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IASbaba’s Daily Current Affairs – 14th April 2017

ECONOMY

TOPIC: General Studies 3

Government Budgeting

Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.

Inclusive growth and issues arising from it.

N K Singh Panel on FRBM review

Introduction

The Fiscal Responsibility and Budget Management Act, 2003 (FRBMA) is an Act of the Parliament of India to institutionalize financial discipline, reduce India’s fiscal deficit, improve macroeconomic management and the overall management of the public funds by moving towards a balanced budget and strengthen fiscal prudence. In recent year there have been persistent calls for review of the same.

Economic Survey 2016-17:

The Economic Survey has called for modifying the Fiscal Responsibility and Budget Management Act, 2003 (FRBM Act) to provide fiscal policy direction for “the India of tomorrow”, but cautioned against fiscal activism adopted by the western world to prop their economies.

The country’s economic experience shows that the fiscal activism embraced by advanced economies — giving a greater role to counter-cyclical policies and attaching less weight to curbing debt — is not relevant for India.
It said the country’s fiscal experience has underscored the fundamental validity of the fiscal policy principles enshrined in the 13-year old FRBM Act.
However, even as the basic tenets of the Act remain valid, the operational framework needs to be modified “for the fiscal policy direction of India of today, and even more importantly the India of tomorrow”, the survey said.

Issue:

The Fiscal Responsibility and Budget Management (FRBM) Review Committee chaired by former Revenue Secretary N.K. Singh has recommended –

The Centre can take a pause on the fiscal consolidation front over the next three years by maintaining a fiscal deficit to GDP ratio of 3% till 2019-20,
On the FRBM roadmap for future, the panel has advocated reaching a fiscal deficit to GDP ratio of 2.8% in 2020-21, 2.6% the subsequent year and 2.5% in 2022-23.
The Panel has recommended an Escape Clause.

In case of contingencies:

The panel has introduced an escape clause that allows the government to skip the fiscal deficit target for a particular year, in situations that include
- National security concerns; acts of war; national calamities; a collapse of the agriculture sector; and far-reaching structural reforms with unanticipated fiscal implications.
It recommended that deviations from the stipulated fiscal targets should not be more than 0.5%.
The Reserve Bank of India governor Urjit Patel was not in favour of such a large deviation.
- Mr. Patel, who was also a member of the panel along with Chief Economic Adviser Arvind Subramanian, was inclined to only permit a 0.3% deviation.
The escape clause can also be triggered if the economy’s real output growth slips by three percentage points from the average of the previous four quarters.
A similar buoyancy clause has been proposed, so that fiscal deficit must fall at least 0.5% below the target if real output grows 3% faster than that average.

FRBM to make way for DFRA

The panel has recommended that the existing FRBM Act and rules be scrapped and a new Debt and Fiscal Responsibility Act be adopted and proposed the creation of a Fiscal Council that the government must consult before invoking escape clauses.

Conclusion:

FRBM Act is a European model of fiscal responsibility. There were concerns of India adopting it as it is. The review panel has suggested relevant reforms with required contingency clauses embedded. As the Economic Survey of the year referenced it is important to remain on the path of fiscal discipline but adopt an Indianised model of the same.

Connecting the dots:

Critically analyse the relevance of FRBM kind of legislation in the current era. Elaborate on the recommendations of the N K Singh panel.

ECONOMY/NATIONAL

TOPIC: General Studies 3

Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.

Inclusive growth and issues arising from it.

Role of institutions

RBI tightening norms on banks

Introduction

Under the Reserve Bank of India Act, 1934 and the Banking Regulation Act, 1949 (as amended from time to time), the RBI enjoys extensive powers of supervision, regulation, and control over commercial and co-operative banks. In light of growing NPAs and nearing compliance of BASEL norms RBI has taken a host of measures for ensuring banks are regulated. The new prompt corrective action (PCA) is apt step in this direction.

RBI’s function as Banker’s bank:

The Bank’s regulatory functions relating to banks cover their establishment (i.e. licensing), branch expansion, liquidity of their assets, management and methods of working, amalgamation, reconstruction and liquidation.
The control by the Bank is exercised through periodic inspection of banks and follow-up action and by calling for returns and other information from them.
The objective of such supervision and control is to ensure the development of a sound banking system in the country.

Issue:

The Reserve Bank of India (RBI) has come out with a revised Prompt Corrective Action (PCA) framework for banks, spelling out certain thresholds, the breach of which could invite resolutions such as a merger with another bank or even shutting down of the bank.

The revised norms have set out three thresholds.
- The provisions of the revised PCA framework will be effective from April 1, 2017 based on the financials of the banks for the year ended March 31, 2017.
- The framework would be reviewed after three years, the RBI said.
The thresholds are based on capital, net non-performing assets, profitability and leverage ratio.
The breach of the first threshold will invite restriction on dividend distribution or require parents of foreign banks to bring in more capital.
- This will get triggered if capital adequacy ratio (including capital conservation buffer) falls below 10.25% or common equity tier-I (CET1) capital ratio falls below 6.75%.
- The trigger for net NPA is 6% and 4% for leverage ratio. Two consecutive years of negative return on assets (RoA) will also be classified in threshold one.
The breach of the second threshold will occur when the capital adequacy ratio falls below 7.75% or CET1 goes below 5.125%.
- The net NPA threshold is breach of 12% and leverage ratio below 3.5%.
- Three consecutive years of negative ROA will also trigger threshold two.
- Breach of threshold two will result in restrictions on expansion of branches and higher provisions.
The breach of the third one on capital “would identify a bank as a likely candidate for resolution through tools like amalgamation, reconstruction, winding up etc.,”

Corrective action that can be imposed on banks includes special audit, restructuring operations and activation of recovery plan.
The RBI has said that promoters of banks can be asked to bring in new management, or even can supersede the bank’s board, as a part of corrective action.

Conclusion:

Increasing NPAs have strained the balance sheets of banks and hurt the stability of the economy. The asset quality review forces banks to declare true picture. Hence the new norms are necessary to set right the macroeconomic fundamentals of the country.

Connecting the dots: