IASbaba’s Daily Current Affairs – 19th August, 2016

IASbaba's Daily Current Affairs Analysis, IASbaba's Daily Current Affairs Aug 2016, UPSC

IASbaba’s Daily Current Affairs – 19th August, 2016

DEFENCE/SECURITY

TOPIC:

General studies 2

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

General studies 3

Security challenges and their management in border areas; linkages of organized crime with terrorism.
Various Security forces and agencies and their mandate

Indian National Defence University (INDU)

The government has placed a draft bill, which proposes for Indian National Defence University (INDU), in the public domain.
While the intent to seek comments is a good sign, the draft bill is a stark illustration of deeper infirmities in thinking about both national security and higher education.

Background:

The idea for creating a National Defence University was first proposed by the Chiefs of Staff Committee in 1967
But it was only after the 1999 Kargil war that this idea was taken seriously when the government created a Committee on the National Defence University (CONDU) headed by the late K. Subrahmanyam.
This committee submitted its report in 2002 and provided the rationale for creating a National Defence University.
In 2010 the Cabinet gave an “in principle” approval for setting up the Defence University in Binola, near Gurgaon.
It was in 2013 that then prime minister, Manmohan Singh, had laid the foundation for the nation’s first defence university at Binola in Gurgaon with the hope that when completed, INDU “will become [a] world class institution of higher defence studies in which we will be able to take justifiable pride”.

Aim of INDU

The aim of INDU would be to provide military leadership and other concerned civilian officials knowledge based higher education for management of the defence of India, and keeping them abreast with emerging security challenges through scholarly research & training.
The INDU would develop and propagate higher education in Defence Studies, Defence Management, Defence Science and Technology and promote policy oriented research related to National Defence.
The think tanks of the University would provide inputs for policy formulation.
The university would prepare officers for high level leadership, Staff & Policy responsibilities.
National College of Defence Studies (NCDS), Indian Institute of Defence Technology (IIDT), Indian Institute of Defence Management (IIDM) and Defence Institute of Distance & Open Learning (DIDOL) would be the constituent colleges and institutions of the INDU.

India already has PME, why do we need INDU then?

India already has existing tri-services institutions for Professional Military Education (PME)
The INDU is proposed to augment existing PME capacities and also to provide the intellectual underpinnings for “jointness” among the different services.
The nature of the challenges facing defence in the 21st century emphasises the vital requirement of education in a military officer’s career
It is also true that the challenges posed by the use of military force in the world today require officers who can think and act independently of formulaic guidelines.
These challenges flow from changes in the strategic environment driven by social, economic and political factors which in turn affect the character of warfare and security as a whole.

As a consequence, there is a need to focus on enhancing the level of professional military education (PME) in India. INDU will help to fulfill these challenges.

In addition the aims of modern PME should be to

Develop the military officers’ understanding of defence in the modern world;
Demand critical engagement with current research on defence and its relationship with the fields of international relations, security studies, military history, war studies and operational experience;
Encourage a systematic and reflective understanding of contemporary conflicts;
Promote initiative, creativity and independence of thought in identifying, researching, judging and solving fundamental intellectual problems; and
Develop relevant, transferable skills, especially communication, use of information technology and organisation and management of the learning process.

Indian PME lacks every single one of these dimensions. Therefore, INDU can effectively fill these gaps.

Conclusion

If we want peace, we need to be prepared for war. And in order to be best prepared for it, we first need to understand it well. In the emerging strategic environment, understanding the knowledge terrain will be as important as knowing the geography or topology of the battlefield was in the past.

The Indian military must also evolve a culture of independent strategic thinking that allows its soldiers to comprehend national security in all its various dimensions.

Therefore, INDU can help in achieving this goal.

However the government needs to move beyond the usual military-bureaucratic apparatus and reach out to the best in the wider academic community if INDU is to become an institution which can sharpen the intellectual underpinnings of Indian statecraft.

Excessive political interference, bureaucratic inertia and inter-services rivalry could reduce it to a substandard institution.

That would be a real tragedy because, as Thucydides once suggested, “the nation that makes great distinction between its scholars and its warriors will have its thinking done by cowards and its fighting done by fools”.

If the INDU is to live to its potential, the complexity of India’s national security challenges needs to be recognised. This means that while the armed forces should have the largest representation, the INDU should not be a monopoly of the armed forces. The INDU will only succeed if all relevant organs of the Indian state are sensitised to the intricacies of national security and thereby foster a ‘whole of government’ approach.

The government should move to appoint an academic council, with broader representation than simply bureaucrats and military officers, and house it in a government-sponsored think tank like the Institute for Defence Studies and Analysis.

It needs to make conscious efforts to learn about best practices in professional military education from other countries. This is not just for the benefit of India’s natural security but for the armed forces themselves whose senior officers need wider and better exposure to prepare themselves — and for them to prepare India’s civilians — for the challenges ahead. Unless these steps are taken, the INDU will become another costly retirement home, and India’s security will be its collateral damage.

Connecting the dots:

India already has existing tri-services institutions for Professional Military Education (PME). However the government has proposed for Indian National Defence University (INDU). Why do we need INDU? What are the aims and benefits of INDU?
Inter-service jointness and integration are two of the most crucial principles of war which provide synergy to our military endeavours. What initiatives and strategies have been and are being adopted by the government of India to promote ‘jointness and integration’?

ECONOMY

TOPIC: General Studies 3

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

Inclusive growth and issues arising from it

Effects of liberalization on the economy

How India banked on reforms

Reforms of 1991 brought India out of the economic crisis
Since 1991, various measures have been incorporated to improve the productivity and efficiency of the system
This has been envisioned to be done by injecting a greater element of competition
Thus, there has been a paradigm shift in India’s approach to economic policy.
It was realised that even though reforms were aimed at real sector predominantly (sector that is actually concerned with producing goods and services), corresponding reforms in financial sector were inevitable for desired results

The key changes in the monetary and banking sectors that were brought about in the first few years after the reforms are achievements in itself.

Monetary sector reforms

The institutional framework within which monetary policy operated underwent far-reaching change

Adhoc treasury bills gone

The most important change was phasing out the issue of ad hoc treasury bills by the government to RBI
The ad hoc treasury bills had a negative impact on fiscal deficit of centre
- How: whenever the government fell short of cash below a particular level, it could issue the ad hoc treasury bills and replenish its cash balances.
Under such ad hoc treasury bill arrangement, RBI virtually lost control over regulating money supply
However, post 1991, this system was removed and it was considered as first step towards RBI autonomy to conduct the monetary policy
Later with Fiscal Responsibility and Budget Management Act, the RBI was not to enter the primary market in government securities
Thus, these reforms enabled the RBI to regulate liquidity in the system according to its judgment

Market tied securities

Along with removing the adhoc treasury bill issuance, a mechanism was developed where in the government was compelled to go to the market and raise funds at market-determined rates
The statutory liquidity ratio was brought down from 38.5%in 1991à 25% by 1996

(SLR= proportion of deposits to be kept by banks in the form of government securities)

To give effect to such an arrangement, a system of primary dealers in government securities was also introduced and elaborate system for auctioning of government bonds of various maturities was put in place.

Open market operations

Open market operations emerged for the first time as an instrument of monetary control
The interest rates on government bonds were artificially fixed which gave no scope for open market operations to be used as an instrument of credit control.
Under this arrangement, Cash Reserve Ratio became the primary instrument of credit control

Market led interest rates

The administered structure of interest rates was dismantled.
With freeing of interest rate structure, the bank rate also became a potential instrument of credit control
Because of this reform, the repo rate became the main instrument of monetary policy

Hence, the instrumental freedom necessary for the conduct of monetary policy was achieved in the early years of reform process. However, there is still a debate on what the objectives of monetary policy should be.

Banking sector reforms

In 1990, the Indian banking sector was dominated by two features
1. PSBs had the bulk of banking assets
2. Banking sector was heavily controlled
This had evolved in an environment of administered interest rates + stipulations on asset allocation

Post nationalisation of banks

Growth of the banking system after 1969 was marked by a spectacular spread of banking sector
1. Increase in the number of branches: 8,187 in 1969à 59,752 in 1990
2. Growth of rural branches: 1,443 in 1969à 34,791 in 1990
While the banking sector widened its reach, the banking health deteriorated.
Low operational efficiencyà low profitabilityà erosion of its capital base
Thus, there was a sense of urgency in banking sector reform

M Narasimham committee

This committee was set up under M Narasimham to recommend steps for revitalising the banking system.
It included prudential norms of
1. Income Recognition
2. Asset Classification
3. Provisioning and Capital adequacy

Prudential norms and capital adequacy

(Prudential norms make health of the banks transparent. It involves norms relating to cash reserves, overnight call rates, income recognition, asset classification, provisioning of non-performing assets, and capital adequacy ratios)

Prudential and capital adequacyà to ensure the safety and soundness of the system
PSBs required to progressively achieve a capital to risk assets ratio of 8 per cent in line with international standards
Though the banks were owned by government, the prudential norms were required to make the system stand on its own strength
The capital adequacy ratio was impose d where the government owned PSBs had to contribute to capital in order to reach the prescribed ratio
This was difficult for the government at that time as it was trying to contain fiscal deficit.
However, the government never departed from this responsibility and continued to contribute to the capital of PSBs
The term, ‘non-performing assets’, was unknown in India till 1991. The RBI progressively tightened the definition for what constitutes a non-performing asset.

Major changes

Passing of a difficult legislation of amending the Nationalisation Act to enable the government to reduce its share of holding in PSBs to 51 per cent.
Dismantling of administered structure of interest rates
- With interest rates stipulated by the RBI, there was hardly any competition
- To bring a positive effect of it, the measures were taken in such a way that banks could get adjusted to the new regime
- Around 2-3 years were taken after which banks had the freedom to determine deposits rates and lending rates.
Private sector banks were given licences
- It was to create a more competitive environment in the banking system
- There were new norms set for the opening of new banks
- Initially, long-term lending institutions that were already in existence were given licences to open banks.
Prudential norms did create uncomfortable situation for banks as several PSBs has to show losses.
- However, with reforms, profitability and efficiency increased and the non-performing asset ratio progressively came down
- Care was taken to ensure that the social content of lending was not reduced.
The Indian banking system emerged stronger because of the changes introduced
Today, the prudential norms have been tightened and altered in the context of changing circumstances. The NPAs are on the rise again.

External sector reforms

There was a complete regime change in external sector
It was expected as the crisis itself was triggered by an acute balance of payments problem.

The reforms had two elements

Changes in the trade sector

Quantitative controls over imports were being removed step by step
The tariff rates were also brought down steadily from the high levels
The changes signalled a move away from an inward looking approachà adoption of an open policy of integrating with the rest of the world

Changes in the exchange rate management

Till 1991, the exchange value of the rupee was determined by the RBI every day.
However, BoP crisis triggered reforms in the exchange rates
Steep devaluation was effected in early July 1991. It was followed by the introduction of the Exim scrip scheme
The Exim scrip scheme enabled exporters to import a certain percentage of their export earnings without restrictions. Thus, there was selective devaluation
The government appointed committee under chairmanship of C Rangarajan to ook at the capital account of India’s BoP.
There were recommendation on management of capital account and changes to exchange rate management
Based on the recommendations of the interim report of this committee and other inputs, the government and RBI moved to a dual exchange rate system in March 1992.

The exchange sector

Under the new system, 40% of the current receipts were required to be surrendered to the RBI at an official exchange rate
The remaining 60% were allowed to be sold at the market-determined exchange rate.
In the final report of the committee, adoption of a unified market-determined exchange rate system was recommended
The experience with the dual exchange rate system provided courage to move to a full-fledged market-determined exchange rate system.

Dual exchange rate

The official rate continued to be Rs. 25.80 a dollar
The market rate ranged between Rs. 30 and Rs. 31.50 a dollar
In 1993, there was a unified market-determined exchange rate system
Initially, the rupee weakened a bit but it subsequently strengthened.
There was a remarkable stability in the exchange rate which remained steady at a level of Rs. 31.37 against the dollar for a long period.
Thus, the transition was smoother than expected
There was reasonably good capital flows and the RBI intervention in new system was continued. As a result of it, the value of the rupee remained stable which resulted in the accumulation of foreign exchange reserves which was a compelling necessity
The RBI from time to time has clarified its position regarding the policy of intervention.
The BoP position of India after 1992-93 has remained strong, unlike what it used to be prior to 1991
The system adopted was called ‘managed float’ but mostly determined by the demand and supply of foreign exchange.
The rupee became convertible on current account in 1994.

Conclusion

Monetary policy, banking and exchange rate reforms were integral part of 1991 reforms.
The institutional reforms in all these sectors brought forward more competition and stability.
However, institutional reforms have to be supplemented by appropriate policies to achieve results.

Connecting the dots:

1991 reforms were more than Liberalisation, privatisation and globalisation. Examine.
The financial sector reforms owns is origins in economic reforms of 1991. Discuss

Refer:

Fashioning a Banking Turn- Public Sector Banks

Economic reforms: A retrospective view

SEBI, a child of the 1991 reforms, needs reform