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Subject: Economics

  • New approach to the revival of economy

    As our attention now shifts to the revival of the economy, we have to take stock of the damage to the economy. As recently as 2008 we have faced a financial crisis, but this crisis is bigger in the scale and our fiscal health is weaker than it was at the time of the 2008 crisis. So, to deal with the situation we have to adopt a novel approach. What should be the approach? Read further to know.

    From 2014 to Covid-19 in finance and banking

    • TBS challenge: As far back as December 2014, the banking sector and infrastructure firms had come under financial stress, a problem that was termed the Twin Balance Sheet (TBS) challenge.
    • By December 2019, the problem had spread to the NBFC and real estate sectors, raising the number of stressed balance sheets to four.
    • Following the Covid-19 shock, the problem of stressed balance sheets will spread across the economy.

    How bad is the damage likely to be?

    • Reports suggest that around one-third of industrial and service firms have applied for moratoria on their bank loans.
    • If only a quarter of these deferred loans eventually go bad, then the stock of non-performing assets (NPAs) would increase by Rs 5 lakh crore.
    • Senior bank officials have been quoted as estimating that the stock of NPAs could increase by as much as Rs 9 lakh crore.
    • In this case, we would be looking at NPAs of Rs 18 lakh crore, equivalent to around 18 per cent of current loans outstanding.

    So, how is the situation different from 2008 financial crisis?

    • At one level, the answer is simple: The shareholders of the financial institutions, which in most cases means the government.
    • But this is where the ubiquity of the balance sheet problem comes in.
    • When the TBS challenge first materialised, after the Global Financial Crisis of 2008-09, the government had a relatively strong balance sheet.
    • Deficits were low, and the consolidated debt-GDP ratio, having fallen by 17 percentage points over the previous 7 years, stood at just over 60 per cent of GDP.
    • So, fiscal room was available, allowing the government to recapitalise the PSU banks.
    • This time, the government’s financial position will be quite different.
    • Central and state government deficits and debts will increase dramatically this year.
    • Revenues, already slowing, have been decimated by the Covid crisis, while expenditures have increased.
    • Add in a slowly recovering economy, and it becomes clear that the fiscal position will remain weak for some considerable time.
    • What are the options with the government? The government will want to pass the burden onto the corporate and household sectors, in the form of higher taxes, more arrears, and possibly higher inflation.
    • But these sectors will resist, for they have financial problems of their own.

    2 ways to minimise the size of the loss

    • It will be tempting to delay recognising the problem, pushing it into the future, by allowing banks not to classify bad loans as NPAs, and barring them from taking defaulters to the IBC system.
    • But this would be the wrong approach and there are two ways to minimise the loss.
    • 1. Prevent bankruptcies from occurring.
    • To do this, banks will need to identify the firms that are viable, and lend them the funds they need to tide them over the immediate crisis.
    • But banks are reluctant to bear the risk of making such loans.
    • So, the government might need to create a guarantee fund to support lending.
    • 2. When firms default, resolve as quickly as possible
    • Speed is necessary because the financial position of stressed firms tends to worsen over time.
    • By definition, stressed firms have poor cash flows and can’t obtain much in the way of loans from banks.
    • So, they don’t have enough money to fund their operations properly.
    • Which means that over time their underlying business deteriorates, destroying the firms’ market value.
    • While public attention focuses on the size of the NPAs, a much more important number is the recovery rate — the degree to which the banks can recover on these loans.
    • And the only way to maximise the recovery rate is to sort out the bad loans speedily.
    • The economy will reap an additional benefit since the resolved firms will be able to contribute to the recovery.

    Consider the question “As the economy stares at the destruction caused by the pandemic certain novel measures to salvage the economy are necessary. In light of this statement suggest the measures that the government should take to avoid the NPA problem from mounting.”

    Conclusion

    A new approach is consequently needed. The immediate problems created by the crisis must be addressed, decisively and quickly. Then the attention will have to turn to address the pre-COVID legacy balance sheet problems.

    Back2Basics: What is NPA?

    • A non-performing asset (NPA) is a loan or advance for which the principal or interest payment remained overdue for a period of 90 days.
    • Banks are required to classify NPAs further into Substandard, Doubtful and Loss assets.
    • Substandard assets: Assets which has remained NPA for a period less than or equal to 12 months.
    • Doubtful assets: An asset would be classified as doubtful if it has remained in the substandard category for a period of 12 months.
    • Loss assets: As per RBI, “Loss asset is considered uncollectible and of such little value that its continuance as a bankable asset is not warranted, although there may be some salvage or recovery value.”

  • Economy and the challenges ahead

    Various projections of growth paint a grim picture of the Indian economy as well as the global economy. This article analyses the sector-wise impact and comes with the GVA projections for 2020-21. The government has to deal with serious challenges like financing huge fiscal deficits. So, what will be the growth rate for 2020-21 and what will be the size of GVA? Read to know!

    Projections of growth and uncertainty

    • Various institutions have assessed India’s growth prospects for 2020-21 ranging from 0.8% (Fitch)to 4.0% (Asian Development Bank).
    • This wide range indicates the extent of uncertainty and tentative nature of these forecasts.
    • The International Monetary Fund (IMF) has projected India’s growth at 1.9%, China’s at 1.2%, and the global growth at (-) 3.0%.
    • The actual growth outcome for India would depend on: 1) the speed at which the economy is opened up 2) the time it takes to contain the spread of virus, and, 3) the government’s policy support.

    Health of India economy before the crisis

    • India slid into the novel coronavirus crisis on the back of a persistent economic downslide.
    • There was a sustained fall in the saving and investment rates with unutilised capacity in the industrial sector.
    • In 2019-20, there was a contraction in the Centre’s gross tax revenues in the first 11 months during April 2019 to February 2020, at (-) 0.8%.
    • These trends continue to beset the Indian economy in this crisis.

    Growth prospects for 20-21 from the output side

    • In 2019-20, which would serve as the base year, India may show GVA growth of about 4.4%,
    • This is well below the Central Statistics Office’s second advance estimate of 9%.
    • The IMF’s GDP growth estimate for 2019-20 is at 2%.
    • GVA is divided into eight broad sectors. Although all sectors have been disrupted, some may be affected less than the others. We divide the output sectors in four groups.
    • Group A- This group is likely to suffer minimum disruption.
    • Agriculture and allied sectors, and public administration, defence.
    • Despite some labour shortage issues, agriculture sector may show near-normal performance.
    • The public and defence services have been nearly fully active, with the health services at the forefront of the the COVID-19 fight.
    • For the group A sectors, it may be possible to achieve 90% of the 2019-20 growth performance.
    • Group D- This group is likely to suffer maximum disruption.
    • This includes, trade, hotels, restaurants, travel and tourism under the broad group of “Trade, Hotels, Transport, Storage and Communications”.
    • This sector may be able to show 30% of 2019-20 growth performance.
    • Group B
    • This comprises sectors which may suffer average disruption showing 50% of 2019-20 growth performance.
    • These sectors are mining and quarrying, electricity, gas, water supply and other utility services, construction, and financial, real estate and professional services.
    • Group C
    • In this group come manufacturing which has suffered significant growth erosion in 2019-20.
    • It is feasible to stimulate this sector by supporting demand.
    • In this case a 40% performance factor on the average growth of the preceding three years is applied.

    So, what are the estimates for 2020-21 GVA?

    • Considering these four groups together, a GVA growth of 2.9% is estimated for 2020-21.
    • Realising this requires strong policy support, particularly for the manufacturing sector which has a weight of 17.4%.
    • It is also based on the assumption that the Indian economy may move on to positive growth after the first quarter.
    • In the first quarter, GVA growth will be negative.

    Policy support for the growth

    • Monetary policy initiatives undertaken so far include a reduction in the repo rate to 4.4%, the reverse repo rate to 3.75%, and cash reserve ratio to 3%.
    • The Reserve Bank of India has also opened several special financing facilities.
    • These measures need to be supplemented by an appropriate fiscal stimulus.
    • Cash-constrained central and State governments have taken expenditure reducing measures by announcing freezing of enhancements of dearness allowance and dearness relief.
    • This may result in savings of â‚č37,000 crore for the Centre and about â‚č82,000 crore for the States, together amounting to 6% of GDP.
    • There is also talk of substantially reducing non-salary defence expenditure.
    • With lower petroleum prices, fertilizer and petroleum subsidies may be reduced.
    • These expenditure cuts are contemplated to keep the fiscal deficit under some control.

    Fiscal stimulus and fiscal deficit

    • Fiscal stimulus can be of three types:
    • 1) Relief expenditure for protecting the poor and the marginalised.
    • 2) Demand-supporting expenditure for increasing personal disposable incomes or government’s purchases of goods and services, including expanded health-care expenditure imposed by the novel coronavirus, and,
    • 3) Bailouts for industry and financial institutions.
    • The Centre had earlier announced a relief package of â‚č1.7-lakh crore.
    • The Centre’s budgeted fiscal deficit of 3.5% of GDP may have to be enhanced substantially to 1) make up for the shortfall in budgeted revenues; 2) account for a lower than projected nominal GDP for 2020-21, 3) provide for a stimulus.
    • Thus, the Centre’s fiscal deficit may increase to 6.0% of GDP.
    • Expenditure on the construction of hospitals, roads and other infrastructure and purchase of health-related equipment and medicines require prioritisation.
    • These expenditures will have high multiplier effects.
    • Similar initiatives may be undertaken by the State governments which may also enhance their combined fiscal deficit to about 0% of GDP to account for 3.0% of GDP under their respective Fiscal Responsibility Legislation/Law and to provide for the shortfall in their revenues and some stimulus.

    Challenges

    • Financing of the fiscal deficit poses a major challenge this year.
    • On the demand side, the Central (6.0%) and State governments (4.0%) and Central and State public sector undertakings (3.5%).
    • These together present a total public sector borrowing requirement (PSBR) of 13.5% of GDP.
    • Against this, the total available resources may at best be 9.5% of GDP.
    • The gap of 4.0% points of GDP may result in increased cost of borrowing for the Central and State governments.

    Consider the question, “Examine the sector-wise damage caused to the economy due to Covid-19 pandemic. What were the fiscal and monetary measures taken to mitigate the damage and challenges faced by the government in meeting the required revenue demands.”

    Conclusion

    The gap in requirement of resources and availability may be bridged by enhancing net capital inflows including borrowing from abroad and by monetising some part of the Centre’s deficit. The monetisation of debt can at best be a one-time effort. This cannot become a general practice. 

    Back2Basics: What is GVA?

    • GVA it is a measure of total output and income in the economy.
    • It provides the rupee value for the amount of goods and services produced in an economy after deducting the cost of inputs and raw materials that have gone into the production of those goods and services.
    • It also gives sector-specific picture like what is the growth in an area, industry or sector of an economy.
    • While GVA gives a picture of the state of economic activity from the producers’ side or supply side, the GDP gives the picture from the consumers’ side or demand perspective.
    • Both measures need not match because of the difference in treatment of net taxes.
    • GDP = GVA + taxes on products – subsidies on products

  • [pib] Kailash – Mansarovar Yatra Route from Dharchula to Lipulekh

    The Border Roads Organisation (BRO) has completed the construction of road from Dharchula to Lipulekh along the China Border, famously known as Kailash-Mansarovar Yatra Route.

    We can expect a prelims question asking to arrange few passes from West to East or vice versa. Click here to get through all such Himalayan Passes.

    Darchula – Lipulekh road

    • The road is an extension of Pithoragarh-Tawaghat-Ghatiabagarh road. In this 80 Km road, the altitude rises from 6000 feet to 17,060 feet.
    • It originates from Ghatiabagarh in Uttarakhand and terminates at Lipulekh Pass, the gateway to Kailash Mansarovar.
    • With the completion of this project, the arduous trek through treacherous high-altitude terrain can now be avoided by the Pilgrims of Kailash Mansarovar Yatra and the period of journey will be reduced by many days.

    (Note: The Lipulekh Pass links Uttarakhand with China’s Tibetan Autonomous Region.)

    Significance

    • At present, the travel to Kailash Mansarovar takes around two to three weeks through Sikkim or Nepal routes.
    • Lipulekh route had a trek of 90 Km through high altitude terrain and the elderly yartris faced lot of difficulties.
    • Now, this yatra will get completed by vehicles.

    Also read:

    The Northern and Northeastern Mountains | Part 2

    Back2Basics: Border Roads Organisation (BRO)

    • The BRO develops and maintains road networks in India’s border areas and friendly neighboring countries and functions under the Ministry of Defence.
    • It is entrusted for construction of Roads, Bridges, Tunnels, Causeways, Helipads and Airfields along the borders.
    • Officers from the Border Roads Engineering Service (BRES) and personnel from the General Reserve Engineer Force (GREF) form the parent cadre of the Border Roads Organisation.
    • It is also staffed by officers and troops drawn from the Indian Army’s Corps of Engineers on extra regimental employment.
    • The BRO operates and maintains over 32,885 kilometers of roads and about 12,200 meters of permanent bridges in the country.

  • [pib] Data on Energy Savings

    The Union Ministry of Power has released a Report on “Impact of energy efficiency measures for the year 2018-19”.

    Things to note:

    1) UJALA Scheme

    2) PAT Scheme

    3) Standards & Labeling Programme

    Possible mains question:

    Q. Discuss the role of Bureau of Energy Efficiency (BEE) in “institutionalizing” energy efficiency services in India.

    About the report

    • This report was prepared by an Expert agency PWC Ltd, who was engaged by the Bureau of Energy Efficiency (BEE).
    • The objective of this study is to evaluate the performance and impact of all the key energy efficiency programmes in India, in terms of total energy saved and the related reduction in CO2 emissions.

    Data on energy savings

    • With our energy efficiency initiatives, we have already reduced the energy intensity of our economy by 20% compared to 2005 levels. This includes both the Supply Side and Demand Side sectors of the economy.
    • The implementation of various energy efficiency schemes has led to total electricity savings to the tune of 113.16 Billion Units in 2018-19, which is 9.39% of the net electricity consumption.
    • Energy savings (electrical + thermal), achieved in the energy-consuming sectors is to the tune of 16.54 Mtoe, which is 2.84% of the net total energy consumption in 2018-19.
    • Overall this has translated into savings worth INR 89,122 crores against last year’s savings of INR 53,627 crore.
    • These efforts have also contributed to reducing 151.74 Million Tonnes of CO2 emissions, whereas last year this number was 108 MTCO2.

    (Note: Mtoe= million Tonne of Oil Equivalent)

    What led to this significant savings?

    • The study has identified the following major programmes, viz. Perform, Achieve and Trade Scheme, Standards &Labelling Programme, UJALA Programme, Municipal Demand Side Management Programme, etc.
    • There is huge capacity still for bringing efficiencies especially in MSME sector and a Housing sector that has now been taken up.

    About the Bureau of Energy Efficiency (BEE)

    • The Bureau of Energy Efficiency is an agency under the Ministry of Power created in March 2002 under the provisions of the nation’s 2001 Energy Conservation Act.
    • Its function is to develop programs which will increase the conservation and efficient use of energy in India.
    • The mission of BEE is to “institutionalize” energy efficiency services, enable delivery mechanisms in the country and provide leadership to energy efficiency in all sectors of the country.

    Back2Basics

    1) PAT Scheme

    • Perform Achieve and Trade (PAT) scheme is a flagship programme of the Bureau of Energy Efficiency under the National Mission for Enhanced Energy Efficiency (NMEEE).
    • NMEEE is one of the eight national missions under the National Action Plan on Climate Change (NAPCC) launched in the year 2008.
    • The scheme aims to reduce specific energy consumption in energy-intensive industries through certification of excess energy saving which can be traded.
    • It refers to the calculation of Specific Energy Consumption (SEC) in the baseline year and projected SEC in the target year covering different forms of net energy going into the boundary of the designated consumers’ plant and the products leaving it over a particular cycle.
    • Those eight Energy Intensive Sectors included are Chlor-alkali, Pulp & Paper, Textile, Aluminum, and Thermal Power plants, Fertilizer, Iron & Steel and Cement.

    2) Standards & Labeling Programme

    • It is one of the major thrust areas of BEE.
    • A key objective of this scheme is to provide the consumer with an informed choice about the energy-saving and thereby the cost-saving potential of the relevant marketed product.
    • The scheme targets display of energy performance labels on high energy end-use equipment & appliances and lay down minimum energy performance standards.

    3) UJALA Scheme

    • Launched in 2015, the Unnat Jyoti by Affordable LEDs for All (UJALA), in a short span of time, has emerged as the world’s largest domestic lighting programme.
    • The main objective is to promote efficient lighting, enhance awareness on using efficient equipment which reduces electricity bills and helps preserve the environment.
    • The Electricity Distribution Company and Energy Efficiency Services Limited (EESL) a public sector body of the Ministry of Power is implementing the programme.

  • Is the perpetual bond a suitable option to raise money?

    The government is exploring ways to raise money to deal with the destruction caused by COVID pandemic. One of the suggestion is the monetisation of fiscal deficit. But this article looks into an alternative approach of issuing bonds based on the idea of Consol bond issued by the British government during WW 2. So, how much amount needs to be raised? and why a perpetual bond like Consol bond is a suitable option for India? Read to know!

    A gathering financial storm

    • India projected a deficit of â‚č7.96-lakh crore in the Budget before the pandemic.
    • Adding to the above concern: 1) Off-balance sheet borrowings of 1% of GDP. 2) The overly excessive target of â‚č2.1 lakh crore through disinvestments.
    • Thus, financial deficit number is set to grow by a wide margin owing to corona crisis.
    • There will be revenue shrinkage from the coming depression that will most certainly be accompanied by a lack of appetite for disinvestment.

    Need for stimulus package and measures taken by the RBI

    • In addition to the expenditure that was planned, the government has to spend anywhere between â‚č5-lakh crore and â‚č6-lakh crore as a stimulus package.
    • The stimulus provided by the government so far and recent announcements by the Reserve Bank of India (RBI) achieved little.
    • All the RBI’s schemes are contingent on the availability of risk capital, the market for which has completely collapsed.
    • The government and the RBI have tried several times to increase lending to below investment grade micro, small and medium enterprises, but have come up short each time.
    • Furthermore, while the 60% increase in ways and means limits for States is a welcome move, many States have already asked for doubling the limits due to the shortages in indirect taxation collections from Goods and Services Tax, fuel and liquor.
    • The government and the central bank need to understand that half measures will do more harm than good.

    What is the Consol Bond?

    • Consol bond is a form of British government bond that has no maturity and that pays a fixed coupon.
    • Consols are basically rare examples of actual perpetual bonds.
    • The bonds were issued in 1917 as the government sought to raise more money to finance the ongoing cost of the First World War.

    So, why bond like Consol Bonds is a good option for India?

    • There is no denying the fact that the traditional option of monetising the deficit by having the central bank buy government bonds is one worth pursuing.
    • Citizens’ active participation is ensured in Consol Bond type alternative.
    • Furthermore, with the fall of real estate and given the lack of safe havens outside of gold, the bond would offer a dual benefit as a risk-free investment for retail investors.
    • When instrumented, it would be issued by the central government on a perpetual basis with a right to call it back when it seems fit.
    • An attractive coupon rate for the bond or tax rebates could also be an incentive for investors.
    • The government can consider a phased redemption of these bonds after the economy is put back on a path of high growth.

    The solution of bond offered here could be a valuable addition in points to the answer to the question which asks about the ways to raise money. Consider the question, “Economic devastation caused by the COVID pandemic has forced the government to explore the various ways to raise the money. Discuss the options available with the government and issues associated with the options.”

    Conclusion

    Politicians and epidemiologists across the world have used the word “war” to describe the situation the world is currently in. So, to raise the money to fight this war against Covid-19, we can take the cue from past and issue bond based on the Consol bond.

    Back2Basics: What is fiscal deficit?

    • A fiscal deficit is a shortfall in a government’s income compared with its spending.
    • The government that has a fiscal deficit is spending beyond its means.
    • A fiscal deficit is calculated as a percentage of gross domestic product (GDP).
    • There can be different types of deficit in a budget depending upon the types of receipts and expenditure we take into consideration. Accordingly, there are three concepts of the deficit, namely-
    • Revenue deficit = Total revenue expenditure – Total revenue receipts.
    • Fiscal deficit = Total expenditure – Total receipts excluding borrowings.
    • Primary deficit = Fiscal deficit-Interest payments.
    • Primary deficit shows how much government borrowing is going to meet expenses other than interest payments.
    • Thus, zero primary deficits mean that the government has to resort to borrowing only to make interest payments.
    • To know the amount of borrowing on account of current expenditure over revenue, we need to calculate the primary deficit.
    • Thus, the primary deficit is equal to fiscal deficit less interest payments.

    Perpetual Bonds

    • A perpetual bond, also known as a “consol bond” or “prep,” is fixed income security with no maturity date.
    • This type of bond is often considered a type of equity, rather than debt. One major drawback to these types of bonds is that they are not redeemable.
    • However, the major benefit of them is that they pay a steady stream of interest payments forever.
    • Perpetual bonds exist within a small niche of the bond market.
    • This is mainly due to the fact that there are very few entities that are safe enough for investors to invest in a bond where the principal will never be repaid.
    • AT-1 bonds which were recently in news due to YES bank failure is an example of a perpetual bond.

     

  • Stimulus package conundrum

    There are many suggestions and expectations around the stimulus package deal to revive the economy crippled post corona pandemic. While everyone agrees over the need of stimulus but there are several opinions and suggestion around the various aspects of the package like size, time, source of revenue etc. But we must be mindful of the pitfalls and constraints while thinking about the stimulus package. So, what are the suggestion and expectation and what are the limitations? Read to know!

    1. Supply-side constraints on stimulus

    • It is argued that a fiscal stimulus package has to follow the timeline.
    • But you cannot ‘stimulate’ an economy during a supply-side lockdown.
    • And that there are ‘announcement effects’ — both good and bad — that go with the stimulus.
    • So, any ‘good stimulus’ can only come into effect post lockdown and extensive consultations are on with everyone for that.

    2. What should be the size of the stimulus package?

    • While thinking about the stimulus, we cannot forget that government revenues too will be seriously hit.
    • The government revenue will be hit by 2-3% of GDP, given that disinvestment target itself is 1% of GDP and the realisation is likely to be close to zero in the current financial year.
    • So, the effective fiscal deficit is going to be somewhere around 7.5 % if you take into account all the off-balance sheet borrowings.
    • The U.S. government has set aside $2 trillion for bailouts or 9% of its GDP.
    • India’s starting point is going to be at around 7.5% of GDP fiscal deficit, then how much more can we afford on top of that?
    • On top of this is all the ‘merit expenditure’ on health and direct income support to the poor cannot be reduced.
    • Can we still formulate a stimulus package comprising 10% of GDP, to be footed by the Central government alone?

      Monetising the deficit and debt-to-GDP ratio

    • From 1947 to 1997, the Central government always routinely monetised its deficit, without leading to high rates of inflation, much less hyperinflation.
    • The Fiscal Responsibility and Budget Management (FRBM) limits are hardly a success and routinely all governments have broken the barrier.
    • Other countries with huge debt-to-GDP ratios like Japan (>200%) and U.S. (125%) get away with barely a rap on the knuckles.
    • But India is pulled up for minor slippages on a 70% debt-GDP ratio.

    3. Should we pay attention to needs and forget about affordability?

    • Some have argued that bailouts should be based on need and not affordability.
    • Can printing money be a solution out of this situation?
    • Possible dangers of printing money: The currency could plunge, inflation soar high and rating agencies could downgrade us to junk.
    • So, shouldn’t there be a more nuanced approach to what constitutes a ‘good’ stimulus?

    4. The problem of low credit flow despite high liquidity

    • There is a lot of liquidity in the economy, but limited credit is flowing due to anaemic lending.
    • Thus, another mantra being espoused is that bank managers should be incentivised to lend and the government should indemnify loans given during this period.
    • This could well lead to bogus companies springing up overnight to grab the stimulus in collusion with banks.
    • The government owes about â‚č1 lakh crore on tax refunds and also had promised to make up for any difference to the States, if the GST did not grow by 14% per annum.
    • This is the time for it to transfer this to the States as a grant, for one year, to offset the revenue loss to States.

    5. Should we go to the IMF?

    • There is talk of going to the International Monetary Fund (IMF).
    • Do we really need the IMF’s bailout which comes with conditions when there is no foreign exchange crisis for financing rupee expenditure?
    • Moreover, there is a perceived global stigma attached to doing so.
    • Won’t the conditionality-led cure be worse than the disease?

    Consider the following question based on the issue “Economic crises accentuate the role of governments. Covid-19 has not been different. In light of the above statement, discuss the various issues that the government faced while coming up with a stimulus package to revive the economy. What are the sources of revenue to be tapped by the government?”

    Conclusion

    Fate is what happens to us. Destiny is what we make in spite of our fate. India’s destiny appears relatively safe, if we cast the mind’s eye around the globe. Lifting the lockdown will be the first step towards a good stimulus and one does need to un-handcuff a billion people to save their lives too.

  • Co-operative banks can use SARFAESI Act to recover dues: Supreme Court

    A five-judge Constitution Bench of the Supreme Court (SC) has ruled that all co-operative banks in the country could make use of the SARFAESI Act to make recovery against defaulting persons.

    Possible mains question:

    What is the SARFAESI Act, 2002? Discuss its various provisions and efficacy to curb Non-Performing Assets (NPAs)?

    What is Sarfaesi Act, 2002?

    • Sarfaesi is an acronym for Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest.
    • It allows banks and other financial institution to auction residential or commercial properties (of Defaulter) to recover loans.
    • The first asset reconstruction company (ARC) of India, ARCIL, was set up under this act.
    • Under this act secured creditors (banks or financial institutions) have rights for enforcement of security interest under section 13 of SARFAESI Act, 2002.

    Provisions of the Act

    • If the borrower of financial assistance makes any default in repayment of a loan or any instalment and his account is classified as NPA by secured creditor, then secured creditor may require before the expiry of a period of limitation by written notice.
    • The act does not apply to unsecured loans, loans below â‚č100,000 or where remaining debt is below 20% of the original principal.
    • This law allowed the creation of asset reconstruction companies (ARC) and allowed banks to sell their non-performing assets to ARC’s (which are regulated by the RBI).
    • Banks are allowed to take possession of the collateral property and sell it without the permission of a court.

    To summarize, the SARFAESI Act empowers financial institutions to ‘seize and desist’. They should give a notice to the defaulting borrower asking to repay the amount within 60 days.

    If the debtor doesn’t comply, the bank can resort to one of the three following measures:

    1) Take possession of loan security

    2) Sell or lease or assign the right over the security

    3) Manage the asset or appoint someone to manage the same

    Ambit of the Act

    • The recent judgment said that the SARFAESI Act qualifies the test of legislative competence, as well as the definition, cannot be said to be beyond the competence of the Parliament.
    • In 2013, the Gujarat High Court had, while hearing a challenge to the amendment of Banking Regulation Act of 1949, to include cooperative societies as financial institutions, ruled it null and void.
    • The high court had then agreed with the submissions of the petitioners who had argued that Sarfaesi would not be applicable to cooperative banks formed under the state law.
    • The Delhi High Court had, on the other hand, ruled that the cooperative banks and societies were for all purposes banks and financial institutions and thus were allowed to use Sarfaesi to make recoveries against defaulters.
    • In its judgment, the apex court held that all such cooperative banks involved in the activities related to banking are covered within the meaning of ‘banking company’.

  • GARUD portal for fast-track approval to COVID-19 related drone operations

    Civil Aviation Ministry and DGCA have launched the GARUD (portal for providing fast track conditional exemptions to government agencies for COVID-19 related drone operations.

    Possible prelim question:

    The Garud Portal which sometimes finds mention in the news is related to-

    a) Air travel of defence personnel

    b) Airlifting of the stranded Indian citizens

    c) Registration of Remotely-piloted aircraft system (RPAS)

    d) None of these

    GARUD portal

    • GARUD is an acronym for ‘Government Authorisation for Relief Using Drones’.
    • The objective of the portal is to assist governmental entities in seeking exemption for COVID-19 related Remotely-piloted aircraft system (RPAS) operations.
    • The Civil Aviation Ministry has clarified that any violation of provisions will make the conditional exemption null and void and will lead to penal action.

  • Pathways to design a resilient economy

    The pandemic of COVID is a watershed moment in the way we look at the world. Truly, the future vocabularies will consist of ‘Pre COVID world’ and ‘Post COVID world’. Undoubtedly, the economic system shall be deeply affected by the COVID wave. The focus of this article is to redesign our economy through new 7 golden rules in the aftermath of Covid-19. As we read these ideas we also come across the faults that lie at the bottom of the present system. This is our opportunity to design a resilient and just system. So, what is the way forward to achieve this? Read to know!

    • When complex systems come to catastrophes, they re-emerge in distinctly new forms.
    • The COVID-19 global pandemic is a catastrophe, both for human lives and our complex
    • Economists cannot predict in what form the economy will emerge from it. But we can develop principles for what lies ahead.

    7 Radical ideas to build back economy

    The COVID-19 catastrophe has challenged the tenets of economics that have dominated public policy for the past 50 years.

    Here are seven radical ideas emerging as pathways to build a more resilient economy and a more just society.

    1. Time to rethink GDP as a measure of growth

    • The obsession with GDP as the measure of progress has been challenged often, but its challengers were dismissed.
    • Now, Nobel laureates in economics-Joseph Stiglitz, Amartya Sen, Abhijit Banerjee, Esther Duflo and others-are calling upon to rethink the fundamentals of economics, especially the purpose of GDP.
    • A five-point ‘de-growth’ manifesto by 170 Dutch academics has gone viral amidst the heightened Internet buzz during the lockdown.
    • Goals for human progress must be reset.

    2. Opening boundaries is not always good

    • Boundary-lessness is a mantra for hyper-globalisers. Boundaries, they say, impede flows of trade, finance, and people.
    • However, since countries are at different stages of economic development, and have different compositions of resources, they must follow different paths to progress.
    • According to systems’ theory, sub-systems within complex systems must have boundaries around them, be permeable ones, so that the sub-systems can maintain their own integrity and evolve.
    • This is the explanation from systems science for the breakdown of the World Trade Organization (WTO).
    • In WTO system, all countries were expected to open their borders.
    • Opening borders caused harm to countries at different stages of development.
    • Now COVID-19 has given another reason to maintain sufficient boundaries.

    3. Role of the government is indispensable

    • Ronald Reagan’s dictum, “Government is not the solution… Government is the problem”, has been upended by COVID-19.
    • Even capitalist corporations who wanted governments out of the way to make it easy for them to do business are lining up for government bailouts.

    4. Problems caused by marketization

    • The “market” is not the best solution.
    • Money is a convenient currency for managing markets and for conducting transactions.
    • Whenever goods and services are left to markets, those who do not have money to obtain what they need are at loss.
    • Moreover, by a process of “cumulative causation”, those who have money and power can acquire even more in markets.
    • The “marketization” of economies has contributed to the increasing inequalities in wealth over the last 50 years, which Thomas Piketty and others have documented.

    5. Focus on citizen welfare, not consumer welfare

    • In economies, human beings are consumers and producers. In societies, they are citizens.
    • Citizens have a broader set of needs than consumers.
    • Citizens’ needs cannot be fulfilled merely by enabling them to consume more goods and services.
    • They value justice, dignity, and societal harmony too.
    • Economists’ evaluations of the benefits of free trade, and competition policy too, which are based on consumer welfare alone.
    • Such evaluations fail to account for negative impacts on what citizens value.

    6. Competition Vs. Collaboration

    • Competition must be restrained: Collaboration is essential for progress.
    • Faith in “Darwinian competition”, with the survival of only the fittest, underlies many problems of modern societies and economies.
    • Blind faith in competition misses the reality that human capabilities have advanced more than other species’ have, by evolving institutions for collective action.
    • Further progress, to achieve the Sustainable Development Goals will require collaboration among scientists in different disciplines and among diverse stakeholders, and collaboration among sovereign countries.
    • Improvement in abilities to share and govern common resources have become essential for human survival in the 21st century.

    7. Public ownership of technologies

    • We are living in an era of knowledge.
    • Just as those who owned more land used to have more power before, now those who own knowledge have more power and wealth than the rest.
    • Intellectual property monopolies are producing enormous wealth for their owners, though many were developed on the back of huge public investments.
    • Moreover, powerful technologies can be used for benign or malign purposes.
    • It is imperative to evolve new institutions for public ownership of technologies and for the regulation of their use.

    How to walk the talk?

    • COVID-19 has revealed structural weaknesses in the global economy. Putting more liquidity in the system as was done in case of 2008 crisis will not be sufficient.
    • The system is in the need of paradigm change.
    • 1. Coordination among experts
    • Experts need to work together with keeping in mind the larger picture.
    • The economic system cannot be redesigned by domain experts devising solutions within their silos.
    • 2. Focus on innovation
    • Innovations are required at many levels to create a more resilient and just world.
    • Innovations will be required in business models too, not just for business survival but also to move businesses out of the 20th-century paradigm that “the business of business must be only business”. 

    The UPSC can ask a question based on the issues discussed here. Consider this question- “COVID has upended the global economy in such a way that it would need an overhaul. The basic tenets of the global economic order would undergo a revaluation. In light of the above statements examine the factors that contributed to the vulnerability of the Indian economy. Suggest the ways to make it more resilient and just.”

    Conclusion

    The redesign of economies, of businesses, and our lives, must begin with questions about purpose. What is the purpose of economic growth? What is the purpose of businesses and other institutions? What is the purpose of our lives? What needs, and whose needs, do institutions, and each of us, fulfil by our existence?

  • What makes MSMEs, most vulnerable to Covid-19 disruptions?

    • The Covid-19 pandemic has left its impact on all sectors of the economy but nowhere is the hurt as much as the Medium, Small and Micro Enterprises (MSMEs) of India.
    • All anecdotal evidence available, such as the hundreds of thousands of stranded migrant workers across the country, suggests that MSMEs have been the worst casualty of lockdown.
    • A closer look at the anatomy of the MSME sector explains why MSMEs are so vulnerable to economic stress.

    Possible mains question:

    Q. Discuss how the nationwide lockdown to control the coronavirus outbreak has led to the resurfacing of inherent bottlenecks in India’s MSME Sector.

    What are MSMEs? How are they defined?

    • Formally, MSMEs are defined in terms of investment in plant and machinery.
    • But this criterion for the definition was long criticised because credible and precise details of investments were not easily available by authorities.
    • That is why in February 2018, the Union Cabinet decided to change the criterion to “annual turnover”, which was more in line with the imposition of GST.
    • According to the proposed definition, which is yet to be formally accepted, a micro-enterprise will be one with an annual turnover less than Rs 5 crore; a small enterprise with turnover between Rs 5 crore and Rs 75 crore; and a medium enterprise with turnover less than Rs 250 crore.

    How many MSMEs does India have, who owns them, and where are they situated?

    • According to the latest available (2018-19) Annual Report of Department of MSMEs, there are 6.34 crore MSMEs in the country.
    • Around 51 per cent of these are situated in rural India.
    • Together, they employ a little over 11 crore people (Chart 3) but 55 per cent of the employment happens in the urban MSMEs.
    • These numbers suggest that, on average, less than two people are employed per MSME.
    • At one level that gives a picture of how small these really are. But a breakup of all MSMEs into micro, small and medium categories is even more revealing.

    Distributions of MSMEs

    • In terms of geographical distribution, seven Indian states alone account for 50 per cent of all MSMEs.
    • These are Uttar Pradesh (14%), West Bengal (14%), Tamil Nadu (8%), Maharashtra (8%), Karnataka (6%), Bihar (5%) and Andhra Pradesh (5%).
    • This breakup provides a sense of where the pain of the MSME crisis would be felt the most.
    • Chart 4 shows, 99.5 per cent of all MSMEs fall in the micro category.
    • The medium and small enterprises — that is, the remaining 0.5% of all MSMEs — employ the remaining 5 crore-odd employees.
    • While micro-enterprises are equally distributed over rural and urban India, small and medium ones are predominantly in urban India.

    What kind of problems do MSMEs in India face?

    • No/Low Formal registration: To begin with, most of them are not registered anywhere. A big reason for this is that they are just too small. But, as it is clear in a time of crisis, it also constrains a government’s ability to help them.
    • Away from Tax norms: GST has its threshold and most micro enterprises do not qualify. Being out of the formal network, they do not have to maintain accounts, pay taxes or adhere to regulatory norms etc. This brings down their costs.
    • Lack of Financial buffer: According to a 2018 report by the International Finance Corporation (part of the World Bank), the formal banking system supplies less than one-third (or about Rs 11 lakh crore) of the credit MSME credit need that it can potentially fund (Chart 5). They don’t have the buffers of the bigger firms or access to cheap capital to help them tide over this period.

    • Bad credit history: The other big issue plaguing the sector is the delays in payments to MSMEs — be it from their buyers or things likes GST refunds etc. A key reason why banks dither from extending loans to MSMEs is the high ratio of bad loans (Chart 6).

    How has Covid-19 made things worse?

    • The MSMEs were already struggling — in terms of declining revenues and capacity utilization — in the lead-up to the Covid-19 crisis.
    • The total lockdown has raised a question mark on workers payment primarily because these firms mostly transact on cash. That explains the job losses.
    • According to a recent survey he did for “small and medium” firms in manufacturing, only 7% said they will be able to survive for more than three months with their cash in hand if their business remains closed.
    • A big hurdle to restarting now is the lack of labour availability.

    What can be done?

    • The RBI has been trying to pump money into the MSME sector but given the structural constraints, it has had limited impact.
    • There are no easy answers for the MSMEs’ sufferings.
    • However, the government can provide tax relief (GST and corporate tax), give swifter refunds, and provide liquidity to rural India (say, through PM-Kisan) to boost demand for MSME products.

    What about credit guarantees?

    • Loans to MSMEs are mostly given against property (as collateral) — because often there isn’t a robust cash flow analysis available — but in times of crisis, property values fall and that inhibits the extension of new loans.
    • A credit guarantee by the government helps as it assures the bank that its loan will be repaid by the government in case the MSME falters.
    • To the extent such defaults happen, credit guarantees are shown as a departmental expense in the Budget.

    Urgent attention required

    • Governments across the world have announced various measures ranging from wage support to direct subsidies to help these businesses tide over these difficult times.
    • But, in India, more than a month after the national lockdown was announced; there is still no blueprint of how the government intends to support these businesses during this period.

    Way forward

    • There is a strong case for urgent government intervention — the costs of intervening early on will be much less than the price of delayed action.
    • To begin with, all dues owned by governments and public sector undertakings to MSMEs can be immediately cleared. This will help ease their immediate cash flow woes.
    • Second, with banks turning risk-averse, credit flow to MSMEs is likely to be depressed as solvency concerns will dominate.
    • In such a situation, the government could step in. It could set up a credit guarantee fund that backstops loans to MSMEs.