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IASbaba’s Daily Current Affairs – 26th October, 2015
NATIONAL
TOPIC: General Studies 3
- Indigenization of technology and developing new technology
A military-industrial complex of our own
- Even after five decades of chasing the goal of indigenous production of defence equipment, more than 70 per cent of the defence equipment our forces use are produced abroad.
- This has not prevented successive governments and the strategic establishment from continuing to pursue this objective.
- They have done this by declaring their intention more vigorously and with greater sincerity, while making few structural changes in the manner in which defence equipment is designed, produced and inducted into service.
What are the new measures taken by the present government?
- Rising the FDI cap in defence sector from 26 percent to 49 percent.
- The government has liberalised the licensing of private domestic firms to produce defence equipment.
A note on the present Defence Procurement Procedure(DPP):
- Ever since the Bofor scandal, procurements by the Defense Ministry have continued to be mired in controversies.
- CAG and CVC reports bundled with CBI investigations have now regrettably become routine with the defense purchases.
- Consequently, much at the expense of national security, defense procurements are now more about—not procuring.
That not enough funds are allocated in the defense budget for addressing deficiencies in the inventory, upgradation and modernization is another matter.
But the little that is available is being allowed to lapse or washed away to the non performing, inefficient defence public sector undertakings.
It is indeed inexcusable particularly when our security vulnerabilities are so high and evident.
Changes in the defence procurement procedure :
- The government of India had appointed, Dhirendra Singh Committee to look into the required changes in the procurement procedure.
- The committee had proposed a strategic partnership model where a private player is chosen to develop a platform in one of six identified segments.
- Perhaps to create a larger number of domestic players, the draft recommendations suggest that the same firm cannot be selected for more than one sector.
- The defence ministry has also set up a task force under V K Aatre, a former DRDO head, to select the private companies under this scheme. The task force’s report is awaited, following which the new DPP will be announced.
Need of the hour:
- First, there must be contestability in each partnership or procurement contract.
In other words, more than one firm (or consortium) should be engaged in the same activity.
In many industries, it has been found the contestability, more than ownership, determines outcomes, efficiency and competitiveness.
- Second, even as the armed forces must be integrated into the design, development and field trials, domestic producers must not be shielded from foreign competition beyond a point.
To achieve this, the defence ministry should separate the development arm from the procurement arm, with the latter having the independence to choose the best kit available at the time of procurement.
- Third, it is important that no government entity or PSU that is an industry player is also assigned the role of a referee or a regulator.
It is possible to reorganise the family of organisations and PSUs under DRDO into producers and oversight bodies depending on their function.
- Fourth, the government must not be shy of closing down indigenisation projects initiated decades ago in a different world when a cash-poor India faced a regime of technology denial.
Way Forward:
- Government should not only look at complete indigenisation but also on other ways to ensure effective national defence.
- Mastering global supply chains and building strategic partnerships based on broad, deep trade might be equally effective alternatives.
- However, it makes sense to give the indigenisation project another try but the approach has to be very different from that of the past.
Connecting the dots:
- Write a note on indigenisation of defence hardware in India with special reference to new naval indigenisation plan 2015.
- Critically examine the various problems associated with defence sector in India.
- Make in India scheme would help India to overcome the existing problems of defence industry. Discuss.
TOPIC:
- General Studies 3: Issues relating to mobilization of resources, growth, development
- General Studies 2: Governance Issues
The problem of debt concentration
Indian corporate vulnerabilities have increased manifold in recent years both in terms of non-performing assets (NPA’s) as well as restructured loans in the banking system.
- Indian banks have confirmed a worrying trend for the same, taking the amount of bad debt in the economy to Rs. 14 lakh crore.
RaghuramRajan said, “The total write-offs of loans made by the commercial banks in the last five years is Rs.1, 61,018 crore, which is 1.27 per cent of the GDP. 1.27 per cent of GDP would have allowed 1.5 million people to send their children to get a full university degree from the top private universities in the country, with all expenses paid. That’s the size of the write-offs that we are talking about.”
Bit by bit, the mountain grows:
- Fast & furious: Faster than required Growth (around 10 percentage points faster than nominal gross domestic product)
- Pursuits of InfraGrowth: Push for higher private investment in infrastructure, citing the needs for development led banks to take excess debt and lend these companies at a very low interest rate; as well as concessions were given in terms of higher exposure limits
- Tangled Policy Maze: Policy confusions, no enabling environment, delays in government decision-making, increase in cost, and environmental clearances added up to the poison injected by the debt.
- ‘Government’ & ‘the’ deal: Close nexus existing between industrialists and politicians working two ways; one for money and the other for power
Mechanisms: (Not exhaustively covered- Update as you study)
RBI:
- Common platform where all the banks need to report on any exposure over Rs. Five crore, has led to the plugging off the information gap and reduction in the play by various banks for the same.
- 5/25 norms: Permitted banks to structure loans for 25 years while giving them the flexibility to revise rates or sell the asset to another bank every five years in infrastructure.
- JLF (joint lenders’ forum): To build incentives and disincentives
- Borrowers and lenders have to reach a conclusion about the prompt corrective action plan.
- Agree under JLF: Banks are incentivised
- Don’t agree: There are disincentives in place for the same
- After the conversion, all lenders under the JLF must collectively hold 51% or more of the equity shares issued by the company
- Strategic Debt Conversion:
- Provide lenders 51% equity control in a company that fails to repay even after its debts are rejigged to give the management a second chance
- Will come into force if the corporate debt restructuring (CDR) mechanism fails
- CDR: It is an arrangement where the lenders and the management of a defaulting company strike a deal to revive the borrower subject to complying by certain commitments.
The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI):
- Only for NPA’s
- Methods of Recovery:
- Securitisation Asset
- Reconstruction
- Enforcement of Security without the intervention of the Court.
Debt recovery Tribunals:
- Debt Recovery Tribunal Act, passed in 1993
- Objective: Facilitating the banks and financial institutions for speedy recovery of dues (Loan amount is Rs. 10 lakhs and above)
(Not exhaustively covered- Update as you study)
Why the need for Urgent Actions:
Financial fragility:
- A major part of the costs of financial restructuring must be borne by the promoters. It can be done by bringing in personal funds to deleverage the companies controlled by them.
- Also, there should be put in place, a proper comprehensive inquiry to establish the extent of funds being siphoned off.
Picking up the pieces:
- The story of Indian economic recovery can be written well only when the private-sector investment in the country picks up majorly and the corporate financials improve, on a larger scale.
- Companies should also, work it out with their banks and should reduce their leverages (debt-to-asset ratio) via asset sales and equity issues and not touch the taxpayer’s money to bail out the business groups.
- Incurring leverage can be beneficial as it facilitates investment leading to faster growth but it also entails risks, that which, an average taxpayer might have to bear.
Repetition of Mistakes:
- This repetition can most possibly take place due to the urgency in reviving the projects and thus, the relaxed and less stringent scrutiny can take place, in lieu of the projects in the pipeline.
- Many banks have gone ahead in lending out money without the clearance proof, which in itself is a wrong move and therefore, greater caution and restraint needs to be exercised and factoring of losses should be initiated at the earliest.
- The trouble in riding on the success of some economic reforms would also remain left out with the capacity under-utilisation, thereby sacrificing on new economic activity.
IMF’s suggestion:
Macro-prudential policies that are especially designed to keep the financial system safe by limiting excessive bank lending mechanism and associated increases in the corporate sector leverage should be the way ahead for emerging economies.
Tools:
Macro level:
- Higher capital requirements for foreign exchange exposures,
- Caps on the share of such exposures on banks’ balance sheets
Micro level:
- Conduct bank stress tests related to foreign currency risks
- Ever-ready alternate mechanism in place to counter corporate stress and sporadic failures
IASbaba’s Views:
- This debt, which was not employed ever in the production of productive assets have gone ahead and created a major pressure on the banking system. Banks need to invest more time in doing a prognosis and in dealing with existing regulatory eclipses in system.
- The increase in credit flow should be increased but preferably via special purpose long-term contractual savings. Since India doesn’t have a well-developed bond market, a pro-active regulatory oversight might work well to take care of the difficulties.
- Government needs to play a central role in mitigating the economic and social damage caused by financial crises by putting in place a crisis resolution approach, ensuring that new management practices are employed to avoid repetition of same mistakes.
- Policy issues need to be sorted out for bringing forth an enabling economy with an ‘Ease of Business’ environment otherwise it’ll turn out to be difficult to attract global investors to transform the vision set by ‘Make in India’, a reality. The fiscal consolidation plan of the government is a step in right direction which will aid the deepening of the corporate debt market.
Connecting the Dots:
- The debt burden is today not only putting enormous pressure on the banking system, it is also threatening the nascent economic recovery. Discuss
- Emerging markets should be prepared for corporate distress and sporadic failures in the wake of rising interest rates in advanced economies. Comment
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