Mains Ready By December. Smash Mains & Smash PYQ Admissions Open
Talk to Mentor

Civilsdaily

Type: Op-ed

  • A plan to revive the broken economy

    The article suggests ways to revive the economy while keeping in mind the livelihood issues of the vulnerable section of society. Urgent concern should be addressed by the food and cash transfer, after that for livelihood in the rural area MGNREGA can be of great help. In the urban area, a  scheme based on the lines of MGNREGA is suggested. In the end, some ways to increase revenue are suggested.

    Food and cash transfers

    • Providing every household with ₹7,000 per month for a period of three months and every individual with 10 kg of free foodgrains per month for a period of six months is likely to cost around 3% of our GDP (assuming 20% voluntary dropout).
    • This could be financed immediately through larger borrowing by the Centre from the Reserve Bank of India.
    • The Centre should also clear outstanding Goods and Services Tax compensation.
    • Food and cash transfer are doable for the following reasons.
    • First, foodgrains are plentiful, as the Food Corporation of India had 77 million tonnes, and rabi procurement could add 40 million tonnes.
    • Second, because of the lockdown restrictions multiplier effect would be less. (so, fewer concerns about inflation)
    • Third, cash transfers in many spheres will only enable current demand to continue (such as payment of house rent to continue occupancy) and not create any fresh demand.
    • Fourth, when greater normalcy finally allows demand held back during lockdown to the surface, output could also expand because of resumed economic activity.
    • Finally, putting money in the hands of the poor is the best stimulus to an economic revival, as it creates effective demand and in local markets.
    • Hence, an immediate programme of food and cash transfers must command the highest priority.

    Need for changes in MGNREGA

    • Millions of migrant workers have gone back home, and are unlikely to return to towns in the foreseeable future.
    • Employment has to be provided to them where they are, for which the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) must be expanded greatly and revamped with wage arrears paid immediately.
    • The 100-day limit per household has to go.
    • Work has to be provided on demand without any limit to all adults.
    • And permissible work must include not just agricultural and construction work, but work in rural enterprises and in care activities too.
    • The revamped MGNREGS could cover wage bills of rural enterprises started by panchayats, along with those of existing rural enterprises, until they can stand on their own feet.
    • This can be an alternative strategy of development, recalling the successful experience of China’s Township and Village Enterprises (TVEs).
    • Public banks could provide credit to such panchayat-owned enterprises and also assume a nurturing role vis-à-vis them.
    • Pandemic highlighted unsustainability of the earlier globalisation.
    • Which means that growth in India in the coming days will have to be sustained by the home market.
    • Since the most important determinant of growth of the home market is agricultural growth, this must be urgently boosted.
    • The MGNREGS can be used for this, paying wages for land development and farm work for small and medium farmers.
    • Also the government support through remunerative procurement prices, subsidised institutional credit, other input subsidies, and redistribution of unused land with plantations is possible.
    • Agricultural growth in turn can promote rural enterprises, both by creating a demand for their products and by providing inputs for them to process.
    • Both these activities would generate substantial rural employment.

    Focus on urban area

    • In urban areas, it is absolutely essential to revive the Micro, Small and Medium Enterprises (MSMEs).
    • Simultaneously, the vast numbers of workers who have stayed on in towns have to be provided with employment and income after our proposed cash transfers run out.
    • The best way to overcome both problems would be to introduce an Urban Employment Guarantee Programme, to serve diverse groups of the urban unemployed, including the educated unemployed.
    • Urban local bodies must take charge of this programme and would need to be revamped for this purpose.
    • “Permissible” work under this programme should include, for the present, work in the MSMEs.
    • This would ensure labour supply for the MSMEs and also cover their wage bills at the central government’s expense until they re-acquire robustness.
    • It should imaginatively also include care work, including of old, disabled and ailing persons, educational activities, and ensuring public services in slums.

    The CARE economy: Public health, education, employment

    • The pandemic has underscored the extreme importance of a public health-care system, and the folly of privatisation of essential services.
    • The post-pandemic period must see significant increases in public expenditure on education and health, especially primary and secondary health including for the urban and rural poor.
    • The “care economy” provides immense scope for increasing employment.
    • Vacancies in public employment, especially in such activities, must be immediately filled.
    • Anganwadi and Accredited Social Health Activists/workers who provide essential services to the population, including during this pandemic, are paid a pittance and treated with extreme unfairness.
    • We must improve their status, treat them as regular government employees and give them proper remuneration and associated benefits, and greatly expand their coverage in settlements of the urban poor.
    • These could easily come within the total package announced by the Prime Minister, which could be financed by printing money.
    • But in the medium term, public revenues must be increased.
    • This is not because there is a shortage of real resources which, therefore, has to be taken from other existing uses through taxation.
    • Rather, since much-unutilised capacity exists in the economy, the shortage is not of real resources; the government has to just get command over them.

    Suggestions to increase public revenue

    • A combination of wealth and inheritance taxation and getting multinational companies to pay the same effective rate as local companies through a system of unitary taxation will garner substantial public revenue.
    • They will also reduce wealth and income inequalities which have become horrendous.
    • A 2% wealth tax on the top 1% of the population, together with a 33% inheritance tax on the wealth they bequeath every year to their progeny, could finance an increase in government expenditure to the tune of 10% of GDP.
    • It would be argued that this might cause large financial outflows, which the country can ill-afford.
    • Contrarily, even foreign capital is more likely to be attracted to a growing economy than one in sharp decline because of a lack of stimulus.
    • Also, a fresh issue of special drawing rights by the International Monetary Fund which India has surprisingly opposed along with the United States would provide additional external resources.
    • These additional resources, would suffice to finance the institution of five universal, justiciable, fundamental economic rights:1) the right to food, 2)the right to employment, 3)the right to free public health care, 4)the right to free public education and 5)the right to a living old-age pension and disability benefits.

    Consider the question, “The economic disruption caused by the pandemic threatens the progress made on the front of inclusive growth. Suggest the measures to ensure the livelihood of the economically vulnerable section of the society in the aftermath of the pandemic in rural and urban areas.”

    Conclusion

    The broken economy must be rebuilt in ways to ensure a life of dignity to the most disadvantaged citizen. The ways suggested here shows how to achieve that.

  • Cooperative Federalism in the Time of Covid-19

    Federalism is part of Basic Structure (Doctrine) of the Constitution. The article is about the lack of cooperative federalism in some of the Central Government’s actions in its fight against the corona crisis. What are those actions? Read to know…

    Opinion of political thinkers on federalism in India

    • K.C. Wheare notes, federalism traditionally signifies the independence of the Union and State governments of a country, in their own spheres.
    • The members of India’s Constituent Assembly carefully studied the Constitutions of other great federations like the US, Canada, Australia and Switzerland.
    • However, they adopted a ‘pick and choose’ policy to formulate a system suited uniquely to the Republic’s need.
    • As a result, India’s Constituent Assembly became the first-ever constituent body in the world to embrace what H. Birch and others have referred to as ‘cooperative federalism’.
    • ‘Cooperative federalism’ is administrative cooperation between the Centre and the States, and a partial dependence of the States upon payments from the Centre.
    • Accordingly, Indian constitutional law expert Granville Austin remarks that despite a strong Centre, cooperative federalism doesn’t necessarily result in weaker States.
    • He also said that the progress of the Republic rests upon active cooperation between the two.

    Lack of consultation with States under DMA 2005

    • The zone classifications into ‘red’ and ‘orange’ has evoked sharp criticisms from several States.
    • The States have demanded more autonomy in making such classifications.
    • The Disaster Management Act of 2005 under which binding COVID-19 guidelines are being issued by the Centre to the States mandates consultation with the States.
    • The Act envisages the creation of a ‘National Plan’ under Section 11, as well as issuance of binding guidelines by the Centre to States under Section 6(2), in furtherance of the ‘National Plan’.
    • The ‘National Plan’ then is a broader vision document while the binding guidelines are its enforcement mechanism.
    • Now, Section 11(2) of the Act mandates State consultations before formulating a ‘National Plan’.
    • And when such binding guidelines are ultimately issued under it, they are expected to represent the views of the States.
    • However, the Centre has not formulated the ‘National Plan’, and has chosen instead to respond to COVID-19 through ad hoc binding guidelines issued to States.
    • Such guidelines thereby circumvent the legislative mandate of State consultations.
    • This selective application of the Act serves to concentrate all decision-making powers with the Centre.

    Lack of funds

    • The Centre has declared that corporations donating to PM-CARES can avail CSR exemptions, but those donating towards any Chief Minister’s Relief Fund cannot.
    • This directly disincentivises donations to any Chief Minister’s Relief Fund.
    • And diverts crores in potential State revenues to PM-CARES; and makes the States largely dependent upon the Centre.
    • Further, the revenue streams of several States have dried up because of the liquor sale ban; negligible sale of petrol/diesel; no land dealings and registration of agreements.
    • States’ GST collections have also been severely affected with their dues still not disbursed by the Centre.
    • All this has made it difficult for States to defray expenses of salaries, pensions and welfare schemes.
    • As it is the States which act as first responders to the pandemic, supplying them with adequate funds becomes a pre-requisite in effectively tackling the crisis.
    • This requires the Centre to view the States as equals, and strengthen their capabilities, instead of increasing their dependence upon itself.

    Consider the question-“Cooperative federalism is the key in the country’s fight against the corona pandemic. Critically examine.”

    Conclusion

    Keeping the spirit of cooperative federalism alive whether in consultation with the States or taking care of their finances is essential as the country is fighting the pandemic. The Centre must realise that we have the best chance of winning the war against pandemic when we are united.

  • Legal aspects of using Disaster Management Act to deal with pandemic

    This article analyses the legal basis of application of the Disaster Management Act to deal with the pandemic by the Central Government. The Disaster Management Act had been enacted using the residuary power of the Union legislature. So, its application to deal with the pandemic gives rise to certain legal issues. Read to know more about such issues.

    Two examples of why centralised approach may be counter-productive?

    • One, the Central government has classified all districts in the country as red, orange or green zones.
    • This classification was done in a bid to lift lockdown restrictions in an area-specific manner.
    • Some States/Union Territories objected to the classification of certain areas/districts as red zones on the ground that these areas are very large.
    • They pointed out that there was no need to keep economic activity on hold in an entire district when cases had been reported only from a small portion of that district.
    • Two, Kerala, probably the best-performing State in terms of its response to COVID-19, was sent a missive by the Central government to refrain from relaxing restrictions in the State.
    • The Central government did not trust the wisdom and judgment of the State government in the matter.

    The federal scheme and residuary power to legislate

    • Under the federal scheme, Parliament can legislate on matters under the Union List (List I).
    • Stage legislatures can legislate on matters under the State List (List II).
    • And both Parliament and State legislatures can legislate on matters under the Concurrent List (List III).
    • The residuary power to legislate on matters that are not mentioned in either List II or List III vests with Parliament under Article 248 of the Constitution read with Entry 97 of List I.
    • Furthermore, the rule of harmonious construction dictates that the entries in the legislative lists must be interpreted harmoniously.
    • And in the event of any overlap between two or more entries, the specific subject matter contained in a particular entry must be deemed to have been excluded from another entry which may deal with a more general subject matter.
    • Finally, as per Articles 73 and 162, the executive power of the Centre and the States is co-extensive with their respective legislative powers.
    • Coextensive legislative and executive power means that the Central and State governments can only take executive actions in matters where Parliament and State legislatures, respectively, have powers to legislate.

    So, which list contains Disaster Management?

    • Disaster management as a field of legislation does not find mention in either List II or List III.
    • Nor does any particular entry in List I specifically deal with this.
    • Thus, the Disaster Management Act could only have been enacted by Parliament in the exercise of its residuary powers of legislation under Article 248 read with Entry 97 of List I.

    Legal problems in using Disaster Management Act for pandemic

    • The Disaster Management Act allows the Centre to issue guidelines, directions or orders to the States for mitigating the effects of any disaster.
    • The definition of ‘disaster’ under the Act is quite broad and, literally speaking, would include a pandemic too.
    • Such a reading of the Act would vest the Central government with powers to issue directions and guidelines to State governments for dealing with the pandemic in their States.
    • However, ‘public health and sanitation’ is a specific field of legislation under Entry 6 of List II.
    • This would imply that States have the exclusive right to legislate and act on matters concerning public health.
    • Thus, the Centre’s guidelines and directions to the States for dealing with the pandemic trench upon a field of legislation and executive action that is exclusively assigned to the States — public health.
    • The Supreme Court has held time and again that federalism is a basic feature of the Constitution and the States are sovereign.
    • The Disaster Management Act cannot be applied to pandemics in view of the fact that the power to legislate on public health is vested specifically and exclusively with the States.
    • Also, under Entry 29 of List III, both Parliament and State legislatures are competent to legislate on matters involving inter-State spread of contagious or infectious diseases.
    • Therefore, theoretically speaking, Parliament would be competent to pass a law that allows the Central government to issue directions to the States to prevent inter-State spread of a disease like COVID-19.
    • That law is not the Disaster Management Act which is concerned with disasters in general, and not pandemics in particular.
    • ‘Prevention of inter-State spread of contagious and infectious diseases’ being a specific legislative head provided in List III, the same must be deemed to have been excluded from Parliament’s residuary legislative powers.
    • Therefore, the Disaster Management Act, which has been enacted under Parliament’s residuary legislative powers, cannot be applied to the prevention of the inter-State spread of contagious and infectious diseases.

    Role of Centre under Epidemic Diseases Act 1897

    • The Epidemic Diseases Act, 1897, has the objective of preventing “…the spread of dangerous epidemic diseases.”
    • However, under this Act, it is the State governments which have the prerogative to take appropriate measures for arresting the outbreak or spread of a contagious or infectious disease in their respective States.
    • The Central government’s powers are limited to taking measures for inspecting and detaining persons travelling out of or into the country.
    • Even if that Act were to be amended, it would not empower the Central government to issue directions to the States to contain the pandemic within the State.
    • It can only deal with the inter-State spread of the disease.

    Consider the question, “Use of the Disaster Management Act to deal with the Covid-19 pandemic gave rise to certain legal issues. Examine them.”

    Conclusion

    Instead of resorting to the Epidemic Diseases Act which gives powers to the States, the Centre has applied the Disaster Management Act. The States are not legally bound to observe the directions/guidelines being issued by the Central government and would be well within their rights to challenge them before the apex court.

     

  • Changes in labour laws: legal but not appropriate

    The article examines the changes made in the labour laws by several states. The legal route to make these changes are different. While some states used the Emergency provision, others used the Ordinance route. One major issue with these changes is that these were brought in without consultation.

    What legal route was used by the States?

    • Changes were made by the several state government in the labour laws dealing with the maximum working hours and other provisions.
    • These changes have been made through notifications issued by the State governments and will be applicable for the next three months.
    • M.P. has also suspended most provisions of the Industrial Disputes Act, 1946 (except those related to retrenchment and layoffs) for 1,000 days for State undertakings.
    • In addition, M.P. issued an ordinance to amend two laws.
    • The M.P. Industrial Employment Standing Orders Act will apply to establishments with more than 100 workmen (up from the existing threshold of 50), in line with the Central Act.
    • The ordinance also enables the government to exempt establishments from the provision of another Act that provided for a labour welfare fund.
    • The Uttar Pradesh government has approved an ordinance that exempts establishments from all labour laws for three years with some exceptions.
    • As this will override provisions of some Central laws, it will require the assent of the President or, in effect, the assent of the Central government.
    • The question is, was there sufficient consultation before all these changes were made?

    Constitutional provisions for the legal route taken: Emergency and ordinance

    • As per the Constitution, the legislature has the authority to make laws.
    • Such laws could delegate powers to the government which are in the nature of detailing some requirements.
    • For example, the Factories Act allows State governments to exempt factories from the provisions of the Act during public emergencies for a maximum period of three months.
    • A public emergency is defined as a grave emergency whereby the security of India or any part is threatened by war, external aggression or internal disturbance.
    • Most States have used this provision, presumably interpreting the current situation as an ‘internal disturbance’.
    • Haryana has used a provision that allows relaxation of work hours “to deal with an exceptional press of work”.
    • The Constitution also permits Central and State governments to make laws through the issuance of an ordinance when the legislature is not in session.
    • Such a law needs to be ratified by the legislature within six weeks of the beginning of the next session. M.P. and U.P. are using this procedure.

    Issues with the changes made

    • Usually, any change in an Act follows a rigorous process of public consultation, scrutiny by committees of Parliament, and debates in the House before being approved.
    • The changes described here have not gone through such a process.
    • However, most of these have a three-month time limit, and any extension would need to be approved by the legislature.

    The four labour codes

    • The Parliament is consolidating 29 existing laws into four codes dealing with- 1) wages, 2) occupational safety and health, 3) industrial relations,4) social security.
    • The first of these has been enacted, the Standing Committee on Labour has submitted the report on the next two, and is examining the last.
    • The Code on Occupational Safety and Health does not specify the maximum hours of work but empowers the government to do so.
    • The Standing Committee report states that the government agreed to incorporate a provision of maximum eight hours per day with overtime permitted for certain types of industry.

    Consider the question “Several States made changes in the labour laws to deal with the problems caused by the corona pandemic. Examine the legal provisions used for making such changes by various States. What are the issues with such changes?”

    Conclusion

    Given the emergency, the government has to take quick action and change the response as the situation evolves. However, that should not be a reason to exclude the processes of consultation with and scrutiny by elected representatives. The legitimacy of state action in a parliamentary democracy comes from the fact that there is constant oversight and check by elected representatives.

  • Shift in the US trade politics and opportunities for India

    The article focuses on the changes in the US trade politics fueled by the corona pandemic. Also there has been a growing demand for abandoning the WTO. So, amid this shift in the US politics, what are the opportunities for India at the global level?

    What went wrong with the WTO: The US point of view

    • Latest opposition to the WTO was expressed in a forceful article by a US senator, Josh Hawley.
    • In his opinion, corona pandemic expresses the hard truth about the modern global economy: it weakens American workers and empowers China’s rise.
    • So, what went wrong?
    • Capital and goods moved across borders easier than before but so did jobs. And too many jobs left America’s borders for elsewhere.
    • As factories closed, workers suffered, from small towns to the urban core.
    • So, he wants US to abandon the WTO.

    Rise of trade politics in the US

    • Under Trump, the Republican Party has turned from the champion to a critic of free trade.
    • The Democratic Party, which embraced globalisation since the early 1990s, has seen the erosion of working-class support.
    • Elections this year could reveal if the shifting alignments on trade are now cast in stone or if anti-trade sentiment in America is deep and wide.

    What alternatives are suggested by the senator?

    • In replacing the WTO, Hawley suggests the following two measures-
    • 1) The United States must seek new arrangements and new rules, in concert with other free nations, to restore America’s economic sovereignty.
    • 2) This, in turn, involves building a new network of trusted friends and partners to resist Chinese economic imperialism.

    How this matters for India?

    • India will have to take a fresh look at the global economy battered by the coronavirus.
    • India should pay close attention to Hawley’s theme on working with “trusted friends and partners” to restructure international trade.
    • Hawley is not alone in articulating this view.
    • Reuters reported from Washington that the Trump Administration is “turbocharging” an initiative to rearrange the global supply chains currently centered on China.
    • This rearrangement of the global supply chain offers an opportunity for India to lead the future global supply chains.

    Consider the question, “Critically analyse the opportunities presented to India by the changes in trade politics in the US”.

    Conclusion

    Hobbled as it was by shaky political coalitions and preoccupied by multiple domestic challenges, India in the mid-1990s struggled to cope with the profound changes in the global economic order. As the world trade system arrives at a contingent moment a quarter of a century later, India is hopefully better prepared.

  • Seven trends in the geopolitics of the world

    The article examines 7 trends that have been emerging in the global order for quite some time now. The corona crisis has only accentuated these trends. So, what are these trends? read to know more.

    1. The rise of Asia

    • The first trend which became clear in the aftermath of the 2008 global financial crisis is the rise of Asia.
    • Economic historians pointed to its inevitability, recalling that till the 18th century, Asia accounted for half the global GDP.
    • The Industrial Revolution accompanied by European naval expansion and colonialism contributed to the rise of the West, and now the balance is being restored.
    • The 2008 financial crisis showed the resilience of Asian economies.
    • And even today, economic forecasts indicate that out of the G-20 countries, only China and India are likely to register economic growth during 2020.
    • Asian countries have also demonstrated greater agility in tackling the pandemic compared to the United States and Europe.
    • This is not limited to China but a number of other Asian states have shown greater responsiveness and more effective state capacity.
    • Consequently, Asian economies will recover faster than those in the West.

    2. Decline of the US

    • The second trend is the retreat of the U.S.after a century of being in the forefront of shaping the global order.
    • The U.S. played a decisive role in shaping the world, from the World Wars to the leadership of the western world during the Cold War, molding global responses to threats posed by terrorism or proliferation or climate change.
    • But recent examples show that interventions in Afghanistan and Iraq have become quagmires that have sapped domestic political will and resources.
    • President Donald Trump called for “America first” and during the current crisis, the U.S.’s efforts at cornering supplies of scarce medical equipment and medicines and acquiring biotech companies engaged in research and development in allied states, shows that this may mean “America alone”.
    • Moreover, even as countries were losing trust in the U.S.’s leadership, its mishandling at the home of the pandemic indicates that countries are also losing trust in the U.S.’s competence.

    3. Weakening unity of the EU

    • A third trend is the European Union’s continuing preoccupation with internal challenges.
    • This internal disruption is generated three factors: 1) EU’s expansion of membership to include East European states 2) Impact of the financial crisis among the Eurozone members 3) Ongoing Brexit negotiations.
    • Threat perceptions vary between old Europe and new Europe making it increasingly difficult to reach agreement on political matters e.g. relations with Russia and China.
    • Rising populism has given greater voice to Euro-sceptics and permitted some EU members to espouse the virtues of “illiberal democracy”.
    • Adding to this is the North-South divide within the Eurozone.
    • This divide was seen when austerity measures were imposed on Greece, Italy, Spain and Portugal a decade ago by the European Central Bank.
    • These austerity measures were persuaded by the fiscally conservative Austria, Germany and the Netherlands.
    • The EU lacked solidarity when Italy was battling the pandemic alone.
    • Further damage was done when Italy was denied medical equipment by its EU neighbours who introduced export controls.
    • Schengen visa or free-border movement has already become a victim to the pandemic.
    • The EU will need considerable soul searching to rediscover the limits of free movement of goods, services, capital and people, the underlying theme of the European experiment of shared sovereignty.

    4. Rise of China

    • China’s growing economic role has been visible since it joined the World Trade Organization in 2001.
    • Its more assertive posture has taken shape under President Xi Jinping’s leadership with the call that a rejuvenated China is now ready to assume global responsibilities.
    • In recent years, the U.S.-China relationship moved from cooperation to competition; and now with trade and technology wars, it is moving steadily to confrontation.
    • A partial economic de-coupling had begun and will gather greater momentum.
    • The Belt and Road Initiative involves investing trillions of dollars in infrastructure building as a kind of pre-emptive move against any U.S. attempts at containment.
    • Even if Mr Xi’s leadership comes under questioning, it may soften some aggressive policy edges but the confrontational rivalry with the U.S. will remain.

    5. Failure of multinational institutions

    • With COVID-19, international and multilateral bodies are nowhere on the scene.
    • The World Health Organisation (WHO) was the natural candidate to lead global efforts against the health crisis but it has become a victim of politics.
    • The UN Security Council (UNSC), the G-7 and the G-20 are paralysed when the world faces the worst recession since 1929.
    • The reality is that these institutions were always subjected to big power politics.
    • During the Cold War, U.S.-Soviet rivalry blocked the UNSC on many sensitive issues and now with major power rivalry returning, finds itself paralysed again.
    • Agencies such as WHO have lost autonomy over the decades as their regular budgets shrank.
    • Budget constraints forced them to increasingly rely on voluntary contributions sourced largely from western countries and foundations.
    • The absence of a multilateral response today highlights the long-felt need for reform of these bodies but this cannot happen without collective global leadership.

    6. The oil prices

    • The two trends were changing energy markets: 1)Growing interest in renewables and green technologies on account of climate change concerns. 2) The U.S. emerging as a major energy producer.
    • Now, a looming economic recession and depressed oil prices will exacerbate internal tensions in West Asian countries which are solely dependent on oil revenues.

    7. Stability of West Asia

    • Long-standing rivalries in the region have often led to local conflicts but can now create political instability in countries where regime structures are fragile.

    Consider the question “The Corona crisis contributed to speeding the failure of a global order which had been faltering before the pandemic afflicted the world. Examine the trends that have been accentuated by the pandemic.”

    Conclusion

    The vaccine may end the corona crisis when it comes, but the unfolding trends in the geopolitics have been altering the world even before the corona crisis and continue to do so after a pandemic is over.

     

  • New approach to economic revival: SNAP

    In this article the author suggests a new approach to deal with multiple bankruptcies and stressed assets that would come up post COVID. So, what is the new approach and how it is different from the existing IBC? Read further.

    Why is speed of resolution important?

    • First, because it is the only way to revive the economy.
    • As revenues have dried up cash flow problems have cascaded down the supply chain.
    • Firms will consequently be unable to restart production unless they first get credit to pay their suppliers and workers.
    • But impaired firms cannot get credit and impaired banks cannot provide it.
    • So, the entire economy will be stuck unless the balance sheet problem is sorted out.
    • Second, speed will also minimise the losses from the COVID crisis.
    • The value of bankrupt firms decays rapidly over time, and the bill for this loss will have to be borne ultimately by the government.
    • So, speed is necessary to contain the damage to the government’s financial position, which has been badly eroded by the COVID crisis.
    • But moving quickly will be difficult.
    • The only real mechanism that currently exists to handle stress and bankruptcy is the Insolvency and Bankruptcy Code (IBC) system, which has been suspended for six months.

    Why the IBC cannot help much?

    • Many have therefore argued for bringing the IBC back into operation as soon as possible.
    • Why such a strategy would not be very effective? The system is slow, with many cases taking two years or more; it could easily become overwhelmed completely if it is forced to absorb a large new set of bankrupt firms.
    • In addition, the IBC envisages that banks maximise their recoveries by auctioning off the bankrupt firms to the highest bidder.
    • But in a nation and indeed a world, where all balance sheets are damaged, it is not obvious who would be able to buy these firms, or at what prices.
    • So recovery rates from sales could be low, undermining the objective of the exercise.
    • Even if strong bidders could be found, there is a fundamental political, even philosophical, question of whether it is really right to take these firms away from their promoters.
    • After all, many of these firms did nothing wrong; they got into financial difficulties because of the corona crisis.

    So, what is the solution?

    • What is needed is a new set of procedures that can utilise much of the existing IBC framework, but are simple, straightforward, and prompt, with a built-in expiry clause.
    • Let’s Call them Special Non-Adversarial Procedures (SNAP).
    • As soon as the lockdown is largely over, the IBC creditor committees (CoCs) could meet to assess the new wave of NPAs.
    • The largest, most complex cases — say, those with debts exceeding Rs 10,000 crore — would be sent to the IBC for regular treatment.
    • But all other cases would be eligible under SNAP
    • After all, the wider the set of companies that are put back on their feet quickly, the stronger the recovery will be.

    How would the SNAP work?

    • Under SNAP, CoCs would, over the next three months, examine delinquent firms’ financial records, checking to see whether they are actually viable.
    • If so, these firms would be designated as Lockdown Affected Enterprises (LAEs), eligible under SNAP.
    • Since the basis of the designation would be that the firm is fundamentally sound but because of COVID impact, an Insolvency Professional (IP) appointed by the CoC would work with existing management (who would continue to run the firm) to arrange for interim finance.
    • Then, the IP would assess how much of a debt reduction the firm needs, and within three months would present a specific proposal to the CoC.
    • If the CoC can reach a two-third majority in favour of the proposal, the promoter would keep the firm, while the firm would be granted immediately released from bankruptcy.
    • Since the National Company Law Tribunal (NCLT) is already overloaded, it would not be involved at all in SNAP.
    • If the CoC cannot reach agreement within the three-month deadline, or if at any subsequent point the firm defaults on its newly reduced debt, it would be sent to the IBC for resolution.
    • SNAP would be disbanded by end-December 2020.

    Checks and balances under SNAP

    • Such a system would have a series of checks and balances, to prevent firms from securing undeserved debt reductions.
    • Banks would need to certify that defaulters are truly LAEs.
    • IPs would need to certify the size of the debt reduction.
    • A large majority of creditor banks would need to agree to the IP’s proposal.

    What should be the role of the government in SNAP?

    • With these checks and balances in place, the government should then commit to two things.
    • First, it should provide some legal cover, ensuring that bankers would not be subject to investigations by the anti-corruption agencies, as long as they followed the LAE rules.
    • Second, the public sector banks would be compensated for the costs of the reduction in the value of the asset, automatically and fully.

    Major advantage of SNAP

    • Besides speed, SNAP would have one further major advantage.
    • It would reduce the adversarial nature of the IBC process, arising because promoters are forced to cede their firms.
    • Under the proposed system, promoters would not only have incentives to cooperate; they would actually want to take the initiative, applying for LAE designation themselves, in the hopes that they could get back to business as soon as possible.
    • Such a system might seem difficult to envisage, but it is certainly feasible: It is a design feature under Chapter 11 of the American bankruptcy act.
    • If SNAP succeeds, some of the special procedures could be introduced permanently into the IBC framework, adding a new dimension: Not just liquidation and rehabilitation under new promoters but rehabilitation under existing management.

    Way forward

    • After SNAP, repair of the financial system would have to go back to addressing the long-standing problems, which will have been aggravated by the crisis.
    • Firms that were unviable even before the COVID crisis would be sent directly to the IBC, but with the IBC reformed.
    • The government should issue guidelines focusing on the following three-
    • 1. Focusing the COCs on the goal of maximising value, disregarding non-commercial objectives.
    • 2. Directing the NCLT courts to focus on the CoCs’ adherence to the procedure rather than on the merits of their decisions.
    • 3. Increasing competition in the auction by allowing promoters to bid for their assets, as long as they have not been declared wilful defaulters.
    • For the power and real estate sectors, a sui generis approach via the creation of a bad bank is still the best way forward.
    • Real estate resolutions need to take into account the interests of home-owners, something that is almost impossible to do under the IBC.

    Consider the question, “Economic revival after the pandemic would require some tweaks in the IBC as it was not designed to handle such situations. Suggest the ways to handle the bankruptcies more effectively and changes that are desired in the IBC.”

    Conclusion

    Introducing three-pronged strategy quickly would set the stage for the economic recovery of India:  1) Special, expedited, non-adversarial and time-bound bankruptcy procedures (SNAP) for COVID-affected firms 2) A reformed IBC focused squarely on loss-minimisation 3)Bad banks for stressed assets in the power and real estate sectors.

    Back2Baciscs: What is Insolvency and Bankruptcy Code-2016?

    1. The Code creates time-bound processes for insolvency resolution of companies and individuals.  These processes will be completed within 180 days.  If insolvency cannot be resolved, the assets of the borrowers may be sold to repay creditors.
    2. The resolution processes will be conducted by licensed insolvency professionals (IPs).  These IPs will be members of insolvency professional agencies (IPAs).  IPAs will also furnish performance bonds equal to the assets of a company under insolvency resolution.
    3. Information utilities (IUs) will be established to collect, collate and disseminate financial information to facilitate insolvency resolution.
    4. The National Company Law Tribunal (NCLT) will adjudicate insolvency resolution for companies.  The Debt Recovery Tribunal (DRT) will adjudicate insolvency resolution for individuals.
    5. The Insolvency and Bankruptcy Board of India will be set up to regulate functioning of IPs, IPAs and IUs.

  • Economy and the challenges ahead

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

    Projections of growth and uncertainty

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

    Health of India economy before the crisis

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

    Growth prospects for 20-21 from the output side

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

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

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

    Policy support for the growth

    • Monetary policy initiatives undertaken so far include a reduction in the repo rate to 4.4%, the reverse repo rate to 3.75%, and cash reserve ratio to 3%.
    • The Reserve Bank of India has also opened several special financing facilities.
    • These measures need to be supplemented by an appropriate fiscal stimulus.
    • Cash-constrained central and State governments have taken expenditure reducing measures by announcing freezing of enhancements of dearness allowance and dearness relief.
    • This may result in savings of ₹37,000 crore for the Centre and about ₹82,000 crore for the States, together amounting to 6% of GDP.
    • There is also talk of substantially reducing non-salary defence expenditure.
    • With lower petroleum prices, fertilizer and petroleum subsidies may be reduced.
    • These expenditure cuts are contemplated to keep the fiscal deficit under some control.

    Fiscal stimulus and fiscal deficit

    • Fiscal stimulus can be of three types:
    • 1) Relief expenditure for protecting the poor and the marginalised.
    • 2) Demand-supporting expenditure for increasing personal disposable incomes or government’s purchases of goods and services, including expanded health-care expenditure imposed by the novel coronavirus, and,
    • 3) Bailouts for industry and financial institutions.
    • The Centre had earlier announced a relief package of ₹1.7-lakh crore.
    • The Centre’s budgeted fiscal deficit of 3.5% of GDP may have to be enhanced substantially to 1) make up for the shortfall in budgeted revenues; 2) account for a lower than projected nominal GDP for 2020-21, 3) provide for a stimulus.
    • Thus, the Centre’s fiscal deficit may increase to 6.0% of GDP.
    • Expenditure on the construction of hospitals, roads and other infrastructure and purchase of health-related equipment and medicines require prioritisation.
    • These expenditures will have high multiplier effects.
    • Similar initiatives may be undertaken by the State governments which may also enhance their combined fiscal deficit to about 0% of GDP to account for 3.0% of GDP under their respective Fiscal Responsibility Legislation/Law and to provide for the shortfall in their revenues and some stimulus.

    Challenges

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

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

    Conclusion

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

    Back2Basics: What is GVA?

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

  • Opportunity for India in changing global order

    The world is going through a transition phase. We are experiencing the rise of new powers and the decline of the old. India has to navigate its path through this changing order keeping its interests in mind. The double opportunity in current scenario for India is explained in the article. To know more about it, continue reading.

    The changing global stage

    • The world today is fragmenting and slowing down economically.
    • Asia-Pacific is the new economic and political centre of the world with the rise of China, India and other powers — Indonesia, South Korea, Iran, Vietnam.
    • Rapid shifts in the balance of power in the region have led to arms races and the US’s “America First” attitude has led to rising uncertainty.
    • China-U.S. strategic contention is growing, uninhibited so far by their economic co-dependence.
    • As China seeks primacy in a world so far dominated by the U.S., the world faces a destabilising power transition which may or may not be completed.

    What should India’s response be to the new situation?

    Alliance with the US?

    • Many experts advocate that India should enter into an alliance with the U.S in the wake of rising China.
    • But India is much greater and more resilient than these people think.
    • Also, the aim of foreign and security policies of India has been the pursuit of strategic autonomy for India.
    • Thus, in the present situation, India should retain the above initiative and not get entangled in others’ quarrels. (i.e. the US-China quarrel)
    • Also, India should focus on pursuing its own national interest in this disorganized and uncertain world by creative diplomacy and flexibility.
    • An alliance seems to be exactly the wrong answer.

    China challenge

    • One way to handle China could be to see whether the two countries can evolve a new modus vivendi.
    • This new modus vivendi shall replace the one that was formalised in the 1988 Rajiv Gandhi visit.
    • The old framework is no longer working and the signs of stress in the relationship are everywhere.
    • The more India rises, the more it must expect Chinese opposition.
    • So, India will have to work with other powers to ensure that its interests are protected in the neighbourhood, the region and the world.
    • The complexity of India-China relations suggests there is a scope for new modus vivendi.
    • This would require a high-level strategic dialogue between the two sides about their core interests, red lines, differences and areas of convergence.

    What India can do to keep the region multi-polar?

    • As U.S. is withdrawing from the world, it will no longer be the upholder of international, economic and political order.
    • There is uncertainty over how the US will choose to deal with China.
    • India must work with other powers to ensure that this region stays multi-polar and that China behaves responsibly.

    Double opportunity for India

    • 1. Opportunity in the US-China contention
    • US-China contention will continue in future. Hence, both China and the U.S. will look to put other conflicts (eg: conflicts with India on trade or border issue) and tensions on the back burner.
    • This effect is already perceptible in the Wuhan meeting between China’s President Xi Jinping and Mr. Modi in early 2018.
    • And the apparent truce and dialing back of rhetoric by both India and China.
    • 2. Opportunity to Change national security Structures
    • Today, India is more dependent on the outside world than ever before.
    • It relies on the world for energy, technology, essential goods like fertilizer and coal, commodities, access to markets, and capital.
    • Adding the new security agenda and the contested global commons in outer and cyberspace and the high seas to India’s traditional state-centred security concerns gives India a sense of insecurity.
    • So, India needs to adapt to the changes and avoid imitating China.

    Consider the question-“The global order is experiencing geopolitical churn, new powers are rising and older are staring at the decline. In such a scenario, examine the opportunities India can explore in the context of the US-China contention”.

    Conclusion

    India risks missing the bus to becoming a developed country if it continues business and politics as usual. The most important improvement that India needs to make concerns its national security structures and their work — introducing flexibility into India’s thinking and India’s structures. For change is the only certainty in life.

  • Judiciary’s tryst with technology

    COVID pandemic has been changing many aspects of our life and forcing us to innovate or embrace the novel changes. The judiciary is not immune to this change. This article advocates for the adoption and popularization of online court. But there were several attempts at the adoption of technology in the working of courts even before the pandemic. Time has now come to its adoption on a wider scale.

    Three types of courts in our justice delivery system

    • First, conventional courts located in court complexes where judges, lawyers and litigants are physically present.
    • Second, online courts where the judge is physically present in the courtroom but the lawyer or litigant is not.
    • This is the present arrangement, except that now the courtroom is the residential office of the judge, due to the lockdown.
    • Third, virtual courts where there is no judge, lawyer or litigant and a computer takes a decision based on the inputs of the litigant.

    Pilot project with Tihar Jail

    • The pilot was for dealing with routine remand cases of prisoners.
    • The procedure postulated prisoners being produced in court, not physically but through video conferencing (VC), hence an online court.
    • The pilot project started tentatively with some hiccups but proved to be a success.
    • Now several courts have adopted the online process with varying degrees of commitment.

    District courts and High Courts’ adoption of online route

    • A few district judges have taken a step forward and recorded the statement of parties in cases of divorce by mutual consent.
    • As of now, several such cases, including those involving NRIs, are dealt with through VC in online courts.
    • Punjab and Haryana judges have gone even further ahead. The online courts record the expert evidence of doctors from PGIMER through VC.
    • This has freed the doctors from time-consuming trips to the courts and has resulted in savings of several crores for the exchequer.
    • A determined and concerted effort is necessary to popularise online courts at the district level.
    • Some high court judges in Delhi and Punjab and Haryana have completely dispensed with paper.
    • In these high courts, everything is on a soft copy, through e-Filing and scanned documents.
    • Lawyers and judges have made necessary adjustments to the new regime and the cases are conveniently heard and decided in “paperless courts”.
    • A few other high courts initiated similar steps, but have yet to institutionalise “paperless courts”.

    What are the problems?

    • Unfamiliarity with the medium of communication is the major issue. Judges are simply not used to consciously facing a camera generally and in particular while hearing a case.
    • Similarly, lawyers find it difficult to comfortably argue while seated.
    • Body language, facial expressions, the tone and tenor, both of the judge and the lawyer, make for important signals and clues which cannot be captured in VC.
    • Some technical problems in conducting online hearings have also surfaced. The bandwidth is not adequate or stable enough.
    • The picture sometimes breaks or gets frozen and the voice often cracks.
    • Consultations are also a problem. Lawyers occasionally need to consult their client or the instructing advocate; judges also need to consult each other during a hearing.
    • Attention needs to be paid to these real-time issues otherwise lawyers will harbour misgivings about a fair hearing.
    • The chairman of the Bar Council of India has voiced a concern that 90 per cent of the lawyers are not computer literate or tech-savvy.

    eCourts Project: A virtual court

    • A virtual court is a unique contribution of the eCourts Project.
    • A pilot virtual court was launched in August 2018 in Delhi for traffic offences and it has been a great success.
    • Virtual courts have been successfully tried out in Delhi, Haryana, Maharashtra and Tamil Nadu.
    • A virtual court is a simple programme through which a person can find out if a challan has been issued to him or her through a search facility.
    • If a challan has been issued, the details are available online and the person may plead guilty or not guilty.
    • On a guilty plea, the minimum fine is imposed and on a not-guilty plea, the case is electronically transferred to the traffic court for trial.
    • At the end of the day, a judge reviews the cases and disposes of them electronically depending on the option exercised.
    • One judge is all it takes to manage the virtual court for Delhi or an entire state.
    • With the launch of virtual courts, the daily footfalls to the courts have drastically reduced and thousands have pleaded guilty and paid the fine electronically.

    Potential of the virtual courts

    • The virtual court system has the potential of being upscaled and other petty offences attracting a fine such as delayed payments of local taxes or compoundable offences can also be dealt with by virtual courts.
    • This will ease the burden on conventional courts and therefore must be strongly encouraged.

    Consider the question- “Covid-19 pandemic has been forcing judiciary for faster adoption of technology. Discuss the issues and advantages of the adoption of technology such as video conferencing by the judiciary”

    Conclusion

    Post lockdown, justice delivery will certainly undergo a transformation. And judges, lawyers and litigants will need to adapt to the new normal. Several countries and courts have made adjustments not only for the period of the pandemic or lockdown but also for the future. We should certainly not be left behind but must also make a roadmap to meet the challenge.