared to other countries at comparable levels of per capita income.
    • However, the worry is that credit growth is declining rapidly.
    • It is mainly attributable to rising risk aversion among lenders, reflecting the high and rising level of NPAs.
    • Risk aversion spiked during the economic contraction.

    Rising NPA of Public Sector Banks

    • The FSR stress tests now indicate that the gross NPA ratio is likely to go up to as much as 13.5% by September 2021 in the report’s baseline case and 14.8% in the ‘severe stress’ case.
    • Within the banking sector, conditions are much worse in public sector banks (PSBs) compared to private banks (PBs) or foreign banks (FBs).
    • The gross NPA figure is forecast to rise to 16.2% for PSBs as compared to 7.9% and 5.4% for PBs and FBs in the baseline case.
    • Clearly, high NPAs are primarily a problem for PSBs, which still account for 60% of India’s total bank credit.

    Expanding banking sector: bypass PSBs and give a big push to private banking

    • The recent report on Ownership and Corporate Structure for Indian Private Sector Banks submitted by an RBI internal working group (IWG) espouses this approach.
    • The IWG’s main  recommendation is to enable large corporations and industrial houses to acquire banking licences.
    • The proposal has been strongly opposed by former governors and deputy governors of RBI, several former chief economic advisers, a former finance secretary, and, most significantly, all save one of the many experts the IWG consulted.

    Four issues with the push to private banking

    • 1) With an industry CRAR of only 12%, the proposed raising of the promoter share cap to 26% could potentially leverage the promoter’s investment by 32 times.
    • The very high risk appetite generated by such leveraging would subject depositors to a high level of systemic risk, given the limited deposit insurance provided in India.
    • 2) Excessive risk appetite would lead to imprudent lending, especially connected lending to group companies. Conglomerates always find ways around regulatory restrictions against such connected lending.
    • 3) Three, a conglomerate’s bank would have access to insider information on borrower companies that compete with its group companies.
    • 4) Conglomerate banks would lead to massive concentration of economic power and political influence against not just competing companies, but even the regulator.

    Way forward

    • A safer and cleaner option would be to help the country’s banking sector grow through simultaneous privatization and recapitalization of PSBs.
    • However, these options do not change the ownership and governance structure of PSBs, which is what primarily is to blame for their poor performance.
    • A better option is for PSBs to recapitalize themselves by raising fresh equity.
    • It would be more prudent financially and also more acceptable politically to test this approach with one or two small PSBs.

    Conclusion

    Government should try to adopt the approach which reduces the risks associated with giving push to private players in the banking sector while making the PSBs more efficient.

    Back2Basics: CRAR-Capital to risk-adjusted-assets

    •  The CRAR is the capital needed for a bank measured in terms of the assets (mostly loans) disbursed by the banks.
    • Higher the assets, higher should be the capital by the bank.
    • A notable feature of CRAR is that it measures capital adequacy in terms of the riskiness of the assets or loans given.

  • Hybrid Annuity Model(HAM) for the benefit of the road sector

    The article explains the working of Hybrid Annuity Model in the road construction and the risks involved in the model.

    Investment in road sector

    • The central government has set a target of increasing the investment in infrastructure to over Rs 111 lakh crore over the period FY20-FY25.
    • Within the transportation segment, projects worth Rs 36.7 lakh crore, constituting 55% of transportation infra, are for the road sector.
    • The large investments planned in the road sector signifies its importance—it has a multiplier effect on the economy and provides large employment opportunities.

    Models for the road sector

    • Out of HAM (Hybrid Annuity Model) and BOT (Build, Operate and Transfer)—toll developers prefer the relatively lower risk HAM model.
    • This is due to its various positives like lower equity requirements, provision for mobilisation advances, better right of way availability, inflation-linked adjustments for bid project cost, termination payments during the construction period and de-linking construction and operations.
    • These HAM features have garnered a favourable response and mix of HAM awards has increased from 10% in FY16 to 48% in H1FY2021.

    How HAM works and risks involved

    • During the operations period for a HAM project, the recovery from authority is in the form of fixed annuity payments along with interest on balance accumulated annuity payments (calculated @300 bps over prevailing bank rate)
    • The only major risk for HAM is the prevailing low bank rates adversely affecting the overall project viability and returns.
    •  Such interest receipts account for around 45% of total inflows.
    • Low bank rate would thus reduce the overall inflows for a HAM project, thereby adversely affecting its debt coverage metrics and returns to the investors.
    • The second problem is related to delayed and inadequate interest rate transmission—there is a transmission lag for the project loan (linked to MCLR of banks).

    Changes in model concession agreement

    • As per revised concession agreement dated November 10, 2020, interest rate on annuities will be equal to the average MCLR of top 5 scheduled commercial banks plus 1.25% instead of bank rate.
    • With the average MCLR replacing the bank rate, there will be a natural hedge between the annuity inflows and interest costs,
    • This will reduce the interest rate risks to a large extent, and that too without any delay.
    • The other major revision is the grant payment from the authority which will now be paid in 10 instalments instead of five.
    • The other major revision is the grant payment from the authority which will now be paid in 10 instalments instead of five.
    • Thus, the spacing between the payment milestones is reduced.
    • This will improve the cash conversion cycle for the contractors executing the HAM projects as their payments are back to back in nature.
    • However, these changes will be applicable for new awards, and the fate of the existing HAM projects is hanging in the balance.

    Conclusion

    With improved attractiveness, HAM is expected to remain the mainstay for public-private partnership projects in the road sector.

    Source:-

    https://www.financialexpress.com/opinion/hamsome-gains/2171329/

  • Improving fiscal situation through budget

    The budget could be an opportunity to increase the consumption which has been impacted by the pandemic and still continues to show the declining trends.

    Continuing decline in consumption

    • The first advance estimates of GDP for 2020-21 are much better than the earlier market consensus.
    • The demand side, however, continues to be in a decline with private consumption falling by 9.5 per cent and its share in the overall GDP reducing by full 100 basis points.
    • Per capita private consumption has contracted by 10.4 per cent, while capital formation has contracted by 14.5 per cent, with imports and exports also contracting.
    • Only government consumption remains in positive territory.

    What should be the growth in nominal GDP for 2021-22?

    • In terms of specific numbers, the average growth in nominal GDP for the decade ending in 2013-14 was 15 per cent, but the average GDP deflator at 7.6 per cent far outpaced average real GDP at 6.8 per cent.
    • For the six year period ending in 2019-20, average nominal GDP growth was 10.4 per cent, with real GDP growth of 6.8 per cent far outpacing the GDP deflator at 3.6 per cent.
    • It is thus extremely important that we ensure that the current inflation trajectory is kept under control through policy interventions.

    Policy recommendations for the farmers

    1) Changing condition for renewal of loan on Kisan Credit Cards

    • Out of the outstanding bank credit of about Rs 12 lakh crore to the agriculture and allied activities sector, Rs 7 lakh crore is for Kisan Credit Cards.
    • The KCC portfolio of banks is under stress over the years due to a variety of factors like crop losses, unremunerated prices, debt waivers and the rigidity of the KCC product.
    • Currently, the renewal of KCC loans with payment of both principal and interest ensures interest subvention.
    • It is proposed that for renewal of KCC loans of small and marginal farmers and for loans of other categories of farmers for amounts up to Rs 3 lakh, the payment of interest must be a sufficient condition for renewal as with other loans.
    • The above measure has the potential to reduce the credit cost for banks considerably on KCCs as NPAs can be prevented more easily and the interest rate on KCC loans can be further reduced.

    2) Formalise tenancy and provide credit to tenant farmers

    • There are 11.5 crore farmers who are PM-KISAN beneficiaries — 6.5 crore farmers have KCC.
    • Thus, the remaining 4-5 crore could be land owning cultivators and at least 3-4 crore of such could be tenants/lessees/landless.
    • Currently, such tenant farmers are not formalised into the credit deliveries of scheduled commercial banks.
    • As of now, it requires state interventions for tenancy certificates which is only available in Andhra Pradesh.
    • Formation of a SHG model under the Deen Dayal Antodoya Yojana will formalise tenancy even without formal documentation of tenancy.
    • This will enable formal lending to take place to three crore landless farmers.

    3) Increasing investment in health and education

    • For health, it government could introduce medical savings account with a defined scheme to deduct interest from the savings account and pay towards a Mediclaim policy.
    • For the record, the size of the health insurance is Rs 32,000 crore and the savings bank interest is Rs 1.15 lakh crore.
    • The government should also consider exempting all retail and health insurance products from GST.

    Three suggestions on the fiscal situation

    • First,Withdraw all tax appeals.
    • Second, accept all domestic arbitration decisions against government departments/agencies.
    • Third, clear all outstanding dues to all parastatal agencies within a stipulated time.
    • This will be a milestone structural administrative change that could be even thought of as a one-time balance sheet entry recognising liabilities and paying them off.
    • As a consequence, we could jump multiple positions on the Ease of Doing Business rankings.

    Conclusion

    By implementing these steps in the budget the government could use this opportnity to stimulate the economy and aid the economic recovery.

  • Digital Lending

    The Reserve Bank of India (RBI) has constituted a working group on digital lending to study all aspects of digital lending activities in the regulated financial sector as well as by unregulated players.

    NPAs are rising in India. And one may find some irritating ads and texts on our smartphones, which desperately wants to disburse easy loans (that too in a limited offer period)!

    Digital Lending

    • Digital lending is the process of offering loans that are applied for, disbursed, and managed through digital channels, in which lenders use digitized data to inform credit decisions and build customer engagement.
    • It consists of lending through web platforms or mobile apps, by taking advantage of technology for authentication and credit assessment.

    Why in news?

    • The move comes in the backdrop of the three borrowers in Telangana committing suicide over alleged harassment by personnel of such digital lenders.
    • There were many more complaining of being subjected to coercive methods after defaulting on repayments.

    Why regulate Digital Lending?

    • Digital lending has the potential to make access to financial products and services more fair, efficient and inclusive.
    • From a peripheral supporting role a few years ago, FinTech-led innovation is now at the core of the design, pricing and delivery of financial products and services.
    • While penetration of digital methods in the financial sector is a welcome development, the benefits and certain downside risks are often interwoven.
    • A balanced approach needs to be followed so that the regulatory framework supports innovation while ensuring data security, privacy, confidentiality and consumer protection.

    Risks associated

    • A growing number of unauthorized digital lending platforms and mobile applications are threats to consumers.
    • Such lenders charge excessive rates of interest and additional hidden charges.
    • They adopt unacceptable and high-handed recovery methods and in turn misuse agreements to access data on mobile phones of borrowers.

    What will the working group do?

    • The RBI working group will evaluate digital lending activities and assess the penetration and standards of outsourced digital lending activities in RBI regulated entities.
    • They would thus identify the risks posed by unregulated digital lending to financial stability, regulated entities and consumers; and suggest regulatory changes to promote orderly growth of digital lending.
    • It will also recommend measures for expansion of specific regulatory or statutory perimeter and suggest the role of various regulatory and government agencies.
    • It will also recommend a robust fair practices code for digital lending players.