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Subject: Economics

  • Can the insolvency code handle the aftermath of the corona crisis?

    The article is about the aftermath of Covid-19 for the Indian business. Though the government has announced the slew of relief packages, one expects a significant spike in the number of bankruptcies. Will India’s Insolvency and Bankruptcy Code be able to deal with this new normal? Some pressing issues that could arise and solutions are discussed here.

    Rise in the pending cases with NCLT

    • Since the commencement of the IBC and setting up of the National Company Law Tribunal (NCLT), 12,000 cases have been filed.
    • Around 4,500 cases have been settled before resolution, with a settlement amount of almost ₹2 trillion.
    • 1,500 cases have been admitted and 6,000 cases are waiting in the queue.
    • The covid-19 epidemic will only increase this traffic jam.
    • Increasing the capacity of NCLT: The pile-up of cases needs to be addressed by increasing capacity of the NCLT, and by ensuring that as many cases as possible are settled without going to the IBC.

    Every issue mentioned here is important from Mains point of view. IBC has been a significant step by the government to streamline the process of insolvency and bankruptcy.

    Need for a relook at section 29A(c) of IBC

    • What is section 29A(c) of IBC? This provision makes ineligible the defaulting person (promoter) from bidding for the asset (buying back) if it has been NPA for a year or more.
    • What was the purpose of section 29A(c): The intent of section 29A is to prevent persons who, by their misconduct or fraudulent motives contributed to the default of the corporate debtor, from “buying back” the corporate debtor from the creditors, potentially at steep discounts.
    • What’s the issue? While this is clearly a justifiable objective, the short window of one year has prevented even genuine promoters who faced major setbacks on account of unforeseen circumstances from being given a second chance.
    • Even though such promoters are often in good the best position to revive their businesses.
    • In view of the current force majeure, we recommend that the grace period of one year under section 29A(c) be extended to two years.
    • And further extensions should be made possible on the approval of a supermajority (i.e. 75%) of the Committee of Creditors.
    • Further, the newly introduced Section 12A allows the bank, which was the insolvency applicant, to exit the insolvency process.
    • Which brings the promoter back in control—provided 90% of the Committee of Creditors agrees and the public bidding process has not commenced.
    • The requirement for exit should be reduced to 75% of the committee.

    Extension of timelines

    • Recently, the Supreme Court did well by passing a suo-moto order on the extension of limitation generally.
    • Based on these SC orders, the National Company Law Appellate Tribunal has ordered that such extension also apply to the outer limit of 330 days for the resolution of corporate insolvency cases.
    • This could be further extended once the gravity of the situation becomes clear over the next few months.
    • The moratorium period on debt financing recently announced by RBI should also be extended to cover money market instruments.

    Need for providing more financing options to corporate debtors

    • While the IBC does provide for interim finance with a preferential position for a corporate debtor, there are known limitations and residual risks on the provision of such finance.
    • The government would do well to look at expanding the market by making changes.
    • The changes could include permitting interim funding by asset reconstruction companies even without being creditors.
    • And making provisions for a minimum return even in case of liquidation, and extending the enhanced priority standing given to interim financiers in the IBC phase to the pre-IBC phase.
    • Post the lockdown, incremental working capital support upto, say, 25% of existing working capital exposure could be allowed in deserving cases even if the account is in default or NPA.
    • This can be deemed to be priority lending to also protect bankers’ interests.
    • The provision could also be made for the extension of concessional finance within limits based on demonstrated export potential.
    • For example- order, short lead-time business, margin adjustments) in order to contribute to the recovery of exporting industries.

    Equitable treatment of operational creditor

    • In the Swiss Ribbons judgment, the Supreme Court urged equitable, though not equal, treatment of operational creditors.
    • The need to protect the interests of operational creditors in bankruptcy proceedings is all the more critical in difficult market conditions where credit would be hard to obtain.
    • Some broad guidelines appear to be desirable.
    • For instance, one could stipulate that in the absence of quality issues, two operational creditors belonging to the same sub-class in terms of the type of product or service sold, should be treated equally.
    • This should be irrespective of group relationships or continuity in the business of the resolved entity.

    Facilitating resolution outside the corporate insolvency resolution process

    • On the issue of closing a case before the onset of insolvency proceedings, there was a case for doing this even before the corona outbreak, and even without the paucity of processing capacity.
    • The labelling of a company as insolvent or bankrupt has a chilling effect on its already dim prospects.
    • Vendors, customers and employees start having second thoughts about associating with this company.
    • Certain rules get triggered—for instance, the rule barring an infrastructure company from accepting new orders.
    • The current outbreak amplifies the case for facilitating resolution outside the corporate insolvency resolution process.
    • At the same time, there is a need to streamline the process to ensure enhanced proceeds.

    Conclusion

    All institutions of the economy will need to fire together in order to maximize the prospects of recovery. A suitably modified bankruptcy framework has a crucial role to play.

    Back2Basics: Difference between financial and operational creditors

    • Financial and operational creditors are different in the sense that their liabilities arise from different origins.
    • Where a financial creditor is liable because of a contract such as a loan or debt and operational creditor is liable because of operational transactions.
    • The difference between a financial creditor and an operational creditor is that a financial creditor is an individual whose relationship with the entity is solely based on financial contracts, such as a loan or debt security.
    • Whereas, an operational creditor is an individual whose liabilities from the entity comes in the form of future payments in exchange for goods or services already delivered.

  • Economic liberalisation and its faults

    The article describes the problems economic liberalisation has created. Covid-19 has exposed these problems even as developed countries faced shortages of masks and ventilators. The focus is on China’s dominance as a manufacturing hub and its implication for the world and India.

    Background of the end of the ‘Licence Raj’ in India

    • Manmohan Singh’s 1991-92 Budget speech marked the beginning of the end of the ‘Licence Raj’ in India.
    • The Budget also announced the reduction of import duties and paved the way for foreign-manufactured goods to flow into India.
    • Following this, most of the manufacturing sector was opened up to foreign direct investment.
    • India’s industrial policy was virtually junked, and policymakers and the political leadership became contemptuous of the idea of self-reliance.

    Shifting of the base in developing countries

    • In the late 1980s, transnational corporations started shifting the production base to smaller companies in developing countries, especially Asia.
    • The reason for this shift was cheap labour and raw materials.
    • Developed countries supported the move because shifting the polluting and labour-intensive industries suited them as long as ownership remained with their companies.
    • Development of global supply chains: The world witnessed the development of global supply chains in many products starting with garments.

    The dominance of China in the global supply chain is at the root of trade war between the US and China. The outbreak of Covid-19 has added it a new dimension and has forced many countries to reframe their trade policies. And India is no different. This makes it an important topic for UPSC. A question can be framed from an impact angle or the US-China trade war angle.

    The emergence of China as a global manufacturing hub

    • Though many developing countries participated in the global production/value/supply
    • The substantial value addition in developing countries happened in a few production hubs, of which China emerged to be a major one.
    • Decentralised to localised production: Manufacturing shifted from a decentralised production system spread across different counties to just a few locations.
    • The countries like China defied the logic of supply/value chains ensuring substantial value addition for themselves.
    • They even carried out backward integration and thus emerged as global manufacturing hubs for certain products.
    • In the case of health products, China became the global supplier of active pharmaceutical ingredients (API), personal protective equipment (PPE), and medical devices diagnostics.

    What were the implications of China’s dominance in a fight against Covid-19?

    • China’s dominance has major implications for the  COVID-19 outbreak.
    • The resultant loss of manufacturing base has affected the ability of many governments, including of developed countries, to put up an effective response to the crisis.
    • The U.K. Prime Minister asked the country’s manufacturers to produce ventilators in order to provide care for critical COVID-19 patients.
    • Similarly, the U.S. President invoked the Defense Production Act of 1950 to ramp up N95 mask production.
    • Under this legislation, the U.S. President can direct U.S. manufacturers to produce goods according to the directions of the government.
    • Similarly, the French Health Minister stated that the country may nationalise vaccine companies if necessary.
    • Spain nationalised all its private hospitals.
    • Israel and Chile issued compulsory licences to ensure that medicines are affordable.
    • Lack of preparedness and dependence: This exposes the poor state of preparedness and dependence on imports for essential goods required to meet the challenge of any major disease outbreak.
    • This shows that what is good for the company may not be good the country in all circumstances.
    • So, the overwhelming objective of private sector-led economic growth has proved to be disastrous.

    Pay attention to the impact on India. The following two points are very important.

    How economic liberalisation affected India’s ability?

    • In India, economic liberalisation has damaged the government’s capacity in two ways.
    • 1. It incapacitated the government to respond to emergencies based on credible information.
    • The dismantling of the ‘Licence Raj’ resulted in the elimination of channels of information for the government, which is crucial to make informed policy choices.
    • For example, it took the government several meetings to determine the production capacity of various pharmaceutical companies.
    • Similarly, there were difficulties in finding out India’s production capacity of PPE, medical devices and diagnostics.
    • 2. The logic and policies of economic liberalisation seriously undermined the manufacturing capabilities of health products in India.
    • The short-sighted policy measures, with the objective of enhancing profitability of the private sector, allowed the import of raw materials from the cheapest sources and resulted in the debasing of the API industry, especially in essential medicine.
    • According to a report of the Confederation of Indian Industry (CII), nearly 70% of India’s API import is from China.
    • The CII report lists nearly 58 API where the dependence is 90% to 100%.
    • The disruption in the supply of API due to the COVID-19 outbreak has impacted the production of not only medicines required for COVID-19 patients, but also of other essential medicines in India.
    • As a cost-effective producer of medicines, the world is looking to India for supply, but it cannot deliver due to its dependence on China.
    • This dependence has also forced India to impose export restrictions on select medicines.
    • Similar dependence exists with regard to PPE, medical devices and diagnostic kits.
    • The 100% dependence on Reagents, an important chemical component for testing, is limiting the capacity of the government from expanding testing because the cost of each test is ₹4,500.
    • Dangers of dependence: In the name of economic efficiency, India allowed unconditional imports of these products and never took note of the dangers of dependency.

    Loss of jobs and poor working conditions

    • Destruction of manufacturing base: Global supply/production chains destroyed the manufacturing base in developed and developing countries.
    • That also resulted in the loss of jobs and poor working conditions in these sectors.
    • Developing countries were asked to ease their labour protection laws to facilitate global production and supply chains popularly known as global value chains.
    • As a result, people were forced to work in precarious working conditions without any social security net.
    • This created an unorganised army of labourers and is preventing many developing country governments from effectively offering relief.

    Conclusion

    A virus has made us rethink our obsession with the economic efficiency theory. It implores us to put in place an industrial policy to maintain core capacity in health products so that we can face the next crisis more decisively.

  • Government must fix an upper limit for fiscal deficit

    D. Subbarao in this article discusses how the government is facing the hard choice of choosing between saving lives and saving the economy. On the government’s response on economic front he argues that the government, unlike the rich countries should keep an upper limit on its spending because of the dangers involved in unrestricted spending.

    Why the dilemma is sharpest for India?

    • This dilemma is arguably the sharpest for India.
    • Because of our high population density and poor medical infrastructure, any laxity in prevention can result in a huge health disaster.
    • On the other hand, an extended lockdown will force millions into the margins of subsistence, push small and large firms alike into bankruptcy, seriously impair financial stability and land us in a humanitarian and economic disaster.

    Why is the relief package criticised as too little?

    • After the lockdown, the government announced a relief package amounting to 0.8 per cent of GDP, that’s been criticised as being too little.
    • From a study of a sample of countries, the latest issue of The Economist reports that India’s lockdown has been the most stringent while its fiscal relief package is the smallest in proportion to GDP.

    What could be the reasons for a cautious approach in the relief package?

    • A possible explanation for the government’s timid fiscal response may be the fear of spooking the market.
    • For years, every economist and analyst has been warning the government of the dire consequences of fiscal irresponsibility.
    • And that warning message must have been so hardwired into the government’s collective mind that it was unable to get over the mental overhang.

    We should be aware of the reasons from the macroeconomic point of view that force the government to limit its fiscal deficit. In this case, India government is exercising the caution owing to the same constraints.

    Uncertainties in the crisis

    • Uncertainty is a defining feature of every crisis.
    • During the global financial crisis, a big uncertainty around the world was about how much risk there was in the system, where it lay and who was bearing it.
    • The uncertainty of the corona crisis is much deeper.
    • There are far too many known unknowns not to speak of unknown unknowns.
    • Uncertainties in corona crisis: We just don’t know enough about the effectiveness of the lockdowns, the age and gender profile of susceptibility to the virus.
    • We also don’t know about the process of recovery, the tipping point if any for mass immunity, whether the virus will attack in waves.
    • And most importantly, when we might have a vaccine and a cure.
    • Governments are, for the large part, having to fly blind.

    Issues over relief and stimulus package

    • There are many issues to be decided and planned on the way forward.
    • A big issue will be an expenditure plan for relief during the crisis and stimulus after some normalcy is restored.
    • Borrow more spend more: Even the most ardent fiscal hawks are now agreed that the government needs to abandon its fiscal reticence, and borrow more and spend more.
    • Even the most extreme monetary purists are agreed that the RBI should fund the government borrowing by printing money.
    • Even the staunchest advocates of financial stability are agreed that more regulatory forbearance is necessary.
    • And virtually everyone is agreed on where additional spending should be directed.

    Debate on how much additionally the government should borrow

    • There is disagreement on how much additionally the government should borrow.
    • There are two opposing views in this regard, which are discussed below.
    • 1. Fiscal risk without preset fiscal deficit: One view is that the government should err on the side of taking a fiscal risk without any preset fiscal deficit number.
    • It should simply determine what needs to be done and borrow to that extent, acting as if there were no fiscal constraint at all.
    • In other words, act as per the diktat of the now famous three words — “whatever it takes”.
    • 2. Set a limit: An opposing view is “whatever it takes” is not an option for India.
    • Many analysts have estimated that just the loss of revenue due to the economic shutdown will take the combined fiscal deficit of the Centre and states beyond 10 per cent of GDP.
    • The borrow and spend programme will be in addition to the above loss.
    • Unlike rich countries, we can’t afford to ignore the risks of fiscal excess of that magnitude, no matter the compelling circumstances.
    • What are the risks involved? There will be a heavy price to pay down the road by way of inflation and exchange rate volatility.

    From the UPSC point of view you must pay attention to the both the arguments made here, question can be asked in UPSC based on the suggestions and their pros and cons. Both the arguments cited above have their merits and demerits.

    Way forward

    • It’s important to keep in mind that we have resources and capability in the near future should there be another wave of the virus later in the year.
    • It will be advisable for the government to fix an upper bound for fiscal deficit and operate within that. For now, the borrow and spend programme should be restricted to 2 per cent of GDP.

  • [pib] “DekhoApnaDesh” Webinar

    The Ministry of Tourism has launched its “DekhoApnaDesh” webinar series to provide information on the many destinations and the sheer depth and expanse of the culture and heritage of India.

    Tourism and tourist sites carry a high incidence of possible prelims questions.  Take time to quickly revise the Swadesh Darshan , PRASHAD Schemes.   Click here for the repository of all such initiaitives.

    About DekhoApnaDesh

    • Under this, a series of webinars will showcase the diverse and remarkable history and culture of India through a documentary series on various cities.
    • It will be including various monuments, cuisine, arts, dance forms, natural landscapes, festivals and many other aspects of the rich Indian civilization.
    • The core of the webinar is based on tourism awareness and social history.
    • The webinar will be available in the public domain through the Ministry’s social media handles- “Incredible India” on Instagram and Facebook.
    • The first webinar, which was part of a series that shall unfold, touched upon the long history of Delhi as it has unfolded as 8 cities.

  • OPEC+ decides combine slashing of crude oil production

    India has made a case for affordable oil prices in the backdrop of the Organization of the Petroleum Exporting Countries-plus (OPEC+) combine slashing production amid the COVID-19 pandemic.

    Global crude oil pricing dynamics greatly impact  India and its import bill. Kindly refer to the article titled “Oil Prices and OPEC+” pinned below this newscard. Various aspects related to the issue are covered in the Burning Issue section . It seeks to answer all your doubts such as ; Impact on Fuel prices,  India’s forex reserves, Strategic petroleum reserves,  etc.

    Why a cause of worry?

    • OPEC accounts for around 40% of global production.
    • The OPEC accounts for 80% of India’s crude oil imports.
    • Any production cut by the OPEC plus arrangement impacts India’s energy security efforts in the short run.

    Impact on India

    • India, which is one of the major OPEC consumers, has always stood for a global consensus on responsible pricing.
    • Indian refiners have cut production as the lockdown has led to a sharp decline in demand for transportation fuels.
    • Demand for domestic cooking gas has, however, increased as more people stay indoors during the lockdown aimed at containing the spread of the coronavirus.

    About OPEC+

    • The non-OPEC countries which export crude oil along with the 14 OPECs are termed as OPEC plus countries.
    • OPEC plus countries include Azerbaijan, Bahrain, Brunei, Kazakhstan, Malaysia, Mexico, Oman, Russia, South Sudan and Sudan.
    • Saudi and Russia, both have been at the heart of a three-year alliance of oil producers known as OPEC Plus — which now includes 11 OPEC members and 10 non-OPEC nations — that aims to shore up oil prices with production cuts.

    Back2Basics:  OPEC

    • OPEC is a permanent, intergovernmental organization, created at the Baghdad Conference in 1960, by Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela.
    • It aims to manage the supply of oil in an effort to set the price of oil in the world market, in order to avoid fluctuations that might affect the economies of both producing and purchasing countries.
    • It is headquartered in Vienna, Austria.
    • OPEC membership is open to any country that is a substantial exporter of oil and which shares the ideals of the organization.
    • Today OPEC is a cartel that includes 14 nations, predominantly from the middle east whose sole responsibility is to control prices and moderate supply.

    Also read:

    [Burning Issue] Oil Prices and OPEC+

  • ConFarm model of agricultural market

    A unique initiative titled Consumer-Farmer Compact in Telangana is ensuring food availability and access in COVID-19 times.

    Such innovative models of agricultural marketing are very crucial while highlighting the limitations of APMCs and eNAM. Make personal notes of such initiatives.

    Consumer-Farmer Compact

    • The initiative is kicked off by some NGOs in June 2018 and has been endeavoring to bring farmers and consumers on the same platform for their benefit.
    • The consumers support farmers with their agricultural needs; in return, farmers ensure consumers are able to access food in a hassle-free manner.

    What does the initiative do?

    • The initiative requires consumers to support farmers at the beginning of a farming season.
    • Each consumer supports a group of farmers with about Rs 12,500 per acre for their farming needs.
    • In return, at the time of harvest, consumers are given products according to the value they invested, leaving the middlemen out.
    • They are provided with millets, pulses, oil, jaggery and other necessary items produced organically — either in bulk or on a monthly basis.
    • The initiative also aims to give millets a push in the urban market, enabling consumers to move beyond the commonly consumed grains such as rice and wheat.

    Significance

    • This model of sharing economy in the village has helped alleviate hunger and ensured their nutritional needs are met.
    • The farmers who are part of the initiative practice traditional ecological farming with an emphasis on biodiverse cultivation.
    • It helps them have dietary diversity in their food choices and control over their land and food production that is not dictated by the vagaries of the market.
    • The practice has brought them closer to a group of consumers who have been keen on trying an alternative route.

    Conclusion

    • At this juncture in crisis — when the free-market system and global trade are staring at an uncertain future — local solutions such as ‘Confarm’ hold greater prominence.
    • Such supply chains such are the need of the hour. Farmers and consumers must come together to face crisis moments in the future as well.

  • Agmark, Hallmark, ISI, BIS, BEE and Other Ratings

  • Use the COVID crisis to transform the agri-marketing system

    This article discusses the impact of lockdown on farmers and how the disruption of the supply chain is adding to their difficulties in selling their produce in the markets.

    In the last two weeks or so, we have been reading about farmers and issues around the agri-marketing supply chain. If you have been following the story on Agriculture Marketing Reforms, you would remember us talking about it in the op-ed titled “A smarter supply line”

    There are 6 suggestions to overhaul our agri-marketing system. These are-

    1. Abolish/reframe the APMC Act

    • There is an urgent need for abolishing or reframing the APMC Act and encourage direct buying of agri-produce from farmers/farmer producer organisations (FPOs).
    • The companies, processors, organised retailers, exporters, consumer groups, that buy directly from FPOs need not pay any market fee as they do not avail the facilities of APMC yards.

    APMC Act restrict the farmers from selling their produce outside the market yard, so in the present context of Covid-19 this is a counterproductive restrictions. UPSC asked question on in in 2014.

    2. The warehouses can also be designated as markets.

    • The warehouse receipt system can be scaled up.
    • The private sector should be encouraged to open mandis with modern infrastructure, capping commissions.

    3. The futures trading should be encouraged by allowing banking finance to hedge for commodity price risks.

    A futures contract is a standardized legal agreement to buy or sell something at a predetermined price at a specified time in the future, encouraging this would help farmers assurance of price and help in making decion for the sowing based on price signal from he markets.

    4. Promote e-NAM through proper assaying and grading the produce and setting up dispute settlement mechanism; rope in major logistics players for delivery of goods.

    5. Avoiding rush in the markets: Procurement must be staggered through coupons and incentives that give farmers an additional bonus for bringing the produce to the market after May 10, or so.

    6. The amount provided under PM Kisan should be increased from Rs 6,000 to at least Rs 10,000 per farming family to partially compensate them for their losses.

    Way forward

    • Besides these, Prime Minister would benefit by taking a leaf out of the book of President Donald Trump. Modi should lead from the front by holding daily press briefings and announce a country-wide relief package amounting to around 8-10 per cent of GDP.
    • Whatever the causes of this disaster are, it is clear that the WHO failed in its duty to raise the alarm in time. India must ask for fundamental reforms in the UN System, including the WHO, making it more transparent, competent, and accountable.

  • How a dollar swap line with US Fed can help in uncertain times?

    India is working with the US to secure a dollar swap line that would help in better management of its external account and provide an extra cushion in the event of an abrupt outflow of funds.

    What are Currency Swaps?

    • A currency swap, also known as a cross-currency swap, is an off-balance sheet transaction in which two parties exchange principal and interest in different currencies.
    • The purpose of a currency swap is to lower exposure to exchange rate risk or reduce the cost of borrowing a foreign currency.

    Why do we need dollars?

    • According to RBI data, 63.7% of India’s foreign currency assets — or $256.17 billion — are held in overseas securities, mainly in the US treasury.
    • While FPIs investors looking for safer investments, the current global uncertainty over COVID outbreak have led to a shortfall in Indian stock markets.
    • This has pulled down India’s foreign exchange reserves.
    • This means that the government and the RBI cannot lower their guard on the management of the economy and the external account.

    How does a swap facility work?

    • In a swap arrangement, the US Fed provides dollars to a foreign central bank, which, at the same time, provides the equivalent funds in its currency to the Fed, based on the market exchange rate at the time of the transaction.
    • The parties agree to swap back these quantities of their two currencies at a specified date in the future, which could be the next day or even three months later, using the same exchange rate as in the first transaction.
    • These swap operations carry no exchange rate or other market risks, as transaction terms are set in advance.

    Benefits of currency swap

    • The absence of an exchange rate risk is the major benefit of such a facility.
    • This facility provides India with the flexibility to use these reserves at any time in order to maintain an appropriate level of balance of payments or short-term liquidity.
    • currency swaps between governments also have supplementary objectives like promotion of bilateral trade, maintaining the value of foreign exchange reserves with the central bank and ensuring financial stability (protecting the health of the banking system).

    Recent examples

    • India already has a $75 billion bilateral currency swap line with Japan, which has the second-highest dollar reserves after China.
    • The RBI also offers similar swap lines to central banks in the SAARC region within a total corpus of $2 billion.

    Note: Relate all other terminologies related to USD-INR convertiblity viz. Current Account, BoP etc.

  • [pib] Operation Lifeline UDAN

    To ensure a steady supply of essentials, even in the most remote locations, the Union Civil Aviation Ministry launched ‘Lifeline Udan’.

    Don’t get confused or correlate this with Ude Desh ka Aam Nagrik (UDAN) Scheme. The name clearly indicates that it is an HADR like operation. Whats HADR? Humanitarian Assistance and Disaster Relief

    Op. Lifeline Udan

    • Under this operation, flights are being operated to transport essential medical cargo to remote parts of the country amid the lockdown to support India’s fight against Covid-19.
    • The flights have been operated by Air India, Alliance Air, Indian Air Force, Pawan Hans and private carriers.
    • The cargo compulsorily supplies goods such as regents, enzymes, medical equipment, testing kits and PPE, masks, gloves and other essential items as applicable by the State and UT Governments.
    • Air India is shouldered to operate dedicated scheduled cargo flights to other countries for transfer of critical medical supplies, as per the requirement.