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IASbaba’s Daily Current Affairs – 7th Oct 2017

ECONOMY

TOPIC: General Studies 3:

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

Reviving Economy- Recapitalising Banks

Background:

From a peak of 9.2 per cent in January-March 2016, GDP growth has fallen every successive quarter: First to 7.9 per cent, then 7.5 per cent, followed by demonetisation which reduced it further to 7 per cent in October-December 2016, then 6.1 per cent and finally 5.7 per cent in April-June 2017.
One major challenges is the rising Non-Performing Assests (NPAs) of the public-sector banks (PSBs).

How grim is the situation?

According to the RBI’s Statistical Tables Relating to Banks in India 2015-2016, NPAs were 3 per cent of gross advances of all banks in India in 2013. By 2016, they had grown to 9.3 per cent. The increase was much more pronounced for nationalised banks — from 2.9 per cent in 2013 to 13.8 per cent in 2016 — compared to privately-owned banks where the NPAs rose from 2 per cent of gross advances in 2013 to 3.1 per cent in 2016.
For the 10 worst PSBs, gross NPAs averaged 16.4 per cent of gross advances as on December 2016, from 22.4 per cent for the Indian Overseas Bank to 14.1 per cent for the Central Bank of India — in effect, each having thoroughly destroyed its balance sheet.
The system does not have enough capital to take care of its bad loans.

What led to this situation?

In an exuberant milieu that started with the UPA 1 government and continued until three years after the global financial crisis of 2008, large corporations conceived major projects proposals in capital-intensive sectors such as power, ports, airports, housing and highway construction.
Banks were only too keen to lend, often without sufficient evaluation of risks and returns. Things started worsening with the policy paralysis brought about by the spectrum and coal mining scandals. Soon, most projects were getting stuck, especially in power and highways; and banks found their loans going sour. Initially, the extent of non-performing loan assets (NPAs) was hidden by “ever-greening”. They were revealed as the RBI tightened the norms.

How are businesses getting affected?

When an entrepreneur gets an order, he uses working capital from banks which finances the raw material inventory and work-in-progress. After production, delivery and collection of final payments, he pays interest on that working capital and draws it down with the bank until the next order. If the working capital cycle remains intact and accommodative, businesses are not hit by a squeeze on financing. But with severe constraints on such finance, all businesses are hit, irrespective of how good demand may be.

Public sector banks (PSBs), comprising 21 “nationalised banks” and six of the State Bank of India group, account for almost 70 per cent of the assets and liabilities of the system.

How have the PSBs behaved in such circumstances?

With large losses on account of heavy provisioning and bad loans eroding their balance sheets, the PSBs have curtailed loans and advances.

What’s the solution?

The NPA crisis in the 1990s was mitigated by a $500 million World Bank loan backed by a corresponding budgetary outlay. This time the cost will be higher and, therefore, one must target the banks carefully. But if we do so, we will strengthen distressed balance sheets and give space to the recapitalised bank to behave as they should. Recapitalisation will raise their enterprise value, which can then be leveraged through selective divestment.
The finance minister thus should begin selective PSB recapitalisation.

Connecting the dots:

Indian economy is facing slowdown. In such a scenario to keep the economy going its necessary that the private sector has enough fund to invest in the economy. In this light reviving public-sector banks has become a necessity. Discuss what should be done to revive the PSBs.

NATIONAL

TOPIC: General Studies 2:

Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

Functions and responsibilities of the Union and the States, issues and challenges pertaining to the federal structure.

Important aspects of governance, transparency and accountability

Simultaneous Elections: Possible Logistically

Background:

The idea of simultaneous elections to Parliament and state assemblies has been around for some time now. It has been examined by the parliament standing committee and the Niti Aayog. NITI Aayog has made it an important item of its three-year action agenda report.
Prime Minister Narendra Modi has advocated it.
Now, the Election Commission has said it would be possible, logistically, to hold simultaneous polls to the central and state legislatures by September 2018.
The most critical questions pertaining to the debate, however, have less to do with logistics but political necessity, Constitutional validity and, indeed, multi-party democracy.

Debate:

The idea, however, remains a fundamentally contested one.

In favor:

Reduction of expenditure- the growing sums of money spent by the candidates, political parties and government, and the routine flouting of all caps and limits on expenses will be curtailed.
Improved governance- A price is also to be paid on the governance front, with ruling parties succumbing to the populist promise and scheme because of an impending election.
Curtailing imposition of the Model Code of Conduct- Government slows to a standstill after the code of conduct comes into force ahead of over-long multi-phase polls.
Minimising disruption of normal public life.
Lessening pressure on crucial manpower deployed for prolonged periods in poll-bound States.

Concerns:

Yet, there are important concerns about imposing simultaneity on the election calendar.

If simultaneous elections are to be held in 2018-19, what happens to assemblies in states that went to polls last year or this year?
After simultaneous polls are held, what if a full five-year term is interrupted by political realignments in an assembly, or assemblies? In a vigorous and diverse democracy, there is no guarantee, either, that the Lok Sabha will run for its full term.
Are State Assemblies, whose tenure is not coterminous with the Lok Sabha’s, to be dissolved prematurely or extended?
A conjoint reading of Articles 83(2) and 172(1) of the Constitution makes it clear that the tenure of the Lok Sabha and the State Assemblies cannot be extended beyond five years except in the case of proclamation of emergency.
Democratic politics cannot be, it must not be, circumscribed by an artificial fixity of tenure of the legislature. Such an insistence on uniformity would only undermine the people’s will by making politics more unresponsive and unrepresentative.
Can fractured verdicts and unstable governments be avoided altogether in a multi-party democracy like India?
Is the early dissolution of Assemblies desirable through proclamation of President’s Rule under Article 356?
Holding simultaneous elections is certain to influence voter behaviour in such a manner as to tilt the polls in favour of national issues and national parties. This could marginalise issues pertaining to States and regional parties.
The federalisation of the polity, in particular, has deepened democracy in India, with every state evolving its own specific format and time-table of political competition, and throwing up its own set of priorities and issues.

The first election in independent India was held simultaneously at the Centre and in the states. But election cycles soon diverged once the realities of mid-term polls, a multi-party system, coalition politics and a federalising polity kicked in. The parliamentary, federal system has worked well for a country of diverse voices and many minorities.
The idea of simultaneous polls — one nation, one polls — threatens to curb the plural and layered federal system by giving it a more presidential and unitary character. It must be resisted.

Conclusion:

All the measures required for holding simultaneous elections requires political consensus which has so far not been reached. The Congress, Left, TMC and the NCP have termed the move “impractical… and leading to a scenario where the necessary balance in Indian democracy given the diversity of the country is lost”.
Clearly, this is too critical and nuanced an issue to be forced through the strength of numbers in Parliament. The present government must strive to evolve a consensus.
Polls may be cumbersome or expensive, but any attempt at reforms must be weighed against whether they strengthen or erode democratic rights.

Connecting the dots:

With present day government, NITI Aayog, Law Commission and now Election Commission in favor of holding simultaneous elections various concerns are being raised by other political parties especially the regional ones. What are these concerns. The need of the hour is to develop a consensus. Discuss.