IASbaba's Daily Current Affairs Analysis

IASbaba’s Daily Current Affairs (Prelims + Mains Focus)- 29th January 2018

(PRELIMS+MAINS FOCUS)

‘Stree Swabhiman’ initiative

Part of: Mains GS Paper I- Women empowerment

Key pointers:

‘Stree Swabhiman’ aims to create a sustainable model for providing adolescent girls and women an access to affordable sanitary products by leveraging CSCs.
An initiative by CSC on women’s health and hygiene.
Under the ‘Stree Swabhiman’ project, sanitary napkin micro manufacturing units are being set up at CSCs across India, particularly those operated by women entrepreneurs.
Besides promoting women’s health and hygiene, the initiative will also provide employment opportunities to women in rural communities as each facility will employ 8-10 women.

Village Level Entrepreneurs:

Over 46,500 women are working as VLEs through the CSCs across the country.
They are offering services like Aadhaar, banking, insurance and promoting digital literacy in rural India.
Village entrepreneurs operating Common Services Centers (CSCs) have the power to transform India by empowering locals and creating employment opportunities in rural India, IT Minister Ravi Shankar Prasad said.
“Women have played a crucial role as change agents under the Digital India programme,” the release added.

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Jan Aushadhi Scheme

Part of: Mains GS Paper II- Government interventions

Key pointers:

Prime Minister Narendra Modi said the medicines that are sold in government-run medical shops are 50-90 per cent cheaper compared to the branded ones and they strictly adhere to the international norms prescribed by the World Health Organization (WHO).
Medical stores called ‘Jan Aushadhi Kendras’ are being run under the government’s ‘Pradhan Mantri Jan Aushadhi Yojana’.
The motive behind this scheme is to make healthcare affordable and encouraging Ease of Living.
Over 3,000 such shops are operational across the country.
It has led not only to availability of cheaper medicines, but also new employment opportunities for individual entrepreneurs.

Article link: Click here

(MAINS FOCUS)

ECONOMY

TOPIC: General Studies 3:

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

Making Indian Banking Sector Dynamic

Introduction:

The ailing banking sector of India requires immediate attention.
A robust and well-capitalized banking sector supports capital formation and economic activity by facilitating intermediation of resources between savers and borrowers. India saves close to 30% of its annual output. Given the importance of the banking sector in the financial system, it has a crucial role to play in channelling these savings to productive investments.

The current banking sector landscape:

The Indian banking sector is dominated by public sector banks (PSBs) with a market share of roughly 70% of total banking assets.
There has been little dynamism in the banking sector in recent decades. Since 1991, only 15 licences have been issued to universal banks, a relatively modest number for a fast-growing economy in which the banking system remains an important source of corporate financing.
PSBs remain the biggest contributors to the large and rising stock of non-performing assets (NPAs), with a share of approximately 90% of the total stock.

Poor health of PSBs:

Rising NPAs have put a strain on the health of PSBs, reflected in their declining profitability ratios which turned negative in 2016 for the first time in a decade.
The deteriorating health of PSBs has adversely affected their ability to lend. Within the industrial sector, credit to medium enterprises continues to decline while growth in credit to large enterprises is barely positive.

It will be difficult for the banking system to support high growth, especially in the industrial sector, if the growth in NPAs is not checked.

What needs to be done?

The government has recognized the urgency for broad-ranging banking reforms, but effective implementation and a multi-pronged approach are essential.
There has been some progress on improving the institutional and regulatory frameworks needed to support a strong banking system. For instance, the Insolvency and Bankruptcy Code has improved the legal landscape and should help in speedier recovery of bad loans. The challenge is to make sure it is implemented effectively.

Moving towards a dynamic banking sector:

India should move towards a more dynamic banking sector that fosters innovation and checks the inefficiencies created by a lack of entry.

Productive reallocation of capital- inefficient banks can be driven out of the system (or merged with other banks) and new banks can enter.
The policy of “on-tap” licensing of banks is a promising step in the direction of increasing competition in the banking sector.
However, some of the conditions, such as initial capital requirements and priority sector lending targets, seem onerous and may fail to attract individual promoters.
There should be a gradual push towards greater private ownership of ailing PSBs.
The argument in favour of PSBs is that they can penetrate unbanked areas where private sector banks do not find it profitable to operate. However, private sector banks should be able to leverage the model of banking correspondents to provide doorstep banking services in rural areas at a reduced cost.
Hence, it is time to re-evaluate the benefits of having a banking system dominated by public sector banks and the benefits that greater private ownership can bring.

Increasing the resilience of the banking sector to losses:

It is impossible to eliminate risk completely from any banking system.
A sound system should, however, be able to minimize risk.

Lending standards should be strengthened for lending to sensitive sectors and bigger projects. In addition, there should be enough provisions for expected losses.
Banks need to have better mechanisms to evaluate the viability of projects when making lending decisions.
To deal with ex-post losses, there should be a vibrant market for stressed assets so that banks are able to sell their NPAs at a fair price. This can be achieved by increasing participation in the market for stressed assets.
Greater competition will lead to a competitive bidding process and help in better price discovery, potentially reducing the losses suffered by banks owing to haircuts on sales of stressed assets.

Other reforms:

Recapitalization of PSBs is important, but should be done in tandem with other reforms, including-

Corporate governance reforms to make the incentive structure of the banks consistent with productive allocation of credit.
Improved financial supervision so that the signs of stress on banks’ books can be identified early.
Development of a vibrant corporate debt market to avoid concentration of credit risk in the banking system.
Improved debt recovery mechanisms to ensure efficient and speedy recovery of assets.

Conclusion:

Without a strong banking system, the government’s vision of making India a $5 trillion economy by 2025 could remain a pipe dream. Many reforms are being taken to reform banking sector, what is required is effective implementation.

Connecting the dots:

Given the importance of the banking sector in the financial system, it is required that necessary reforms are undertaken making the sector competitive and dynamic. Discuss.

NATIONAL

TOPIC: General Studies 2:

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

Salient features of the Representation of People’s Act.

State funding of elections

Background:

Indian elections are the world’s biggest exercise in democracy but also among the most expensive.
Parties and candidates need large sums of money for voter mobilisation, advertising, consulting, transport, propaganda and printing of campaign materials to reach voters in constituencies.
Corporate donations constitute the main source of election funding in India which is mainly the black money, with business and corporate donations to political parties commonly taking this form.
The public disclosure system that exists is limited.

Best practices elsewhere:

India’s privately funded election campaign stands in contrast to the trend in most countries. Partial or full public funding or transparent regulation and financial accountability of political finance exists in many countries as in the U.S.

Issues:

Corruption in election finance and the flawed party funding system drive political parties to misuse government’s discretionary powers to raise funds for election campaigns.
The combined effect is the absence of a level playing field which has reduced the effectiveness of our democracy.
Absence of transparency in funding- Even 70 years after Independence the country had not been able to evolve a transparent method of funding political parties which is vital to the system of free and fair elections.

Issues with electoral bonds:

Anybody can buy electoral bonds in the form of bearer bonds and donate it anonymously to a political party of their choice.
All donations given to a party will be accounted for in the balance sheets but without exposing the donor details to the public.
Donors continue to prize anonymity as they fear disclosure could invite adverse consequences from political opponents.
As a result, the Election Commission (EC), the Income Tax department and the voter would remain in the dark about it.
Bonds will allow corporate houses to make anonymous donations through banking channels to the party of their choice. This would lead to further opacity in the funding process and further limit oversight and accountability.
The bonds scheme imposes no restrictions on the quantum of corporate donations. Consequently, electoral bonds cannot address the problems that arise from the corporate control over politics and corporate capture of government policies and decisions.
Electoral bonds will result in unlimited and undeclared funds going to certain political parties which will be shielded from public scrutiny as the balance sheets will not show which party has been the beneficiary of this largesse.

Far from reducing the large-scale corporate funding of elections, the introduction of electoral bonds does not even address this issue.
Anonymity is perhaps one of the biggest threats to our democracy today; it is the very wellspring of institutionalized corruption.

Three steps back:

Lifting of the maximum limit of 7.5% on the proportion of the profits a company can donate to a political party, thus opening up the possibility of shell companies being set up specifically to fund parties.
Amendment of the Foreign Contribution (Regulation) Act (FCRA) opening the floodgates of foreign funding to political parties, especially those which have a foreign support base.
The refusal of political parties to come under the RTI Act in order to conceal their sources of funding.

Ill-Consequences:

The above three things will end up strengthening the business-politics nexus.
It goes against the position taken by various electoral reform committees that the existing pattern of political funding encourages lobbying and capture of the government by big donors.
Far from making the funding process transparent, the bond scheme could provide a backdoor to corporates and other lobbies for shaping public policy to benefit their interests.
There is thus a legitimate fear that policy decisions of political parties and politicians after being elected may be biased in favour of groups that fund them.
Moreover, these bonds are likely to reverse the small steps towards transparency of political finance that came as a result of RTI-driven public disclosure of income tax returns of political parties arguing that these disclosures were a matter of public interest and should be available to citizens. Proposed amendments to the Income Tax Act and the Reserve Bank of India (RBI) Act will exempt parties from keeping records of donations made through bonds.
The decision to reduce cash contributions from Rs. 20,000 to Rs. 2,000 is a step in the right direction, but the net effect is debatable, since it could prompt parties to take smaller cash donations, and therefore not declare their source.
The Association for Democratic Reforms found that nearly 70% of party funding over an 11-year period came from unknown sources; nearly Rs. 7,900 crore donations came from unknown sources in 2015-2016.
Electoral bonds will not change this.

Reducing the high cost of elections:

Elections that work well are essential for democracy; conversely, money power can corrode the entire process.
A major concern associated with the high cost of elections is that it prevents political parties and candidates with modest financial resources from being competitive in elections.
A number of government committees have outlined reform proposals to contain the negative effects of the high cost of elections.
These include strong disclosure norms, strict statutory limits on election expenses and ceiling on corporate donations to political parties.
The rules to limit and restrict the campaign expenditure of parties are largely inoperative because it is easy to circumvent them.

Solution:

State funding of elections (in various forms) is a potential solution to this problem.
The Indrajit Gupta Committee on State Funding of Elections had endorsed partial state funding of recognised political parties and their candidates in elections way in 1998.
The government needs to show political will to have a discussion on state funding of elections.
The mechanics of this process need to be carefully worked out to establish the allocation of money to national parties, State parties and independent candidates, and to check candidate’s own expenditure over and above that which is provided by the state.

Conclusion:

A formula that is both efficient and equitable can be formulated based on the experiences of other countries which have state funding of elections. This is required to ensure that democracy works for everyone and not just for the wealthy few.

Connecting the dots:

Indian elections are the world’s biggest exercise in democracy but also, among the most expensive. Discuss the issues. How electoral bonds falls short to solve the issue. What should be the way ahead.