1. ‘Population not the sole factor in J&K delimitation’

A provision in delimitation Acts from 1952 onwards, which says that other than population, factors like physical features, boundaries of administrative units, communication facilities and public convenience should be taken into account while drawing constituency boundaries, has led to the Opposition’s concerns over the ongoing delimitation exercise in Jammu and Kashmir.

While officials of the Delimitation Commission say they have followed the rule in recommending six additional seats in Jammu and one in Kashmir, the National Conference (NC) has objected to the proposal, terming it unacceptable. The increase in seats would tilt the balance of power towards Jammu and away from the Kashmir Valley.

On criticism of the proposal, a senior official involved in the process said the provision to consider factors other than population had “always been adhered to”. Uttarakhand had all hill districts with 20% less population than the districts in the plains in the 2008 delimitation, the official said.

What is delimitation? 

Delimitation refers to the process of demarcation of the boundaries of parliamentary or assembly constituencies. The process is carried out every few years to ensure that each constituency has approximately an equal number of voters — the underlying logic being that a set number of voters have one representative in the Lok Sabha as well as in the state assemblies across the country. Therefore, the exercise is carried out after every census. 

Given the political sensitivity of the exercise, no government — central or state — can carry it out, and after every census, Parliament enacts a Delimitation Act under Article 82 of the Constitution. Subsequently, a high-powered body known as the Delimitation Commission is constituted, which carries out the process of demarcation of constituency boundaries. The orders of this commission are legally binding and not subject to scrutiny of any court of law. Even Parliament cannot suggest modifications to an order issued by the commission.

The commission consists of a chairman — a retired or sitting judge of the Supreme Court — the chief election commissioner or any of the two election commissioners, and the election commissioner of the state in which the exercise is being carried out. In addition, five MPs and five MLAs of the state are chosen as associate members of the commission.

Since the commission is a temporary body with no full-fledged staff of its own, it relies on EC employees to carry out the long-drawn exercise. Census data for each district, tehsil and gram panchayat is collected, and the new boundaries are demarcated. The exercise can take up to five years.

How has delimitation been different in J&K?

A delimitation commission was first constituted for J&K in 1952. Subsequently, they were constituted in 1963, 1973 and 2002. 

Delimitation in J&K has followed a slightly different trajectory than in the rest of the country, due to the special status it was accorded under Article 370. 

While delimitation of Lok Sabha seats in J&K was governed by the Constitution of India, that of the erstwhile state’s Assembly seats was governed by the Jammu and Kashmir Constitution and specifically, the Jammu and Kashmir Representation of the People Act, 1957.

The last time a delimitation exercise was conducted in J&K was under President’s Rule in 1995 by the retired Justice K.K. Gupta’s Commission. The next exercise was due in 2005, but in 2002, the Farooq Abdullah government chose to freeze delimitation until 2026 by amending the Jammu & Kashmir Representation of the People Act, 1957, and Section 47(3) of the Constitution of Jammu & Kashmir.

Why is delimitation so controversial in J&K? 

The delimitation of J&K is a politically volatile issue since it is directly related to the representation of Muslim-dominated Kashmir and Hindu-dominated Jammu in the legislative assembly. 

Political parties, which have been seeking greater representation for Jammu in the Assembly, including the BJP, have argued that the freeze enforced in 2002 has led to poorer representation for Jammu. 

While the J&K Assembly, at that time, had 87 seats — 46 in Kashmir, 37 in Jammu and 4 in Ladakh — 24 were reserved for Pakistan-occupied Kashmir. 

According to the Jammu and Kashmir Reorganisation Act, 2019, the seats for Jammu and Kashmir Assembly will be increased by seven seats, in effect they will go up from 83 to 90 post-delimitation. 

The concern for several mainstream political parties in the Valley has been that representation may be increased for Jammu after the delimitation exercise, and not Kashmir, thereby weakening their electoral fortunes. 

The present status

A delimitation commission, headed by retired Supreme Court judge Ranjana Prakash Desai, was set up by the government in 2020. While it was supposed to lapse on 5 March this year, it was given a year’s extension given the Covid-19 pandemic and the delays caused by it. 

It is, however, learnt that the commission had resumed its work in full-swing in the run-up to the PM’s meeting with political parties in the state. 

Earlier this month, the Election Commission had written to deputy commissioners of all 20 districts in J&K asking them to furnish information on issues such as population density and topography in all the districts and Assembly constituencies. 

While mainstream political parties in Kashmir had earlier boycotted the meetings of the delimitation commission — calling the exercise “palpably unconstitutional” — there seems to be a rethink within the parties now, with several of them agreeing to engage in a dialogue with the central government over the political future of the UT.

2. Do Indians need insurance for bank deposits?

At an event last week to mark the payment of over ₹1,300 crore to depositors in troubled cooperative banks, Prime Minister Narendra Modi flaunted his government’s revamped deposit insurance scheme. The scheme, which was upgraded through the Deposit Insurance and Credit Guarantee Corporation (DICGC) Amendment Bill, 2021, guarantees to compensate depositors up to a limit of ₹5 lakh within a period of 90 days from when a bank fails. At the same event, the Reserve Bank of India (RBI) Governor Shaktikanta Das warned depositors to be careful and avoid investing in risky banks just because they offer higher returns. In a conversation moderated by Prashanth Perumal J., Amiyatosh Purnanandam and Amol Agrawal discuss whether we need insurance for bank deposits. Edited excerpts:

What is the need to raise the value of the deposits that will be insured from ₹1 lakh to ₹5 lakh?

Amiyatosh Purnanandam: There are two parts to this answer. One is that if you look within India, the ₹1 lakh limit was set many decades ago. Now, if you do a simple calculation based on the inflation rate, the ₹1 lakh limit that was set in the 1990s has become extremely inadequate when adjusted for inflation. And two, if you look at international standards and compare the insurance limit, ours is still much lower than those of several comparable economies. For example, think about South Korea and Brazil. We are also way below the level that we see in the U.K. and the U.S. Of course, you cannot compare figures across countries in isolation given differences in purchasing power and all those things, but broadly speaking, we still have a lower amount of deposit insurance than other countries. So, by raising the limit to ₹5 lakh, we are going in the right direction.

We need deposit insurance because we want to give confidence to depositors that if a bank does go down, they don’t need to run to the bank. They can keep their money in the bank, and the bank can continue operating without any financial trouble. So, it’s a combination of these things.

Amol Agrawal: It is a step to try and infuse more confidence in the banking system. From a historical perspective, this whole discussion on deposit insurance began in India after we saw a number of bank failures that led to attempts to try and stabilise the banking system. In the 1930s, the U.S. set up deposit insurance. India set up deposit insurance in the 1960s to deal with bank failures. So, in several ways, there are history lessons here, too, that each time your banks fail in large numbers, the central bank does something about deposit insurance.

How does the deposit insurance system in India compare with those in other countries?

AP: I don’t think anyone has ever lost money in any scheduled commercial bank in India. So, what that means is that in India, de facto, there is 100% insurance. So, depositors do not lose money. It is just that the guarantee is not provided explicitly. And that leads to its own distortions. It’s a little bit of a nuanced answer. If you ask, hey, how does deposit insurance in India compare with other economies, the answer is that this limit of ₹5 lakh is much lower than in other countries — in the range of six to 10 times lower than what is the case in comparable economies. But in India, depositors don’t lose money. There may be a delay, and that can be pretty costly. So, there could be a lot of liquidity risk but no credit risk because the government always comes in and rescues banks.

If nobody loses their money, doesn’t it make depositors complacent? They have no incentive to do any due diligence before making a deposit. How do you address that problem?

AA: This whole thing of due diligence and trying to find out which bank is riskier… if you look at other financial products, you as an investor have to figure out ways to protect yourself. So, what is it about bank deposits that they need to be insured? Now, I understand that the stability of the banking system is important, but so is the stability of debt markets, equity markets and all sort of financial markets. And here we have an implicit insurance of 100% of deposits, so people are not really doing their due diligence and hence there is nothing disciplining investors. Even the premiums the banks pay to deposit insurance agencies is a flat premium. So, it basically means that whether you are a risky or a less risky bank, both pay the same premium. That doesn’t make sense. We need to move to a more risk-adjusted premium model. The sooner we get there, the better it is, because then somehow the information about risk will reach depositors sooner and they will be more wary of investing money.

AP: Absolutely. We need risk-based deposit insurance premiums, which is simply absent in India. When you don’t have that, then it’s too much to ask of a retail depositor to be prudent about which bank they invest in. If a bank offers a higher interest rate and there is a reasonable expectation that the government will effectively come in and bail them out, then investors will be tempted to go to that bank. So, I do not think that under the current policy, investors will be discerning enough to figure out the good banks. Investors, in fact, will eventually migrate towards banks offering higher interest rates knowing that at the end of the day, the government will bail them out in case of trouble. The way to address the distortion is to go with risk-based pricing. And second, there has to be some sort of restriction on risk-taking by banks itself. Otherwise, this is going to be a huge cost to the taxpayers. Anyway, I think it is too much to ask of depositors to be prudent when it comes to where they deposit their money. I don’t think that will work. What needs to be done is better monitoring.

How likely are private insurers to insure bank deposits? Will private insurance companies actually be willing to assume such a risk? Or would they be more discerning?

AP: Look, here’s the thing: who will insure the insurer? That is the whole idea behind deposit insurance. It comes into play when panic sets in, like in 2008, when everybody was panicking about the financial sector and wanted their money back, fueling a self-fulfilling crisis. Now, in that scenario, private insurance might not work because people might think that the private insurer will become bankrupt. This is where the might of the government comes in because the government has the ability to be the lender of last resort. So, unlike other insurance, like car insurance or health insurance, deposit insurance is about panic in the entire market. And when it’s about panic in the entire market, the thought that some other market participant will be able to assume the risk I think is too optimistic. In the U.S., you have some small pockets of private insurance but these are not at the scale we need.

AA: It’s too much to imagine that private insurance can provide confidence during a crisis. In times of panic, usually it’s the state which has to come in to bail people out. We saw in the 2008 crisis that the U.S., which is generally seen as a more market-driven financial system, had to be eventually bailed out by the government. And obviously, there is a fair bit of difference around this kind of thinking between the free-market Austrian school of economics and the more interventionist Keynesian school which thinks that the government can and should do the job. In India specifically, the RBI has done a done a decent job of regulating the system.

AP: I’m a firm believer in free-market economics, but I believe that when it comes to managing panic, it should be the government that should do it. But at the same time, the deposit insurance should be properly priced, and the risk should be properly monitored. See what happened with AIG in the 2008 financial crisis. It was insuring a bunch of financial products that were underwritten by Goldman Sachs and other private banks. In the end, AIG’s survival itself became very doubtful in 2008. Ultimately, the U.S. government had to come in and rescue them. So, if you look at the evidence, it always goes back to ‘who will insure the insurer?’ and we’ll always run that risk of the insurance company itself going bust. What happens then? I think it should be government’s job to manage this issue.

What exactly do you see as the role of the RBI in regulating banks given depositor complacency?

AA: The DICGC is basically owned by the RBI. So, there are quite a few RBI officials working in the DICGC, and there is a lot of discussion and thinking at the DICGC. But when it comes to bank failures, it is the RBI and not the DICGC that is playing a major role, so it is the RBI that comes under criticism when there’s trouble at a bank. In the U.S., in contrast, the Federal Deposit Insurance Corporation also plays a role in the resolution of troubled banks, with the Federal Reserve not playing an active role in the resolution process other than lending to the troubled institution. I think the RBI is running campaigns about financial literacy and all these things. I think it needs to also begin to drive home the point that not all banks are the same and people should be careful. But then, financial literacy campaigns are useful but only in a few pockets.

AP: What needs to be done, and where I think the RBI can do a lot more and can add a lot more value, is that it could stay a little bit ahead of the problem. So, when these bank failures happen, whether it is a cooperative bank or any other bank, there are a lot of signs of the failure that build up leading to the crisis. Often those warning signs are missed by the regulators. As I often like to say: regulators are always a few steps behind the banks. Banks innovate and they’re always ahead of the game creating new financial products. But regulators are still always playing the catch-up game in terms of figuring out the true level of risk that banks have taken. So, where I’m going with that is that the RBI and other regulatory agencies have to be really on top of the precise risk model, the disclosure of that information and quick action before a bank fails. This is hard because you need to have a good model to figure out which bank is under stress. So, depositors’ discipline has to go hand in hand with improvement in risk management system across the board.