📰 NITI Aayog study to track economic impact of green verdicts
Think tank for ‘economically responsible approach by judiciary’
•The NITI Aayog — the government's apex thinktank — has commissioned a study that seeks to examine the “unintended economic consequences” of judicial decisions that have hindered and stalled big-ticket projects on environmental grounds.
•A perusal of the document appears to suggest that judgments that negatively impact major infrastructure projects don't adequately consider the economic fallout — in terms of loss of jobs, revenue. Doing so, it reckons, would contribute to public discourse among policymakers for promoting an “economically responsible approach by judiciary” in its decisions.
•The project brief, a copy of which has been viewed by The Hindu, says that it intends to examine five major projects that have been “impacted” by judicial decisions of the Supreme Court or the National Green Tribunal. It plans to do this by interviewing people who've been affected by the closure of the projects, environmental campaigners, experts and assessing the business impact of closure.
•Projects to be analysed include the construction of an airport in Mopa, Goa; cessation of iron ore mining in Goa and, the shutting down of the Sterlite copper plant in Thoothukudi, Tamil Nadu. The others are decisions by the NGT involving sand mining and construction activities in the Delhi National Capital Regions.
•“These have been some of the most significant cases in the recent past that have caused substantial damage to the economy,” the brief notes.
•The study is to be undertaken by the Jaipur-headquartered CUTS (Consumer Unity and Trust Society) Centre for Competition, Investment and Economic Regulation, that also has an international presence.
•“The judiciary needs to take into account environment, equity and economic considerations while deciding cases, and needs to institutionalise a mechanism for it,” the brief notes. “The absence of ex-ante (before an event) analysis of the economic costs associated with a decision is further exacerbated when judicial activism by courts and tribunals is also in play.”
•Vikrant Tongad, Uttar Pradesh-based environmentalist and Founder, SAFE (Social Action for Forest and Environment) was among those whom CUTS reached out to, as an expert, because of his involvement in campaigns against sandmining operations.
•He told The Hindu that he found the study “surprising” in its intent. “Does the government now want to train judges not to give such judgments? Is the government forgetting that due to their negligence, courts have been forced to give strict orders. Will the NITI Aayog also study how much damage will be done if the courts do not give such orders,” he asked.
•Vice-Chairman of NITI Aayog Rajiv Kumar said the study was a purely economic exercise.
•“The intent of this study is to analyse the cost and benefit of certain judicial decisions. It doesn’t question judicial intervention. I was, for example, happy to see how Supreme Court's intervention led to the adoption of CNG (compressed natural gas, in transport vehicles in Delhi) and the economic benefits from it.”
•In the case of the Mopa airport, Goa, the Supreme Court, on March 2019, had suspended the environmental clearance to the project because the government's environmental appraisal process was faulty. In January 2020, however the Supreme Court allowed the project, under environmental oversight by the CSIR-National Environmental and Engineering Research Institute (NEERI), a government funded environmental appraisal body.
•In the case of Sterlite Copper, Vedanta, which owns the unit, has been petitioning the High Court and Supreme Court to reopen the plant, that has been accused of producing metallic toxins and polluting water for years the years.
Anxiety, depression among the top concerns reported by callers
•Seventy per cent of callers to a mental health rehabilitation helpline launched, in September 2020 by the Social Justice and Empowerment (SJE) Ministry, were men according to an internal report of the Ministry accessed by The Hindu. About 32% of those who reached out were students.
•The Kiran helpline (1800-599-0019) of the Department of Empowerment of Persons with Disabilities (DEPwD) of the Ministry was launched on September 7 by SJE Minister Thaawarchand Gehlot. From September 16, 2020 to January 15, the helpline received 13,550 new calls, of which 70.5% were from males and 29.5% from females, the report said.
•A total of 1,618 follow-up calls were fielded by the mental health professionals of the helpline, it said.
•The majority of callers (75.5%) were in the age group of 15 to 40 years, while 18.1% were older, in the 41 to 60 age group, it said.
•Categorising the callers, the report said, 65.9% had “milder nature of distress”, while 26.5% were “moderately distressed” and 7.6% were “severely distressed”. The report said 32.3% of the callers were students, 15.2% were self-employed, 27.1% were employed, 23.3% were unemployed, 1.4% were home-makers and 0.7% did not reveal the information.
•While most of the callers (78.2%) sought help for themselves, others reached out for their parents, siblings, spouse and others.
•“Majorly the challenges faced by the callers were related to anxiety (28.5%) and depression (25.5%); while few others included pandemic-related challenges (7.8%), suicidal tendency (2.8%), substance abuse (3.4%) and others miscellaneous (32%),” the report said.
•Most of the calls were from the North zone (40.32%), followed by West (27.08%), South (16.99%), East (11.28%) and North East (4.33%), the report said.
•An DEPwD official said the number of calls to the helpline had increased to 15,170 till January 31, while there had been 1,978 follow-up cases.
•Speaking to The Hindu on condition of anonymity, a clinical psychologist of the DEPwD working on the helpline said most of the calls had been from “young adults”. Students were facing anxiety and depression due to the uncertainty about their future and lack of interaction with peers during the COVID-19 pandemic, the psychologist said.
•Another psychologist working at regional centre of the DEPwD fielding calls from Haryana, said students were the largest group of callers. The psychologist added that women from rural areas had reached out to the helpline with complaints of anxiety and disturbances within families.
•The 24/7 helpline offers early screening, psychological first-aid, psychological support, distress management, mental well-being, psychological crisis management services and referrals to mental health experts and is operated by 81 front-line professionals, apart from volunteer psychiatrists, clinical and rehabilitation psychologists, the Ministry report said.
📰 After oils, FSSAI caps transfats in foods
Slaps limit on use of TFAs in processed foods from January 2022
•The FSSAI has amended its rules to put a cap on trans fatty acids (TFAs) in food products just weeks after it tightened the norms for oils and fats.
•“Food products in which edible oils and fats are used as an ingredient shall not contain industrial trans fatty acids more than 2% by mass of the total oils/fats present in the product, on and from 1st January, 2022,” said the revised regulations notified recently and made public on February 5.
•In December, the FSSAI had capped TFAs in oils and fats to 3% by 2021, and 2% by 2022 from the current levels of 5%.
•“The 2% cap is considered to be elimination of trans fatty acids, which we will achieve by 2022. We are happy to say that we will be reaching this goal a year sooner than the WHO deadline. We have held eight meetings with industry stakeholders and they are onboard to implement the rules,” FSSAI CEO Arun Singhal told The Hindu.
•Trans fatty acids are created in an industrial process that adds hydrogen to liquid vegetable oils to make them more solid, increase shelf life of food items and for use as an adulterant as they are cheap. They are present in baked, fried and processed foods as well as adulterated ghee which becomes solid at room temperature. They are the most harmful form of fats as they clog arteries and cause hypertension, heart attacks and other cardiovascular diseases.
•As per the World Health Organisation (WHO), approximately 5.4 lakh deaths take place each year globally because of intake of industrially produced trans fatty acids. The WHO has called for the elimination of industrially-produced trans fatty acids from the global food supply by 2023.
•“The latest amendments to FSSAI rules signal the completion of the process of regulating trans fats in India. The move will make a big difference to the health harm caused by this unwanted ingredient. This allows FSSAI and the State-level food safety machineries to focus on implementation and enforcement of the regulations,” said Ashim Sanyal, COO of Consumer Voice.
•“The two recent regulations limiting trans fats to below 2% make India a global and regional leader on the issue. Eliminating this harmful ingredient from India's food supply is a clear step in the right direction towards creating safer and healthier food systems,” said Ms. Vandana Shah, Regional Director, South Asia Programs, Global Health Advocacy Incubator.
📰 Uttarakhand glacier burst | Experts point to climate change impact
Glacier retreat, permafrost thaw are projected to decrease the stability of mountain slopes, say reports.
•A deluge that resulted from a glacial melt on Nanda Devi flooded the Rishiganga river in Uttarakhand and washed away at least two hydroelectric power projects — the13.2 MW Rishiganga hydroelectric power project and the Tapovan project on the Dhauliganga river, a tributary of the Alakananda.
•There were also concerns that the excess water would further travel downstream to the river Alaknanda and threaten villages as well as hydro projects on the river.
•However the India Meteorological Department has said that no rains are forecast. Officials of the Central Water Commission meanwhile said the flooding from the glacial burst has been contained.
•Environmental experts have attributed the glacial melt to global warming. Glacier retreat and permafrost thaw are projected to decrease the stability of mountain slopes and increase the number and area of glacier lakes, according to the latest assessment reports of the UN Intergovernmental Panel on Climate Change.
•There is also high confidence that the number and area of glacier lakes will continue to increase in most regions in the coming decades, and new lakes will develop closer to steep and potentially unstable mountain walls where lake outbursts can be more easily triggered.
•Farooq Azam, Assistant Professor, Glaciology and Hydrology division, IIT Indore, said such a glacial burst was an “extremely rare event”.
•“Satellite and Google Earth images do not show a glacial lake near the region, but there’s a possibility that there may be a water pocket in the region. Water pockets are lakes inside the glaciers, which may have erupted leading to this event. We need further analysis, weather reports and data to confirm if this indeed was the case,” he said.
•Climate change has driven erratic weather patterns like increased snowfall and rainfall, warmer winters has led to the melting of a lot of snow. The thermal profile of ice, say experts, was increasing. Earlier the temperature of ice ranged from -6 to -20 degree C, it is now -2 making it more susceptible to melting.
📰 Central Bank of Sri Lanka repays swap line facility with RBI
Amid speculation, both sides clarify development not linked to ECT deal.
•The Central Bank of Sri Lanka (CBSL) settled a $ 400 million currency swap facility from the Reserve Bank (RBI) of India last week, meeting the terms that the two countries had agreed upon.
•The update sparked speculation in local media that India may have “abruptly terminated” the agreement, following Colombo’s decision to pull out of a 2019 agreement to develop a Colombo Port terminal jointly with India and Japan.
•However, both countries clarified that the developments were not linked. “The CBSL settled its swap facility with Reserve Bank of India as scheduled. There was no special request from India for a premature settlement as erroneously reported by certain media outlets. Discussions on future collaboration continue,” the Central Bank of Sri Lanka said in a tweet on Friday.
•“The two countries had agreed on the date earlier, this scheduled repayment has nothing to do with the ECT decision,” Sri Lanka’s State Minister of Money and Capital Market and State Enterprise Reforms Ajith Nivard Cabraal told The Hindu.
•The CBSL obtained the swap facility on July 31, 2020, for an initial period of three months, to cope with the severe economic impact of the pandemic. Subsequently, the RBI provided a three-month rollover at CBSL’s request, until February 1, 2021. “Further extension would require Sri Lanka having a successfully negotiated staff level agreement for an IMF programme, which Sri Lanka does not have at present,” a spokesman of the Indian High Commission said.
•“It is reiterated that India abides by all of its international and bilateral commitments in letter and spirit,” he added, days after India urged the Sri Lankan leadership to adhere to Colombo’s commitments on the ECT.
Foreign reserves under strain
•Covid-19 struck Sri Lanka in March 2020, putting its foreign reserves under strain since, as tourism, worker remittances and exports were badly hit. Sri Lanka’s looming foreign debt obligations -- $ 6.8 billion this year – and fall in gross official reserves to $ 5.6 billion as of December 31, 2020, according to Central Bank Data, foretell another challenging year.
•However, the Rajapaksa administration has said it will not seek an IMF bailout. Colombo has instead sought further loans from China, among others, and additional currency swap facilities from both, India and China. Neither China nor India has responded to Colombo’s debt freeze request. Sri Lanka owes over $5 billion to China and $ 960 million to India in debt repayment.
•Secretary to the Treasury S.R. Attygalle said Sri Lanka expects the $1.5 billion swap facility from China to come through soon. “The [bilateral] negotiations are nearly over, only the final paperwork is pending. We should be able to complete that by the end of this month,” he told The Hindu on Saturday.
•The currency swap is only one of at least three requests Colombo has made to Beijing since the pandemic. Following approval of a $ 500 million loan from China in March 2020, the Sri Lankan government has sought an additional $700 million loan, in addition to applying for another ‘Covid-19 Emergency and Crisis Response Facility’, to the tune of $ 180 million, from the Beijing-backed Asian Infrastructure Investment Bank (AIIB). “The negotiations are proceeding well,” a Chinese Embassy spokesman told The Hindu.
•Meanwhile, amid questions over whether New Delhi would clear Colombo’s $ 1 billion swap line request, in the wake of the ECT deal falling through, an Indian official source said: “the request is under consideration.” State Minister Cabraal said: “Negotiations are going on, but even if India decides not to offer it, we will understand. The Indian Economy is also under grave pressure due to the pandemic, you see,” he told The Hindu.
📰 Staying watchful: On RBI and prices
The RBI cannot afford to drop its guard on vigilance over prices with interest rates so low
•The RBI’s Monetary Policy Committee (MPC) has expectedly yet again left benchmark interest rates unchanged and reiterated that it will continue with its accommodative stance, at least into the next fiscal year, in order to secure a sustained economic recovery. The central bank’s rate setting panel has reasoned that while there are promising signs in the welter of data that it has looked at, the ongoing recovery is “still to gather firm traction” making it crucial to provide continued policy support for restoring growth. The sharp deceleration in retail inflation in December, when headline CPI inflation eased to 4.6% after being stuck above the RBI’s upper tolerance threshold of 6% for six straight months, clearly appears to have smoothed the brow for the six members of the committee and provided them the space to stay focused in the near term on prioritising growth. The rollout of the COVID-19 vaccination programme as well as the Union Budget’s proposals to give a boost to infrastructure, and innovation and research, among other things, have been recognised as factors likely to restore confidence and lend a fillip to the growth momentum, respectively. Rural demand’s persistent resilience is what the MPC sees undergirding the demand recovery, aided, in its view, by good prospects for agriculture. And here, while overall rabi sowing has been 2.9% higher year-on-year as on January 29, the farmers’ agitation involving cultivators from key crop-growing States including Punjab, Haryana and U.P. is a cause for concern as a protracted impasse has the potential to disrupt farm output threatening both growth and inflation dynamics.
•The central bank has also understandably sought to privilege its role as the government’s debt manager through a clutch of regulatory announcements accompanying the latest monetary policy. The two main measures involve extending the enhanced ‘held-to-maturity’ dispensation for banks buying debt issued by the Centre and States by a year up to March 31, 2023, and allowing retail investors to make direct online purchases of government securities via a ‘Retail Direct’ gilt securities account held with the RBI. With the Centre alone targeting to borrow as much as ₹12-lakh crore at the gross level in the coming financial year, the debt manager faces the unenviable task of ensuring that the flood of debt not only finds takers at a price that does not push up borrowing costs for the rest of the real economy but also of trying and preventing it from crowding out demand for private investment credit. With interest rates being held at near record lows and inflation still persisting above the RBI’s benchmark repo rate of 4% resulting in negative real returns for savers, the RBI can ill afford to drop its guard on vigilance over prices.
📰 Infrastructure push now, fiscal consolidation later
The Union Budget has provided reasonable stimulus to growth, but concerns remain about fiscal deficit
•The fiscal year 2020-21 has been an extraordinary one, where India had to face an acute economic crisis triggered by a non-economic factor — a pandemic. The National Statistical Office has estimated that the economy would shrink by 7.7%. There are other estimates which put the shrinkage at an even higher level. Against this background, there were huge expectations from the Union Budget regarding stimulus to growth. The Budget, taken as a whole, has provided reasonable stimulus to growth through a change in the composition of expenditure and other measures to improve the climate for investment. But concerns remain about fiscal deficit.
Transparency versus stimulus
•Proposed growth in central expenditure, both in 2020-21 Revised Estimates (RE) and in 2021-22 Budget Estimates (BE), indicates the extent of contemplated fiscal stimulus. Since three quarters of 2020-21 have already passed, the expenditure push in 2020-21 RE over actual expenditure in 2019-20 has to be implemented in the last quarter. Controller General of Accounts data for expenditures already incurred in the first nine months of 2020-21 indicate that for reaching the projected RE levels, the growth required in the last quarter of the current fiscal year over the corresponding period of the previous year would be 102.9% for total expenditure, 109.9% for revenue expenditure, and 60.3% for capital expenditure. These upsurges appear extraordinary. This involves transferring on to the Budget, the accumulated food subsidies amounting to ₹2,54,600 crore given to the Food Corporation of India through National Small Savings Fund (NSSF) loans. The balance of subsidies amounting to ₹1,68,018 crore would be the food subsidy pertaining to 2020-21 (RE). This is a desirable change towards transparency. Taking revenue expenditure figures as budgeted, a contraction of 2.7% is seen in 2021-22 BE over 2020-21 (RE). However, after adjusting for the NSSF-accumulated food subsidy amount, the growth in revenue expenditure in 2021-22 (BE) is 6.7%. A good part of expenditure for the last quarter of 2020-21 may also pertain to clearing unpaid dues of various stakeholders including the private sector, autonomous bodies and government-aided institutions. Clearing these payments is desirable and would add to demand. It is these overdue expenditures which would enable the government to reach the high expenditure growth levels in the last quarter of this fiscal year. The main expenditure push comes through a budgeted growth of 26.2% in capital expenditure in 2021-22. Relative to GDP, capital expenditure is expected to increase from 1.6% in 2019-20 to 2.3% in 2020-21 RE and 2.5% in 2021-22 BE, signalling a significant change in priority.
Receipts augmentation
•Budgeted increase in the Centre’s gross tax revenues is dependent on nominal GDP growth of 14.4%, with a buoyancy of 1.6 for direct taxes and 0.8 for indirect taxes. The assumed high buoyancy of direct taxes appears optimistic although there would be a positive base effect. The nominal income growth projected may also be optimistic.
•Significant increases are planned in non-tax revenues and non-debt capital receipts. From a contraction of 35.6% in 2020-21 (RE), non-tax revenues are budgeted to grow by 15.4% in 2021-22. This increase is mainly predicated on higher dividends from non-departmental undertakings and spectrum sales. In the case of non-debt capital receipts, mainly covering disinvestment, a budgeted growth of 304.3% in 2021-22 stands in contrast with the contraction of 32.2% in 2020-21 (RE). Disinvestment initiatives have so far yielded minimal results.
•An important initiative pertains to the launching of a National Monetisation Pipeline. This would be the first practical step towards asset monetisation. The pipeline may eventually start yielding revenues, but the time lags involved remain unpredictable because of various potential disputes and claims associated particularly with government-owned land. A transparent auction process needs to be set up to facilitate suitable price discovery. Slippage in revenue estimates may not be ruled out on account of realisation of lower than anticipated increases in nominal GDP growth, direct tax buoyancy, and disinvestment targets.
Infrastructure and initiatives
•The budgeted increase in capital outlay would provide the central government’s share to the National Infrastructure Pipeline. However, success of the infrastructure expansion plan would depend on other stakeholders of the pipeline playing their due role. These include State governments and their public sector enterprises and the private sector. Some of the proposed Budget initiatives include setting up of a Development Finance Institution (DFI) with an initial capital of ₹20,000 crore, to serve as a catalyst for facilitating infrastructure investment. In order to manage non-performing assets of public sector banks, there is a proposal to set up an Asset Reconstruction Company and an Asset Management Company. These institutional initiatives may prove to be effective. Much depends upon the fine-tuning the operations of these institutions.
•In the action taken report, the Union government has accepted the recommended vertical share of 41% for the States in the shareable pool of central taxes. The government has accepted the Fifteenth Finance Commission’s recommendation for revenue deficit grants, local body grants and disaster-related grants. The scope of revenue deficit grants has been extended to cover 17 States in the initial years. The determination of these grants is not based on equalisation principle although some norms have been used in the assessment exercise. However, the government has put on hold the consideration of State-specific and sector-specific grants including performance-based incentives. The substantive issue pertains to the mode of transfers in terms of general-purpose unconditional transfers vis-à-vis specific purpose and conditional transfers. States had shown a preference for the former mode and it is for this reason that the 14th Finance Commission had raised the States’ share from 32% to 42%. The reduction from 42% to 41% is only on account of the consideration of 28 States excluding Jammu and Kashmir because of its new status. The increasing resort to the imposition of cesses which are almost permanent have reduced the shareable pool. In fact, the States’ share in the Centre’s gross tax revenues is only 30% in 2021-22 (BE).
A road map
•The COVID-19 shock has fortified the sharp upsurge in fiscal deficits in 2020-21 and 2021-22. The Fifteenth Finance Commission has also proposed a revised fiscal consolidation road map for the Centre and States. The Fifteenth Finance Commission has recommended the setting up of a High-Powered Intergovernmental Group to re-examine the fiscal responsibility legislations of the Centre and States. In the context of COVID-19, some economists have gone to the extent of advocating almost giving up the prudential norms. This will be a wrong lesson to learn from the crisis. The Centre has indicated taking the fiscal deficit to 4.5% of GDP by 2025-26. The Finance Commission has also indicated a similar figure.
•The issue of debt sustainability can be certainly re-examined by taking into account the evolving profiles of debt, interest payments, and primary deficits relative to GDP. Fiscal deficit must be related to household savings in financial assets and the interest payments to revenue receipts. It should not be forgotten that in fiscal 2021-22, interest payments to total revenue receipts will be 45.3%, pre-empting a significant proportion of revenue receipts. We must be conscious of the burden of the rising stock of debt.
📰 An India-EU trade pact may still remain elusive
COVID-19, Brexit and international tensions have unsettled the European Union and exacerbated its internal discords
•After its invitation to British Prime Minister and arch-Brexiteer Boris Johnson to visit India, New Delhi plans to start negotiations on investment and trade agreements with the European Union (EU). These are likely to run into the same problems as the discussions that began on a comprehensive free trade agreement in 2007 but were aborted due to differences on movement of professionals, labour, human rights and environmental issues and India’s high tariffs, inconsistent tax regime and non-payment of arbitral awards. Before COVID-19 and Brexit, the EU had the same GDP as the United States and was one of India’s major trade and investment partners. Being the largest democracies and unions of linguistically, culturally and ethnically diverse States, both the EU and India are well suited for a special relationship, but the reality is that the status is one without any spark of mutual chemistry.
•The EU now finds itself in an unusually turbulent situation. COVID-19, Brexit and international tensions caused by former U.S. President Donald Trump have unsettled the EU and exacerbated internal discords. The crises of 2020 obfuscated the structural lack of unity in the EU, because despite its desire for greater integration, it faces obstacles from adherence to the rule of law to a strategy for dealing with China, Russia, Turkey and Iran. After months of tortuous negotiation over Hungary and Poland’s objections, member States finally agreed on a long-term budget and a COVID-19 recovery package of $2 trillion. The two countries had opposed anti-COVID-19 support being linked to good governance, in particular, accusations of suppression of human rights and lack of independence in the judiciary.
Shadow of Euroscepticism
•The EU’s attempt to condition its budget on the rule of law during the pandemic and recession only sharpened the emphasis on the veto power to which every member State is entitled. Apart from the two main defaulters, many others also resiled on civil liberties, making the option of approving COVID-19 recovery funds by excluding the dissenters a proposition that would have risked a dangerous controversy on how united the EU should be.
•It was not only Britain that spawned a populist movement agitating to leave the EU. Europe’s many Eurosceptic parties now focus on preventing closer unity, which has been lacking on the eurozone and migration crises and implementing COVID-19 lockdowns. Elections are due in many EU States, including Germany and the Netherlands, which both have strong Eurosceptic movements. The Alternative für Deutschland (Alternative for Germany) is the official opposition in Germany, while in the Netherlands, Geert Wilders leads the largest opposition party.
•The fear of Eurosceptic parties forces mainstream politicians, as in Britain, to adopt populist rhetoric. Dutch Prime Minister Mark Rutte and French President Emmanuel Macron have criticised Islam and anti-secular immigrants, a pattern repeated in other EU countries including Germany, the Czech Republic and Austria.
Trump and a recalibration
•The Trump presidency forced Europe to reassess its relationship with America, which stimulated the EU’s drive for greater self-reliance in security, economics, supply chains and climate change, and an attempt to emerge as a major global pillar alongside the United States and China. While there is relief that the U.S. may now be more predictable, Europe will resist taking sides in any U.S.-China tug of war. This is underlined by the EU-China Comprehensive Agreement on Investment concluded after minimal consultation with Washington.
•A common security and defence policy also causes division. Mr. Macron would like to see Europe take greater control of its security, but Germany, the Netherlands, Portugal and others are uncomfortable with the prospect of building larger military capabilities, and remain content with security being subsidised by the North Atlantic Treaty Organization and the U.S. while they continue to engage in profitable business with China and Russia.
•The COVID-19 pandemic led to riots in the Netherlands for the first time in 40 years, and the resignation of the Italian Prime Minister. It also introduced divisive vaccine nationalism into the Union. The EU hoped that its central vaccination procurement would be a symbol of solidarity, although initially some members closed their borders, Germany and France restricted exports of personal protective equipment, and there was suspicion by some about the motives of others that were hosts to big vaccine producers. Those fissures are now overshadowed by the EU’s procurement programme for the bloc from Astra-Zeneca, Moderna and Pfizer, which warn that vaccines cannot be delivered as scheduled due to production problems despite advance payment, and the anticipated shortfall will be up to 60% in the current year’s quarter. Lately, it transpires that the German government, ostensibly a strong advocate of European solidarity, had negotiated a separate vaccine contract with Pfizer in September last year.
•For the EU to resolve these innumerable and diverse problems without further widening existing ruptures will require enormous political will and adroit skill. Trade agreements with India will be the least of its problems.
📰 Can a ‘bad bank’ solve the growing NPA crisis?
What is the Budget proposal on non-performing assets, and can it help recapitalise public sector banks?
•The story so far: Finance Minister Nirmala Sitharaman in her Budget speech on Monday revived the idea of a ‘bad bank’ by stating that the Centre proposes to set up an asset reconstruction company to acquire bad loans from banks. While the problem of bad loans has been a perennial one in the Indian banking sector, the COVID-19 pandemic-triggered lockdown last year and the moratorium subsequently extended to borrowers by the Reserve Bank of India (RBI) have worsened the crisis. With banks expected to report even more bad loans this year, the idea of a ‘bad bank’ has gained particular significance.
What is a ‘bad bank’?
•A bad bank is a financial entity set up to buy non-performing assets (NPAs), or bad loans, from banks. The aim of setting up a bad bank is to help ease the burden on banks by taking bad loans off their balance sheets and get them to lend again to customers without constraints. After the purchase of a bad loan from a bank, the bad bank may later try to restructure and sell the NPA to investors who might be interested in purchasing it.
•A bad bank makes a profit in its operations if it manages to sell the loan at a price higher than what it paid to acquire the loan from a commercial bank. However, generating profits is usually not the primary purpose of a bad bank — the objective is to ease the burden on banks, holding a large pile of stressed assets, and to get them to lend more actively.
What is the extent of the crisis faced by banks?
•According to the latest figures released by the RBI, the total size of bad loans in the balance sheets of Indian banks at a gross level was just around ₹9 lakh crore as of March 31, 2020, down significantly from over ₹10 lakh crore two years ago.
•While the size of total bad loans held by banks has decreased over the last few years, analysts point out that it is mostly the result of larger write-offs rather than due to improved recovery of bad loans or a slowdown in the accumulation of fresh bad loans.
•The size of bad loan write-offs by banks has steadily increased since the RBI launched its asset quality review procedure in 2015, from around ₹70,000 crore in 2015-16 to nearly ₹2.4 lakh crore in 2019-20, while the size of fresh bad loans accumulated by banks increased last year to over ₹2 lakh crore from about ₹1.3 lakh crore in the previous year. So, the Indian banking sector’s woes seem to be far from over.
•Further, due to the lockdown imposed last year, the proportion of banks’ gross non-performing assets is expected to rise sharply from 7.5% of gross advances in September 2020 to at least 13.5% of gross advances in September 2021.
What are the pros and cons of setting up a bad bank?
•A supposed advantage in setting up a bad bank, it is argued, is that it can help consolidate all bad loans of banks under a single exclusive entity. The idea of a bad bank has been tried out in countries such as the United States, Germany, Japan and others in the past.
•The troubled asset relief program, also known as TARP, implemented by the U.S. Treasury in the aftermath of the 2008 financial crisis, was modelled around the idea of a bad bank. Under the program, the U.S. Treasury bought troubled assets, such as mortgage-backed securities, from U.S. banks at the peak of the crisis, and later resold them when market conditions improved. According to reports, it is estimated that the Treasury through its operations earned nominal profits.
•Many critics, however, have pointed to several problems with the idea of a bad bank to deal with bad loans. Former RBI governor Raghuram Rajan has been one of the critics, arguing that a bad bank backed by the government will merely shift bad assets from the hands of public sector banks, which are owned by the government, to the hands of a bad bank, which is again owned by the government. There is little reason to believe that a mere transfer of assets from one pocket of the government to another will lead to a successful resolution of these bad debts, when the set of incentives facing these entities is essentially the same.
•Other analysts believe that unlike a bad bank set up by the private sector, a bad bank backed by the government is likely to pay too much for stressed assets. While this may be good news for public sector banks, which have been reluctant to incur losses by selling off their bad loans at cheap prices, it is bad news for taxpayers, who will once again have to foot the bill for bailing out troubled banks.
Will a ‘bad bank’ help ease the bad loan crisis?
•A key reason behind the bad loan crisis in public sector banks, some critics point out, is the nature of their ownership. Unlike private banks, which are owned by individuals who have strong financial incentives to manage them well, public sector banks are managed by bureaucrats who may often not have the same commitment to ensuring these lenders’ profitability. To that extent, bailing out banks through a bad bank does not really address the root problem of the bad loan crisis.
•Further, there is a huge risk of moral hazard. Commercial banks that are bailed out by a bad bank are likely to have little reason to mend their ways. After all, the safety net provided by a bad bank gives these banks more reason to lend recklessly, and thus, further exacerbate the bad loan crisis.
Will it help revive credit flow in the economy?
•Some experts believe that by taking bad loans off the books of troubled banks, a bad bank can help free capital of over ₹5 lakh crore that is locked in by banks as provisions against these bad loans. This, they say, will give banks the freedom to use the freed-up capital to extend more loans to their customers. This gives the impression that banks have unused funds lying in their balance sheets that they could use if only they could get rid of their bad loans. It is, however, important not to mistake banks’ reserve requirements for their capital position. This is because what may be stopping banks from lending more aggressively may not be the lack of sufficient reserves, which banks need to maintain against their loans.
•Instead, it may simply be the precarious capital position that many public sector banks find themselves in at the moment. In fact, many public sector banks may be considered to be technically insolvent as an accurate recognition of the true scale of their bad loans would show their liabilities as far exceeding their assets. So, a bad bank, in reality, could help improve bank lending not by shoring up bank reserves, but by improving banks’ capital buffers.
📰 The cost of Internet shutdowns
Governments must find a way other than digital curbs to balance civil liberties and security
•The movement led by farmers against the Central government’s agricultural laws has become a part of our national and international discourse. Keeping aside the merits and demerits of the contentious legislation, the manner in which the Centre introduced the Bills and its actions towards countering the movement have raised plenty of concerns.
•A principal concern among these has been the recurrent shutdowns, ordered by the Ministry of Home Affairs, of Internet services around many border areas of NCR since the unruly incidents on January 26. Unfortunately, these blockages are not new. India shuts down Internet services more than any other democracy in the world. The past four years have seen over 400 such shutdowns. Many parts of Jammu and Kashmir saw a partial restoration of digital services after a long period of 223 days — the longest Internet shutdown across the world — since the abrogation of Article 370 in the erstwhile State. Many, including UN rights groups, termed these shutdowns a form of collective punishment for people, and an overreach of governments on citizens’ rights and liberties.
•Currently, Indian laws have vague provisions for suspending telecommunication services, including the Internet, during times of public emergencies, or, if required, for protecting ‘public interest’. Meanwhile, the Supreme Court had declared in January 2020 that the right to access the Internet is one of our fundamental rights, alongside the freedom to carry on any trade, business or occupation over the medium of Internet, under Article 19 of the Constitution.
•The impact of shutdowns becomes even more pronounced during a pandemic. During the COVID-19 outbreak, the ones with good connectivity and know-how of digital tools were able to carry on with their lives with relatively fewer disruptions. Meanwhile, the ones without digital literacy or connectivity found themselves completely left out of all social and economic systems.
•Blanket bans on digital connectivity during the COVID-19 crisis may breed deep-rooted societal difficulties. The most vulnerable among us may be cut off from health and welfare alerts; there could be breaks in vital digital services, including those currently being used by hospitals to monitor the well-being of their patients at risk of infection, including the elderly, and pregnant women; students may lose access to avenues of learning as classes shift online; journalists may find it impossible to do ground-reporting from already volatile areas.
Massive losses
•Today, almost all white-collar employment sectors, including IT, financial and consulting services, are encouraging their employees to work from home. Internet shutdowns will freeze economic activity in affected areas and cause large-scale disruptions in economic output. India is estimated to have lost over ₹20,000 crore in 2020 because of Internet shutdowns. Despite the costs and inconveniences involved, the shutdowns, on very rare occasions, do become necessary evils. However, it is hard to classify the ones initiated by the Central government in recent years under those categories.
•Internet bans should be a last resort and must be enforced following well-formulated protocols. Emergency response and relief systems for the vulnerable have to then work in parallel. Upgrading cyber divisions of law enforcement agencies with new-age innovations may offer several alternatives. The use of some of these technologies, including mass surveillance systems and communication interceptors, also presents its own ethical dilemmas.
•As the pace of globalisation, digitisation and connectivity accelerates, balancing civil liberties with security concerns will become an increasingly difficult task. Governments, especially in democracies, will have to create modern, independent institutions that have the authority and expertise to create frameworks that meet these challenges, without falling back on measures that result in state overreach.
