IASbaba’s Daily Current Affairs – 14th November, 2015
General studies paper 3:Indian Economy and issues
General studies paper 2: Statutory, regulatory and various quasi-judicial bodies; Important aspects of governance, transparency and accountability,e-governance applications, models, successes, limitations, and potential
Dealing with Failure: Bankruptcy Code
The World Bank’s Doing Business Report 2016 pointed out that it takes more than four years to resolve insolvency cases in India, as against one-and-a-half years in OECD (Organization for Economic Cooperation and Development)’s high-income countries.
For a country to move up the development ladder successfully, a consistent flow of investment becomes a foremost priority to achieve. And for that investment to adopt a way of continuous flow in the economy, determinants like ‘ease of doing business’, operational legal framework as well as an apt Risk Management environment needs to be put in place.
A sort of predictability and a way out of financial distress with a timely intervention, when put in place- makes for a higher flow of capital in the economy with more clarity and an assured safety net. This will take care of the new business units, jobs, income generation as well as greater availability of credit for businesses by freeing up capital, thereby boosting innovation and productivity
Insolvency and Bankruptcy Code- (IBC)
A proposed legal framework for facilitating the transparent and rapid exit of failed enterprises, leading to an environment- valuing stability, and enhancing better institutional infrastructure at place:
Address the crisis of non-performing assets in the banking sector,
Improve the climate for entrepreneurship and
Enable the corporate and infrastructure bond market.
Pillars of IBC:
Information Utilities and
Lenders and Owners: Defining ‘failures’ and formulation of clear fundamental from where there is a point of no-return is extremely important to avoid unnecessary litigations. Also, the elements of Risk management should be included and should have a presence in every major decision involving areas where dues can take place.
Operational dues: Wages to Employees, Trade Credit Bills, etc
Calm Period- Insolvency Resolution Process (IRP):
This calm period will be for a period of 180 days wherein the claims of all creditors will be suspended leading to a smooth working for the debtor.
The debtor though has to maintain that the firm is being managed by a regulated “insolvency professional” leading to a building up of confidence in the minds of the investors that no asset stripping is taking place.
The second step involves a formation of a committee in order to propose revival plans, establishing possible tools like debt restructuring, infusion of new equity capital, bringing in new shareholders, etc., after which the creditor’s committee can take a final decision.
Acceptance of Revival Plans: Approval of 75 per cent of the creditors
Creation of a Resolution Corporation to monitor financial firms, and intervene
To close firms that can’t be revived or
Change their management to protect investors or depositors
In India, there are myriad of laws scattered and exists without a time-frame, thus, leading the cases to be dragged on for a very long time. Thus, removal of judicial bottlenecks and delays are crucial to a reform process and can stimulate both assurance and responsive mechanism for entrepreneurs.
Also, the economic decisions should not be dependent upon a single entity ensuring independence of work. The pillars of IBC should additionally, act as an enabling infrastructure dealing efficiently with the procedural laws in place and making recovery easier and enabling provision of unsecured loans for the entrepreneurs.
A robust insolvency code and a need to keep improving it to suit the specific needs of the country and the existing business environment is important to unlock new avenues for funding and foster growth in the Indian markets
Connecting the Dots:
Discuss the need for an insolvency-adjudicating authority in the country
Has the position of lenders been traditionally weaker? Comment
Topic: General studies paper 2
Important International institutions, agencies and fora- their structure, mandate.
Bilateral, regional and global groupings and agreements involving India and/or affecting India’s interests
Saving the WTO from risk of Irrelevance:
What is the issue?
The World Trade Organisation (WTO) came into being as a result of the evolution of the multilateral trading system starting with the establishment of the General Agreement on Tariffs and Trade (GATT) in 1947. The protracted Uruguay Round negotiations spanning the period 1986–1994, this resulted in the establishment of the WTO.
But WTO right now faces a serious existential crisis. This is primarily because, since its inception in 1995, it has failed to deliver on significant trade liberalisation.
Nevertheless WTO faces such severe existential crisis, It is the only multilateral platform that allows smaller and developing countries to make concerted efforts at integrating trade and development by allowing these countries to negotiate international trade issues in blocks and together withstand the relentless demand of developed countries to open their markets without reciprocal benefits.
It also allows for effective and non-partisan settlement of trade disputes and for the review of each country’s trade policy.
So let’s see some of the reason for WTO facing Existential crisis
This existential crisis of the WTO has deepened due to the conclusion of a plethora of free trade agreements (FTAs), including mega FTAs like the recently executed Trans Pacific Trade agreement (TPP).
TPP has countries like the US, Canada, Australia, Japan and New Zealand as its members with a collective GDP of $27.5 trillion, approximately 40 per cent of the global economy and covering nearly a third of global trade.
All these FTAs operate on the basis of non-most favoured nation (MFN) principle, which is a fundamental cornerstone of the WTO.
FTAs may act as building blocks for the multilateral trading regime if they liberalise ‘substantially all trade’ between its constituent members and do not impose a higher burden on non-constituent members than what existed before the formation of the free trade area
These conditions are given in Article XXIV of the General Agreement on Tariffs and Trade (GATT), an integral part of the WTO, and constitute an exception to the MFN rule. Thus, all FTAs that WTO member countries sign have to satisfy these legal requirements but whether they are following the rule is hardly have any answers
What is Trans-Pacific Partnership (TPP)?
TPP seeks to frame a new agenda for global trade, requiring countries to commit beyond their existing multilateral obligations under the WTO as well as the agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS).
The Trans-Pacific Partnership has become the centrepiece of U.S.’s Asia policy, with the Barrack Obama-led administration investing considerable political and diplomatic capital in it.
What developed countries say?
The reality was while Doha was a development agenda, domestic agriculture and industry interests in the U.S. (and in other developed countries) showed no appetite for making necessary concessions.
Instead, the game moved towards ensuring that when emerging economies were showing signs of rapid growth, developed countries did not lose the lead. It was time to demand a more enduring value for technology and IPR.
Also Enforcement of higher environment and labour standards was sought to be made a norm even on a trade platform. More assured access for trade and investment was demanded with firm commitments about reform.
So how can we overcome this?
The answer for that is strengthening the existing mechanisms that exercise supervisory control over FTA’s
Strengthening the role of CRTA:
First, as per WTO law, all WTO member countries are bound to notify the WTO of their intention to enter into a FTA. The WTO’s Committee for Regional Trade Agreements (CRTA) examines the compatibility of the notified FTA with WTO rules.
In other words, the CRTA could come to the conclusion that the notified FTA is inconsistent with WTO rules. This would, in turn, compel countries to make their FTA compatible with WTO rules.
However, WTO’s CRTA, which must decide by consensus, has never been able to finalise any report examining the compatibility of FTAs with WTO rules.
As a result, one does not know whether the humongous number of existing FTAs act as ‘building blocks’ or ‘stumbling blocks’ for the multilateral trading regime. There is an urgent need to strengthen the CRTA to ensure that the exercise of checking the compatibility of notified FTAs is carried out swiftly.
Role of WTO’s DSU:
Second, countries could ensure greater control of the WTO over FTAs by using WTO’s dispute settlement understanding (DSU). WTO member countries have frequently used the DSU to settle a variety of trade disputes with other members Thus; a WTO member country can use the DSU to challenge deviation from MFN, which is permissible only if the requirements of Article XXIV are satisfied.
The use of the DSU is particularly important in the context of the TPP. It is widely believed that the TPP purports to create a set of standards that would lead to significant market access barriers for many developing countries.
For example, in the case of Vietnam, the US has offered a zero per cent import duty on apparel imports subject to the Rules of Origin (ROO) practised by the US. The US ROO in apparel follows a “yarn-forward rule”, which stipulates that yarn used to make textiles or apparel must be sourced from another TPP country
Currently, the largest providers of cotton yarn to Vietnam are China, South Korea and India, who are incidentally not members of the TPP. This will create a higher and more restrictive regulation of commerce to non-constituent countries like India and thus violate Article XXIV.
To provide another example of the trade restrictiveness on third parties of the TPP, it is believed that certain market access conditionality’s have been included in the form of higher environmental and labour standards. These standards will necessarily make a significant dent on the global competitiveness of products originating from countries like India, which will not be able to meet such standards, again leading to a potential violation of Article XXIV.
IAS Baba’s Views:
Protectionist and exclusionary FTAs weaken multilateralism. Thus, India and other developing countries should consider exercising their rights under the WTO, which would not only challenge these protectionist FTAs but also revitalise an almost moribund international organisation.
Developed countries should work on FTA’s such that it doesn’t weaken the relevance of other multilateral organisations or grouping of developing and also least developed countries.
Connecting the dots:
WTO is slowly weaning from the purpose for which it was created ?critically analyse
The OROP quicksand – Veterans risk losing public support due to their immoderate position. Government needs to reach out, soothe tempers.
The tax puzzle- If the surge in tax collections is sustainable, the finance minister has the elbow room to shoot for a fiscal deficit that is significantly lower than the Budget’s 3.9 per cent of GDP, or to bump up