📰 A monumental litmus test
How the Supreme Court decides the cases around Article 370 will have a deep bearing on democracy
•Perhaps not since the Indira Gandhi-declared Emergency has the Supreme Court of India faced an examination such as this, where its moral fibre is at stake. There, in ADM Jabalpur v. Shivkant Shukla, the court, by its own subsequent admission, came up lamentably short. The court, by ruling that fundamental rights, including a person’s right to life, could be validly suspended during a period of emergency, left democracy teetering on the edge of the abyss. Now it faces a litmus test nearly as monumental. The cases before it concern not only the validity of the government’s decision to virtually revoke Article 370 of the Constitution — and, with it, the special status that Jammu and Kashmir (J&K) enjoyed — but also the legality of the chilling limitations placed on civil liberties in the region. How the court decides these cases will have a deep bearing on the destiny of democracy in India.
A dilution of Article 370
•Article 370, which pledged relative autonomy in governance to J&K, was premised on the idea that ultimate sovereignty rested with the people. But time after time this basic compact has been weakened by successive regimes at the Centre, including by India’s first elected government. For its part, the Supreme Court has invariably overlooked these transgressions, by affirming the Union government’s position of hegemony. The presently executed moves, however, push the envelope further, by stripping Article 370 of all its meaning. And this the government has achieved not through debate and deliberation but through constitutional obfuscation.
•When the Supreme Court hears arguments on the questions arising out of these events, the government will likely point to the political nature of the dispute. In defending its decision, the government has already offered a plethora of justifications — in this, the important and critical need to re-assimilate in J&K, Kashmiri Pandits who suffered a harrowing exodus from the State has scarcely found mention.
•But regardless of the ends of the government, what ought to be clear is that the rule of law demands that any state action is bound by the Constitution and its limits. After all, that is precisely why we have a Constitution underpinning our democratic republic. When judges exercise their minds on the simple legality of the government’s orders it should be evident to them that the quashing of Article 370 is unlawful. And that, for the court, is all that should matter.
•Article 370’s raison d’être is contained in the Instrument of Accession signed by Hari Singh, the then Maharaja of J&K, on October 26, 1947. The provision, in constitutionalising the terms of that accord, stipulated that Parliament could legislate for J&K only over matters concerning external affairs, defence and communications. Where Parliament intended to legislate over additional areas otherwise provided for in the terms of the accession, it could do so by consulting the State government. But where it proposed to enact laws beyond the agreed subjects it required not only the State government’s concurrence but also the express ratification of J&K’s Constituent Assembly.
•The Article, therefore, clearly envisaged the idea that J&K would have a Constitution of its own. Its chief drafter, N. Gopalaswami Ayyangar, was conscious of the fact that any permanent arrangement between the State and the Union could be arrived at only once the State’s Constitution was brought into force. It was to put in place an arrangement in the meantime that Article 370 provided a few other stipulations. For example, it granted the President the power to make orders applying specific provisions of the Constitution other than Articles 1 and 370 to J&K. But even such orders required subsequent ratification by the State’s Constituent Assembly. It was thus clear that once J&K’s Constitution came into force, together with Article 370, it would form a cohesive means of governing the State.
Condition for abrogation
•This position is further illuminated by Article 370(3). The clause, as Gopalaswami Ayyangar put it to India’s Constituent Assembly, “explains the whole of this article”. It accorded the President a power to declare either the Article in full or any part of it inoperative on the recommendation of the Constituent Assembly of the State. This recommendation, as Gopalaswami Ayyangar explained, was a “condition precedent” to any effort at abrogating the provision.
•No doubt, this original arrangement was meant to be temporary. But it was temporary only in the sense that the structure of governance would eventually be elucidated by the J&K Constitution that the State’s Constituent Assembly was meant to frame. On its drafting, the Assembly could have well chosen to recommend to the President the abrogation of Article 370 (which could have even meant separation from the Union). But given that no such recommendation was made, the intention was writ large: the Article would continue to represent the sole means of taking India’s Constitution into the State. Although this disposition has since been disturbed in various different ways, invariably at the instance of the Indian government, as the Supreme Court recognised as recently as in December 2016, unless the conditions in clause (3) were met, Article 370 would have to remain.
Misreading Article 367
•The Union government has not entirely disputed this position. But in finding itself thwarted by these constraints, what the government has offered us is an illusory and coercive change to the constitutional bargain. Article 367, which provides rules for interpreting the Constitution, has been modified insofar as it applies to J&K by providing that wherever the term “Constituent Assembly of the State” was used in Article 370 it would refer only to the “Legislative Assembly of the State”. Nifty as this might sound, the substitution, in effect, does not merely alter Article 367, but it also impinges on Article 370 itself, something which the provision, as Ayyangar was keen to stress on, decidedly prohibits.
•Swiftly following this presidential order came a statutory resolution which suggested to Parliament the abrogation of the essential components of Article 370. But because J&K was under President’s Rule, Parliament had now stepped into the shoes of the State’s Legislative Assembly. This meant that, as a result of the newly shaped Article 367, it also acted as the State’s Constituent Assembly. The incongruity could scarcely be more evident. The Union executive vested in Parliament an unrepresentative constituent power, which meant it could recommend to the President the absolute nullification of Article 370. The upshot of all this was that a decision of portentous significance affecting J&K’s political future was made even though the people of the State were afforded neither an opportunity to speak for themselves nor the chance to speak through their own elected representatives.
•Our Constitution’s brilliance is contained in its fidelity to principles. Those principles are not fungible. Under no circumstances do they license government to use the excuse of a supposed noble end to trump the Constitution’s guarantees. The processes concretised by the Constitution are important because they partake in them a vow to pay heed to the consent of the governed. When those processes are allowed to be broken they strike at the understanding that sovereignty rests with the people.
•To borrow from Annie Dillard’s inimitable words, in this case, casting aside constitutionalism feels like “sliding down the mountain pass and into the region of dread”. Already the extraordinary blockade of communication channels in J&K, and the detention of scores of people, including three former Chief Ministers of the State, have been regarded as unexceptional, and, even more ominously, as necessary consequences of the constitutional change. The judgment in ADM Jabalpur may well have been overruled since, but the ghosts of the court’s darkest days have not fully dissipated. In J&K, the legacy of ADM Jabalpur has persisted for decades. Now when the court reviews the government’s decisions it may want to recall its past blunders, especially the ones that entrenched its place in the annals of the Emergency’s history.
PM Narendra Modi has been invited as the chief guest of the Eastern Economic Forum in Vladivostok by Russian President Vladimir Putin on September 5.
•India sees Russia as a long-term, reliable partner and at the coming bilateral summit between Prime Minister Narendra Modi and President Vladimir Putin, both nations are set to add new areas of cooperation beyond the traditional ones, said Indian envoy in Russia D.B. Venkatesh Varma.
•“Russian Far East is a priority for us, it’s a priority for Russia. We see commonalities in terms of economic cooperation and investment. You can expect some major announcements on how India-Russia relations are going to be diversified. And cooperation in the Russian Far East will be a major component of that diversification,” Mr. Varma told a small group of journalists from New Delhi at the Indian Embassy in Moscow.
•Mr. Varma expressed the confidence that the Vladivostok summit would result in not only consolidating the traditional areas of cooperation - defence, nuclear, space and energy, but also add new pillars of cooperation, including inter-regional cooperation.
•The Russian Far East comprises the eastern Russian territory between Lake Baikal in eastern Siberia and the Pacific Ocean.
•Mr. Modi has been invited as the chief guest of the Eastern Economic Forum (EEF) in Vladivostok by Mr. Putin on September 5.The bilateral summit will be held on the sidelines of the EEF.
•External Affairs Minister S. Jaishankar arrived in Moscow on Tuesday for talks with his Russian counterpart Sergey Lavrov to finalise preparations for the summit meeting. He is scheduled to speak at the Valdai discussion club on Indo-Pacific and will hold discussions with Mr. Lavrov on Wednesday.
•Mr. Varma said the special and privileged partnership between the two countries was poised for a “new leap forward.” He pointed to the “summer of intense activity” between the two countries.
•Minister of Oil and Natural Gas, Dharmendra Pradhan will be in Moscow later this week, which officials said was for negotiations on expansion of energy cooperation, including long-term gas supplies.
Logistics agreement
•Next week, Indian and Russia are likely to seal a military logistics support agreement, the Agreement on Reciprocal Logistics Support (ARLS), official sources said. The pact will facilitate access to each others’ military facilities for exchange of fuel and provisions on mutual agreement, simplifying logistical support and increasing operational turnaround.
•India signed the Logistics Exchange Memorandum of Understanding (LEMOA) with the U.S. in August 2016 and has since concluded several such agreements.
•Some progress is also expected on an effort to conclude long-term spares and maintenance agreements for military hardware India has procured from Russia. There could also be an announcement on the manufacture of Ka-226T utility helicopters for the Indian military through a joint venture, the commercial discussions for which have been under way for sometime.
📰 Kerala, TN, Himachal top India’s child well-being index, says report
Meghalaya, Jharkhand and Madhya Pradesh feature at the bottom, says NGO
•Kerala, Tamil Nadu, Himachal Pradesh and Puducherry topped the charts in the child well-being index, a tool designed to measure and tracks children’s well-being comprehensively. Meghalaya, Jharkhand and Madhya Pradesh featured at the bottom, as per a report released by the non government organisation World Vision India and research institute IFMR LEAD on Tuesday. The report is an attempt to look at how India fairs on child well-being using a composite child well-being index.
‘Crucial report’
•Speaking about the report Amitabh Kant, CEO-Niti Ayog noted: “The India child well-being index is a crucial report that can be mined both by the Government and civil organisations to achieve the goal of child well-being and we will use this report effectively. This report provides insights on health, nutrition, education, sanitation and child protection. Our government is fully committed towards securing the rights and well-being of children and, for this, we are making investments in this regard.”
•The dimensions of the index include healthy individual development, positive relationships and protective contexts.
24 indicators
•“Focusing on the three key dimensions, 24 indicators were selected to develop the computation of the child well-being index. The report highlights the multi-dimensional approach towards measuring child well-being — going beyond mere income poverty. Children have the potential to transform the country, but if neglected, they will exacerbate the burden of poverty and inequality. It is imperative that all stakeholders prioritise and invest in the well-being of our children,” added Cherian Thomas, CEO, World Vision India.
•The report, meanwhile, calls for States to look at their respective scores on the dimensions of child well-being, and to prepare for priority areas of intervention with specific plans of action. It also hopes to trigger policy level changes, seek better budgetary allocations and initiate discussions with all stakeholders, which can help in enhancing the quality of life of all children in the country.
‘Compelling insights’
•“The research has brought to the fore compelling insights on child well-being in India. One of the primary objectives of this index is to garner attention to the under-researched theme of child well-being in India, and inspire further academic and policy conversations on related issues. Some of the key indicators that need to be studied in the future include mobile usage, digital access, financial literacy, mental health and quality of relationships per se, between parents/peers and children,” noted Sharon Buteau, executive director, IFMR LEAD.
📰 Cooking with gas, not wood
Under the PM Ujjwala Yojana, rural areas that still rely on solid fuel can be encouraged in three ways to use clean fuel
•When we introduced ourselves to Kishan Kumar Dubey, he remembered that we had visited his home four years ago. Mr. Dubey was a respondent in our study conducted on solid fuel use in 1,550 households between August and December 2018. Wearing glasses, Mr. Dubey sat on his bed in a pucca house with green stone flooring. He was thin and coughed often. On the shelf above him were books neatly wrapped in saffron cloth.
Preference for the chulha
•Mr. Dubey had recently received an LPG cylinder and stove through the Pradhan Mantri Ujjwala Yojana. His family could afford to hire labourers to cut wood, and they used the gas stove only to make tea. Dal, sabzi, roti and rice were made by Mr. Dubey’s daughters-in-law on the chulha (earthern/ brick stove). Mr. Dubey believed that food cooked on a chulha was healthier and tastier. In contrast, rotis cooked on gas cause indigestion, he said. He thought that cooking with solid fuels was healthy for the person cooking too: fumes purified the eyes because they caused tears, and in blowing into a traditional stove, a woman did kasrat (exercise). Clearly, Mr. Dubey had never cooked on a chulha.
•In another part of the same village in Madhya Pradesh, Rajni Bai, a Dalit woman, had also received LPG through the same scheme. Ms. Rajni’s household did not own any land or animals. She did not have access to dung or agricultural produce to burn in a traditional stove. She appreciated the cylinder and the gas stove. The cylinder lasted her two and a half months. She had used it “carefully”, supplementing it with wood collected from the forest. But when we interviewed her, the cylinder had been sitting empty for 15 days. Ms. Rajni could not afford a refill. The rains had made the wood wet and harder to burn, but she made all the food on her traditional stove made from mud.
•Ms. Rajni and Mr. Dubey are at opposite ends of the wealth spectrum, but it would be hard to see this by looking at their cooking fuel. They are not unique. In our survey conducted in 127 villages across four States — Bihar, M.P., Rajasthan, and Uttar Pradesh — we found that the rich were less likely to use a chulha for cooking compared to the poor, but not by much: more than 60% of the richest households had used a chulha yesterday.
•Using cleaner fuels such as LPG is essential to reduce rural air pollution and improve health. What can policymakers do to achieve exclusive use of clean fuels in rural India? Three strategies could work: communicating the harms of solid fuels and the benefits of cleaner fuels; reducing the cost of LPG cylinder refills in rural areas; and promoting gender equality within households, particularly in cooking and related tasks.
Using clean fuel
•Like Mr. Dubey, 92% of the respondents in the survey said food cooked on a chulha tastes better than food cooked on gas, and more than 86% believed that food cooked on a chulha is healthier. Fortunately, only 22% agreed with Mr. Dubey that cooking food on a chulha is better for the health of the cook than cooking food on gas. Even among those who believed that cooking on a chulhaharms health, the harms most often invoked were not respiratory, but to the eyes of the person cooking. A large anti-tobacco style campaign communicating that solid fuels harm respiratory health may change these beliefs. Similarly, advertisements that food cooked on gas can be as tasty and healthy as food cooked on a chulha would be helpful.
•Reducing LPG prices in rural areas, where residents are poorer and solid fuels are easier to access, would also help. One way is to build on the targeting experience of the National Food Security Act. Under this Act, 75% of rural households are classified as priority households and entitled to subsidised rations. Another 10% of extremely poor households are classified as Antyodaya households, eligible for higher grain amounts at even lower prices. If priority households could become eligible for even higher subsidies in a revamped LPG pricing regime, and Antyodaya households could become eligible for LPG cylinders free of cost, exclusive LPG use would likely be higher.
•Finally, public policy must recognise that in households such as Mr. Dubey’s, if he was doing his share of the cooking, a complete transition to LPG would have happened already. Our survey asked questions on who cooks food, who makes dung cakes, and who collects wood in rural households. Men rarely cook or make dung cakes in rural households. Current Ujjwala messaging, which focuses on the benefits of clean fuels for women, reinforces this inequality. Advertisements showing that gas is so good that even men can cook with it will challenge both misinformation on LPG and gender inequalities in household tasks.
📰 Questions on RBI’s credibility outlandish, says Nirmala Sitharaman
Nirmala Sitharman’s remarks come after Rahul Gandhi hit out at the government over the record cash transfer from the RBI
•Any suggestions on the credibility of the Reserve Bank of India (RBI) are “outlandish”, Union Finance Minister Nirmala Sitharaman said on Tuesday, responding to criticism on the transfer of ₹1.76 lakh crore surplus from the central bank to the exchequer.
•Speaking a day after the Central government’s windfall from the RBI, Ms. Sitharaman said the government was yet to decide on the deployment of the funds.
•“I cannot comment right now on how these funds would be deployed. We will inform [the media] only after we have taken a decision on this,” the Minister said at a press briefing.
•Ms. Sitharaman and Minister of State for Finance and Corporate Affairs Anurag Thakur were in Pune for an in-depth meeting with tax officials, traders, entrepreneurs and industry experts on issues related to the GST.
Refutes Rahul
•The Minister slammed Congress leader Rahul Gandhi over the latter’s remarks accusing the Narendra Modi-led Central government of “stealing” money from the RBI.
•“Whenever Congress MP Rahul Gandhi has used words like ‘chori and chor’ (thievery) [pertaining to the BJP-led NDA government], a thing that comes to my mind is that though he tried his best to malign us using such words, the public has given him and his party a fitting reply ” she said and added that the Congress had no right to tarnish the RBI’s reputation.
•“Rahul Gandhi should first ask the erstwhile Finance Ministers and senior leaders of the Congress party before hurling allegations of “theft from the RBI” at us…but it appears he has become an expert at using words like chor and chori,” said the Finance Minister.
•Stating that she was not responding to any specific criticism in particular, Ms. Sitharaman said the Bimal Jalan committee on economic capital framework (ECF) included eminent experts and that it was constituted by the RBI itself and not by the government.
•“It is worrying that a committee appointed by the Reserve Bank is being questioned. The committee has had several sittings and has come out with a formula. It was appointed by the RBI, it had experts and they gave a formula, based on which the amount was arrived at,” the Minister said.
•“Now, any suggestions about credibility of RBI, therefore, for me seems a bit outlandish considering that the committee was appointed by the Reserve Bank itself,” the Minister added.
•Ms. Sitharaman further said the committee members themselves had given an explanation through the media that issues like fiscal financial stability, the surplus to meet any emergency and contingency had all been factored in by the committee while coming up with its formula.
•Responding to questions on the auto industry’s demands for a GST rate cut, she said GST rates were not in the Finance Ministry’s domain but that of the GST Council.
•When asked about the stimulus announced last week to revive the sagging auto sector, Ms. Sitharaman said: “I have announced some measures for the automobile sector last week…I have to see how it goes. I’ll also have to take some inputs to gauge the impact of those measures.”
•Ms. Sitharaman said the meeting with tax officials and traders had chiefly focused on matters pertaining to GST forms, simplifications, and deadline-related issues.
•Urging tax officials not to overreach themselves to meet their targets, she said that the tax deadlines that had been fixed were in consultation with all the authorities.
•“They are achievable deadlines and realistic. My request to them was not to overreach,” she said.
📰 Rare tarantula sighted in Villupuram district
The known habitat of Peacock Parachute Spider is in degraded forests near Nandyal in Andhra Pradesh
•In an interesting find, researchers have sighted a critically endangered species of tarantula for the first time beyond its known habitat in the Eastern Ghats.
•The spider belonging to the genus Poecilotheria, commonly known as the Peacock Parachute Spider or Gooty Tarantula was spotted by a team of researchers of the Puducherry-based Indigenous Biodiversity Foundation (IBF) in the Pakkamalai Reserve Forests near Gingee in Villupuram district.
Chance spotting
•The team of wildlife researchers was involved in field work in the reserve forests recently when they sighted a Gooty Tarantula (Poecilotheria metallica) resting in a cave. The species was later cross-matched with photographic evidence published by the Zoo Outreach Organisation and Wildlife Information Liaison Development Society.
•The species, known to be endemic to India, was found at different locations in the reserve forests. The International Union for Conservation of Nature (IUCN) categorised it as Critically Endangered.
•According to K. Raman, founder of IBF, “The spider was sighted way back in 1899 by Reginald Innes Pocock on the basis of a single female specimen in Gooty. About 102 years later this species has been recorded at degraded forest between Nandyal and Giddalur in the Eastern Ghats of Andhra Pradesh.” IUCN says on its website that it could not be said to occur naturally in Gooty, since it could have come from the Eastern Ghats at least 100 km away.
•S. Vimalraj, a wildlife researcher said the species had so far not been sighted in any other part of India or Sri Lanka except its known habitat in Andhra Pradesh.
Not surveyed before
•According to Zeeshan A. Mirza, Researcher at National Centre for Biological Sciences (NCBS), Bengaluru, “This is an interesting find as this area has never been surveyed before. Species of this genus can be identified based on the banding patterns on the underside of the legs. Tarantulas are biological pest controllers and there is a huge demand for them by collectors in the pet trade. There is an urgent need to protect them.”
📰 Oil firms to hike petrol, diesel prices from April
Move aimed at recovering ₹30,000 crore invested in upgrading refineries to meet BS-VI norms.
•State-owned oil marketing companies (OMCs) are set to increase the prices of petrol and diesel with effect from April 2020 to recover over ₹30,000 crore of investments made by these firms in upgrading their refineries to meet the BS-VI standards.
•Hindustan Petroleum Corporation Limited (HPCL) chairman Mukesh Kumar Surana told The Hindu, “Upgrading to BS-VI was part of our expansion project in our Mumbai and Visakh refineries. Upgrading to BS-VI comes at a cost. We have invested close to ₹5,000 crore for upgradation to BS-VI. Besides, we need to incur additional operating expenses to run those units as we need to produce hydrogen. We will try to get a compensation.”
•State-owned OMCs have so far invested over ₹30,000 crore in upgrading their refineries to produce cleaner BS-VI fuels after the government, in 2016 decided to meet the global best practices and leapfrog to BS-VI, skipping BS-V norms.
•On the quantum of hike, Mr. Surana said, “We will not charge more than what we are supposed to do. We need to see the pricing as it depends on the international products prices and demand and supply in the international markets. We need to benchmark our prices with global prices.” He, however, did not elaborate on the exact hike for consumers.
•BS-VI emission norms are equivalent to Euro VI, to be effective from April 1, 2020. “Pricing, we have not decided yet. It will be done closer to the launch. We will start making available BS-VI fuels in our depots by January so that all our outlets have these fuels by March. It may be a marginal hike between 50 paise per litre and ₹2 per litre,” the director of another OMC said.
Price build-up
•Currently, the price build-up of petrol comprises the base price of ₹32.81 and freight cost of ₹0.35 per litre. The price charged to dealers (excluding excise duty and VAT) is ₹33.16.
•With excise duty at ₹19.98 per litre, average dealer commission of ₹3.55 per litre and VAT (including VAT on dealer commission) of ₹15.30 per litre, the retail selling price at Delhi is rounded off to ₹71.99 per litre.
•Similarly, price build-up of diesel includes the base price of ₹37.15 per litre. With freight cost of ₹0.32 per litre, the price charged to dealers (excluding excise duty and VAT) is ₹37.47 per litre. With an excise duty of ₹15.83 per litre, average dealer commission of ₹2.49 per litre and VAT (including VAT on dealer commission) of ₹9.64 per litre, the retail selling price at Delhi is rounded off to ₹65.43 per litre.
📰 Government should use RBI funds in a prudent manner
It is morally unacceptable that any one government can swallow even a part of such funds to help meet its expenditure in a particular year.
•After a long tug of war, the government has eventually had its way with the Reserve Bank of India, managing to get it to part with a portion of its accumulated reserves. The RBI board, on Monday, decided to transfer a massive ₹1,76,051 crore to the government, including a sum of ₹52,637 crore from its contingency reserve built over the last several years. The outflow from the RBI’s reserves was limited to this amount only because the Bimal Jalan Committee, appointed to recommend the economic capital framework for the RBI, decided to keep a major part of the reserves locked up and out of the reach of the government while opening up the remainder with strict stipulations. The Committee has recommended, and rightly so, that the Currency and Gold Revaluation Reserve Account (₹6.91 lakh crore as of June 30, 2018), at least half of which was eyed by the government, represents unrealised gains and hence is not distributable to the government. In the case of the Contingency Reserve (built out of retained earnings), which was ₹2.32 lakh crore as of the same date, the committee said that it should be maintained within a band of 6.5-5.5% of total assets. It left it to the RBI board to decide the precise percentage it was comfortable within this band and transfer the excess to the government. As it happened, the board, in its Monday meeting, decided to peg this ratio at 5.5% thus enabling it to transfer a sum of ₹52,637 crore to the government immediately. The committee should also be complimented for clearly specifying that the revaluation reserve cannot be used to bridge shortfalls in other reserves.
•In principle, it could be argued that the government as sovereign owns the RBI and hence there is nothing wrong if it decides to tap the central bank’s reserves. Yet, that it actually chose to do so is unfortunate because these reserves represent inter-generational equity built up over several years by the RBI by squirrelling away a part of its annual surplus. It is morally unacceptable that any one government can swallow even a part of such funds to help meet its expenditure in a particular year. The reserves, as the Jalan Committee has pointed out, represent the country’s savings for a ‘rainy day’, which is a monetary or financial crisis. Interestingly, the net surplus of ₹1,23,414 crore posted by the RBI in 2018-19 is more than double that of the previous year and is considerably higher than the ₹65,876 crore that it netted in 2015-16. Only the release of the RBI’s Annual Report in the next few days will help in the understanding of the reasons behind the sharp jump in the surplus. The big transfer from the RBI will free up the hands of the government at a time when tax revenues are undershooting the target by a long chalk. The money, it is hoped, will be put to use in a prudent manner.
📰 Review capital framework every five years, says Jalan Committee
Jalan panel for aligning RBI’s accounting and financial years to cut need for paying interim dividend
•The Bimal Jalan Committee, set up to review the Reserve Bank of India’s (RBI’s) economic capital framework, has suggested that the framework may be periodically reviewed after every five years.
•“Nevertheless, if there is a significant change in the RBI’s risks and operating environment, an intermediate review may be considered,” the report, which was made public on Tuesday, said.
•The panel recommended to align the central bank’s accounting year with the financial year which could reduce the need for paying interim dividend.
•“It could reduce the need for interim dividend being paid by the RBI. The payment of interim dividend may then be restricted to extraordinary circumstances,” the report said.
•For 2018-19, the RBI had paid ₹28,000 crore as interim dividend.
•Historically, the July-June year would have been linked to the agricultural seasons which is not a consideration in these times, it said.
•By doing so, the RBI would be able to provide better estimates of the projected surplus transfers to the government for the financial year for budgeting purposes.
•The committee also recommended that the RBI should put in place a framework for assessing the market risk of its off-balance sheet exposures in view of their increasing significance.
•The panel also suggested a clearer distinction between the two components of economic capital — realised equity and revaluation balances — mainly because of the volatile nature of the revaluation balances.
•“The committee was of the view that given the inclusion of the revaluation balances in the RBI’s overall risk buffers, measures to address volatility will have to be introduced,” the report said.
•The committee observed that even if the RBI’s economic capital could appear to be relatively higher, it is largely on account of the revaluation balances which are determined by exogenous factors such as market prices and the central bank’s discharge of its public policy objectives.
•Going forward, the Jalan panel said that the financial resilience of the RBI may be articulated by the central board in terms of the risk protection desired for its balance sheet.
Dual sets of targets
•So far as the surplus distribution policy for the future is concerned, the panel said it should move away from targeting total economic capital alone, to one where it has a dual set of targets, that is, the total economic capital of the RBI and the level at which realised equity is to be maintained.
•“The committee recommends that the minimum level of realised equity to be maintained should be the sum of the monetary and financial stability risks, credit risk and operational risk,” the report said.
📰 Rediscovering development banks
The agenda to set up a development bank is a welcome initiative, but questions remain on its design
•Finance Minister Nirmala Sitharaman’s press conference on August 23, announcing a slew of measures to boost the economy and financial market sentiments, had an interesting idea. It was about setting up a development bank.
•Ms. Sitharaman said: “In order to improve access to long-term finance, it is proposed to establish an organisation to provide credit enhancement for infrastructure and housing projects, particularly in the context of India now not having a development bank and also for the need for us to have an institutional mechanism. So, this will enhance debt flow toward such projects.” The announcement could have far-reaching implications for India’s financial system. This article explains why.
What are development banks?
•Development banks are financial institutions that provide long-term credit for capital-intensive investments spread over a long period and yielding low rates of return, such as urban infrastructure, mining and heavy industry, and irrigation systems. Such banks often lend at low and stable rates of interest to promote long-term investments with considerable social benefits. Development banks are also known as term-lending institutions or development finance institutions. To lend for long term, development banks require correspondingly long-term sources of finance, usually obtained by issuing long-dated securities in capital market, subscribed by long-term savings institutions such as pension and life insurance funds and post office deposits. Considering the social benefits of such investments, and uncertainties associated with them, development banks are often supported by governments or international institutions. Such support can be in the form of tax incentives and administrative mandates for private sector banks and financial institutions to invest in securities issued by development banks.
•Development banks are different from commercial banks which mobilise short- to medium-term deposits and lend for similar maturities to avoid a maturity mismatch — a potential cause for a bank’s liquidity and solvency. The capital market complements commercial banks in providing long-term finance. They are together termed as the Anglo-Saxon financial system. Historically, in the U.K. and the U.S., such a debt market took root to fund expansion of the market economy and colonial investments in the 19th century, such as financing of railways worldwide. This market was mostly sweetened by fiscal sops to promote Britain’s global political and commercial interests.
•Industrialisation of continental Europe and Asia was, however, financed under the aegis of German-type universal banks (providing long- and short-term credit) and state-sponsored (or guaranteed) development banks underwriting the risks of long-term credit. For instance, the earliest and ubiquitous saving institution, namely the post office bank (mostly government-owned and managed), mobilised national savings and channelled them into development banks for long-term investments whose social rates of return were higher than the assured interest rates for depositors. Alexander Gerschenkron, a Ukrainian economic historian at Harvard University, famously theorised that the greater the backwardness of a country, the greater the role of the state in economic development, particularly in providing long-term finance to catch up with the advanced economies in the shortest possible time.
•In the context of the Great Depression in the 1930s, John Maynard Keynes argued that when business confidence is low on account of an uncertain future with low-interest rates, the government can set up a National Investment Bank to mop up the society’s savings and make it available for long-term development by the private sector and local governments.
•Following foregoing precepts, IFCI, previously the Industrial Finance Corporation of India, was set up in 1949. This was probably India’s first development bank for financing industrial investments. In 1955, the World Bank prompted the Industrial Credit and Investment Corporation of India (ICICI) — the parent of the largest private commercial bank in India today, ICICI Bank — as a collaborative effort between the government with majority equity holding and India’s leading industrialists with nominal equity ownership to finance modern and relatively large private corporate enterprises. In 1964, IDBI was set up as an apex body of all development finance institutions.
•As the domestic saving rate was low, and capital market was absent, development finance institutions were financed by (i) lines of credit from the Reserve Bank of India (that is, some of its profits were channelled as long-term credit); and (ii) Statutory Liquidity Ratio bonds, into which commercial banks had to invest a proportion of their deposits. In other words, by sleight of government hand, short-term bank deposits got transformed into long-term resources for development banks. The missing capital market was made up by an administrative fiat.
•However, development banks got discredited for mounting non-performing assets, allegedly caused by politically motivated lending and inadequate professionalism in assessing investment projects for economic, technical and financial viability. After 1991, following the Narasimham Committee reports on financial sector reforms, development finance institutions were disbanded and got converted to commercial banks. The result was a steep fall in long-term credit from a tenure of 10-15 years to five years. The development of the debt market has been an article of faith for over a quarter-century, but it has failed to take off — as in most of Europe and industrialising Asia, where the bank-centric financial system continue to prevail.
•China’s development banks — the Agricultural Development Bank of China, China Development Bank, and the Export-Import Bank of China — have been at the forefront of financing its industrial prowess. After the global financial crisis, these institutions have underwritten China’s risky technological investments helping it gain global dominance in IT hardware and software companies. Germany’s development bank, KfW, has been spearheading long-term investment in green technologies and for sustainable development efforts requiring long-term capital.
•In this light, the Finance Minister’s agenda for setting up a development bank is welcome. However, a few hard questions need to be addressed in designing the proposed institution. How will it be financed? If foreign private capital is expected to contribute equity capital (hence part ownership), such an option needs to be carefully analysed, especially in the current political juncture. The design of the governance structure is fraught with dangers with many interest groups at work. One sincerely hopes that the political and administrative leadership carefully weigh in the past lessons to lay a firm foundation for the new institution.
