Note4Students
From UPSC perspective, the following things are important :
Prelims level: Zero click attack
Mains level: Paper 2- Issues with surveillance
Context
The Pegasus spyware, created by NSO Group in Israel has created a political storm in India over its alleged use by the government.
About the Pegasus spyware controversy
- It uses a “zero-click” attack which allows the device to be taken over remotely by exploiting software and hardware vulnerabilities.
- The Israeli Defence Ministry’s stated that Pegasus and other cyber products are exported “exclusively to government entities” and are only for the purpose of preventing and investigating crime and counter terrorism.
- Pegasus has been used to illegally hack into people’s lives and to obtain private information outside the boundaries of the law.
- Those who were supposedly targeted range from the uppermost echelons of the judiciary, Opposition party leaders, activists and journalists.
How it harms freedoms and rights guaranteed by the Constitution
- A person has the basic fundamental rights of liberty, privacy, speech and expression amongst others.
- These rights go hand in hand with each other.
- The alleged use of Pegasus to illegally hack into persons’ lives, listen in on private conversations, to thereafter use this private information against said persons in hope of gaining undue advantage, are all outside the boundaries of the law.
- Surveillance on this level would have the effect of instilling fear and directly hampering a person’s ability to freely make their own decisions.
- The effect is that a person does not have the freedom to think, to speak or even be in the privacy of their own homes.
Legal provisions for surveillance
- In December 2018, the government authorised 10 security and intelligence agencies to intercept, monitor and decrypt any information generated, transmitted, received or stored in any computer resource.
- The authorisation is required before any of the 10 notified agencies can intercept, monitor or decrypt any information.
- This and other grounds are being taken by the government before the Supreme Court to defend its stance.
- The Data Protection Bill (yet to be passed by Parliament) offers no protection in respect of surveillance.
- Sections 43 and 66 of the Information Technology Act, 2000 criminalise hacking.
Conclusion
The majority is not always right. A democracy has the indelible right to question, to demand answers and explanations. The government has many questions to answer and steps to take to protect the rights and freedoms of its citizens.
Back2Basics: Zero-click attack
- A zero-click attack is a remote cyber attack which does not require any interaction from the target to compromise it.
- Pegasus spyware eliminates the need for human errors to compromise a device and instead relies on software or hardware flaws to gain complete access to a device.
- Zero-click attacks occur only when an attacker is able to takeover a device remotely after successfully exploiting vulnerabilities in the software and hardware of the phone.
- To make this kind of attack successful, an attacker needs to exploit flaws in a device, whereas spear phishing is a social engineering attack.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: ONDC
Mains level: Paper 3- Advantages and challenges in the Open Network for Digital Commerce project
Context
The Department for Promotion of Industry and Internal Trade (DPIIT) recently issued orders appointing an advisory committee for its Open Network for Digital Commerce (ONDC) project.
About ONDC project
- The Open Network for Digital Commerce (ONDC) project aims to make e-commerce processes open-source.
- In simple terms, it aims at creating a platform that can be utilised by all online retailers.
- This is another effort by the government to facilitate the creation of shared digital infrastructure, as it has previously done for identity (Aadhaar) and payments (Unified Payments Interface).
- It will digitise e-commerce value chains, standardise operations, promote inclusion of suppliers, and derive efficiencies in logistics.
What are its advantages?
- Level playing field: When done well, this approach can level the playing field and create value for users.
- Curb monopoly: The market is dominated by a few players who are facing investigations for unfair trade practices in many countries.
- Prevent market failure: The sector is characterised by many small players who individually do not have the muscle to have an equitable bargain with e-commerce companies.
- Economists call this a “market failure”, and it presents a legitimate case for intervention.
The three layers of an open digital ecosystem and their conceptual framework for adoption and safeguards
1) Tech layer
- The “tech layer” should be designed for minimalism and decentralisation.
- The government should restrict its role to facilitating standards and protocols that provide open access, and in getting them adopted organically.
- Building an entire tech platform should happen only if a standards-based approach doesn’t suffice.
- If built, the platform should be built on “privacy by design” principles.
- It should collect minimal amounts of data (especially personal data) and store it in a decentralised manner.
- Tools like blockchain could be used to build technical safeguards that cannot be overridden without active consent.
2) Governance layer
- Avoid excessive government intervention: The “governance layer” around this should allay business fears of excessive state intervention in e-commerce.
- Legal provision: Any deployment of standards or tech should be accompanied by law or regulation that lays out the scope of the project.
- Independent regulator for personal data: If collection of any personal data is required, passing the data protection bill and creating an independent regulator should be a precondition.
- Handling by independent society: To assure the industry of fairness, the government could hand over the stewardship of the standards or platform to an independent society or non-profit.
3) Community layer
- A community layer can foster a truly inclusive and participatory process.
- This may be achieved by making civil society and the public active contributors and seeking wide feedback on drafts of the proposal.
- Once the framework is implemented, ensuring quick and time-bound redressal of grievances will help build trust in the system.
Concerns with government creating shared digital infrastructure
- This approach also comes with risks and we should tread with caution.
- In general, governments should intervene in markets only when there is a clearly identifiable market failure or massive societal benefits from creating shared infrastructure.
Way forward
- The government’s championing of open-source technology for digital commerce is commendable.
- It should also push the envelope on the other principles of the open-source movement — transparency, collaboration, release early and often, inclusive meritocracy, and community.
- Even if we do all things right, an infrastructure-led approach may not be sufficient.
- Therefore, we need to supplement infrastructure with tightly-tailored regulation.
- We need to explore the concept of interoperability, that is, mandating that private digital platforms like e-commerce firms enable their users and suppliers to solicit business on other platforms.
- To drive the adoption of an open e-commerce platform in a sector with entrenched incumbents we need to create “reference applications”, and financial or non-financial incentives.
- Useful learnings can be drawn from the adoption of UPI: The government supported the rollout of BHIM as a reference app, and offered incentives.
Consider the question “How the Open Network for Digital Commerce project can help deal with the issues with the e-commerce sector? Suggest the approach the project should adopt to make it a success.”
Conclusion
It is timely that India is exploring innovative ways to bridge the gaps in e-commerce markets. But the boldness of this vision must be matched by the thoughtfulness of the approach.
Back2Basics: What is ‘Privacy by Design?
- Privacy by design is a concept that integrates privacy into the creation and operation of new devices, IT systems, networked infrastructure, and even corporate policies.
- Developing and integrating privacy solutions in the early phases of a project identifies any potential problems at an early stage to prevent them in the long run.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: Not much
Mains level: Paper 2- Importance of medical workforce in making the healthcare system robust
Context
On July 8, 2021, the Union government announced the “India COVID-19 Emergency Response and Health Systems Preparedness Package: Phase II”. But it lacks provision for the medical workforce.
Objectives of the package
- The stated purpose of the package is to boost health infrastructure and prepare for a possible third wave of COVID-19.
- There is plan to increase COVID-19 beds, improve the oxygen availability and supply, create buffer stocks of essential medicines; purchase equipment and strengthen paediatric beds.
What is lacking in the package?
- Workforce shortage: The package barely has any attention on improving the availability of health human resources.
- As reported in rural health statistics and the national health profile there are vacancies for staff in government health facilities, which range from 30% to 80% depending upon the sub-group of medical officers, specialist doctors to nurses, laboratory technicians, pharmacists and radiographers, amongst others.
- Interstate variation: In addition, there are wide inter-State variations, with States that have poor health indicators with the highest vacancies.
Way forward
- Package for filling the existing vacancies: The COVID-19 package II needs to be urgently supplemented by another plan and a similar financial package (with shared Union and State government funding) to fill the existing vacancies of health staff at all levels.
- An objective approach to assess the mid-term health human resource needs could be the Indian Public Health Standards (IPHS).
- IPHS prescribes the human resources and infrastructure needed to make various types of government health facilities functional.
- The pandemic should be used as an opportunity to prepare India’s health system for the future.
- Scrutiny of the progress on policy decision: The progress on key policy decisions, for the last few years, to strengthen India’s health system, including those in India’s national health policy of 2017, need to be objectively scrutinised.
- These two sets of policy decisions should be reviewed and progress monitored, through a meeting of the Central Council of Health and Family Welfare, of which the Health Ministers of the States are members.
Conclusion
India’s health system will not benefit from ad hoc and a patchwork of one or other small packages. It essentially needs some transformational changes.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: Mazar-e-Sharif, Kandahar
Mains level: Paper 2- Engaging the Taliban
Context
With over a third of Afghanistan’s more than 400 districts under Taliban control, the talk-to-the-Taliban option is indeed the best of the many less than perfect options available to India.
India need a reset in its Afghanistan policy
- India has ‘temporarily’ closed its consulate in Kandahar.
- This follows the decision to suspend operations in the Indian consulates in Jalalabad and Herat.
- India’s decision to partially “withdraw” from Afghanistan shows that betting only on the government in Kabul was a big mistake,
- It also shows that India realises the threat the Taliban poses to Indian assets and presence in Afghanistan.
- To safeguard its civilian assets there as well as to stay relevant in the unfolding ‘great game’ in and around Afghanistan, India must fundamentally reset its Afghanistan policy.
- India must, in its own national interest, begin ‘open talks’ with the Taliban before it is too late.
- Open dialogue with the Taliban should no longer be a taboo; it is a strategic necessity.
Reason for avoiding open talks with Taliban
- There are at least five possible reasons why India appears to want to keep the Taliban engagement slow and behind closed doors.
- First, if India chooses to engage the Taliban directly, it could make Afghanistan President Ashraf Ghani, to look towards China and the Shanghai Cooperation Organisation (SCO) for national security and personal political survival.
- Second, India is also faced with the dilemma of who to talk to within the Taliban given that it is hardly a monolith.
- Third, given the global opprobrium that Taliban faced in its earlier avatar and the lack of evidence about whether the outfit is a changed lot today, New Delhi might not want to court the Taliban so soon.
- Fourth, there is little clarity about what the Taliban’s real intentions are going forward and what they would do after ascending to power in Kabul.
- Fifth, it would not be totally unreasonable to consider the possibility of Pakistan acting out against India in Kashmir if India were to establish deeper links with the Taliban.
Reasons India should engage with the Taliban openly
- Wide international recognition: Whether we like it or not, the Taliban, is going to be part of the political scheme of things in Afghanistan, and unlike in 1996, a large number of players in the international community are going to recognise/negotiate/do business with the Taliban.
- Countering Pakistan: The Taliban today is looking for regional and global partners for recognition and legitimacy especially in the neighbourhood.
- So the less proactive the Indian engagement with the Taliban, the stronger Pakistan-Taliban relations would become.
- A worldly-wise and internationally-exposed Taliban 2.0 would develop its own agency and sovereign claims including perhaps calling into question the legitimacy of the Durand Line separating Pakistan and Afghanistan, something Pakistan was always concerned about. T
- The Taliban would want to hedge their bets on how far to listen to Pakistan.
- That is precisely when New Delhi should engage the Taliban.
- Security of civilian assets: India needs to court all parties in Afghanistan, including the Taliban if it wants to ensure its security of its civilian assets there.
- It makes neither strategic nor economic sense to withdraw from Afghanistan after spending over $3 billion, something the Government seems to be prepared to do
- Being a part of Afghanistan’s future course: If India is not proactive in Afghanistan at least now, late as it is, Russia, Iran, Pakistan and China will emerge as the shapers of Afghanistan’s political and geopolitical destiny, which for sure will be detrimental to Indian interests there.
- Continental grand strategy: Backchannel talks with Pakistan and a consequent ceasefire on the Line of Control, political dialogue with the mainstream Kashmiri leadership, secret parleys with Taliban all indicate that India is opening up its congested north-western frontier.
- Except for the strategic foray into the Indo-Pacific, India today is strategically boxed in the region and it must break out of it. Afghanistan could provide, if not immediately, India with such a way out.
Consider the question ” India’s Afghan policy is at a major crossroads; to safeguard its civilian assets there as well as to stay relevant in the unfolding ‘great game’ in and around Afghanistan, New Delhi must fundamentally reset its Afghanistan policy. Comment.”
Conclusion
In the end, India’s engagement with the Taliban may or may not achieve much, but non-engagement will definitely hurt Indian interests.
Back2Basics: Durand Line
- Durand Line, boundary established in the Hindu Kush in 1893 running through the tribal lands between Afghanistan and British India, marking their respective spheres of influence.
- In modern times it has marked the border between Afghanistan and Pakistan.
- The acceptance of this line—which was named for Sir Mortimer Durand, who induced ʿAbdor Raḥmān Khān, amir of Afghanistan, to agree to a boundary—may be said to have settled the Indo-Afghan frontier problem for the rest of the British period.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: BITs
Mains level: Paper 3- Cairn Energy case
Context
The recent move by Cairn to seize India’s sovereign assets in order to enforce its arbitration award has brought into focus the dispute and the related issues.
Utility of Bilateral Investment Treaties (BIT)
- After the World Wars, as more countries gained sovereignty, they tended to look at foreign investments as a form of neo-colonialism.
- Bilateral investment treaties became the primary tool to forge relationships between developed and developing countries.
- The BITs help to adopt standards for prompt, adequate and effective compensation in case of expropriation.
- With the advent of globalisation, BITs became the means for foreign investment in developing countries.
- Although the impact of investment agreements on foreign investments remains highly contextualised and inconclusive, these came to govern international investment relations.
- The BITs retained the old-world construct that allowed international arbitration.
- However, many developing countries view arbitration of tax matters as a breach of their sovereign right to tax.
The Cairn Energy case
- In 2012, explanations were added to the Income Tax Act 1961 — these provisions were deemed as having a retrospective effect.
- This was more in response to the Supreme Court’s decision in the Vodafone case which denied the income tax department’s assertion of tax claims arising from the offshore transfer of interest that substantially derived their value from India.
- The 2012 explanations to the IT Act indeed sought to fix tax avoidance.
- Looking into the details of the Cairn case, one can see the series of reorganisations that tip-toed around tax laws of multiple jurisdictions, resulting in the non-payment of tax.
- Taxing offshore indirect transfers — a structuring device to gain tax advantage from the indirect sale of assets — is not unique to India (336 tax treaties contain such an article).
- It is also possible to see that the underlying assets of the subsidiaries were immovable assets in India.
- The UK-India tax treaty allowed for taxation of capital gains as per Indian law.
- India challenged the admissibility of the case before the arbitration tribunal.
- However, the case rests on a distinction between tax and tax-related investment.
- Surely, all investments have tax implications and the acceptance of such a distinction could create problems even where tax is explicitly carved out from the bilateral investment treaties.
- The option of arbitration upon an unsuccessful Mutual Agreement Procedure (MAP) resolution is not available in India.
- For this reason, over the years, there has been a rising trend in tax disputes involving BITs.
- The Cairn case is one such instance where arbitration was invoked especially since MAP was not an option.
Way forward
- The case raises many questions that administrators must address through reform.
- India’s model BIT introduced in 2016 rectifies the issue of the distinction between tax dispute and investment-related taxation dispute through the specific exclusion of taxation.
- The recognition of a tax-related investment dispute, distinct from a tax dispute, should not undermine such a carve-out.
Conclusion
It is also important to note even if the award is enforced, the matter of tax avoidance stands pending before the High Court. Given the complexity, the only reasonable solution would be a negotiated settlement. Even if there’s a resolution in the Cairns case, questions of law would remain.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: FPI and FDI
Mains level: Paper 3- Equity market bubble
Context
Even as the real economy returns to the doldrums after being hit by the second wave of COVID-19 infections, the continuing bull run in India’s equity market in the April-June quarter has baffled many observers.
V-shaped recovery of equity market
- The benchmark BSE Sensex had nosedived to below 28,000 in March-April 2020, following the nationwide lockdown.
- The equity market posted a sharp V-shaped recovery in 2020-21.
- The Sensex surged beyond 50,000 in February 2021 and is currently closing on the 53,000 level.
Factors suggesting bubble in equity market
- There was an 81%-plus growth in the Sensex between April 2020 and March 2021 in the backdrop of real GDP growth plummeting to -7.3% during the same period.
- While output contraction had reversed from the third quarter of 2020-21, the inflation rate also rose and remained way ahead of the real GDP growth rate in the last two quarters (Chart 1).
- It is difficult to find any rationality behind the skyrocketing BSE Sensex in the context of such stagflation in the real economy.
- Just like the fall in the equity prices was driven by the exit of foreign portfolio investors (FPI), the return of massive FPI inflows has driven the Indian equity bubble since then (Chart 2).
- Net FPI inflows clocked an unprecedented ₹2.74 lakh crore in 2020-21, the previous high being ₹1.4 lakh crore in 2012-13.
- The Reserve Bank of India (RBI)’s annual report (2020-21) to state stated that: “This order of asset price inflation in the context of the estimated 8 per cent contraction in GDP in 2020-21 poses the risk of a bubble.”
Global factors
- The global liquidity glut, following the expansionary, easy money policies adopted by the fiscal and monetary authorities of the OECD and G20 countries, has led to equity price inflation in several markets driven by FPIs, especially in Asia.
- Following cues from the U.S. and the U.K., Asian equity markets in Singapore, India, Thailand, Malaysia and Hong Kong are currently witnessing price-earnings (P/E) ratios significantly above their historic means.
- The BSE Sensex’s P/E ratio of 32 in end-June 2021 is way above its historic mean of around 20.
What could burst the bubble?
- Change in monetary policy: With COVID-19 vaccination and economic recovery proceeding apace in the U.S., the U.K. and Europe, fiscal and monetary policy stances will change soon.
- Exit of FPIs: Once the U.S. Federal Reserve and other central banks start raising interest rates, the direction of FPI flows will invariably change bringing about corrections in equity markets across Asia.
- India remains particularly vulnerable to a major correction in the equity market because of two reasons.
- Low pace of vaccination: The pace of COVID-19 vaccination in India, given the vast population, lags behind most large countries.
- In the absence of a substantial increase in the vaccination budget and procurement, large segments of the Indian population will remain vulnerable to a potential third wave of COVID-19, with its attendant deleterious impact on the real economy.
- Weak fiscal stimulus: India’s economic recovery from the recession will remain constrained by the weak fiscal stimulus that has been delivered by the Central government.
- Data from the IMF clearly show that while the total global stimulus consisted of additional public spending or revenue foregone measures amounting to 7.4% of global GDP, India’s fiscal measures amounted to 3.3% of GDP only.
Consider the question “What are the factors driving equity market boom globally? What are the factors that could threaten such boom with a major correction?”
Conclusion
With all agencies, including the RBI, downsizing India’s growth projections for 2021-22, it remains to be seen how long India’s equity bubble lasts.
Back2Basics: P/E ratio
- The price-to-earnings ratio (P/E ratio) is the ratio for valuing a company that measures its current share price relative to its per-share earnings (EPS).
- The price-to-earnings ratio is also sometimes known as the price multiple or the earnings multiple.
- To determine the P/E value, one simply must divide the current stock price by the earnings per share (EPS).
P/E Ratio=Earnings per share / Market value per share
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: Article 19 and 21
Mains level: Paper 3- Issues with surveillance by the government
Context
The ‘Pegasus Project’ report says that over “300 verified Indian mobile telephone numbers, including those used by ministers, opposition leaders, journalists, the legal community, businessmen, government officials, scientists, rights activists and others”, were targeted using spyware made by the Israeli firm, NSO Group.
Threat to press freedom
- Revelations highlight a disturbing trend with regard to the use of hacking software against dissidents and adversaries.
- A significant number of Indians reportedly affected by Pegasus are journalists.
- This is not surprising since the World Press Freedom Index produced by Reporters Without Borders has ranked India 142 out of 180 countries in 2021.
- The press requires (and in democracies is afforded) greater protections on speech and privacy.
- Privacy and free speech are what enable good reporting.
- This has been recognised in Supreme Court decisions.
- In the absence of privacy, the safety of journalists, especially those whose work criticises the government, and the personal safety of their sources is jeopardised.
- Such a lack of privacy, therefore, creates an aura of distrust around these journalists and effectively buries their credibility.
Issues with the legal provision
- Provisions of law under the Indian Telegraph Act of 1885 and the Information Technology (IT) Act of 2000 are used by the government for its interception and monitoring activities.
- While the provisions of the Telegraph Act relate to telephone conversations, the IT Act relates to all communications undertaken using a computer resource.
- Both provisions are problematic and offer the government total opacity in respect of its interception and monitoring activities.
- Section 69 of the IT Act and the Interception Rules of 2009 are even more opaque than the Telegraph Act, and offer even weaker protections to the surveilled.
- No provision, however, allows the government to hack the phones of any individual since the hacking of computer resources, including mobile phones and apps, is a criminal offence under the IT Act.
Issues with surveillance system
- Surveillance itself, whether under a provision of law or without it, is a gross violation of the fundamental rights of citizens.
- Violation of freedom of speech: The very existence of a surveillance system impacts the right to privacy and the exercise of freedom of speech and personal liberty under Articles 19 and 21 of the Constitution, respectively.
- It prevents people from reading and exchanging unorthodox, controversial or provocative ideas.
- No scope for judicial scrutiny: There is also no scope for an individual subjected to surveillance to approach a court of law prior to or during or subsequent to acts of surveillance since the system itself is covert.
- No oversight: In the absence of parliamentary or judicial oversight, electronic surveillance gives the executive the power to influence both the subject of surveillance and all classes of individuals, resulting in a chilling effect on free speech.
- Against separation of power: Constitutional functionaries such as a sitting judge of the Supreme Court have reportedly been surveilled under Pegasus.
- Vesting such disproportionate power with one wing of the government threatens the separation of powers of the government.
- The existing provisions are insufficient to protect against the spread of authoritarianism since they allow the executive to exercise a disproportionate amount of power.
Way forward
- There needs to be oversight from another branch of the government.
- Judicial oversight: Only the judiciary can be competent to decide whether specific instances of surveillance are proportionate, whether less onerous alternatives are available, and to balance the necessity of the government’s objectives with the rights of the impacted individuals.
- Surveillance reforms: Not only are existing protections weak but the proposed legislation related to the personal data protection of Indian citizens fails to consider surveillance while also providing wide exemptions to government authorities.
- Surveillance reform is the need of the hour in India.
Consider the question “Discuss the threats posed by the use of surveillance systems by the government. Suggest the measures to deal with these threats.”
Conclusion
The only solution to the problem of spyware is immediate and far-reaching surveillance reform.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: Not much
Mains level: Paper 2- Limits on China's role in Afghanistan
Context
Amid the gloom that has enveloped Afghanistan, one hope for many countries has been China’s potential role in stabilising it.
Factors that call for China to play role in Afghanistan
- Scope for India-China cooperation: In the past, even India thought that Afghanistan would be a natural area for India and China to work together.
- But little came out of the understanding after the Wuhan summit in 2018.
- Northern neighbours: Afghanistan’s northern neighbours, Turkmenistan, Uzbekistan, and Tajikistan all have expanding political and economic ties with China but have traditionally relied on Russia for their security.
- They might support a larger role for Beijing in Afghanistan in partnership with Russia.
- Iran, Kabul’s western neighbour, also has deepening ties with China.
- Bilateral cooperation with the U.S.: Washington, now locked in an escalating confrontation with Beijing, sees Afghanistan as a potential area of bilateral cooperation.
- Role of Pakistan: Beijing is indeed critical in Pakistan’s plans for Afghanistan.
- Afghan leaders have also been eager to draw China’s BRI into their plans for economic modernisation.
- China was also important for Kabul’s political calculus in limiting Pakistan’s quest for dominance.
Two challenges in China playing role in stabilising Afghanistan
1) Caution in Chinese policy
- The first relates to the deep sources of caution in Chinese policy.
- Neither the prospect of mining Afghanistan’s natural resources nor the vanity of being the newest superpower will compel China to rush into the Afghan vacuum.
- China has deep concerns about Taliban’s ideology and its potential role in fomenting instability in its restive Muslim-majority province, Xinjiang.
- Beijing cannot depend on its special relationship with the Pakistan army to ensure the security of China’s frontiers as well as its investments in Afghanistan.
- The growing attacks on CPEC projects in Pakistan, underline the difficulty of pursuing economic development amid endemic violence.
2) Priorities of Taliban
- The second set of problems relate to the priorities of Taliban.
- It remains to be seen whether the economic development of Afghanistan is a top priority for the Taliban or not.
- Also, is it open to let in foreign capital and all the baggage that comes with it?
- More fundamentally, there is no clarity on the role of economic modernisation in Taliban’s fierce insistence on the creation of an Islamic emirate in Afghanistan.
Conclusion
It is against this backdrop that the chances of China playing a major role in stabilising Afghanistan remain slim.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: Article 21
Mains level: Paper 2- Addressing the issue of undertrials
Context
After the death of Stan Swamy, questions about the conditions of jails and treatment of the incarcerated have been raised anew.
Issue of deaths of prisoners
- The NCRB data reports the death of over 1,800 prisoners in the year 2018. An estimated 70 percent of prison inmates are undertrials.
- Despite constitutional provisions like Article 21, which says, no person shall be denied life or liberty except by the due process of law, the number of undertrials is increasing.
How prisoners are subjected to additional torture
- Overcrowding, delayed medical attention, unhygienic conditions and malnutrition exist in all Indian prisons.
- It is the responsibility of the State and the judiciary to ensure that they are only deprived of their liberty and are not exposed to any additional torture in the form of medical deprivation, unhygienic conditions, bad or inadequate food, etc.
- Yet, thousands are dying every year and the prison authorities are not made accountable.
Way forward
- Acts of extreme neglect that could result in the death of inmates should be acknowledged as extrajudicial torture and made an offense.
- The SC in Sunil Batra (I) v. Delhi Administration (1978), held that “the humane thread of jail jurisprudence that runs right through is that no prison authority enjoys amnesty for unconstitutionality”.
- ARC Recommendations on Prison Reforms: The Union and State Governments should work out, fund and implement at the
earliest, modernization and reforms of the Prison System as recommended by the All India Committee on Jail Reforms (1980-83).
b. The attendant legislative measures should also be expedited.
c. Rules regarding Parole and Remission need to be reviewed.
- Infrastructure: Prisoner Information System, Biometric Identification, facilities for pregnant women, up-gradation of hospitals, etc is needed.
- Strengthening the Open Prison System.
Conclusion
The government needs to take urgent measures to address the issue of additional torture in various forms and the death of prisoners.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: Ministry for Cooperation
Mains level: Paper 3- Performance of cooperative movement
Context
Two weeks ago, the government created a new Ministry for Cooperation. India is, perhaps, the first country to have such a ministry. The Ministry can play an important role in the transformation of cooperatives in the country.
How 1991 economic reforms benefited agriculture
- On July 24, 1991, India decided to unshackle the spirit of private sector entrepreneurship through the move to de-license industry and reduce tariffs on a host of commodities.
- Trade policy changes improved the terms of trade for agriculture and benefitted millions of farmers.
- Agri-exports increased, but this led to higher domestic prices.
The success story of dairy sector in India
- In 1991, Manmohan Singh, then finance minister wanted to delicense the dairy sector as well, but there was stiff opposition from Verghese Kurien.
- It was after 10 years in 2002 that the dairy sector was fully de-licensed.
- The competition between cooperatives and corporate dairy players has benefitted millions of farmers around the country.
- With the entry of the private sector, the growth of the dairy sector accelerated at double the speed.
- Today, both procure roughly the same quantities and growth in the organised private sector is faster than in cooperatives.
Performance of cooperative movement in India
- India’s experience with the cooperative movement has produced mixed results — few successes and many failures.
- There are cooperatives in the financial sector, be it rural or urban.
- But the performance of these agencies when measured in terms of their share in overall credit, achievements in technology upgradation, keeping NPAs low or curbing fraudulent deals has been poor to average.
- Sugar cooperatives of Maharashtra initially touted as exemplars of the movement, are in the doldrums now.
- Many are being sold to the private sector.
Performance of cooperatives in dairy sector
1) Amul
- The performance of the cooperative champion, Gujarat Cooperative Milk Marketing Federation (GCMMF) — with its poster brand, Amul — has been most successful.
- During Operation Flood, it received a lot of capital at highly concessional terms.
- But its success is also the result of professionalism, business and, therefore, keeping politics away.
- But despite the grand success of Gujarat’s milk cooperatives in Gujarat, the model did not spread to other states as successfully.
2) Karnataka Milk Federation
- In its eagerness to please milk farmers, the Karnataka Milk Federation (KMF), which sells its products under the brand name of Nandini, gives them Rs 5 to Rs 6 extra per litre.
- This subsidy, given by the state government, cost the exchequer Rs 1,260 crore till 2019-20.
- KMF procures a lot of milk and then dumps it at lower prices in the market for consumers.
- This depresses prices in adjoining states like Maharashtra, affecting the fortunes of Maharashtra milk farmers.
- If Maharashtra and Karnataka were two different countries, Maharashtra would be challenging Karnataka at the WTO.
Way forward
- The new Ministry of Cooperation can work towards ironing out distortions in state price policies due to subsidization such as in Maharastra and Karnatak milk prices.
- Cooperatives desperately need technological upgradation.
- The Ministry of Cooperation can give them soft loans for innovation and technology upgradation.
- But such loans should also be extended to the private sector to ensure a level playing field.
- The Ministry of Cooperation needs to ensure the least political interference in the operation of cooperatives.
Conclusion
The new Ministry of Cooperation can work towards bringing in professionalism in cooperatives and make them more competitive.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: Recommendation 202
Mains level: Paper 2- Social security for migrant labour
Context
The migrants’ crisis after the two covid waves compelled policy-makers to make certain provisions for them in the schemes announced for the assistance of the poor.
Supreme Court judgement on the issue
- On June 29, the Supreme Court finally delivered its judgment on the plight of migrant labour.
- The judgement was notable for two main reasons.
- First, it recognised that there was the large-scale exclusion of migrant workers and other informal workers from existing schemes due to the lack of their registration and outdated eligibility lists.
- It noted that no benefits will be denied to migrant workers for want of an Aadhaar card and that food assistance will be provided for migrants who were not covered by the National Food Security Act.
- Second, it connected informal workers and migrant workers, both of whom experience exclusion, and mandated that the portal for registration of all informal/migrant workers should be fully operational before July 31.
Advantages of providing social protection
- Investment in social protection is not charity, it is an investment in workers’ productivity and in equitable growth.
- Providing social protection is, as the UN mooted in 2009 when it spelt out the social protection floor (SPF) initiative after the global financial crisis, the surest way out of a crisis by boosting demand at the bottom of the pyramid.
- The report of the Advisory Committee of the ILO, in which India was represented by its labour secretary, provides a strong rationale for instituting a universal SPF during economic crises.
- As a result, all constituents of the ILO adopted Recommendation 202 on social protection floors at the International Labour Conference in 2012.
Inadequate provisions by government
- The Unorganised Workers’ Social Security Act, was approved by Parliament in December 2008.
- But it lacks the mandatory elements of the NCEUS’s proposals and included neither a National Minimum Social Security Package, nor the provision for mandatory registration.
- Estimates show that the central government’s expenditure on all major social protection programmes declined from 1.96 per cent of GDP in 2008-09 to 1.6 per cent in 2013-14 and to only 1.28 per cent in 2019-20.
Way forward
- The National Commission for Enterprises in the Unorganised Sector (NCEUS) had pointed out that the circular migrant workers were a disadvantaged segment among informal workers.
- Comprehensive law: The NCEUS had advocated a comprehensive law for the protection of the rights of all informal workers, including migrants, home workers, and domestic workers.
- Universal registration: NCEUS had also recommended a universal registration mechanism based on self-declaration, with the issuance of a smart social security card, and a National Minimum Social Security Package.
- Guaranteed social security/social protection: We need the provision of a minimum level of guaranteed social security/social protection for all informal workers and their households within a definite time frame.
- More public spending: Guaranteed social protection would involve a clear framework and a commitment to greater public resources being spent on social protection as a large class of workers in India do not have an identifiable employer and a contributory social insurance framework will not work for them.
- Recommendation 202: Government should embrace ILO’s Recommendation 202 and work towards these in a time-bound manner.
Conclusion
To end the silent, painful, and enduring crisis for the workers, as well as the crisis for the economy, the government must urgently recognise the right to social security, embedded both in the Indian Constitution and international covenants.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: BIT
Mains level: Paper 2- State sovereignty
Context
Last year, an arbitration tribunal indicted India for breaching its obligations by imposing taxes retrospectively on Cairn. As a result, Cairn Energy has been attempting to seize Indian assets in several jurisdictions to recover $1.7 billion due from India.
How asset seizure order affects India?
- This episode projects India as an unfriendly country for investors at a time when it wishes to project itself as a prime destination for foreign investment.
- This episode puts India in the league of countries like Pakistan, Congo, Venezuela, Russia and Argentina, who have been part of attachment proceedings overseas due to their failure to comply with international arbitral awards.
- Fighting cases will consume an enormous amount of time, money, and resources, in addition to attracting bad press internationally.
Understanding the doctrine of state immunity
- State immunity is a well-recognised doctrine in international law.
- It safeguards a state and its property against the jurisdiction of another country’s domestic courts.
- Despite the universal acceptance of this doctrine, there is no international legal instrument in force administering its implementation.
- Attempts are underway to create binding international law on the application of the rules of state immunity such as the United Nations Convention on Jurisdictional Immunities of States and Their Property (UNSCI).
- However, this convention is yet to be ratified by 30 countries — the minimum number required to bring it in force, as per Article 30(1) of UNSCI.
- India has signed the convention, but not ratified it.
- The doctrine of state immunity has progressed from absolute immunity to restrictive immunity in which immunity is only for the sovereign functions of the state.
Can India invoke state immunity?
- Most prominent jurisdictions follow the concept of restrictive immunity.
- State immunity can be invoked to resist the seizure of sovereign assets, but not commercial properties.
- In the context of the execution of the investment treaty arbitration awards, properties serving commercial functions are available for seizure.
- In the case of India, the most popular commercial property that foreign investors would target for attachment are the global assets of India’s public sector undertakings such as Air India.
Way forward
- If India wishes to continue the case, it needs to carefully study the laws on state immunity in different jurisdictions where attachment proceedings are likely to come up.
- A better option would be to admit that amending the tax law retrospectively was a mistake and comply with the international ruling.
Conclusion
At the time when India seeks to project itself as an attractive investment destination, such cases could be a setback. India needs to avoid such disputes in the future.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: Not much
Mains level: Paper 2- Judicial interference in investigation
Context
Instances of judiciary directing the investigating officer point to the need for restraint from the judiciary.
Challenging the discretion of investigating officer
- There have been growing instances of subordinate judicial officers, and even High Courts sometimes, directing the investigating officer to effect the arrest of a particular individual.
- To deal with the issue, the Supreme Court of India recently made the observation that courts have no authority to direct an investigating officer to in turn direct the arrest of any particular individual connected with a crime
- This points to the need for a slightly kindlier view of police conduct and more latitude to them in the standard operating procedures which they follow, especially when they investigate a complicated crime.
- The Code of Criminal Procedure (CrPC) vests sufficient discretion in the investigating officer to take such decisions as arrests and searches.
Issues with court’s directions
- Court observations that smack of a lack of faith in police ability and integrity will make grass-root level policemen even more arbitrary than now and force them into carrying out questionable actions that will cast aspersions on an officer’s ability to think for himself.
- Court interference in the day-to-day investigation is not only undesirable but is also not sanctioned by law.
- Only the Supreme Court, has been vested with enormous authority and discretion by the Constitution, the lesser courts shall not give directions in the matter of arrests and searches.
Safeguard against police misconduct
- We need to educate the Executive and the common man that it is now well-established law that the police have to register an FIR.
- It is mandatory that every police station in the land should register a complaint under the relevant sections of a statute the moment a cognisable offence is made out in the complaint
- There is another safeguard against police misconduct.
- The CrPC makes it obligatory for the investigating officer to write a diary that details the action taken every day following registration.
- When in doubt, the competent court, which already has a copy of the first information report, can demand to see the case diary.
- Courts should remember that the police are a well-established hierarchy that is obligated to ensure objectivity during a criminal investigation.
- Every investigation is supervised by at least two immediate senior officers.
Conclusion
Judicial interference in an investigation is counterproductive to the idea of justice. Therefore, there is a need for allowing more freedom to the investigating officers in the standard operating procedure that they follow.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: Social backwardness
Mains level: Paper 2- Claim of backwardness and challenges
Context
Two rulings of the Supreme Court have frayed nerves in Maharashtra on the broader question of “reservation”. The other pertains to OBC reservation in local bodies. Both issues have relevance beyond Maharashtra.
Challenges in addressing the demand for reservation
- Lack of quantitative data: The issue of actual numbers or population share of OBCs has been talked about for over a decade.
- Besides, there is a need to understand the socio-economic situation of different backward communities.
- In the last instance, we have to decide which groups are backward and what needs to be done for them.
- The political class have consistently avoided the juridical reality.
Consensus between judiciary and political class
- That consensus after implementation of Mandal commission recommendation had three dimensions:
- 1) Accepting that caste is the main cause of tradition-born backwardness among a large section of the population.
- 2) Resorting to “reservation” as the easiest policy response.
- 3) Recognising and accommodating the political aspirations of the backward sections by expanding the social base of the political elite.
- But this resulted in the current deadlock on the question of social justice.
- Today, not only the Marathas, but Jats and Patidars, too, claim that vast numbers among them have been left behind in the contemporary economy.
- These demands have deflected attention from two matters.
- 1) That the enabling provision of the Constitution aims at social backwardness (caused by societal location).
- 2) That the causes of economic distress originating in development policies are distinct from backwardness primarily originating in caste location.
- Granting reservations on an economic basis seems to have complicated matters.
Five reservation-related issues gaining renewed urgency
- Intra-OBC differentiations: This issue was already raised by a member of the Mandal Commission itself.
- Most states have failed to come up with an effective arrangement to addressing the issue.
- The Centre is currently waiting for a report on this question.
- Intra-caste stratification: Intra-caste stratification is increasing — something that was rather limited at the time of Mandal.
- What sociologist D L Sheth called as classification is now becoming the central issue, with many complications.
- Advantages and logic: The third question is about the specific advantages and logic of reservation in the three different arenas of employment, education and political representation.
- Limits of reservation: There is need to discuss the limits of reservation and the need to think of additional measures to augment the policy of social justice.
- Setting boundaries: With such widespread poverty and suffering, how do we distinguish between backwardness primarily caused by a group’s social location in traditional social order and backwardness resulting from distortions of the political economy?
- Unless we grapple with this question, reservation is bound to remain a contentious issue.
Way forward
- The above questions are best left ideally to a third backward classes commission whose time has come.
- Removing the 50 per cent cap legislatively needs to be considered.
Conclusion
We need to devise a mechanism to verify the claims of backwardness to address the increasing demands for reservation from the politically strong section of society.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: Right to reproductive freedom
Mains level: Paper 2- Coercive policy measures to control population
Context
Recently, the government of Uttar Pradesh released a “Population Policy” in which it stated its intention to bring the gross fertility rate in the State down from the existing 2.7 to 2.1 by 2026.
Provisions in the Bill
- This draft law, titled the Uttar Pradesh Population (Control, Stabilisation and Welfare) Bill, 2021, seeks to provide a series of incentives to families that adhere to a two-child norm.
- The Bill also intends on disentitling families that breach the norm from benefits and subsidies.
- It promises public servants who undergo sterilisation and adopt a two-child norm several benefits.
- The draft Bill also contains a list of punishments.
- A person who breaches the two-child norm will be debarred from securing the benefit of any government-sponsored welfare scheme and will be disqualified from applying to any State government job.
- Existing government employees who infringe the rule will be denied the benefit of promotion.
- Transgressing individuals will be prohibited from contesting elections to local authorities and bodies.
Issues with coercive population control policies
1) Counter-productive measure
- Through an affidavit filed in court, the central government argued that “international experience shows that any coercion to have a certain number of children is counter-productive and leads to demographic distortions”.
2) Against international obligations
- India is committed to its obligations under international law, including the principles contained in the International Conference on Population and Development Programme of Action, 1994.
- Foremost in those principles was a pledge from nations that they would look beyond demographic targets and focus instead on guaranteeing a right to reproductive freedom.
3) Against right to reproductive freedom and privacy
- In Suchita Srivastava & Anr vs Chandigarh Administration (2009), the Court found that a woman’s freedom to make reproductive decisions is an integral facet of the right to personal liberty guaranteed by Article 21.
- This ruling was endorsed by the Supreme Court’s nine-judge Bench verdict in K.S. Puttaswamy vs Union of India (2017).
- A reading of the plurality of opinions there shows us that the Constitution sees a person’s autonomy over her body as an extension of the right to privacy.
- A simple reading of U.P.’s draft law will show us that, if enacted, it will grossly impinge on the right to reproductive freedom.
- However, In Javed & Ors vs State of Haryana & Ors (2003), the Court upheld a law that disqualified persons with more than two children from contesting in local body elections.
- But the present UP Bill is far more disproportionate, therefore, the judgment in Javed can no longer be seen as good law.
- The UP government will likely argue that there is no violation of privacy here because any decision on sterilisation would be voluntary.
- But, as we ought to by now know, making welfare conditional is a hallmark of coercion.
- Therefore, the proposed law will fall foul of a proportionality analysis.
4) Negative consequences
- An already skewed sex ratio may be compounded by families aborting a daughter in the hope of having a son with a view to conforming to the two-child norm.
- The law could also lead to a proliferation in sterilisation camps, a practice that the Supreme Court has previously deprecated.
- In Devika Biswas vs Union of India (2016), the Court pointed to how these camps invariably have a disparate impact on minorities and other vulnerable groups.
Way forward
- Experiences from other States in India show us that there are more efficacious and alternative measures available to control the growth of population, including processes aimed at improving public health and access to education.
Conclusion
For one thing, the reasoning of the Bill goes against the Puttaswamy case. But as rousing as the nine-judge Bench verdict is, its legacy depends on how its findings are applied.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: Inventory model vs marketplace model
Mains level: Paper 3- Issues with regulation of e-commerce
Context
The proposed Consumer Protection (E-Commerce) Rules, 2020, have been drafted ostensibly in the name of the consumer. The rules are driven more by the desire to shield the traditional brick-and-mortar stores, and handicap e-commerce firms, especially the foreign ones.
Issues with the provisions of draft Consumer Protection (E-Commerce) Rules, 2020
1) Fall-back liability clause is unfair for those operating through marketplace model
- Under this provision, e-commerce entities will be liable in case suppliers on the platform fail to deliver the goods to consumers, causing them a loss.
- E-commerce firms in India operate through either the inventory model or the marketplace model.
- As FDI is permitted only in the marketplace model.
- Under the marketplace model, e-commerce platforms don’t hold inventory, but simply connect buyers and sellers.
- Foreign players typically operate through this model.
- Considering that these platforms exercise little or no control over the inventory under this model, how can they be held liable for the sellers’ actions.
2) Identifying goods based on country of origin and providing fair opportunity to domestic sellers
- The draft rules also require e-commerce platforms to identify goods based on their country of origin.
- And when goods are being viewed for purchase by consumers, the rules also mandate platforms to provide suggestions to ensure “fair opportunity” for domestic sellers.
- This raises the question as to why the Make in India campaign is being pushed through the Consumer Protection Act.
- Surely, if domestic manufacturers are competitive, consumers will automatically gravitate towards them.
- Interests of consumers, not domestic manufacturers, should be at the core of the consumer protection framework.
3) Overlapping/competing jurisdictions
- Data protection: The draft rules have sought to safeguard consumer data by restraining e-commerce firms from sharing consumer data without consent.
- But the data protection should be governed by the provisions under the Personal Data Protection Bill and not the Consumer Protection Act.
- Considering the graded approach that is likely to be adopted under the Data Protection Bill, an e-commerce user’s data could be classified as per its vulnerability and be left under the jurisdiction of the data protection authority.
- Dominant position: The rules also state that e-commerce entities are prohibited from abusing their dominant positions in the market.
- The “abuse of dominant position” has been given the same meaning as that prescribed under Section 4 of the Competition Act, 2002.
- This will open the scope for new consumer protection authority to enter into issues of abuse of dominant position — the domain of the Competition Commission of India.
Consider the question “Over-regulation tends to curb competition and create monopolies instead of ensuring its holistic growth dovetailed with fair competition. In light of this, examine the issues with the draft Consumer Protection (E-Commerce) Rules, 2020?”
Conclusion
The lines of demarcation that have been drawn up in the retail landscape — single brand vs multi-brand, online vs offline, domestic vs foreign — serve only to protect powerful vested interests, not benefit the consumer as is often proclaimed.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: Federal structure
Mains level: Paper 2- Challenges to India's federalism
Context
In 2026, there will be the challenge of addressing the conflict between the democratic principles and the federal principles, when there will be a reallocation of Lok Sabha seats. India needs to reimagine the current federal compact to address the challenges to federalism.
Population freeze for Lok Sabha seats
- Since 1976, seats in the Lok Sabha have reflected the 1971 census and have not taken into account changes in the population.
- The primary reason for this has been unequal population growth among States.
- India’s most highly developed and prosperous States have been successful at family planning, while the poorer States continue to expand.
- The freeze was thus a chance to ensure that India’s most successful States are not punished politically for their success.
- Therefore, the Indian Constitution may face an unprecedented crisis in 2026 when there will be a dramatic change in the composition of the Lok Sabha.
Challenge of balancing the principle of democracy and federalism
- As Article 1 of the Indian Constitution says, India is a Union of States.
- However, the history of the linguistic reorganisation of States in 1956, and subsequent movements for Statehood afterwards demonstrates that States are distinct associative communities, within the federal structure of the Indian Union.
- In a democratic set-up, all citizens are equal and are thus entitled to equal representation in governance.
- But this would imply that bigger States are likely to dominate the national conversation over smaller States.
- This leads us to an inherent contradiction between the principles of democracy and federalism when federal units are unequal in size, population and economics.
- The small States fear that they would get a smaller share of the pie economically, a much reduced say in national issues, and be irrelevant in the political governance of the country.
How the US Constitution addresses the concerns of small states
- When the Americans adopted their Constitution, they protected smaller States in four ways.
- First, national powers over the States were limited.
- Second, each State regardless of size had two seats in the Senate, giving smaller States an outsized role in national governance.
- Third, Presidents are elected by electoral votes, which means they must win States rather than the total national population.
- Fourth, the slave-owning states were allowed to count the slaves for purposes of representation, with each slave being counted as three-fifths of a person.
- This essential structure remains the bedrock of the American Constitution today.
How Indian Constitution deals with the issue?
- India’s quasi-federal structure has always been sui generis.
- Our founders knew that India’s diversity made federalism inevitable, but, fearing separatist tendencies among States that had never been a single political unit, they also created a strong centre.
- However, the 1956 reorganisation of States on linguistic lines was a popular recognition of federal principles and yet did not result in separatist tendencies.
- Since then, new States within the Union have been created in response to the demands of people for greater autonomy.
Way forward on addressing the challenges to federalism
- There is an urgent need to reimagine our national compact.
- Following are the components of such a new balance that need to be fine-tuned to Indian realities.
- Give more powers to States: The powers of States vis-à-vis the Centre contained in the Lists and in the provisions dealing with altering boundaries of States must be increased to assuage the fear of smaller States that they will be dominated by bigger ones.
- More localised decision-making is bound to increase national prosperity.
- Indeed, this was the entire goal of the creation of Panchayat governance through the 73rd and 74th Amendments to the Constitution.
- Expand the role of Rajya Sabha: The role and composition of the Rajya Sabha, our House of States, must be expanded.
- This would allow smaller States a kind of brake over national majoritarian politics that adversely impact them.
- Consent of all states on financial redistribution: Constitutional change and the change in financial redistribution between the States must require the consent of all or nearly all States.
- Constitutional provisions dealing with language and religion must also be inviolate.
- Break the bigger States: Serious thought must be given to breaking up the biggest States into smaller units that will not by themselves dominate the national conversation.
Conclusion
The unity of India is, of course, the fundamental premise underlying this discussion; but this unity does not depend on an overbearing Centre for its survival.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: Independent director
Mains level: Paper 3- Dual approval system for independent directors
Context
While the regulators have taken giant strides to enhance board independence in India, one significant conundrum persists about appoint and removal process of the independent directors.
How appointment and removal process affects the independence of independent directors?
- Independent directors are appointed just like other directors through shareholder voting by a simple majority.
- This confers a significant power in the hands of significant shareholders to handpick the independents.
- In case of family-owned companies, it is not uncommon to appoint “friendly” independent directors.
- As for public sector undertakings, there is a demonstrable affiliation between independent directors and the ruling political parties.
Dual Approval System: Way forward
- The above trends suggest that unless independent directors owe their allegiance to the shareholder body as a whole, independence is likely to remain largely in form and not function.
- In its consultation paper, SEBI proposed a “dual approval” system.
- Under this system, the appointment of an independent director required the satisfaction of two conditions:
- First, the approval by a majority of all shareholders.
- Second, the approval of a “majority of the minority”, namely the approval of shareholders other than the promoters.
- SEBI recommended the same “dual approval” system for the removal of independent directors as well.
- SEBI drew inspiration from Israel and the premium-listed segment of the United Kingdom, which confers greater power to minority shareholders in installing or dethroning independent directors.
- SEBI has not yet made any mention of implementing the dual approval system.
Issues with Dual Approval System
- The first issue is that it militates against the majority rule principle that is intrinsic in a corporate democracy.
- While understandable, that is hardly an immutable rule as corporate law does make exceptions in cases involving oppression of minority shareholders.
- The second concern is that placing too much power in the hands of minority shareholders would be counterproductive, as it could result in a tyranny of the minority.
- However, the dual approval system instead represents the best of both worlds. It does not negate the promoter’s involvement in the process of appointing or removing independent directors.
- Only consensus candidates would end up becoming independent directors.
- The third issue is one of shareholder apathy: Will minority shareholders be motivated to exercise an informed and meaningful choice?
- Minority shareholders tend to be passive when they are unable to influence the outcome of shareholding voting.
- However, where they do have a significant say, like in the “majority of the minority” process, they are likely to be more active in exercising their franchise.
Consider the question “How far has the provision of appointing independent directors to safeguard the interest of minority shareholders succeeded in its objectives? Suggest the changes to improve the challenges faced by the independent directors.”
Conclusion
In all, the appointment and removal system continues to undermine the independence and efficacy of corporate boards. The SEBI needs to implement the dual approval system at the earliest.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: CAD
Mains level: Paper 3- Forex reserves and its significance
Context
The ascending stock of forex reserves has led to the view this will enable the sole devotion of monetary policy to domestic objectives.
Assessing the significance of forex reserves
Let’s look into the experinec of China and India in this regard.
1) Learning from China’s experience
- In 2016, China had a strong external position—current account surplus and more than $3tn forex reserves.
- However, investors’ expectations on renminbi (RMB) value began to shift due to rising concerns about its growth outlook, domestic rate cuts and eventual depreciation, and imminent tightening of US monetary policy, resulting in net capital outflows of $725 billio (bn) over the year.
- This put sustained pressure upon the RMB.
- Eventually, China resorted to capital control measures, which slowed the outflow and supported the RMB in the first half of 2017.
2) India’s own historical record
- India’s own historical record shows that, high or low, forex reserves didn’t prevent investors from reappraising positions.
- India experienced this in case of oil prices (2018) or taper fears (2013).
- The CAD was moderate, at 1.1% and 1.4% of GDP in two quarters to December 2017.
- But as oil prices climbed, current account projections were rapidly revised to 2.5-3% of GDP in less than a quarter seeing the jump in the import bill, lagging exports and continuous outflow of portfolio capital.
- Reserves totalled $424 bn then (end-March 2018); foreign currency assets were $399 billion.
- Against a mere $9 bn capital outflow, the peak-to-trough decline in reserves was $19 bn in April-June 2018, with 5% depreciation of the rupee.
- The sharper, $21 bn fall in mid-April to July 20, 2018 equalled the reserves decline in April-August 2013 taper episode when the rupee depreciated three times more or 15%!
- Forex reserves were much lower in 2013 ($255 bn range) and it had taken only a quarter for the current account gap to widen from 4.0% of GDP in April-June 2012 to 5.4% and a record 6.7% in subsequent two quarters to December 2012!
Key takeaways
- History shows that no level of reserves is a foolproof guarantee for macroeconomic stability or interest rate immunity.
- The important lesson these episodes hold is that repressive attempts do not always convince markets or prevent shifts in expectations and often compel large, abrupt adjustment.
- Investors reassess positions, including global factors, whatever the reserves’ stock.
- The crucial role of reserves is psychological, i.e. market confidence and liquidity insurance that is immediate and unconditional that allows central banks to buy time, whether for a gradual adjustment, soft landing, or as the case may be.
Distortion in bond market and RBI’s role in it
- RBI has been systematically suppressing bond yields, particularly the 10-year benchmark, the reference rate for banks.
- So effective was the repression that the bond market became irrelevant as yields altogether stopped responding to inflation or fiscal developments.
- The 207-basis-point jump in retail inflation in a month in May, which exceeded expectations, caused not even a flicker in the yield premium for example.
- This did not prevent responses elsewhere though – the overnight indexed swap (OIS), which signals future interest rate movements, increased 20-30 basis points at different tenures with fresh inflation risks.
- Clearly, the market reading was inconsistent with RBI’s, whose rigid adherence to a particular level (6% in the case of the old, 10-year bond) was disregarded outright.
- The monetary policy cue was not being accepted, failing to soothe ruffled feathers about inflation.
Risk involved in RBI’s policy
- If the global financial cycle were to suddenly turn, risk-aversion set in, or oil prices shoot up to risky levels, investors will undoubtedly look at actual differentials, not the one set in stone by RBI.
- There will be exchange rate pressures, which RBI can no doubt manage with liberal reserves.
- But the duration and degree of adjustment is not in RBI’s control, identically to the bond market one, where it has infinite capacity to keep local yields where it wants.
- There’s a limit to how much foreign currency it can sell—the $609bn reserve holding is finite.
- Currency depreciation can, therefore, worsen a bad situation as higher inflation pressurises domestic interest rates to rise.
- RBI’s issuance of the new 10-year benchmark bond at 6.10%, which came as a surprise against its previous inflexibility, indicates RBI has internalised the above risks.
- The disparate movements were undermining RBI, whose commitment to continue the accommodative monetary policy as long as necessary to revive and sustain growth has been reassuring.
Conlcusion
When the economy is open, financially integrated and subject to cross-country dynamics, it is more prudent to let market forces play out a bit than persist with a stance that could turn unsustainable despite the high reserves.
Back2Basics: What is Current Account Deficit (CAD) ?
- The current account deficit is a measurement of a country’s trade where the value of the goods and services it imports exceeds the value of the products it exports.
- The current account includes net income, such as interest and dividends, and transfers, such as foreign aid, although these components make up only a small percentage of the total current account.
- The current account represents a country’s foreign transactions and, like the capital account, is a component of a country’s balance of payments (BOP).
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: SCO members
Mains level: Paper 2- Afghanistan after the US withdrawal
Context
A regional conclave of foreign ministers taking place in Dushanbe this week under the banner of the Shanghai Cooperation Organisation (SCO) should give us a sense of the unfolding regional dynamic on Afghanistan.
SCO addressing challenges in Afghanistan
- Geography, membership and capabilities make the SCO an important forum to address the post-American challenges in Afghanistan.
- The SCO was launched 20 years ago by China and Russia to promote inner Asia stability.
- The current members of the SCO are China, Russia, Kazakhstan, Kyrgyzstan, Tajikistan, Uzbekistan, Pakistan, and India.
- The SCO has four observer states — Iran, Afghanistan, Mongolia and Belarus.
- The idea of a regional solution to Afghanistan has always had much political appeal.
- But divergent regional strategic perspectives limit the prospects for a sustainable consensus on Afghanistan.
Implications of the US exit for the region
- The quiet satisfaction in Moscow, Beijing, Tehran and Rawalpindi at the US’s exit from Afghanistan, however, is tinged by worries about the long-term implications of Washington’s retreat
- Regional players have to cope with the consequences of the US withdrawal and the resurgence of the Taliban.
- Neither Moscow nor Beijing would want to see Afghanistan becoming the hub of international terror again under the Taliban.
- For China, potential Taliban support to the Xinjiang separatist groups is a major concern.
- Iran can’t ignore the Sunni extremism of the Taliban and its oppressive record in dealing with the Shia, and Persian-speaking minorities.
- Pakistan worries about the danger of the conflict spilling over to the east of the Durand Line, and hostile groups gaining sanctuaries in Afghanistan.
Three factors that drive India’s Afghan policy
- The US exit means a new constraint on Delhi’s ability to operate inside Afghanistan.
- There is also the danger that Afghanistan under the Taliban could also begin to nurture anti-India terror groups.
- If India remains active but patient, many opportunities could open up in the new Afghan phase.
- Three structural conditions will continue to shape India’s Afghan policy.
- One is India’s lack of direct physical access to Afghanistan.
- This underlines the importance of India having effective regional partners.
- Second, it remains to be seen if Pakistan’s partnership with China and the extension of the China Pakistan Economic Corridor into Afghanistan can address Pakistan’s inability to construct a stable and legitimate order in Afghanistan.
- Third, the contradiction between the interests of Afghanistan and Pakistan is an enduring one.
- While many in Pakistan would like to turn Afghanistan into a protectorate, Afghans deeply value their independence.
- All Afghan sovereigns, including the Taliban, will inevitably look for partners to balance Pakistan.
Way forward for India
- India must actively contribute to the SCO deliberations on Afghanistan, but must temper its hopes for a collective regional solution.
- At the same time, Delhi should focus on intensifying its engagement with various Afghan groups, including the Taliban, and finding effective regional partners to secure its interests in a changing Afghanistan.
Conclusion
India should pursue the regional solution to Afghanistan challenge after the US exit while increasing the engagement with the various players in Afghanistan including the Taliban.
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