1. WhatsApp approaches Delhi HC to challenge new IT rules
‘Breaking end-to-end encryption infringes on citizens’ rights’
Instant messaging app WhatsApp has approached the Delhi High Court challenging the Central government’s new Information Technology Rules, 2021, which include a requirement for social media platforms to compulsorily enable “the identification of the first originator of the information” in India upon government or court order.
The Facebook-owned company argued that this provision forces it “to break end-to-end encryption on its messaging service, as well as the privacy principles underlying it, and infringes upon the fundamental rights to privacy and free speech of the hundreds of millions of citizens using WhatsApp to communicate privately and securely”.
The Information Technology (Intermediary Guidelines and Digital Media Ethics Code) Rules, 2021, was notified on February 25 this year amidst concerns raised by various experts over its impact on privacy, freedom of expression and security of users online.
While this is the first major tech company to challenge the new IT rules, the Delhi HC is already seized of petitions by several news portals, such as The Wire, The News Minute, Quint Digital Media Limited and the Foundation for Independent Journalism, over its attempt to regulate digital news media. The petitions claimed that the new rules seek to regulate online news portals by imposing a vaguely worded “Code of Ethics”.
WhatsApp, in its plea, has contended that the new IT Rules violate the fundamental right to privacy guaranteed under Article 21 of the Constitution of India. It highlighted the landmark judgment of the Supreme Court in the K.S. Puttaswamy case, where it held that the right to privacy is a fundamental right guaranteed under the Constitution. More recently, the Supreme Court affirmed that the right to privacy included the right to anonymity, it argued.
“Requiring intermediaries ‘to enable the identification of the first originator of the information’ in India on end-to-end encrypted messaging services constitutes a dangerous invasion of privacy,” WhatsApp said.
“This would require Petitioner [WhatsApp] to build the ability to identify the first originator of every communication sent in India on its platform, as there is no way to predict which message will be the subject of such an order seeking first originator information,” it said.
This eliminates the right of the hundreds of millions of Indian citizens using WhatsApp to maintain the privacy of their messages, which is antithetical to end-to-end encryption and the core privacy principles underlying it, the plea argued.
It further said enabling the identification of the first originator of information in India results in significant harm, including “breaking end-to-end encryption and chilling lawful speech”.
The new IT Rules also violate the fundamental right to freedom of speech and expression, WhatsApp argued as “privacy is inextricably intertwined with the right to freedom of speech and expression because it protects people from retaliation for expressing unpopular, but lawful, views”.
“With end-to-end encryption, users feel safe to communicate freely,” WhatsApp said.
Article 21 of the Indian Constitution: Protection of Life and Personal Liberty
The Government of India Act, 1935 provided for the establishment Article 21 of the Indian Constitution declares that no person shall be deprived of his life or personal liberty except according to the procedure established by law. It comes under the Part III of the Indian constitution and is one of the fundamental rights guaranteed to all citizens of India. In this article, we will discuss various other rights and liberties that are a part of Article 21.
Article 21 of Indian constitution
- Article 21 is a fundamental right and is included in Part-III of Indian Constitution.
- This right is available to all citizens as well as non-citizens alike.
- Supreme Court has described this right as the “heart of fundamental rights”
- According to Justice Bhagwati, Article 21 “embodies a constitutional value of supreme importance in a democratic society.”
- Article 21 secures two rights: The right to life and the Right to personal liberty.
- Article 21 cannot be suspended during an emergency.
Meaning and Scope of Article 21 of Indian Constitution
The right to life in Article 21 of Indian constitution does not mean animal existence or the mere act of breathing. It guarantees the right to a dignified life. Some of the rights that are currently included in the ambit of Article 21 includes (mentioned in Menaka Case):
- Right to live with human dignity.
- Right to the decent environment including pollution-free water and air and protection
- against hazardous industries.
- Right to livelihood.
- Right to privacy.
- Right to shelter.
- Right to health.
- Right to free education up to 14 years of age.
- Right to free legal aid.
- Right against solitary confinement.
- Right to a speedy trial.
- Right against handcuffing
- Right against inhuman treatment.
- Right against delayed execution.
- Right to travel abroad.
- Right against bonded labor.
- Right against custodial harassment.
- Right to emergency medical aid.
- Right to timely medical treatment in a government hospital.
- Right not to be driven out of a state.
- Right to a fair trial.
- Right of prisoner to have necessities of life.
- Right of women to be treated with decency and dignity
- Right against public hanging.
- Right to hearing.
- Right to information.
- Right to reputation.
- Right of appeal from a judgment of conviction
- Right to social security and protection of the family
- Right to social and economic justice and empowerment
- Right against bar fetters
- Right to appropriate life insurance policy
- Right to sleep
- Right to freedom from noise pollution
- Right to electricity
Now, let us look at some of the historic judgments that widened the scope of Article 21:
- Kharak Singh vs. the State of UP and Others: Right to privacy was included in Article 21 by this case.
- Sunil Batra vs. Delhi Administration: In this case, Supreme Court deemed the fatal handcuffs for the convicted persons as unconstitutional as it suggests inhuman behavior towards the prisoner. The court reiterated the clause “protection to the convicted and accused person” under Article 21.
- Mohini Jain vs. the State of Karnataka, 1992 SC: The SC held that the Right to life also includes the Right to education.
- Unni Krishnan vs. the State of Andhra Pradesh, 1993 SC: In this case, SC fixed the age that right to education is a fundamental right to the children for the age of 6-14 years.
- Subhash Kumar vs. the State of Bihar: SC included the right to get pollution-free air in the ambit of the right to life.
- Lachma Devi vs. Attorney General of India: In this case, SC made the execution of a death sentence at a public place unconstitutional.
Important Cases Related to Article 21 of the Indian Constitution
- A.K Gopalan vs. the State of Madras, 1951: The Supreme court has taken a narrow interpretation of Article 21 in this case. It held that the protection under Article 21 is available only against arbitrary executive action and not from arbitrary legislative action. This means that the state can deprive a person of the rights available in Article 21 based on a law.
- Maneka Gandhi vs. UOI, 1978: In this case, the SC overruled its judgment of the Gopalan Case by taking a wider interpretation of Article 21. It ruled that the right to life and personal liberty of a person can be deprived by law on the condition that the procedure prescribed by that law is reasonable, fair, and just. Further, it clarified that the right to life does not merely mean animal existence. It held that all those aspects of life which go to make a man’s life meaningful, complete, and worth living will be included in this.
2. NCLT orders liquidation of Devas
Incorporation of company itself was with a fraudulent motive, tribunal says
The National Company Law Tribunal (NCLT) has ordered the liquidation of Devas Multimedia Pvt. Ltd. while declaring that the company was not only incorporated in a fraudulent manner to carry out unlawful purposes but also its management continued to resort to fraudulent activities in relation to its 2005 controversial contract to get bandwidth from Antrix Corporation, the Indian Space Research Organisation’s commercial arm.
The NCLT has directed the Official Liquidator (OL) to take expeditious steps to liquidate the company in order to prevent it from perpetuating its fraudulent activities and abusing the process of law in enforcing the award passed in 2015 by the arbitration tribunal of the International Chamber of Commerce (ICC), and submit a report by July 7.
“The incorporation of Devas itself was with fraudulent motive and unlawful object to collude and connive with the then officials of Antrix and to misuse/abuse process of law, to bring money to India and divert it under dubious methods to foreign countries,” the Bengaluru Bench of the NCLT said in its verdict delivered on May 25.
A Bench comprising Rajeshwara Rao Vittanala (Member-Judicial) and Ashutosh Chandra (Member-Technical) delivered the verdict while allowing a company petition filed by Antrix on January 19, 2021, after obtaining sanction from the Central government to liquidate Devas.
The NCLT found that “Devas failed to show any cogent reason as why it should not be wound up and to keep its name on the Registrar of Companies (RoC), Karnataka. The only reason apparent on record, by perusal of various pleading raised in the instant petition is that it wants to prosecute enforcement of award in question, in the name of the company in the courts.”
National Company Law Appellate Tribunal (NCLAT)
National Company Law Appellate Tribunal (NCLAT) was constituted under Section 410 of the Companies Act, 2013.
- It hears appeals against the orders of National Company Law Tribunal(s) (NCLT), with effect from 1st June, 2016.
- It is the Appellate Tribunal for hearing appeals against the orders passed by NCLT(s) under Section 61 of the Insolvency and Bankruptcy Code, 2016 (IBC).
- It is the Appellate Tribunal for hearing appeals against the orders passed by Insolvency and Bankruptcy Board of India under Section 202 and Section 211 of IBC.
- It is the Appellate Tribunal to hear and dispose of appeals against any direction issued or decision made or order passed by the Competition Commission of India (CCI).
The President of the Tribunal and the chairperson and Judicial Members of the Appellate Tribunal shall be appointed after consultation with the Chief Justice of India.
The Members of the Tribunal and the Technical Members of the Appellate Tribunal shall be appointed on the recommendation of a Selection Committee consisting of:
- Chief Justice of India or his nominee—Chairperson.
- A senior Judge of the Supreme Court or a Chief Justice of High Court— Member.
- Secretary in the Ministry of Corporate Affairs—Member.
- Secretary in the Ministry of Law and Justice—Member.
- Secretary in the Department of Financial Services in the Ministry of Finance— Member.
3. Experts seek to dispel vaccine fears
Alarm set off by French scientist’s claim that the jabs could create virus variants
Antibody dependent enhancement (ADE), when antibodies to an infection can sometimes aggravate infection or trigger a respiratory disease, is something that vaccine developers must watch out for. However, there is no scientific case that such ADE may actually trigger newer virus variants, say experts.
The controversy was triggered by a much-shared article in the last few days, that claimed the French 2008 Nobel Laureate, Luc Montaigner, 89, to have said vaccination in a pandemic was lethal and there was an association between rising vaccinations and death rates. While it emerged that he did not explicitly say so, he did say that vaccinations were an “enormous mistake” as they were creating “the variants”.
The interview is in French and a translation is available on the website of the RAIR Foundation, which describes itself as an “activist grassroots” organisation “to combat threats from Islamic supremacists, radical leftists and their allies”.
In an excerpt from the interview, Dr. Montaigner, who in 2008 was co-winner of the Nobel Prize in Medicine for discovering the Human Immunodeficiency Virus (HIV), says, “It is the antibodies produced by the virus that enable an infection to become stronger. It’s what we call Antibody Dependent Enhancement (ADE), which means antibodies favour a certain infection.”
Gagandeep Kang, microbiologist at Christian Medical Centre, Vellore, in a series of tweets on Wednesday, laid out why Dr. Montaigner’s assertions were incorrect.
Vaccination was a method to teach the immune system to trigger the antibodies and specialised immune-system cells in case of a future infection by an actual virus. There were both neutralising and non-neutralising antibodies produced.
ADE was identified as a “potential problem” in vaccine development, Dr. Kang said, adding an example of it was in the case of infection with dengue virus. There were four types of dengue virus and an infection or vaccination against one could trigger enhanced disease if someone were subsequently infected with a type to which there were not enough neutralising antibodies produced. “All (SARS-CoV-2) vaccines were being evaluated to see that they made high amounts of neutralising antibodies. And they are,” said Dr. Kang.
However, it was important to continue studying long-term protection and immune response in vaccine breakthrough cases (infection after vaccination) to understand what was happening with immunity and safety. But so far there wasn’t any (concerning) signal, she added.
In an earlier interview with The Hindu, Vineeta Bal, immunologist and professor at the Indian Institute of Science Education and Research, Pune had said that neutralising antibodies were “good antibodies” but that didn’t make non-neutralising ones automatically bad until proven. “Their utility may be limited. Some antibodies on binding to their targets lead to ADE [Antibody Dependent Enhancement of viral infection] and they can be labelled as ‘dangerous’ or ‘bad’ in your parlance. But in an immune individual amongst a large number of antibodies, such ADE causing antibodies are pretty much impossible to identify,” she said.
Antibody-dependent enhancement (ADE)
- Antibody-dependent enhancement (ADE), sometimes less precisely called immune enhancement or disease enhancement, is a phenomenon in which binding of a virus to non-neutralizing antibodies enhances its entry into host cells, and sometimes also its replication.
- This phenomenon—which leads to both increased infectivity and virulence—has been observed with mosquito-borne flaviviruses such as Dengue virus, Yellow fever virus and Zika virus,with HIV, and with coronaviruses.
An ongoing question in the COVID-19 pandemic is whether—and if so, to what extent—COVID-19 receives ADE from prior infection with other coronaviruses.
4. Dhaka clears currency swap for Lanka
Gotabaya’s request to Modi for a $1.1 billion currency swap is pending since 2020
Bangladesh on Tuesday cleared a $200 million currency swap facility for Sri Lanka, becoming the first South Asian country to extend crucial financial assistance to the island nation this year.
Dhaka-based The Daily Star newspaper reported on Wednesday that Bangladesh was extending “a lifeline of sorts to the beleaguered Sri Lankan economy”, offering to top up its depleting foreign reserves. “The board of the Bangladesh Bank has decided in principle to lend $200-250 million from Bangladesh’s reserves to Sri Lanka for three months,” Mohammad Sirajul Islam, a spokesman for the Bangladesh Bank, the country’s central bank, told AFP in Dhaka.
With Sri Lanka’s main foreign exchange-earning sectors — tourism, export of garments and tea — badly hit due to the pandemic, the country has been struggling to maintain its reserves in the face of a daunting debt repayment schedule.
In April 2021, Sri Lanka’s foreign reserves stood at $4.5 billion, about the same amount that the country is due to settle this year in external loan repayments.
So far this year, Colombo has obtained financial assistance from China, through a $1.5 billion currency swap arrangement, and a $500 million loan, in addition to the $500 million extended last year. Sri Lanka also inked a $500 million loan-agreement with the EXIM Bank of Korea a fortnight ago. India, which extended a $400 million currency swap facility from the Reserve Bank of India — it was settled in February 2021 after an extension — is yet to respond to Sri Lanka’s year-old request for an additional $1.1 billion currency swap facility.
President Gotabaya Rajapaksa made the request during a telephone conversation with PM Narendra Modi in May 2020. New Delhi is also yet to approve Prime Minister Mahinda Rajapaksa’s request for a debt moratorium, which he sought before the pandemic hit the region.
Meanwhile, Dhaka clearing the request — discussed during PM Mahinda Rajapaksa’s visit to the capital in March — brings some relief to Colombo, senior officials said, although the decision is yet to be formalised in a bilateral agreement. Despite the pandemic, Bangladesh’s foreign reserves hit a record high in April, crossing the $45 billion mark.
Currency Swap Arrangement for SAARC
- The SAARC currency swap facility came into operation on 15th November, 2012.
- Under the revised framework,
- The RBI will continue to offer a swap arrangement within the overall corpus of USD 2 billion.
- The swap drawals can be made in US dollar, euro or Indian rupee. The framework provides certain concessions for swap drawals in Indian rupee.
- The facility will be available to all SAARC member countries, subject to their signing the bilateral swap agreements.
- The framework is valid from 14th November, 2019 to 13th November, 2022.
Currency Swap Arrangement
- The word swap means exchange. A currency swap between the two countries is an agreement or contract to exchange currencies with predetermined terms and conditions.
- Central banks and Governments engage in currency swaps with foreign counterparts to meet short term foreign exchange liquidity requirements or to ensure adequate foreign currency to avoid Balance of Payments (BOP) crisis till longer arrangements can be made.
- India and Japan in the year 2018 signed a bilateral currency swap agreement.
- RBI will get a certain amount of yen and the Bank of Japan will get an equivalent amount in Indian rupees on a decided swap rate.
- After a specified period, both the countries will repay the amount at the same swap rate.
5. Quad targeting China: Consul General
Calls to decouple Indian and Chinese economies opportunistic, says Tang Guocai
China’s Consul General in Mumbai said it was “self-contradictory” to ask China to keep supply chains open, amid a current surge in Indian imports of supplies, while at the same time “threatening decoupling” between the Indian and Chinese economies.
He also hit out at the India-United States-Japan-Australia grouping, known as the Quad, describing it as “an attempt for containment”.
“It is self-contradictory for some Indian media and think tanks to ask China keeping the supply chain open on the one hand, and threaten decoupling with China on the other. Such opportunistic and protective ideas will only add up to the problem,” said Tang Guocai. He was speaking at a seminar on Tuesday on poverty reduction organised by China’s Consulate in Mumbai, along with the South Indian Education Society in Mumbai and the Yunnan International Research Centre, according to remarks published on the consulate’s website.
He said organisations and businesses in China were “making every effort supporting India to fight the virus”. “As a matter of fact, China is providing the vast majority of oxygen concentrators and other medical supplies India needs,” Mr. Tang said. “China is the first country to get out of the pandemic and resume development, offering India and the region huge opportunities. We are glad to find the second wave of COVID-19 here is melting down. As two of the world’s largest vaccine producers, China and India have every reason to join hand and work for the final victory against the pandemic in our region and the world.”
Since early April, Chinese firms had received orders for more than 60,000 oxygen concentrators from Indian firms, of which around half have been exported, in addition to more than 5,000 ventilators. India has asked China to keep supply chains open to ensure smooth movement of goods after Sichuan Airlines last month announced a 15-day suspension in cargo flights. The airline later said it would resume services. External Affairs Minister S. Jaishankar said earlier this month companies had been encountering difficulties in logistics, but following his April 30 conversation with his counterpart Wang Yi, approvals had been expedited and the logistics chain was flowing.
China’s government has criticised India’s recent moves to not include its telecom firms in 5G trials and to place more stringent curbs on FDI coming in from countries that share a border with India, seen widely as being aimed at Beijing.
On calls to accelerate decoupling from China, Mr. Tang said “Western ‘Hawkish strategy’ and ‘wolf pack tactics’ will eventually shoot themselves in the foot”, as he drew a contrast between the Regional Comprehensive Economic Partnership (RCEP) trade deal, which India withdrew from, and the Quad, describing RCEP as bringing in “a new wave of multilateralism and free trade”.
“The integration and development of East Asia, South Asia and Southeast Asia are unstoppable,” he said “RCEP has always opened its door to India,” he said. “On the other hand, ‘the group of four’ (Quad) advocates so-called democratic alliance, and targets certain specific country in an attempt for containment.”
He said China’s experiences in poverty reduction, particularly its rural revitalisation strategy, offered lessons for India, with the government last year announcing the eradication of absolute poverty. Poverty eradication was premised on the idea that “China does not simply ‘transfuse blood’ to the poor, but to encourage them to work hard and ‘make blood’ themselves”.
He also slammed the West for hindering China’s development and said “under the pretext of the so-called democracy and human rights issues, they disrupt the agriculture industry of developing countries”. “For instance, the West has been fabricating the so-called “cotton human rights” issue in Xinjiang, China,” he said referring to allegations of forced labour and human rights abuses in the cotton industry.
“In fact, India’s cotton-spinning and agriculture also suffered likewise,” he said. “They are actually trying to create racial divisions politically and stifle the foundation of national rejuvenation economically, so that China and India will remain poor and weak forever.”
Regional Comprehensive Economic Partnership
The Regional Comprehensive Economic Partnership (RCEP) is a mega-regional economic agreement being negotiated since 2012, between ASEAN and Free Trade Agreement (FTA) member partners.
|ASEAN Members||FTA Partners|
- Goals: Boost economic growth and equitable economic development, advance economic cooperation and broaden and deepen integration in the region through the RCEP.
- It aims to cover the trade in goods and services, investment, economic and technical cooperation, intellectual property and dispute resolution.
- In 2017, the 16 prospective signatories (including India) accounted for a population of 3.4 billion people with a combined gross domestic product (GDP) of US$ 21.4 trillion, about half of the world population and 39 percent of the world’s GDP.
- Countries in East Asia region have thriving trade and economic relations with each other through free trade agreements.
- The Association of Southeast Asian Nations (ASEAN) (ASEAN+1 FTAs) has free trade agreements with six partners namely,
- The People’s Republic of China (ACFTA)
- Republic of Korea (AKFTA)
- Japan (AJCEP)
- India (AIFTA)
- Australia and New Zealand (AANZFTA)
- To broaden and deepen the engagement among parties and to enhance parties’ participation in the economic development of the region, the leaders of the 16 participating countries established the RCEP.
- The RCEP was built upon the existing ASEAN+1 FTAs with the spirit to strengthen economic linkages and to enhance trade and investment-related activities as well as to contribute to minimising development gap among the parties.
- The RCEP negotiations were launched between the Ten ASEAN member states and six ASEAN FTA partners during the 21st ASEAN Summit and related summits in Phnom Penh, Cambodia in November 2012.
- To achieve a modern, comprehensive, high-quality, and mutually beneficial economic partnership agreement among the ASEAN Member States and ASEAN’s FTA partners.
Major FTAs India Signed
- South Asia Free Trade Agreement (SAFTA)
- India-ASEAN Comprehensive Economic Cooperation Agreement (CECA)
- India-Korea Comprehensive Economic Partnership Agreement (CEPA)
- India-Japan CEPA
India and RCEP
- India has dropped out of the RCEP in November 2019 in ASEAN+3 summit, because of the following reasons:
- Widening Trade Deficit: India’s trade deficit with the ASEAN, Korea and Japan has widened post-FTAs.
- Tariff elimination due to RCEP could worsen the trade deficit, at $105.2 billion in 2018-19.
- The RCEP proposes that 92% of India’s goods would be tariff-free over the next 15 years. India have to slash existing tariffs on up to 90% of all goods.
- Since import duties are also a source of revenue for India, it could experience a disproportionate loss of customs revenue.
- India’s trade deficit with China is at $53 billion, further reduction or removal of customs tariffs will lead to an influx of cheaper products from China.
- Sensitive List: Most of the RCEP countries have very high tariffs on certain products sensitive to them, such as rice, footwear, dairy products and honey, which they can continue to shield through the sensitive lists.
- The objections raised by India:
- Base Year for Tariffs: The RCEP will result in reduction of tariffs in all member countries. Since negotiations began in 2013, the pact has proposed that the base year for reducing tariffs will be 2013. However, India wanted to change the base year applied to reduce tariffs to 2019.
- India has raised customs duties on many products since 2014.
- India has increased tariffs on sectors such as textiles, auto components and electronic items on average from 13% to 17%.
- Auto-Trigger Mechanism: The auto-trigger mechanism is used when there is a sudden surge in imports.
- It will allow to decide which products it does not want to offer the same concessions to.
- Ratchet Obligations: India wants exemptions on ratchet obligations.
- A ratchet mechanism means that if a country signs a trade agreement with another country and removes or reduces tariffs and quotas. It cannot go back on them and bring in more restrictive measures.
- Data Localisation: As part of the RCEP, India wants all countries to have the rights to protect data.
- The countries may prevent the transfer of information across borders.
- Services Sector: India has demanded that the ASEAN countries should open up their services sector so that Indian professionals and workers can have easier entry into their market.
- However, ASEAN countries are very sensitive about protecting this sector and have not offered much liberalisation even within the bloc to each-other.
- Rules of Origin: India wants strict rules of origin to prevent Chinese goods from flooding the country through member countries that may have lower or no duty levels.
- Chinese garments are making their way into India through the duty-free route under the South Asia Free Trade Pact and the Duty-Free Quota-Free window from Bangladesh.
- Base Year for Tariffs: The RCEP will result in reduction of tariffs in all member countries. Since negotiations began in 2013, the pact has proposed that the base year for reducing tariffs will be 2013. However, India wanted to change the base year applied to reduce tariffs to 2019.
- The sectors that have shown resistance to the agreement are:
- Dairy: Dairy is vital to India, given the place milk and other derivatives hold in Indian households.
- New Zealand is an exporter of dairy products and will be eyeing India primarily to sell milk powder and fat products. India, one of the largest consumers of milk and milk products, has so far been self-sustainable and has sometimes produced a surplus. The entry of New Zealand could change the scenario.
- Nearly, 93.4% of New Zealand’s milk powder, 94.5% of its butter, and 83.6% of its cheese production got exported in 2018. India’s export of milk products does not match up.
- It could lead to 50 million rural people losing their jobs, which will push up the need for importing.
- Automobile: RCEP could allow a “back-door entry route” for automobile parts from China.
- Textile: The free import of polyester fabrics from China, Vietnam, Bangladesh and other countries, which could lead to cheaper textiles, affecting an already-hit sector.
- India’s trade deficit with China in the textiles and clothing sector is likely to be widened that could be detrimental for its domestic textile manufacturers.
- Steel: The steel industry also has concerns regarding China, that excessive imports could harm the domestic market.
- It will damage India’s export competitiveness since the trade balance in the country is already skewed to a greater extent.
- Agriculture: An apex body of planters of tea, coffee, rubber, cardamom and pepper said that RCEP would make things worse for the sector, which is already experiencing a downturn.
- The products will be under intense competition and imports into the country will likely increase over time.
- Dairy: Dairy is vital to India, given the place milk and other derivatives hold in Indian households.
Reasons for India’s Withdrawal
- Unfavourable Balance of Trade: Though trade has increased the post-Free Trade Agreement with South Korea, ASEAN countries and Japan, imports have risen faster than exports from India.
- According to a paper published by NITI Aayog, India has a bilateral trade deficit with most of the member countries of RCEP.
- Chinese Angle: India has already signed FTA with all the countries of RCEP except China. Trade data suggests that India’s deficit with China, with which it does not have a trade pact, is higher than that of the remaining RCEP constituents put together.
- This trade deficit is the primary concern for India, as after signing RCEP cheaper products from China would have flooded the Indian market.
- Further, from a geopolitical perspective, RCEP is China-led or is intended to expand China’s influence in Asia.
- Non-acceptance of Auto-trigger Mechanism: To deal with the imminent rise in imports, India had been seeking an auto-trigger mechanism.
- Auto-trigger Mechanism would have allowed India to raise tariffs on products in instances where imports cross a certain threshold.
- However, other countries in the RCEP were against this proposal.
- Protection of Domestic Industry: India had also reportedly expressed apprehensions on lowering and eliminating tariffs on several products like dairy, steel etc.
- For instance, the dairy industry is expected to face stiff competition from Australia and New Zealand.
- Currently, India’s average bound tariff for dairy products is on average 35%.
- The RCEP binds countries to reduce that current level of tariffs to zero within the next 15 years.
- Lack of Consensus on Rules of Origin: India was concerned about a “possible circumvention” of rules of origin.
- Rules of origin are the criteria used to determine the national source of a product.
- Current provisions in the deal reportedly do not prevent countries from routing, through other countries, products on which India would maintain higher tariffs.
Reasons for India to Review
- Global Economic Stagnation due to Covid-19: With global trade and the economy facing a steep decline due to Covid-19 pandemic, RCEP can serve as a bulwark in containing the free fall of the global economy and re-energising economic activity.
- Further, the RCEP presents a unique opportunity to support India’s economic recovery, inclusive development and job creation even as it helps strengthen regional supply chains.
- Need For Economic Realism: India should deter seeing RCEP only from the Chinese perspective.
- India should acknowledge that the trade bloc represents 30% of the global economy and world population, touching over 2.2 billion people, and staying out of RCEP may result in suboptimal economic growth without leveraging Asia-Pacific demand.
- In this regard, India can draw inspiration from Japan & Australia, as they chose to bury their geopolitical differences with China to prioritise what they collectively see as a mutually beneficial trading compact.
- Strategic Need: It is not just because gains from trade are significant, but the RCEP’s membership is a prerequisite to having a say in shaping RCEP’s rules.
- This is necessary to safeguard India’s interests and the interests of several countries that are too small to stand up to the largest member, China.
- Moreover, staying out of RCEP may also affect India’s Act East policy.
6. Bank NPAs likely dropped in FY21: Care
The quantum of gross non-performing assets (GNPAs) of scheduled commercial banks (SCBs) may have declined by end March compared with FY20, following write-offs, lower slippages, restructuring plans, ECLGS support for MSMEs and resilience in the economy, Care Ratings said.
However, with the Supreme Court allowing the recognition of NPAs, FY21-end numbers may be either similar to or slightly above December-end numbers, it said. PSBs’ GNPAs are expected to be about ₹6 lakh crore at March end compared with ₹6.8 lakh crore a year earlier.
WHAT ARE NPAS?
Generally speaking, NPA is any asset of a bank which is not producing any income.
In other words, a loan or lease that is not meeting its stated principal and interest payments.
On a bank’s balance sheet, loans made to customers are listed as assets. The biggest risk to a bank is when customers who take out loans stop making their payments, causing the value of the loan assets to decline.
Loans don’t go bad right away. Most loans allow customers a certain grace period. Then they are marked overdue. After a certain number of days, the loan is classified as a nonperforming loan.
Banks usually classify as nonperforming assets any commercial loans which are more than 90 days overdue and any consumer loans which are more than 180 days overdue.
For agricultural loans, if the interest and/or the installment or principal remains overdue for two harvest seasons; it is declared as NPAs. But, this period should not exceed two years. After two years any unpaid loan/installment will be classified as NPA.
1. Sub-standard: When the NPAs have aged <= 12 months.
2. Doubtful: When the NPAs have aged > 12 months.
3. Loss assets: When the bank or its auditors have identified the loss, but it has not been written off.
After a certain amount of time, a bank will try to recoup its money by foreclosing on the property that secures the loan. The way money is recouped is a highly contentious issue not just with banks but also with Micro-Finance Institutions (MFIs). We will discuss it later in the article.
All of this can be explained in a much more technical manner, but that is not required here. For example, we do not need to list all the conditions that make the banks declare an asset as NPAs like ” In respect of derivative transactions, the overdue receivables representing positive mark-to-market value of a derivative contract, if these remain unpaid for a period of 90 days from the specified due date for payment.”
Only understanding the basic concepts will suffice. UPSC is not going to ask you these details, but about the impact and solutions of NPAs. Even in prelims, these details will not be asked. So we avoid technicalities and jargons here. It is not useful for a GS paper, even if some of it may be useful for Economics optional paper.
EXTENT OF NPAs
Gross NPAs of domestic banks jumped to 4.2 % of total lending by the end of September 2013 from 3.6 % six months before, according to the Reserve Bank of India (RBI).
As per a recent warning by the RBI, bad loans (NPAs) could climb to 7% of total advances by 2015.
In absolute terms, gross NPAs are estimated to touch Rs 2.50 lakh crores by the end of March this year. This is equal to the size of the budget of Uttar Pradesh. The biggest chunk of the soured debts is with state-run banks (Public sector banks or PSBs), which account for two-thirds of loans but 80 % of the bad assets.
WHY IT MATTERS?
The higher is the amount of non-performing assets (NPAs), the weaker will be the bank’s revenue stream.
In the short-term, many banks have the ability to handle an increase in nonperforming assets — they might have strong reserves or other capital that can be used to offset the losses. But after a while, if that capital is used up, nonperforming loans will imperil a bank’s health. Think of nonperforming assets as dead weight on the balance sheet.
Here is the impact of the NPAs:
- As the NPA of the banks will rise, it will bring a scarcity of funds in the Indian security markets. Few banks will be willing to lend if they are not sure of the recovery of their money.
- The shareholders of the banks will lose a lot of money as banks themselves will find it tough to survive in the market.
- This will lead to a crisis of confidence in the market. The price of loans, i.e. the interest rates will shoot up badly. Shooting of interest rates will directly impact the investors who wish to take loans for setting up infrastructural, industrial projects etc.
- It will also impact the retail consumers like us, who will have to shell out a higher interest rate for a loan.
- All of this will lead to a situation of low off take of funds from the security market. This will hurt the overall demand in the Indian economy. And, finally it will lead to lower growth rates and of course higher inflation because of the higher cost of capital.
- This trend may continue in a vicious circle and deepen the crisis.
- Total NPAs have touched figures close to the size of UP budget. Imagine if all the NPA was recovered, how well it can augur for the Indian economy.
RBI governor Raghuram Rajan has recently said that NPAs must be curbed before the problem becomes alarming.
WHY SUCH A SITUATION?
The rising incidence of NPAs has been generally attributed to the domestic economic slowdown. It is believed that with economic growth slowing down and rate of interest going up sharply, corporates have been finding it difficult to repay loans, and it has added up to rising NPAs. Even finance minister P Chidambaram stated that bad loans are a function of the economy and hence, having bad loans during distressed times is very natural.
However, The NPA mess is not entirely because of the reversal of economic cycles.
Here we look at the other reasons behind this mess. Basically the whole problem can be divided into two parts – External problems and internal problems as faced by the banks.
Reasons related to the corporate sector
- Apart from the slowdown in India, the global economy has also slowed down.
This has adversely impacted the corporate sector in India. Continuing uncertainty in the global markets has lead to lower exports of various products like textiles, engineering goods, leather, gems etc. It can be noted that imports and exports combined equal to around 40% of India’s GDP!
A hurt corporate sector is finding it difficult to pay loans
- The ban in mining projects, delay in environmental related permits affecting power, iron and steel sector, volatility in prices of raw material and the shortage in availability of power have all impacted the performance of the corporate sector. This has affected their ability to pay back loans.
- Banks in India are highly regulated. Priority sector lending (PSL) is one of these regulations which require the banks to give a certain % of their loans to certain sections of society. These are farmers, SCs, STs, IT parks, MSMEs etc.
- Naturally one would assume that the weaker sections covered under PSL are the ones to be blamed for the situation. However, it is not the case.
As per recent news reports, the Standing Committee on Finance will be now examining the reasons for high NPAS in PSBs.
- The data, shared with the Standing Committee, shows that NPAs in the corporate sector are far higher than those in the priority or agriculture sector.
- Within the priority sector, incremental NPAs were more in respect to micro small and medium enterprises followed by agriculture.
- However, even the PSL sector has contributed substantially to the NPAs.
- As per the latest estimates by the SBI, education loans constitute 20% of its NPAs!
The sluggish legal system (Judiciary in India) and lack of systematic and constant efforts by the banks make it difficult to recover these loans from both corporate and non-corporate.
- Indiscriminate lending by some state-owned banks during the high growth period (2004-08) is one of the main reasons for the deterioration in asset quality. Bankers say there is a lack of rigour in loan appraisal systems and monitoring of warning signals at state-run banks. This is particularly true in case of infrastructure projects, many of which are struggling to repay loans. Besides, these projects go on for 20 to 30 years.
- Poor recovery and use of coercive techniques by banks in recovering loans
- The wait and watch approach of banks have been often blamed as the reason for rising NPAs as banks allow deteriorating asset class to go from bad to worse in the hope of revival and often offer restructuring option to corporates.
A Parliamentary panel, examining increasing incidents of NPAs, has observed that state-owned banks should stop “ever-greening” or repeated restructuring of corporate debt to check the constant bulging of their non-performing assets. Members of the panel were of the view that NPAs are the result of bad economic situation, but there were also management issue of every-greening of loans, which could be avoided by “not renewing loans, particularly of corporate”.
7. Editorial-1: The long shadow of political turmoil in Nepal
With uncertainty set to continue, India needs to remain actively engaged with all the political actors
Politics in Nepal entered another phase of uncertainty last week. The country’s President, Bidya Devi Bhandari, dissolved the House of Representatives (lower house) late night on Friday, at the suggestion of Prime Minister K.P. Sharma Oli (picture), in a partisan move that disregarded the Constitution. Fresh elections were announced for between November 12 and 18. Announcing elections was just to ensure that Mr. Oli continues in office and controlling the state machinery, even as Nepal battles a second and deadlier COVID-19 wave.
Oli’s opportunistic politics
Mr. Oli came to power after the 2017 elections, the first undertaken in the federal republic of Nepal, established under the 2015 Constitution. He led his party, the CPN(UML), to an impressive tally of 121 seats and together with the Maoist Centre’s 53 seats, enjoyed a near absolute majority in the 275-strong House. In May 2018, the two allies merged to cement their alliance and created the Nepal Communist Party (NCP).
Relations with India saw positive movement. New Delhi was willing to overcome its reservations about Mr. Oli’s anti-Indian nationalist tirades. Prime Minister Narendra Modi visited Nepal in May 2018, shortly after Mr. Oli’s visit.
However, Mr. Oli’s autocratic tendencies soon began to surface. The power sharing arrangement worked out with former Maoist leader Pushpa Kamal Dahal ‘Prachanda’ started fraying. The original idea that both would take turns at being Prime Minister and run the NCP as co-chairs became irksome for Mr. Oli. While he weaned away the Maoist cabinet members, senior disgruntled UML leaders led by former Prime Ministers, Madhav Kumar Nepal and Jhala Nath Khanal, gravitated towards Prachanda. Differences emerged in the open and a growing demand surfaced for honouring the ‘one person one post’ policy. Prachanda was willing to let Mr. Oli continue the full term as Prime Minister, provided he gave up his role as co-chair of the party. Mr. Oli decided otherwise.
Mr. Oli needed a distraction and by end 2019, found one in the Kalapani boundary issue. India issued new maps following the division of the State of Jammu and Kashmir into Union Territories, Jammu and Kashmir and Ladakh. While 98% of the India-Nepal boundary was demarcated, two areas, Susta and Kalapani, had remained pending.
Though the new Indian map did not affect the India-Nepal boundary in any material way, it was an opportunity for Mr. Oli to don his nationalist mantle. He expanded the Kalapani area dispute from one covering approximately 60 square kilometres on Nepal’s northwest tip with Uttarakhand and China by raising the demand for restoring an additional 335 sq. km. The boundaries were fixed in 1816 by the British, and India inherited the areas over which the British had exercised territorial control in 1947.
Domestic politics takes over
Caught up in the first COVID-19 wave, India kept deferring bilateral talks, perhaps not realising the domestic political pressures on Mr. Oli. In May 2020 when Defence Minister Rajnath Singh inaugurated the 75 km road through Kalapani that linked to the Kailash-Mansarovar pilgrimage route, Mr. Oli upped the ante by whipping up nationalist sentiment, getting a new map of Nepal endorsed by the House and adopting a constitutional amendment to sanctify Nepal’s new territory. While this did not alter the situation on the ground, it cramped the prospects of any dialogue with India. It was a short reprieve and Mr. Oli’s political troubles soon returned to haunt him.
President Bhandari has been Mr. Oli’s close comrade since she entered active politics after the untimely demise of her husband Madan Bhandari, a charismatic UML leader, in a car accident in 1993. Mr. Oli was her political mentor and backed her elevation as President. She reciprocated by ignoring constitutional propriety and approving dubious ordinances including amending the Constitutional Council Act that enabled Mr. Oli to pack constitutional positions with his loyalists.
Amid rumours that Prachanda and Mr. Nepal were planning to move a no-confidence-motion against him after he had studiously ignored the meetings and decisions of party’s Secretariat and the Standing Committee, Mr. Oli got President Bhandari to approve dissolution of the House on December 20, paving the way for elections in April-May. The President’s decision was uniformly criticised as unconstitutional as the NCP enjoyed a near-absolute majority.
India decided to steer clear of the mess, calling it an ‘internal matter’ while the Chinese Ambassador continued to actively push for a rapprochement between the NCP factions. A five-judge constitutional Bench of the Supreme Court unanimously called for a restoration of the House on February 23 strengthening the Prachanda-Nepal faction but on March 7, delivered a bombshell by overturning the UML-Maoist merger of May 2018, against which an appeal had been pending for two years.
Mr. Oli took over the reins of the old CPN(UML), reviving prior structures but now excluding Mr. Nepal and his supporters. Some were served suspension notices. The Nepal faction was reduced to a minority; under the law, a split in the party requires a 40% of both the parliamentary party and the central committee. Prachanda, heading the Maoist Centre with 49 members since four had joined hands with Mr. Oli, needed new allies to wage his battles.
Though Mr. Oli had lost majority in the House as Maoist Centre was no longer supporting him, he challenged the Opposition to file a no-confidence-motion, certain that the Maoists, Nepali Congress (NC) and the Janata Samajbadi Party (JSP) would fail to reach an agreement on a new Prime Minister. He was proven right but overtaken by hubris, he took another gamble. He called for a trust vote on May 10 that he lost as 28 UML dissident members were absent and half the JSP voted against him while the other half abstained.
The Opposition again failed to present an alternative. In a questionable decision, Mr. Oli was sworn in by President Bhandari on May 14 as Prime Minister under Article 76(3) that permits the leader of the largest party to be sworn in and given 30 days to demonstrate majority. Within a week, Mr. Oli announced that he would not seek another vote of confidence. Without resigning, however, he advised the President to explore other options. Within a day, as rumours gained ground that NC leader Sher Bahadur Deuba had managed to gather support from 149 members, including 49 Maoists, 26 UML dissidents and 12 from the JSP, Mr. Oli rushed to the President and gave her a list of 153 supporters that included all 121 UML and 32 JSP members, including UML dissidents and JSP members who voted against him on May 10. Without bothering to verify, President Bhandari dissolved the House and announced fresh elections, justifying that the rival claims exceeded the strength of the House.
Since 2008 when a new Constituent Assembly was elected to prepare a constitution for a federal republic, Nepal has seen three NC Prime Ministers (G.P. Koirala, Sushil Koirala and Deuba), two Maoist Prime Ministers (Prachanda twice and Baburam Bhattarai), three UML Prime Ministers (Nepal, Khanal and Oli sworn in thrice) and a Chief Justice as caretaker Prime Minister in 2013. None has damaged the Constitution and the political fabric of Nepal as much as Mr. Oli, together with an obliging Ms. Bhandari. Opposition leaders have challenged the House dissolution in the Supreme Court but its outcome is uncertain. Meanwhile a raging COVID-19 puts a question mark on the election. In case an election is held, Mr. Oli will campaign on a nationalist anti-Indian platform.
It is clear that political uncertainty will continue. India has traditionally supported constitutionalism and multi-party democracy in Nepal. At this juncture, it needs to remain actively engaged with all the political actors, and equally importantly, avoid being perceived as partisan.
8. Editorial-2: Naturally, selection
Prioritising the vulnerable in COVID-19 vaccination for 18-plus group is essential
When supply is finite, it is a no-brainer that a burgeoning demand will not be met. Tailoring supply for optimal effect would then be the prudent way ahead, a strategy that the Centre would do well to employ in its COVID-19 vaccination programme. Though the ideal, distant at this stage, is to achieve vaccination of the entire population or enough to create herd immunity, supply considerations will necessarily mean prioritisation of groups for vaccination. While the vaccines have been shown to be effective in preventing death or severe disease by and large, the vaccine’s effect on interrupting or reducing transmission is also an important consideration in deployment. Studies have shown an inverse correlation between vaccinations and infections; a study in Tamil Nadu showed that the percentage of people over 60 years infected in the second wave had come down by 7%, even as the numbers in other age groups rose. This age segment was among the early priority groups for vaccination. With the government opening up vaccinations for all adults, it is imperative that some line list of priority be readied, on the basis of vulnerability and societal role.
Primary among them are people in the services sector — those whose jobs mandate interactions with multiple people. This would include those in banks, delivery agents, transportation staff, store workers, vendors, lawyers and journalists. As States begin free vaccinations for the 18-plus age group, it will be prudent to draw up a priority list even in the 18-44 age category, as Kerala, Karnataka and Tamil Nadu have done, for instance. While Kerala seeks to prioritise those with co-morbidities, disabilities and 43 categories of field staff of various departments, Karnataka has included 18 categories of people in its priority list for the 18-plus age group — including bank workers, forest department staff and construction workers. Tamil Nadu has determined a broad list of categories including the disabled, vendors, e-commerce staff, pharmacy and grocery store staff, those in the transportation sector, and school and college teachers, besides mediapersons. The Centre, which has assumed a sutradhar’s role in this entire pandemic, must draw up a list of priority categories that each State can then adapt to its local requirements. While lockdowns, in force in most States, will slow down the pace of transmission and give health-care resources a much-needed break, the way ahead is certainly vaccination — and prioritised vaccination. Once vaccine supply picks up, a more expansive first-come, first-served basis, as in the private sector now, can be adopted. Until then, it is the government’s bounden duty to ensure an equitable coverage among vulnerable groups of people who are most at risk, and carry a higher risk of transmission, because of the sheer number of people they interact with daily.
9. Editorial-3: Imperious missteps
The Centre should recall the Lakshadweep Administrator and drop his ill-conceived plans
Lakshadweep, an archipelago of 36 islands totalling 32 square kilometres in the Arabian Sea, has had an idyllic existence as a Union Territory. But no longer, it seems, as the long arm of Delhi is rummaging around the islands these days. Praful K. Patel, a BJP politician from Gujarat, who arrived as Administrator in December, appears determined to upend the landscape and recast the lives of the islanders, around 70,000 of them, all according to his authoritarian imagination. The draft Lakshadweep Development Authority Regulation 2021 gives sweeping powers to the Administrator to take over land and forcibly relocate people, and proposes harsh punishment to those who resist. In other measures, proposed or implemented, the consumption or sale of beef, a part of the food habits of many, could be an offence punishable by seven years in prison; those who have more than two children cannot contest panchayat elections. Anyone could be held in prison without reason up to a year, under a new Goonda Act, in a place that has a very low crime rate. The traditional livelihood of fishing communities has been impeded by mindless regulations that deny them access to coastlines. Their sheds on the coastal areas have been demolished, saying they violated the Coast Guard Act. Dairy farms run by the administration have been shut.
Development, as it is coming, is not a promise, but a serious threat to the people of Lakshadweep and the fragile ecosystem. Mr. Patel is no stranger to controversies. In March, the Mumbai police named him as an accused in a case related to the death by suicide of seven-time Dadra and Nagar Haveli MP Mohan Delkar. Mr. Patel was named in the suicide note. He is the first politician to become the Administrator. In the last five months, he has demonstrated a unique disregard for the people’s concerns and priorities. In the absence of any administrative rationale or public good in these blatantly arbitrary measures, there are fears of other motivations. Commercial interests could be at play, and the land that inhabitants are forced to part with could be transferred to buyers from outside. There could also be ill-advised political plans to change the demography of the islands. People have risen in protest, but far from listening to them, the Administrator seems insistent on his plans. Rajya Sabha Members from Kerala, K.C. Venugopal of the Congress and Elamaram Kareem of the CPI(M) have in separate letters urged the President to recall the Administrator. The rationale for carving out Union Territories as an administrative unit is to protect the unique cultural and historical situations of their inhabitants. The Centre is inverting its responsibility to protect into a licence to interfere. It must recall the Administrator and reassure the islanders.
10. Editorial-4: The end of the road for India’s GST?
The fundamental problem is the erosion of ‘trust’ and ‘trustworthiness’ between the States and the Centre
The 43rd meeting of the Goods and Services Tax (GST) Council is to be held on May 28. Representatives of 31 States and Union Territories are expected to attend. They belong to 16 different political parties. Of the 31 representatives, 17 members are from the ruling BJP or its alliance partners. Ideally, this nugget about political affiliations should not matter in a Council set up to decide indirect taxes. But in today’s India, ‘the economic is political’, to paraphrase the American saying.
States are dependent on GST collections for nearly half of their tax revenues. The GST Council was mandated to meet at least once every quarter, but it had not met for two quarters, ostensibly due to the pandemic. Several of the 14 members of the non-BJP group implored the Finance Minister to convene the GST meeting to help them manage their finances but none of the 17 members of the ruling group deemed it necessary. Even the need for a meeting to determine tax revenues for States is evidently a political decision.
Spirit of cooperative federalism
The representative from West Bengal will attend the meeting against the backdrop of the Centre using investigative agencies to selectively target and incarcerate some of the State’s ministers, soon after their election victory. The Kerala representative will attend the meeting in the knowledge that his predecessor complained bitterly about the Centre reneging on its promise to pay guaranteed GST compensation to the States. The Chhattisgarh representative will attend this meeting aware of how the Centre imposed sudden and stringent policy conditions to grant approval to States for extra borrowing in the middle of the pandemic last year. The Maharashtra minister will attend the meeting with a feeling of betrayal over how the States have been forced to pay a much higher price for COVID-19 vaccines than the Centre. The Punjab Finance Minister will be cognisant of how the Centre legislated new farm laws unilaterally that affected Punjab’s farmers deeply. The Rajasthan representative will be aware of how a sudden lockdown imposed by the Centre with no consultations with the States threw millions of Rajasthani migrant workers in disarray. The Tamil Nadu representative will be wary of the Centre’s duplicity in levying cesses that garner significant revenues for the Centre without sharing them with the States. The Delhi representative will be suspicious of the Centre’s motives after it stealthily passed legislation to strip the elected Delhi government of its governance powers. The list is endless. These are not acts in the spirit of ‘cooperative federalism’.
The catchy phrase ‘cooperative federalism’ was introduced into India’s political lexicon to justify the transition to GST in 2017. Sadly, like other catchy phrases such as ‘Minimum government, maximum governance’ and ‘Make in India’, this too has turned out to be hollow. Cooperative federalism has a larger meaning beyond just fiscal federalism. It also entails cooperative political, administrative and governance federalism between the States and the Centre.
The Trust Game
The GST Council is not an inanimate economic body. It is a compact of trust between the States and the Centre, set in the larger context of India’s polity. Behavioural economists, such as the Nobel Laureate, Daniel Kahneman, have articulated the critical role of the twin attributes of ‘trust’ and ‘trustworthiness’ among heterogeneous participants in an economy. Using a tool called ‘The Trust Game’, they have demonstrated that the motive of ‘altruism’ leads to the most optimal economic outcome for everyone in the group while a motive of ‘spite’ leads to the worst outcome for all. The tragedy of the GST Council is that it is afflicted with spite and forced to function under the prevailing cloud of vendetta politics.
The 17 members of the ruling dispensation and the 14 members of the non-BJP dispensation in the GST Council represent exactly one half of India’s population each. However, the non-BJP group contributes a higher share of 60% of overall GST revenues and accounts for 63% of the country’s GDP. With elections to another seven States due next year, these numbers could change dramatically again. If the functioning of the GST Council is subject to the vagaries of elections and consequent vendetta politics, GST will continue to be just a caricature of its initial promise.
The 15th Finance Commission report formally acknowledges that GST has been an economic failure that did not deliver on its early promises. GST, as postulated by technocrats, was supposed to be the panacea for India’s throttled economy to deliver enormous economic efficiency gains, improve tax buoyancy and collections, boost GDP growth and usher in greater formalisation of the economy. Three years after its launch and even before COVID-19, GST had failed on all those promises.
Problems underpinning GST
Economists and commentators point to the multiple rates structure, high tax slabs and the complexity of tax filings as the problems underpinning India’s GST. These were indeed the initial problems in the way GST was implemented, leading to some of its current woes. But now, GST has a more fundamental problem — the erosion of ‘trust’ and ‘trustworthiness’ between the States and the Centre. Technical fixes such as simplification of GST rates and tax filing systems to restore GST to its initial promise is akin to applying a pain balm to an injury that needs surgery.
The States paid a huge price for GST in terms of loss of fiscal autonomy. The promised economic gains are invisible, and India’s federalism has been ruptured. GST in today’s politically acerbic, hate-ridden and divided India is an unviable and unworkable proposition.
GST has endured so far primarily because the States were guaranteed a 14% growth in their tax revenues every year, which minimised their risks of this new experiment and compensated for their loss of fiscal sovereignty. This revenue guarantee ends in July 2022. This can lead to a crumbling of the precarious edifice on which GST stands today.
In a situation where the States have no taxation powers, their GST revenues are uncertain, the supposed economic benefits seem phantom, and the hypocrisy of ‘cooperative federalism’ looms large, what is the incentive for States to continue in a GST regime? When the Prime Minister can impose a draconian lockdown in a ham-fisted manner without consultation or play favourites with critical oxygen supplies during an emergency, there seems very little motivation for the States to cooperate in a chase for an elusive economic goal by sacrificing their significant economic powers of taxation.
Technocratic cheerleaders of GST failed to factor in India’s unique political economy and its ramifications. Striking a balance among diverse interests of India’s numerous parties in a larger political climate of spite and suspicion to arrive at a uniform tax policy for the nation is a near impossibility. Tamil Nadu’s new Finance Minister P.T.R. Thiagarajan and I had warned of these exact issues in an article in 2017 in this newspaper.
The tapestry of India’s GST was stitched on a fabric of implicit trust and painted with vibrant economic colours. The fabric is now torn and the colours have faded. The loose thread of guaranteed revenues that holds this together is about to snap. The end of India’s grand GST experiment seems inevitable unless there is a radical shift in the tone and tenor of India’s federal politics, backed by an extension of revenue guarantee for the States for another five years.
11. Editorial-5: Tackling rural economic distress
There is an urgent need to strengthen the public distribution system and the MGNREGS
Several States are under lockdown again. This will have severe implications for the livelihoods of those in the informal sector. There is adequate evidence that migrant workers and the rural poor have been facing great distress over the past one year and the crisis for food and work is only going to intensify further.
Hunger and distress
A few months ago, the Right to Food campaign and the Centre for Equity Studies published a ‘Hunger Watch’ report which compared the pre-lockdown situation last year to the situation in October 2020 to assess the impact of the nationwide lockdown. The survey involving 4,000 respondents across 11 States exposed the life and livelihood uncertainties of people belonging to low-income categories in the informal sector. In October 2020, 27% of the respondents said that they had no income; 40% respondents said that the nutritional quality of food had become “much worse”; and 46% of the respondents said they had to skip one meal at least once in the day in October 2020.
The migrants have again become vulnerable due to the lockdown in different cities. While many have once again headed to their villages, a large population has got stranded in different parts of the country without work. The Stranded Workers Action Network, a group of individuals helping distressed migrant workers since last year, has been reaching out to workers for providing essential help. According to them, 81% of the people whom they reached out to said that work had mostly stopped since April 15, 2021 and 76% of the workers said they are short of food and cash and require immediate support.
In this context, there is an urgent need to strengthen the public distribution system (PDS) and the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS). The government announced 5 kg free foodgrains for individuals enlisted under the National Food Security Act (NFSA), for May and June 2021. The government should expand PDS coverage immediately and include all eligible households under the schemes. According to an independent study, about 100 million people are excluded from the ration distribution system owing to a dated database based on the 2011 Census.
The Centre should also extend the free foodgrains programme to a year instead of limiting it to two months. The economic crisis is likely to last for a long time. It is being reported that India procured record amounts of rice and wheat last year through mandis. The total procurement is way more than the current requirement for PDS. It is thus quite possible to expand the safety net of the NFSA.
The Centre had allocated ₹73,000 crore for 2021-22 for MGNREGS and notified an annual increment of about 4% in wages. Both these provisions are inadequate to match the requirements on the ground. The central allocation for MGNREGS is about ₹38,500 crore less than last year’s revised estimate. Of the 7.56 crore households which worked in MGNREGS in 2020-21, even if 1 crore households opt out of the scheme this year, the Centre should still budget for 75-80 days of employment in the year for 6.5 crore families given the current scale of economic distress. By this rationale, at the current rate of ₹268/day/person, at least ₹1.3 lakh crore will have to be budgeted. The government should also re-consider its decision of a mere 4% increase in MGNREGS wages and hike it by at least 10%. This will mean another ₹10,000 crore. Therefore, at least ₹1.4 lakh crore will be required to ensure uninterrupted implementation during the year.
A large population is facing hunger and a cash crunch. The situation is only becoming more dire as the pandemic continues to rage on. Therefore, the Union government should prioritise food and work for all and start making policy reforms right away.