IASbaba's Daily Current Affairs Analysis

IAS UPSC Prelims and Mains Exam – 15th May 2019

(MAINS FOCUS)

ECONOMY

TOPIC: General studies 2 and 3

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

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

Inclusive growth and issues arising from it.

Resolving the NPA Crisis

Background:

Non-performing assets (NPAs) at commercial banks amounted to 11.2% of advances, in March 2018. The ratio of gross NPA to advances in PSBs was 14.6%. These are levels typically associated with a banking crisis.

Origin of the NPA crisis

During the credit boom period of the years 2004-05 to 2008-09 commercial credit (or what is called ‘non-food credit’) doubled. It was a period in which the world economy as well as the Indian economy were booming.
Indian firms borrowed heavily in order to avail of the growth opportunities they saw coming. Most of the investment went into infrastructure and related areas — telecom, power, roads, aviation, steel. Businessmen were overcome with exuberance, partly rational and partly irrational.

Thereafter, as the Economic Survey of 2016-17 notes, many things began to go wrong.

Due to problems in acquiring land and getting environmental clearances, several projects got stalled. Their costs soared.
With the onset of the global financial crisis in 2007-08 and the slowdown in growth after 2011-12, revenues fell well short of forecasts.
Financing costs rose as policy rates were tightened in India in response to the financial crisis. The depreciation of the rupee meant higher outflows for companies that had borrowed in foreign currency. This combination of adverse factors made it difficult for companies to service their loans to Indian banks.

As per the process of provisioning the banks estimate that a particular borrower may not be able to pay back the loan in full and hence make a provision of the amount they could lose (as in that won’t be paid back to banks). Banks start creating provisions on a loan given when the borrower starts defaulting on his repayment instalments.
Higher NPAs mean higher provisions on the part of banks. Provisions rose to a level where banks, especially PSBs, started making losses. Their capital got eroded as a result. Without adequate capital, bank credit cannot grow.

Privatisation of PSBs is not the right solution:

Since the problem of NPAs is more concentrated in PSBs, some have argued that public ownership must be the problem stating that public ownership of banks is beset with corruption and incompetence. The solution, therefore, is to privatise the PSBs, at least the weaker ones.

There are problems with this formulation. There are wide variations within each ownership category. In 2018, the State Bank of India’s (SBI’s) gross NPA/gross advances ratio was 10.9%. This was not much higher than that of the second largest private bank, ICICI Bank, 9.9%. The ratio at a foreign bank, Standard Chartered Bank, 11.7%, was higher than that of SBI.

Explanation:

PSBs had a higher exposure to the five most affected sectors — mining, iron and steel, textiles, infrastructure and aviation. These sectors were impacted by factors beyond the control of bank management- Infrastructure projects were impacted by the global financial crisis and environmental and land acquisition issues. In addition, mining and telecom were impacted by adverse court judgments. Steel was impacted by dumping from China.

Plans to prevent such crises:

Wholesale privatisation of PSBs is not the answer to the complex problem.
We need a broad set of actions, some immediate and others over the medium-term and aimed at preventing the recurrence of such crises.

Resolving the NPAs.
Banks have to accept losses on loans (or ‘haircuts’). They should be able to do so without any fear of harassment by the investigative agencies. The Indian Banks’ Association has set up a six-member panel to oversee resolution plans of lead lenders.
To expedite resolution, more such panels may be required. An alternative is to set up a Loan Resolution Authority, if necessary through an Act of Parliament.
The government must infuse additional capital needed to recapitalise banks.
Over the medium term, the RBI needs to develop better mechanisms for monitoring macro-prudential indicators. It especially needs to look out for credit bubbles.
Strengthening the functioning of PSBs:

Actions needs to be taken to strengthen the functioning of banks in general and, more particularly, PSBs. Governance at PSBs, meaning the functioning of PSB boards, can certainly improve.
One important lesson from the past decade’s experience with NPAs is that management of concentration risk — that is, excessive exposure to any business group, sector, geography, etc. — is too important to be left entirely to bank boards.
Overall risk management at PSBs needs to be taken to a higher level. This certainly requires strengthening of PSB boards. We need to induct more high-quality professionals on PSB boards and compensate them better.
Succession planning at PSBs also needs to improve. Despite the constitution of the Banks Board Bureau to advise on selection of top management, the appointment of Managing Directors and Executive Directors continues to be plagued by long delays. This must end.

Conclusion:
The task of accelerating economic growth is urgent and acceleration in economic growth is not possible without addressing the problem of non-performing assets. There is ample scope for improving performance within the framework of public ownership. The above suggested solutions should be focused upon.

Connecting the dots:

Wholesale privatisation of public sector banks is not the right solution to the issue of NPAs. Comment.

NATIONAL/WELFARE

TOPIC: General studies 2

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

Welfare schemes for vulnerable sections of the population by the Centre and States and the performance of these schemes; mechanisms, laws, institutions and bodies constituted for the protection and betterment of these vulnerable sections

Issues with Contract farming in India

In news:

PepsiCo India recently took 11 persons including farmers and traders to court for unauthorised use of its protected potato variety. Following a backlash on the social media, and criticism in the press, PepsiCo India dropped the litigation.
Farmers whom PepsiCo India sued were found to be growing its FL 2027 variety, which goes by the trade name FC 5.

Legal system:

In India:

The Protection of Plant Varieties and Farmers’ Rights (PPVFR) Act is a uniquely Indian law enacted in 2001, which not only recognises the rights of breeders (for 15 years) in the novel varieties they have developed, but also gives entitlements to farmers. Under the Indian law, farmers virtually enjoy a licence. They can save, use, sow, re-sow, exchange, share and even sell—in unbranded packaging—the produce or seed, even of a protected variety, grown in their fields.

Other countries:

On the other hand, the International Convention for the Protection of New Varieties of Plants primarily protects the rights of breeders while carving out exceptions for farmers.

The US, as a country that rewards innovation, has stiff protection for breeders’ rights. Its Plant Variety Protection Act prohibits a person from selling, marketing, offering, delivering, consigning, exchanging or exposing for sale a protected variety without explicit consent from the owner.

Issues:

Respect for IPRs is necessary for the sustainability of the processing industry. It is unfair for the company if its rivals buys produce from unauthorised growers by paying a slightly higher price because they were saving on royalty payments.
India lags in both potato processing and exports, though it is the second-largest potato producer. New proprietary varieties suitable for processing and global palates will not come to India if IPR protection is weak. There is no reason why farmers should profit from intellectual property they don’t own.

Importance of Contract farming:

It is good for farmers as they get stable prices, better technology and new markets. At times, market prices will be higher than contracted prices but it provides a steady income.
Success stories:
Contract farmers like PepsiCo India, McCain and HyFun Frozen Foods have incentivised micro-irrigation and other good agronomic practices in areas like Banaskantha where food irrigation was the norm. They have encouraged mechanisation of planting, sowing and harvesting, which is both labour and cost-saving. Techniques like anti-sprouting coating have been popularised. PepsiCo India is the largest procurer of processing quality potatoes. It says it buys 3 lakh tonnes annually. That’s a transfer of Rs 300 crore to 24,000 contract farmers.
Corporate involvement in agriculture is necessary for profitable and innovative agriculture. The share of corporate investment in agriculture was just 2%, that of the government was 14% and of farmers 84%.

Way ahead:

Group contracts that can be beneficial for both small farmers and companies as these reduce transaction costs and improve compliance to contract terms by both parties.
Governments should frame and enforce laws that protect the farmer interest adequately and are sophisticated enough to take into account the changing dynamics of contract farming.

Also read: PepsiCo versus potato growing farmers
https://iasbaba.com/2019/05/daily-current-affairs-ias-upsc-prelims-and-mains-exam-11th-may-2019/

Connecting the dots: