IASbaba’s Daily Current Affairs – 7th September, 2015

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IASbaba’s Daily Current Affairs- 7th September, 2015

NATIONAL

Special category states and centre – state finances in India

• The concept of a special category state was first introduced in 1969 when the 5th Finance Commission sought to provide certain disadvantaged states with preferential treatment in the form of central assistance and tax breaks.
• Initially three states Assam, Nagaland and Jammu & Kashmir were granted special status but since then eight more have been included (Arunachal Pradesh,  Himachal Pradesh,  Manipur, Meghalaya, Mizoram, Sikkim, Tripura and Uttarakhand).

What’s the rationale behind conferring such status?

The main rationale for special status is that certain states, because of inherent features, have a low resource base and cannot mobilize resources for development.

Some of the features required for special status are :

• Hilly and difficult terrain.
• Low population density or sizeable share of tribal population.
• Strategic location along borders with neighbouring countries.
• Economic and infrastructural backwardness.
• Non-viable nature of state finances.

Who grants special status to states ?

The decision to grant special category status lied with the National Development Council, composed of the Prime Minster, Union Ministers, Chief Ministers and members of the Planning Commission.

However now with the dismantling of the planning commission and national development council, the competent authority to grant special status to states is still unknown.

Benefits of having special status by a state :

• The Planning Commission was allocating funds to states through central assistance for state plans.
• Central assistance can be broadly split into three components: Normal Central Assistance (NCA), Additional Central Assistance (ACA) and Special Central Assistance.
• NCA, the main assistance for state plans, is split to favour special category states: the 11 states get 30% of the total assistance while the other states share the remaining 70%.
• The nature of the assistance also varies for special category states; NCA is split into 90% grants and 10% loans for special category states, while the ratio between grants and loans is 30:70 for other states.
• For allocation among special category states, there are no explicit criteria for distribution and funds are allocated on the basis of the state’s plan size and previous plan expenditures.
• Allocation between non special category states is determined by the Gadgil Mukherjee formula which gives weight to population (60%), per capita income (25%), fiscal performance (7.5%) and special problems (7.5%). 
• Special category states also receive specific assistance addressing features like hill areas, tribal sub-plans and border areas.
• Beyond additional plan resources, special category states can enjoy concessions in excise and customs duties, income tax rates and corporate tax rates as determined by the government.

Now with dismantling of planning commission , how the above work will be carried out, we have to wait and watch.

Raghuram Rajan committee on backwardness and special assistance to states :

• The Union government had constituted a committee headed by Raghuram Rajan, to suggest ways to identify indicators of the relative backwardness of the States for equitable allocation of Central funds.
• A panel had recommended a new “composite development index” of backwardness to determine which States need special assistance.
• The committee had proposed an index of backwardness composed of 10 equally weighted indicators for monthly per capita consumption expenditure, education, health, household amenities, poverty rate, female literacy, percentage of the Scheduled Caste/Scheduled Tribe population, urbanisation rate, financial inclusion and physical connectivity.
• The 10 States that score above 0.6 (out of 1) on the composite index have been classified as “least developed,” the 11 States that scored from 0.4 to 0.6 are “less developed” and the seven States that scored less than 0.4 are “relatively developed.”
• However no action has been taken by the government with regards to implementation of the recommendations of the committee.

Way forward(Iasbaba’s view):

• In order to achieve the status of a special category state, a state has to project itself as socioeconomically or strategically vulnerable state however it is ironical that a number of states are demanding their names to be included in the list of special category states in order to exploit the numerous benefits conferred to such states.
• Need of the hour is a comprehensive committee which looks into the demand of such special category states a suggest a formula, based on which special status can be conferred to deserving states.

Connecting the dots:

• What is meant by special category states ? Comment on the criteria which is used to accord special status to states.
• What is a backward state in India? Comment on various committee reports wrt backwardness of states in India.
• Critically analyse the pattern of financial distribution between union and the states in India, with special focus on special category states.

ECONOMICS

Indradhanush Plan for Public Sector Banks (PSBs)

About Indradhanush Plan:

Indradhanush plan aims at reviving the deteriorating state of PSBs. It is a revival plan which will infuse nearly 25000 crore in public sector banks. Indradhanush plan has proposed 7 elements.

What Indradhanush offers?

• Heavy dose of capitalization for PSB for improvement in their health crippled by bad loans
• Infusion of 25000 crore, out of which 20000 crore within first month
• Setting up of Bank Board Bureau, board will start functioning from April 2016.
• This board will replace the existing recruitment board.
• Plan also aims to address the legal and risk management control for bank.
• Framework for evaluation of allocation and performance of management team
• It has appointed 5 heads of PSB, out of which 2 are from private sector

7 elements of Indradhanush:

• A: Appointments
• B: Bank Board Bureau
• C: Capitalization
• D: De-stressing
• E: Empowerment
• F: Framework of Accountability
• G: Governance Reform

What are Indradhanush’s ambiguities?

• Out of 25000 crore, 5000 crore will be disbursed based on the performance of the bank, this will make allocation ambiguous.
• Appointing heads from private sector bank has disappointed and demotivated the employees and officers in PSB
• Infusion of capital in stressed banks is a necessary move, but it is still not adequately expressed the way funds be channelized
• Government says that there will not be any interference in the working and management of banks, but again conflict arises when government semantically distinguishes between interference and intervention.
• Governance reforms are not specifically been taken in consideration and there lies a gap in understanding the real nature of pertaining problems in different banks.

Way Forward:

• It is desired that public sector banks should enjoy decision making and autonomy
• If infusion of capital is made, then it should also take care of adequacy and transparency
• Bank Board Bureau, should function effectively and should help banks in overcoming the ambiguity in respect of appointments, which can ultimately motivate employees in PSB
• Empowering banks can help them in effectively framing policies which will in particular suit the need
• Banks need strategy to materialize for risk management, recovery of bad loans and asset restructuring.

Background:

1. J. Nayak committee was set up reviewing the governance in public sector banks.

Committee’s recommendation

• To introduce reforms by changing the shareholding of Government in public sector banks
• Because if majority of shares are held by government then decision making lies to a large extent in hand of government
• To ensure transparency in appointments
• To train staff in banks so that they can perform well and this will lead to enhanced productivity of the staff and bank
• Reforms in recruitment, training and transfers.

Connecting the dots:

• Critically comment on the shareholding of government in public sector banks.
• ‘Indrashanush has offered a way forward for public sector banks by infusing capital, setting up Bank Board Bureau and empowering banks’. Critically comment on the statement in light of Indradhanush plan and its effectiveness.
• Will capital infusion revive the banks or there is much more needed? Comment.