📰 A new vulnerability
The objective of cow vigilante groups is clearly to target particular communities
•cow vigilante groupshave emerged as the most prominent non-state actors in India in terms of their capacity to unleash violence. They strike at will even in regions not governed by the Bharatiya Janata Party (BJP). Given the shoddy nature of the allegations levelled by these groups, the objective seems more to target Muslim traders and citizens than rescuing cows. The brutal attack on two Muslims last week in Hapur, Uttar Pradesh is the latest instance of this pernicious trend. Hence, it would be more appropriate to call these groups as Muslim vigilante groups.
•The cow protection movement has a long history that goes back to the colonial days. Gandhiji wrote: “But, just as I respect the cow, so do I respect my fellow-men. A man is just as useful as a cow no matter whether he be a Mahomedan or a Hindu. Am I, then, to fight with or kill a Mahomedan in order to save a cow? In doing so, I would become an enemy of the Mahomedan as well as of the cow. Therefore, the only method I know of protecting the cow is that I should approach my Mahomedan brother and urge him for the sake of the country to join me in protecting her.” (Hind Swaraj, chapter 10). Had Gandhi been alive today, he would have protested the Dadri lynching with a fast unto death. Like Nayantara Sahgal, Gandhi would have wanted a ban on man slaughter. But Gandhians like Anna Hazare are silent. While Gandhiji urged for persuasive approach, the Hindu right believes in creating a climate of fear and intimidation.
•For decades the Hindu right has campaigned for cow protection as a Hindu-Muslim issue, as if Muslims took to beef eating only to humiliate Hindus. No definitive theory exists of how Muslims took to beef eating; but none approves the humiliation of Hindus as the reason for Muslims to resorting to beef eating. As Dalits too eat beef, this is a Dalit issue as well. As a cause, cow slaughter is limited to the upper castes.
A churning
•A comparison of the protests triggered by the Dadri lynching in 2015 and the Una flogging in 2016 sheds crucial insights into the political churning taking place in both communities. In the first instance, artists and intellectuals, and not Muslim organisations, led the protests. Despite vigilante violence, Muslims have conducted themselves with remarkable dignity, showing their unwavering trust in India’s constitutional polity.
•No doubt the cow protection movement has struck a chord with many Hindu conservatives, most of whom constituted various levels of leadership of the Congress and non-Congress parties under whose patronage anti-cow slaughter laws were passed in various States long before the BJP came into existence. The difference between the Hindu right and Hindu conservatives is their position on vigilante violence, which a majority of Hindu conservatives do not approve of. What political colour their silence takes in the future will determine the future of Hindu-Muslim relations.
•Dalits, on the other hand, came together in massive protest after the Una flogging, forcing the Prime Minister to make a statement on August 6, 2016. Their protest is said to have been a major reason why Anandiben Patel resigned as Chief Minister of Gujarat a few days before this. Interestingly, the name of Dadri victim, Mohammad Akhlaq, that parliamentarian Sugato Bose described as “a beautiful name” in a parliamentary debate in 2015, has yet to be acknowledged by the Prime Minister.
Differences and the state
•When Mohammad Ali Jinnah campaigned for Pakistan, Muslim settlement in “geographically contiguous areas” was a favourable factor for Muslim separatists to argue for their cause. But B.R. Ambedkar could not make a similar case for a Dalit homeland because he did not have the argument of “geographically contiguous areas”. Hence, he upheld the message, “educate, organise and agitate”. The Dalit uprising post-Una is a glorious tribute to that message of Ambedkar.
•That Muslim food habits, particularly beef eating, could be a major impediment to harmonious life in a free India was foreseen by Muslim separatists. Jinnah made a categorical argument that a separate homeland was necessary on account of Muslim food habits, among others. Unconvinced by the claim that Indian Muslims as a religious minority would be granted all the freedom that they could possibly enjoy in future Pakistan, he gave a new twist to his campaign at Lahore in 1940. He argued by saying, “Mussalmans are a nation according to any definition of a nation, and they must have their homelands, their territory, and their state”, and opposed the tag of Muslims as religious minorities. It would undermine Indian democracy if the vigilante violence against Muslims serves to project those fears of Jinnah and other Muslim separatists as legitimate.
•In its fight against radical Islam, the Indian state has launched preventive arrests; often, innocent Muslim youths become its tragic victims. No such effort is seen with regard to the vigilante groups, though the Prime Minister has declared that most gau rakshaks have a criminal background. Gandhiji understood that India has enormous potential for violence, which is why he chose the path of non-violence, according to Paul Brass. The continuation of vigilante violence would only make India even more vulnerable to violence.
📰 Change perceptions in J&K
Military and political action apart, dealing with the psychological aspects of affected communities is critical.
•The suspension of operations in Jammu and Kashmir (J&K) has been called off by the government. Its fate was obvious ever since that bloody Thursday when journalist Shujaat Bukhari, and a young soldier, Aurangzeb, were brutally killed. The ceasefire will soon be forgotten and the new set of stories will be about the next phase of ‘Operation All Out’. What will also be forgotten are the reasons that forced the government to announce the truce despite the success that the security forces had been achieving in counterterrorist operations. Anyway, with the State government now having fallen, there will be a fresh look to find a way forward.
Internal and external facets
•In seeking answers, we have to consider both the external and internal facets of the conflict. Pakistan plays a key role in keeping the conflict alive; its Army gives unstinted support to terror groups. In the absence of any incentive, and an almost complete breakdown of diplomacy between the two countries, some of us feel that the only option left to deter Pakistan is to keep up military pressure along the Line of Control (LoC). However, it appears that the government has taken the position that the 2003 ceasefire must be respected. The two Director Generals of Military Operations (DGMOs) had talks on May 29 and agreed to “fully implement the Ceasefire Understanding of 2003 in letter and spirit”.
•Unfortunately, the 2003 agreement was only verbal, so there is no “letter and spirit” to it. This has kept it fragile. For the ceasefire to succeed, it must be based on some strong principles that promote confidence between the two armies. As long as infiltration continues, forward patrols are attacked by groups from across the border, and soldiers killed, there can be no peace among troops facing off on the LoC. It is essential that the two DGMOs meet and formalise an agreement in which Pakistan agrees to do more to seal off its border to prevent terrorists from entering India. It is obvious that Pakistan will be reluctant to do this, but it must be put on the spot or exposed for the whole world to see.
•There must also be greater interaction between the local commanders of the two armies — for instance, flag meetings can be held along the border. Often it is local dynamics that trigger firing, which then escalates and spreads to other areas. If confidence can be built between local officers, it will enhance peace. An example can be taken from Ladakh where regular border meetings with Chinese officers have been instrumental in keeping the border calm.
A multi-pronged approach
•Looking at the internal situation in J&K, it is obvious that a multi-pronged approach involving both kinetic and population-centric measures is required. Perhaps the simplest in terms of understanding is the need to target the terrorists who have vitiated the atmosphere in the State. The security forces are confident and capable of dealing with this threat — 250-300 terrorists in the State can carry out a few high-profile terror attacks but are simply incapable of forcing any revolutionary change.
•A little more complicated is the law and order situation in dealing with stone-pelting mobs. The injuries and deaths which inevitably follow these clashes lead to a repeated cycle of violence. However, there is no option but to check this with a firm hand. If the writ of the state is seen as weak, the population will distance itself from the government.
•Meanwhile, the government must look at meeting the aspirations of the larger population with a view towards long-term conflict resolution. This is the most complex task, with many competing narratives being offered as solutions. When faced with this dilemma, it is sometimes helpful to go back to understanding why ethnic conflicts often defy solutions.
•In his article, “Between Past and Future: Persistent Conflicts, Collective Memory, and Reconciliation”, Irit Keynan writes: “Ethnic and national conflicts entail two major aspects — defined by scholars as a socio-political aspect and a socio-psychological aspect — with the latter no less crucial than the former... The socio-psychological aspect pertains to a wide range of issues relating to the community, including a community’s sense of identity and self-perceptions, its fears and sense of collective threats, perceived past, and portrayal of its role in the conflict... The socio-political aspect involves issues such as land, natural resources, economic and political dominance. Despite the complexity of the socio-political matters, in situations of intractable conflict it is the socio-psychological aspect, as well as history, that dominates the relationship between the involved adversaries and plays a central role in interpreting and fuelling persistent animosity.”
•Israeli scholar Daniel Bar-Tal writes in his paper, “Overcoming Psychological Barriers to Peace Making: The Influence of Mediating Beliefs about Losses”: “In (prolonged and violent) conflicts the involved societies evolve [a] culture of conflict of which the dominant parts are societal beliefs of collective memories and of ethos of conflict, as well as collective emotional orientation... These narratives are selective, biased and distorted as their major function is to satisfy the societal needs rather than provide [an] objective account of reality.”
•A similar situation is evident in J&K. In Kashmir, perceptions have been generated of a government being at war with its people. Given this reality, it should be clear that issues like good governance and development, while important, need to be accompanied by measures that address the socio-psychological aspects of the people of all regions of the State. This has been a key weakness in our approach, and the separatists, along with some politicians, have made the situation worse by continuously exploiting existing societal beliefs and collective memory, rather than pointing to their dangers.
•The government also needs to embark on a strong perception-changing programme that challenges the existing narratives, brings out the horrific cost of conflict to the people and the benefits of peace and cooperative relations. Concrete steps by the government are a must. We often think of social media as the answer to all our perception-shaping issues but without follow-up action, the impact of social media can soon fade.
•The conflict in J&K defies simple solutions. Among the many actions required to be taken on the military, economic, political and social fronts, dealing with the psychological aspects of affected communities is critical. Memories and perceptions are perhaps the biggest hindrances to reconciliation and must be addressed by showing greater empathy.
📰 Smoke and mirrors
Most humanitarian interventions have been undertaken when they suit the interests of the U.S. and its allies
•When the Cold War ended, the withering of its restraining influences spawned many ethnic and state-breaking conflicts. Also, the feeling of hubris generated in the U.S. by the demise of the Soviet Union amplified its interventionist proclivities. A combination of these factors led to so-called “humanitarian” interventions, especially in the Balkans and West Asia.
•Some of these, as in Bosnia and Kosovo, did achieve humanitarian ends by preventing ethnic cleansing on a national scale. Others, as in Iraq, Libya and Syria, made bad situations infinitely worse. Nonetheless, such interventions helped create a new international norm whereby it was assumed that the “international community” — or more aptly the Western powers — had the right to intervene in countries where governments engaged in brutal suppression of their peoples. The term Responsibility to Protect (R2P), derived from a 2001 report by a high-powered commission at the behest of the UN Secretary General, became the linchpin of the humanitarian intervention argument.
•R2P and its corollary, humanitarian intervention, have ended up subverting the international order rather than strengthening it, for two major reasons. First, such interventions have been undertaken with the objective of regime change but without much thought about the rebuilding of state institutions that this would entail. Consequently, they often ended up inducing state failure, which has led to people seeking security through ethnic, sectarian and tribal protection rackets, thus accentuating internal conflicts. Second, humanitarian interventions are undertaken largely at the behest of the P-3 (the U.S., the U.K. and France), who wield veto power in the UNSC and have the wherewithal to mount such interventions. Where they are unable to garner support in the UNSC they have launched interventions under the banner of the “coalition of the willing”, as in the case of Iraq. Most humanitarian interventions have been undertaken when they suit the interests of the U.S. and its allies.
•Demands for intervention in humanitarian crises, such as in Gaza, that do not suit the P-3, especially the U.S., face the threat of veto in the UNSC. This is why genuine humanitarian crises crying out for intervention remain unaddressed. Most humanitarian interventions are in fact extensions of the Western powers’ foreign policies rather than genuine attempts at protecting the security of affected populations.
•The related idea that the P-5 should not exercise their right to veto on issues of humanitarian intervention, while discussed in the R2P report, got no traction because the permanent members were not interested in their actions being restrained. In the absence of such a provision, R2P merely legitimises the major powers’ penchant to intervene for their own benefit. Consequently, humanitarian intervention is often little more than a game of smoke and mirrors.
📰 Proposed water aerodrome in Chilika Lake likely to face green hurdle
•The Airports Authority of India has proposed to set up a water aerodrome in Chilika Lake for starting amphibious aircraft operations in Odisha.
•A pre-feasibility study has already been completed. The Chilika Development Authority, the apex regulatory authority for Chilika Lake, has been asked to submit its opinion about the project.
•“We have received a proposal regarding setting up of a water aerodrome in Chilika Lake. We are evaluating the possible ecological consequences of the project. We will soon submit our opinion,” said Suhanta Nanda, Chief Executive of the Chilika Development Authority.
•Sources, however, said the project will most likely face a green hurdle. “For six months between October and March, Chilika turns into a temporary habitat for lakhs of migratory and residential birds. If an aircraft flies at low height, there is every chance of the birds getting hit. While the bird population will be in danger, safety of passengers of amphibious aircraft will also be jeopardised,” a senior officer said.
•Noise pollution generated by close to 10,000 boats has already taken a toll on the endangered Irrawaddy dolphins in the lake. The amphibious aircraft operation would add to the woes.
•As many as 155 endangered Irrawaddy dolphins were spotted in Chilika, which is the single largest habitat of this species in the world. After clearing the lake of illegal man-made enclosures, dolphins have now started moving freely in all sectors.
•Meanwhile, the Odisha government has decided to regulate boat operation in the lake following the death of six passengers in a recent boat tragedy. It has made life jackets mandatory for tourists and GPS on the boats.
📰 The tools for counting
It’s time to debate the modalities of the next Census, given the earlier confusion over caste data.
•As the 2011 Census approached, demands for inclusion of data on caste in Census reached a crescendo. P. Chidambaram, the Union Home Minister at the time, was opposed to collecting caste data and blocked it by claiming that it was logistically impossible for the Census, but caste information could be collected via the planned Below Poverty Line (BPL) Census, later renamed the Socio-Economic and Caste Census (SECC). Hasty inclusion of the caste question in the SECC has resulted in largely unusable data. The government tasked former NITI Aayog chairman Arvind Panagariya to look into this, but the effort has stalled. Consequently, if we want information regarding the size and characteristics of various castes in India, we must continue to look to the Census of 1931.
•It is hard to imagine that the 2021 Census will not face another slew of demands for collection of caste data. It also seems likely that once again we will be unprepared for a full caste census. If we really want to collect data on caste in India and not let the discourse about Indian society be shaped by the political exigencies of colonial India, the time to plan is now.
An ongoing argument
•Should we collect data on caste? Some would argue that the simple act of asking about caste creates a chasm within society. Part of this resistance comes from reaction to the preoccupation of colonial administrators-turned-arm-chair anthropologists who saw caste as the defining feature of Indian society. Colonial Censuses, beginning with the first Census in 1871, included questions about caste and used these data to divide and conquer India by first privileging Brahmins as interpreters of Indian culture and then targeting them as the roots of caste-based oppression and inequality.
•G.S. Ghurye, the early 20th century pioneer of Indian sociology, reacted sharply by identifying this passion for classification as the source of anti-Brahmin movements. Veena Das, doyenne of modern Indian anthropology, also notes that the colonial Censuses via the process of recording caste generated a conception of community as a homogeneous and classifiable community and thereby influenced the processes of political representation. Consequently, post-Independence Censuses have shied away from including questions about caste.
•The challenge for modern India lies in figuring out whether caste-based political mobilisation and strong sentiments for or against reservations would disappear just because we choose not to collect statistics about caste. Patels, Gujjars, Jats and Marathas do not seem to care about the lack of Census data as they demand reservations. Nor has the caste cauldron of Karnataka elections calmed because we can only roughly estimate the size of the Lingayat and Vokkaliga communities.
What is at stake?
•Our political systems, civil society and courts continue to assume that broad caste-based social categories — Dalits, Adivasis, Other Backward Classes (OBCs) and upper castes — defined largely using data from 1931 Census and a few special purpose surveys continue to shape economic conditions in 21st century India. Without accurate data at a granular level for each of these categories consisting of thousands of jatis (castes) and upjatis (subcastes), we have no way of knowing whether this is correct.
•Indian society has undergone a tremendous transformation since 1931. Land ownership that bolstered the power of upper castes has lost its hold. Land fragmentation and decades of agricultural stagnation have turned many upper caste landowners into marginal farmers barely eking out a subsistence. While landlessness, once the bane of Dalit existence, has left the landless better poised to take advantage of rising rural wages, particularly construction wages. Consequently, while at a broad brushstroke the National Sample Survey (NSS) shows that mean consumption expenditure of forward castes is higher than that of Dalits, clusters of poverty persist among forward castes. According to NSS data, the bottom fourth of forward castes are poorer than the top half of Dalits. India Human Development Survey shows that 56% of Dalit children ages 8-11 cannot read but neither can 32% of forward caste and 47% of OBC children.
•Economic growth of the past century, combined with strong affirmation action undertaken by successive governments of the independent nation, may have changed relative fortunes of various groups. Some jatis may have managed to pull themselves out poverty and marginalisation, while others may have sunk into it. Hence, it is time to collect data that reflects the current situation.
•Collection of caste data is not easy. The SECC asked interviewers to write down the name of the caste exactly as articulated by the respondent. By some reports, it has revealed as many as 46 lakh castes. Sometimes the same caste is spelt in different ways, at other times some individuals report their jati and others upjati making it difficult to create mutually exclusive categories. One cannot help but sympathise with the Ministry of Rural Development and the Ministry of Housing and Urban Poverty Alleviation which were asked to tack on a question about caste at the eleventh hour in the SECC without any preparation.
•However, we have nearly three years before the Census of 2021 and are fortunate to have data from the SECC and technologies rooted in machine learning at our disposal. It would be possible to set up an expert group that uses the SECC data in conjunction with other data sources such as matrimonial advertisements and State-specific Scheduled Castes/OBC lists to make a comprehensive list of castes and condense them into meaningful categories via machine learning tools. These categories could then be validated by domain experts from the Indian Council of Social Science Research (ICSSR) institutions in various States to come up with a district specific list of castes that would cover more than 90% of individuals in any given district. Interviewers could use this precoded list to allow respondents to self-classify with a small residual group’s responses being recorded verbatim and categorised later. This is very similar to the technique through which occupational and industrial classification systems are created.
Genie’s out already
•Collection of data on castes is inherently risky. Politicians have long realised the advantages and disadvantages of capitalising on the sense of relative deprivation among various groups. A caste Census could easily roil the waters in ways that are hard to predict. However, once the SECC was conducted, the genie was out of the bottle. Demands are already rife for the release of these data. Conceding that these data are flawed and looking for better ways of collecting data on caste may be a way of calming the waters before the 2019 election.
•It will take courage for a future government to collect data on caste and to use it to rationalise reservation policies. However, without better and more current data, our discourse on caste and affirmative action remains dominated by decisions made by the colonial administration.
📰 Sketchy deal: On OPEC oil output boost
As Saudi Arabia drives an OPEC agreement to increase oil output, the real impact is unclear
•When it comes to crude oil prices, politics dwarfs everything else. The Organization of the Petroleum Exporting Countries (OPEC) on Friday agreed to increase its daily output to address the problem of rising crude oil prices. Saudi Arabia’s Energy Minister Khalid al Falih announced that the cartel’s output would be increased by about a million barrels a day beginning in July. The official statement released by the group, however, failed to mention any solid numbers regarding the planned increase in production. It simply stated that OPEC countries would “strive” to adjust production levels in order to conform to the terms of the production cut deal reached in 2016. Unsurprisingly, in the absence of any clear intent on the part of OPEC to guide prices lower, the price of the benchmark WTI crude increased by as much as 5% after Friday’s announcement of a production increase. OPEC members had in late 2016, it is worth noting, agreed to a historic deal to cut output by 1.2 million barrels a day in order to end a supply glut and raise the price of oil. Since then, the cartel has in fact managed to overshoot its production cut target following unexpected outages in countries such as Venezuela and Libya, contributing to the steep rise in oil prices. In May, for instance, OPEC overshot its production cut target by 624,000 barrels a day. The lack of any clear commitment from OPEC to raise production suggests that the threat of a supply shock still looms over the global economy. But, for now, the deal allows stakeholders in the energy market to save face.
•The pressure on Saudi Arabia, the de facto leader of OPEC, to be seen as doing something to tackle rising oil prices was clear, going into the meeting on Friday. U.S. President Donald Trump has been vocal in recent months about the need to bring down rising oil prices that threaten to put the global economy under stress. Other oil-importing economies, especially emerging markets such as India that have been affected by the rising cost of oil imports, have also been exerting pressure. The present deal could help the Saudis appease major oil consumers to some extent. Meanwhile, Iran, which has been opposed to raising OPEC output as it would lower prices, is set to suffer a marginal loss as it lacks spare capacity to ramp up production. This works in favour of its rival, Saudi Arabia, which can recover from the impact of lower prices by capturing market share. The deal, however, still allows Iran to save face by projecting the proposed output increase simply as a return to the original OPEC agreement framed in 2016. Whether all this politicking will bring a stable reduction in global oil prices remains to be seen.
📰 For nutrition security: On undernourishment
India remains lacking in the commitment to tackle undernourishment.
•The UN’s State of Food Security and Nutrition in the World report for 2017 has important pointers to achieve nutrition policy reform. At the global level, the five agencies that together produced the assessment found that the gains achieved on food security and better nutrition since the turn of the century may be at risk. Although absolute numbers of people facing hunger and poor nutrition have always been high, there was a reduction in the rate of undernourishment since the year 2000. That has slowed from 2013, registering a worrying increase in 2016. The estimate of 815 million people enduring chronic food deprivation in 2016, compared to 775 million in 2014, is depressing in itself, but more important is the finding that the deprivation is even greater among people who live in regions affected by conflict and the extreme effects of climate change. In a confounding finding, though, the report says that child under-nutrition rates continue to drop, although one in four children is still affected by stunting. These are averages and do not reflect the disparities among regions, within countries and between States. Yet, the impact of the economic downturn, many violent conflicts, fall in commodity export revenues, and failure of agriculture owing to drought and floods are all making food scarce and expensive for many. They represent a setback to all countries trying to meet the Sustainable Development Goal on ending hunger and achieving food security and improved nutrition.
•India’s efforts at improving access to food and good nutrition are led by the National Food Security Act. There are special nutritional schemes for women and children operated through the States. In spite of such interventions, 14.5% of the population suffers from undernourishment, going by the UN’s assessment for 2014-16. At the national level, 53% of women are anaemic, Health Ministry data show. What is more, the Centre recently said it had received only 3,888 complaints on the public distribution system (PDS) over a five-year period. All this shows that the Centre and State governments are woefully short on the commitment to end undernourishment. Institutions such as the State Food Commissions have not made a big difference either. Distributing nutritious food as a public health measure is still not a political imperative, while ill-conceived policies are making it difficult for many to do this. The report on nutritional deficiency should serve as an opportunity to evaluate the role played by the PDS in bringing about dietary diversity for those relying on subsidised food. In a report issued two years ago on the role played by rations in shaping household and nutritional security, the NITI Aayog found that families below the poverty line consumed more cereals and less milk compared to the affluent. Complementing rice and wheat with more nutritious food items should be the goal.
📰 Govt. testing ‘big data’ system to aid banks assess credit risks
IT ministry sponsored project includes RBI, two cooperative banks as partners
•The government is testing a new system that will assist banks in assessing credit risk and the probability of fraud using big data analysis. The system is expected to help lenders, particularly rural and cooperative banks, tackle the issue of rising non performing assets (NPAs).
•A credit rating model has been developed “that can assist the rural and cooperative banks to quantify risks under the big data context,” according to an internal note of the Ministry of Electronics and IT. “Currently, rural and cooperative banks depend on judgement of the bank manager, resulting in high NPA,” the ministry observes.
•The ministry sponsored project includes as partners the Reserve Bank of India (RBI), Bangalore-based IT firm Processware System and two cooperative banks.
•A senior government official, who did not wished to be named, said the project is aimed at helping banks quantify risks associated with retail loans such as gold loans, personal loans and vehicle loans. Under the project, a statistical and machine learning algorithmic model has been developed to predict the probability of default with an aim to reduce NPAs. “A model has also been developed for predicting different types of frauds in the banking sector based on RBI guidelines,” the official added.
Web-enabled software
•A web-enabled software is also being tested, which when implemented will assist the banks to easily adopt the models for credit rating, non-performing assets and fraud. Validation of the models has been done using data from several banks.
📰 AIIB to invest $200 mn in infra fund
Almost 25% of funds committed are for India projects: Finance Minister Goyal
•The board of Asian Infrastructure Investment Bank (AIIB) has approved $100 million investment in the National Infrastructure and Investment Fund (NIIF) which could be followed by a similar tranche later, Piyush Goyal, the minister in charge of finance, said.
•“I was given the good news that today [Sunday] the AIIB board has approved an investment in the NIIF (National Infrastructure and Investment Fund), the first tranche of $100mn has got approved,” the Minister said on the sidelines of the India Infrastructure Expo and ahead of the third-AIIB annual meeting that starts on Monday.
•This is the first time that India is hosting the annual meeting of AIIB, which would be addressed by Prime Minister Narendra Modi on Tuesday.
•India is the second largest shareholder in AIIB after China and is also the largest recipient of funds from the multilateral agency.
•“Nearly 25% of the total funds committed by AIIB have been committed for projects in India, both in the government sector and the private sector, which is a matter of great satisfaction,” Mr. Goyal said.
Leveraging investment
•Earlier in the day, Economic Affairs Secretary S.C. Garg told the media that there will be a leverage of 10-12 times on the original investment, which can result in up to $2.4 billion flowing into infrastructure projects.
•The Beijing-headquartered agency, which started operations in January 2016, has approved $4.4 billion investments so far, including $1.2 billion in India, making the country the largest beneficiary so far.
•Mr. Garg said the government had sent a proposal to the AIIB seeking $475 million for the Mumbai Urban Transport Project-III which had already been approved in-principle.
Belt and Road initiative
•Asked about India’s reservations about China’s Belt and Road Initiative, which includes China-Pakistan Economic Corridor (CPEC) that goes through Pakistan-occupied-Kashmir, AIIB Vice-President Danny Alexander said that the AIIB was an apolitical organisation that invested in projects as per a board policy that was decided by the member-states.
•He added that he would not be able to comment on internal relations of member-states.
•AIIB has 86 countries as its members.
📰 Of banks and ebbing deposit flows
Commercial banks’ deposits expanded by 6.7% in FY18, the lowest growth rate in more than 5 decades
•Of late, Indian banks have come up against a problem that they’ve seldom had to face over the last two decades — having too few takers for their fixed deposits.
•RBI data showed that in the financial year ended March 2018, aggregate deposits of scheduled commercial banks expanded by 6.7%. That’s the lowest annual growth rate recorded in over five decades. Over the last two decades, banks have been able to expand their deposit base at an average rate of 16% a year.
•It would be tempting to attribute the ultra-low growth in FY18 to the high base effect caused by demonetisation. After all, the second half of FY17 saw an unusual deluge of deposits into banks triggered by the ban on high-value currency notes. This propped up bank deposit growth to 15.3% in FY17. But if you exclude this as an aberration, new deposits flowing into banks have been on a decline since FY15.
•RBI data showed that in the nine years from FY05 to FY14, bank deposits saw a massive surge in their popularity. Net inflows into banks grew more than four-fold during this period, from ₹1.95 lakh crore in FY05 to ₹9.55 lakh crore in FY14. But the juggernaut was halted in FY14. New deposit mop-ups dipped to ₹8.27 lakh crore in FY15 and further to ₹7.94 lakh crore in FY16. The note ban offered a temporary breather by drawing back ₹14.3 lakh crore into banks in FY17. But the flows have ebbed quickly thereafter, to just ₹7.17 lakh crore in FY18.
Why the decline
•What has caused Indian savers to lose their long-held affinity for bank deposits? Well, one obvious reason is diminishing returns. Historical trends suggest that inflows into bank deposits carry a high correlation with interest rates. FY05 marked a low point in interest rates in the economy, with 1 to 3-year bank deposits offering 5.25%-5.75%. Rates climbed steadily to 9.25% by FY12 and stayed put until FY14. Thereafter, as a slowing economy forced RBI to prune policy rates, deposit rates slumped to 6.75% in FY18. Deposit mop-ups by banks have followed a similar trajectory.
•The hunt for better returns has prompted savers to actively seek out market-linked alternatives to bank deposits. Savers have upped their allocations to NBFC deposits, which have seen a fourfold rise in their deposit base in the last four years. More significantly, with the stock markets taking wing from FY14, retail savers have been making a beeline for equity mutual funds which delivered a 15-20% return between FY13 and FY18.
•From pull-outs of ₹11,000 crore in FY14, equity funds attracted more than ₹80,000 crore in net inflows in FY15 and went on to amass ₹2.6 lakh crore in new flows in FY18. A rising number of those investors are also signing up for monthly investments with systematic investment plans (SIPs) now funnelling over ₹7,000 crore a month into mutual funds. Debt funds have emerged as more tax-efficient alternatives to bank deposits too.
PSBs hit most
•But a third and far more disturbing reason for savers shying away could be the relentless adverse news flow about bad loans, capital adequacy woes and multi-billion rupee frauds, that have kept bank depositors on the tenterhooks in the last three years.
•It is public sector banks (PSBs) — the most hit by these problems — that have seen their deposits dry up the most. In FY18, PSBs managed a minuscule 3.1% growth in their aggregate deposit base. But private banks saw a brisk 17.4% growth in deposits while regional rural banks managed a 7.2% increase. Newbie small finance banks, which offered high rates, managed a fourfold jump in deposit base in one year. With consistently better deposit growth, private banks have seen their share in aggregate deposits shoot up from 21 to 27% in the last four years while PSBs have seen their share plummet from 73 to 67%.
•Dwindling deposit flows into banks have significant repercussions for the economy and banks themselves.
•One, it is credit that oils the wheels of the economy and as the economy revives from its slumber of the last three years, banks may find it difficult to bankroll the credit needs of industry. This may impede industrial revival. In the ten years to FY17, the annual increase in deposits for banks easily outpaced additional demand for credit each year. In FY17, thanks to the riches from demonetisation, new deposit flows exceeded the incremental loan offtake by a massive ₹8.4 lakh crore. But in FY18, the tables turned drastically, with deposit flows falling short of incremental credit demand by about ₹91,000 crore. While deposit growth has slumped lately, credit growth has accelerated from the single to double digits. Yes, as banks have scrounged for funds to lend, bond markets have stepped in to bankroll industry. But given the lack of breadth in the Indian bond market, the market route is open only to large corporates with high credit ratings. For lower-rated companies, MSMEs and sundry small borrowers, a cutback in bank lending usually means a squeeze on credit availability.
•Two, the funds crunch has forced banks to step back from lending to the government too. Domestic banks, to fulfil their statutory liquidity ratio (SLR) requirement, are required to compulsorily park 19.5% of their deposits in government securities. This requirement allows the Central and State governments, which survive on deficit financing, to periodically dump gilts on banks to raise money. But after indulging in a gilt buying binge in FY17 and overshooting their SLR requirements, banks have found no reason to buy more gilts in recent months. This has this sent borrowing costs for the Centre shooting up (it topped 8% recently), and raised concerns about how the Centre or the States will successfully complete their borrowing programmes this year.
•Three, banks have also been constrained by their rising stockpile of non-performing loans. With ₹10 lakh crore of bank funds locked up in NPLs and sluggish recoveries, banks’ hands have been further tied in expanding their loan book.
•This poses a Chakravyuha-like problem for banks. Expanding their loan book of healthy borrowers is the fastest way for beleaguered banks to ‘grow’ out of the NPL mess. And, it is by lending to non-government entities, that they can earn the high yields that cushion their profits from the rising bad loan write-offs. But both of these require healthy deposit flows, which are eluding the needy banks the most.
The way out
•So, can banks now woo back savers with higher deposit rates? They have certainly been trying in the last six months, by pegging up their deposit rates far more rapidly than RBI’s policy rates. Conveniently for them, the stock markets have also lost some steam, sharply pruning equity fund returns. But RBI data for the first two months of FY19 doesn’t indicate a material turnaround in deposit flows.
•It is too early to conclude that domestic savers, vexed with the adverse news flow from PSBs, have shifted their loyalties for good. But given that market conditions are now favouring banks over equity avenues, this is the time for both banks and the government to try their level best to woo back skittish depositors and rebuild the domestic savers’ confidence in the banking system. Else, PSBs may permanently lose out on the precious deposit base that is the bread and butter of their existence.
📰 The two facets of NPA management
•The phenomenal increase in non-performing assets (NPAs) and wilful defaults over the last three years raises serious concerns about the effectiveness of NPA management and its mechanisms. Given the potential adverse impact that the increasing incidence of NPAs might cause, it is critical that NPA resolution takes place in a timely manner. Policies concerning NPA resolution must address two critical aspects: first, how to prevent it occurring at this scale in the future? and second, how to manage the existing accumulated NPAs?
•Till recently, most of the initiatives by the government and the RBI (Reserve Bank of India) had centred on the latter — how to manage the existing NPAs. The emphasis was on finding ways to reduce the magnitude of NPAs. This was driven by the idea that bank balance sheets must be cleaned up and restored. While it is important to clean up the balance sheet of banks by reducing or eliminating bad loans, it is equally important to think about preventive measures. Typically, preventive measures are structural in nature. Both elements are quite important to a robust NPA management mechanism.
Regulator’s role
•The government and the regulator have to play a greater role in the process of NPA management. The role of the government has historically been crucial when there is a banking failure or crisis. It is the government which comes to the rescue, either through direct intervention or through the regulator. The role of government becomes even more important as it happens to be the principal owner of the majority of the affected banks in India.
•On preventive measures, there is a need for evolving a framework in order to bring transparency into the operation and management of SCBs (scheduled commercial banks), particularly the PSBs (public sector banks), on four major parameters — project appraisal, monitoring, accounting, and auditing. As large loans constitute a substantial portion of the total NPAs, a robust credit appraisal mechanism is very much required. As large loans tend to be relatively technically complex, the banks must enhance their technical capabilities to undertake project monitoring effectively. Greater emphasis must be placed on bringing efficiency and transparency into the accounting system. Emphasis should be given on strengthening the audit system in banks.
•The above measures can potentially reduce the possibilities of collusion among the officials of the funding institutions and the borrowers.
‘Bad bank’
•On NPA resolution, to deal with the existing accumulated NPAs, there is a need for creating a publicly funded ‘bad bank’ or an asset management company which will deal with the stressed assets of PSBs. The approach should be to formulate a resolution mechanism which will maximise recovery, and thereby, reduce the burden on the banks or the government. It can be very similar to the Swedish model where the bad bank bought the stressed assets from the affected banks and sold it at a higher price at the time of economic expansion, when asset prices picked up. This way, recovery on the bad loans can be maximised. The life span of the Swedish bad bank ‘Securum’ was 15 years, and it was fully owned by the government.
•On a similar line, the Government of India, too, can create a bad bank, with full government ownership. The proposed institution can continue to exist without an expiry date as the NPA problem is perennial.
•The managerial staff of the ‘bad bank’ may, however, be outsourced to boost operational and managerial efficiency.
•The proposed bank should function independently with greater professionalism and should be accountable to the government.
•Given the fiscal constraints, it may not be viable for the government to finance the proposed bad bank through budgetary support fully. The government can, however, partly finance the proposed ‘bad bank’ by issuing equity shares with the government holding the majority share.
📰 Key monetary tools at the RBI’s disposal
•The Reserve Bank of India (RBI), earlier this month, raised its policy repo rate by 25 basis points to 6.25%, the central bank’s first interest rate increase in four-and-a-half years.
Cash Reserve Ratio (CRR)
•Banks need to hold some portion of their deposits in cash with the RBI. This ratio is called CRR. If the RBI cuts CRR, banks will be left with more money to lend or invest. On the other hand, if the CRR is raised, banks will have lesser money to lend.
•RBI uses CRR to absorb excess liquidity or to release funds needed for economic growth. The present CRR is 4%.
•When a bank’s deposits increase by ₹100, and if the CRR is 4%, the banks will have to park ₹4 with the RBI. The bank can use only ₹96 for investments and lending purposes.
Statutory Liquidity Ratio (SLR)
•Banks also have to invest a certain portion of their deposits in government securities with the RBI. This percentage is known as SLR. Banks can earn return on these investments. The current SLR is 19.5%. If a deposit of ₹100 is made in a bank, then the bank will have to invest ₹19.5 in government securities. So, to meet CRR and SLR requirements, a bank has to earmark ₹23.5 (4+19.5).
What is the repo rate?
•When banks need money they can borrow from the RBI against their surplus government securities at a fixed interest rate. This rate is known as the repo rate. The higher the repo rate, the higher the cost of short-term money to the banks and vice versa. Generally, whenever the repo rate is raised, banks pass the burden on to customers.
•If the repo rate is lowered, then banks can potentially charge lower interest rates on the loans taken by borrowers.
What is the reverse repo rate?
•The reverse repo rate is the rate of interest offered by RBI, when banks deposit their surplus funds with the RBI for short periods. The reverse repo rate at present is 6%.
