1. IL & FS CRISIS

​Background

• IL&FS Group is a vast conglomerate with a complex corporate structure that funds infrastructure projects across the world’s fastest-growing major economy like Chenani-Nashri road tunnel, India’s longest and has raised billions of dollars from the country’s corporate debt market.

• IL&FS is a Systematically Important Non-Deposit Core Investment Company (CIC-ND-SI) i.e. any crisis at IL&FS would not only impact equity and debt markets but could also stall several infrastructure projects of national importance.

• Many major corporates, banks, mutual funds, insurance companies, etc. such as LIC, HDFC and SBI have stakes in the IL&FS group.

 

Possible Reason for Default

• As per RBI, CIC-ND-SI is a Non-Banking Financial Company (NBFC)

• With asset size of Rs 100 crore and above.

• It holds not less than 90% of its net assets in the form of investment in equity shares, preference shares, bonds, debentures, debt or loans in group companies.

• Its investments in the equity shares (including instruments compulsorily convertible into equity shares within a period not exceeding 10 years from the date of issue) in group companies constitutes not less than 60% of its net assets.

• It does not trade in its investments in shares, bonds, debentures, debt or loans in group companies except through block sale for the purpose of dilution or disinvestment.

• It accepts public funds

 

Shadow Banking System

• Shadow banking is that part of the financial system where credit intermediation involving entities and activities remains outside the regular banking system. The term was coined by economist Paul McCulley in 2007.

• Working structure: They have a higher cost of funding. But the lack of regulatory oversight allows them to take on more risks than banks. So, they can cut corners and earn higher returns. They can also go bust more spectacularly.

• Significance: They provides a valuable alternative to bank funding and helps support real economic activity. It is also a welcome source of diversification of credit supply from the banking system, and provides healthy competition for banks.

• Critical lapse in Corporate Governance Norms: as Risk Management Committee, constituted met only once between 2015 and 2018.

• Shareholder Negligence: Well-known institutions such as LIC, HDFC, etc. which were major shareholder in ILF&S are guilty of negligence. For example, HDFC had not nominated a director to the board of IL&FS since last year.

• Asset-liability mismatch and weak corporate bond market: IL&FS owns long-term infrastructure financed with short-term funding because long-term (tenure of more than 10 years) debt is not available in India. This resulted in defaulting in one of the short-term repayment obligation due to various reasons like:

• Slow pace of new infrastructure projects in India, and some of IL&FS’s own construction projects, including roads and ports, have faced cost overruns amid delays in land acquisition and approvals. Disputes over contracts have locked about Rs 9,000 crore of payments due from the government.

 

Lack of Effective Regulation:

• RBI which oversees NBFCs like IL&FS and the union finance ministry which oversees major shareholders like LIC, SBI, etc. are at fault here as the crisis was allowed to develop over a period of time.

 

Impact of Crisis

• India’s Lehman Brothers moment: IL&FS debt papers enjoyed highest safety status by Credit rating Agency, for a long time on account of factors such as satisfactory liquidity conditions and the backing of major public sector units. However, current crisis reflects Failure of Credit Rating Agencies.

• The lack of confidence in the credit ratings is in danger of undermining India’s financial stability, leading to a drying up of credit lines for shadow lenders and wider concerns about the impact on the economy.

• Lack of Capital Expenditure: It’s impact may spill over into the wider infrastructure industry, pushing up funding costs and pulling government investment plans for achieving New India by 2022.

• Impact on Stock Market: It might witness significant repercussions, including widespread redemption pressures, sell-off in the debt market, liquidity crunch and possible cancellation of licences of as many as 1,500 smaller non-banking financial companies (NBFCs) due to lack of adequate capital.

• Liquidity crisis: There are concerns over short-term liquidity in the market for commercial papers raised by NBFCs.

• Impact on Shadow Banking: According to RBI, India has about 11,000 shadow financing companies, out of which 248 are systemically important non-deposit taking institutions, who will face greater regulatory scrutiny and short term liquidity crisis, which could impact the sustainability of many NBFC’s.

• Other cascading effects of IL&FS’s defaults: Rising borrowing costs, exacerbated by the turmoil in markets in recent days, will lead to a credit crunch in the sector.

 

Steps Taken by Government

• Taking Managing Control: Government superseded the IL&FS board under section 241(2) of the Companies Act, 2013, which enables supersession of a company’s board to prevent it from further mismanagement in order to protect public interest. Its Implications are

• Increasing Confidence of Lenders by giving them assurance that their outstanding loans to IL&FS will be repaid.

• Improving Financial Market Stability: It effectively stops the spread of systemic instability in an inter-connected financial system, especially as panic had started spreading across the financial, money and capital markets.

• It helps in restoring the confidence of the financial market and Ease of doing Business in India.

• Government has also ordered Serious Fraud Investigation Office (SFIO) to investigate into the affairs of crisis-hit IL & FS and its subsidiaries amid concerns over financial irregularities.

 

Way Forward

• Short Term Measures like finalization of a restructuring plan, identification and valuation of assets, sale of the assets and repayment of outstanding loans.

• Government must arrange adequate liquidity for IL&FS to obviate future defaults and ensure smooth implementation of infrastructure projects.

• Strenghtening Corporate Governance norms by implementing Kotak panel recommendation and incentivize boards to play a more effective role in supervising company executives.

• Shareholders awareness: Shareholders must be more actively involved in keeping tab on the key policy decisions of the companies.

• Effective checks and balance system at the firm level to check any discrepencies at initial level.

• Leveraging National Financial Reporting Authority for enforcement of auditing standards and ensuring the quality of audits to strengthen quality of audits and enhance investor & public confidence in financial disclosures of companies.

• Creating an independent regulator for credit rating agencies, to have rating actions in a proactive manner rather than a reactive manner.

• Rating agencies also need better market intelligence and surveillance rather than depending upon historical data and some structure based on past estimates.

 

Deepening the debt markets:

• The Centre and the RBI should look at ways to provide access to infrastructure players like ILF&S to borrow long-term funds.

• The successful resolution of issues of banks’ non-performing assets (NPAs) through the Insolvency and Bankruptcy Code (IBC) can increase sources of long-term debt.

• The Indian corporate bond market is currently skewed towards high-rated debt instruments (AA and AAA) as most regulators in India have set a minimum of ‘AA’ rating for bonds to be eligible for investment. In line with the budget announcement, the government should work with various regulators to allow increased investment in relatively lower-rated bonds.

• Timely Project clearances: Ensuring timely clearances, especially to infrastructural projects is a must to minimise cost inflation of these projects. Expanding the “Plug and Play” approach to other sectors can be a possible solution.

 

Improved Ratings Accuracy:

• Securities and Exchange Board of India (SEBI) should examine the process for issuing ratings for corporate bonds and figure out why the rating agencies did not spot early signs of the crisis.

• There should not be undue importance on who is the promoter backing the company while providing ratings. Instead loan amount, asset quality, profitability, etc. should be basis for assigning rating to the company.

 

2. Bank Consolidation

Amalgamation vs Merger

• Amalgamation is the combination of one or more companies into a new entity (e.g. bank A and bank B combine to form a new bank C).

• In merger one company acquires the other companies. (e.g. bank B acquires bank C and D and eventually only bank B shall exist).

• The government has decided that Bank of Baroda, Vijaya Bank and Dena Bank shall be “amalgated” making the new entity India’s third Largest Bank.

 

Background

• Narasimham committee of 1991 had recommended a restructuring of Indian banks with 3-4 large banks that could be positioned as global banks and 8-10 smaller ones with a national footprint.

• The P J Nayak committee in 2014 suggested that government should privatise or merge some PSBs.

• In 2017, the government had approved the “merger” of SBI’s five associate banks and later of the Bharatiya Mahila Bank (BMB) with SBI.

• Last year, the Government had constituted Alternative Mechanism Panel headed by the Minister of Finance and Corporate Affairs, Arun Jaitley to look into merger proposals of public sector banks. o The proposals received from banks for in-principle approval to formulate schemes of amalgamation will be placed before the Alternative Mechanism.

• A Report on the proposals cleared by Alternative Mechanism will be sent to the Cabinet every three months.

• Alternative Mechanism may also direct banks to examine proposals for amalgamation.

• Alternative Mechanism will receive inputs from Reserve Bank of India (RBI) before according in-principle approval.

 

Arguments in favour of Consolidation

• Too many Public Sector Banks (PSBs): Currently there are 21 PSBs in India which often cannibalise into each other’s businesses.

 

Resolving the NPA issue:

• Reserve Bank of India expects the gross NPA ratio for state-owned banks to rise to 16.3% by March 2019 from 15.6% in March 2018.

• The consolidation is being seen as a way out of the NPA issue through the “strong” banks absorbing the strain on the books of weaker banks.

 

Increase in business:

• Consolidation will lead to substantial rise in:

• customer base

• market reach

• offering more services or products to customers

• Global banks: The consolidation will help create a globally stronger and competitive financial institutions. Currently Indian banks are small when compared with their global peers.

• Cost cutting: Consolidation can lead to reduced operating costs for public sector banks as:

• All duplicate operations and redundancies are rationalised (e.g. shifting and closure of many overlapping branches especially in urban areas).

• Excessive manpower can be shed off in the long run.

• Enhanced geographical reach: For example, Vijaya Bank has strength in the South while Bank of Baroda and Dena Bank had a stronger base in Western India. That would mean wider access for both the proposed new entity and its customers.

 

Greater capital and liquidity:

• Merger will lead to a bigger capital base and higher liquidity which will help in meeting the norms under BASEL III.

• It will also reduce the government's burden of recapitalising the public sector banks time and again.

• Enhanced human resource: Merger can lead to availability of a bigger scale of expertise and that helps in minimising the scope of inefficiency which is more common in small banks.

 

Employee welfare:

Recent banking reforms/steps taken:

• The Government in 2016 set up an autonomous body called Banks Board Bureau (BBB) to recommend for selection of heads of PSBs and Financial Institutions and help Banks in developing strategies and capital raising plans.

• The Insolvency and Bankruptcy Code (IBC) has made it easier for banks to recover through liquidation of assets.

• The government committed to Rs. 2.11 lakh crores capital infusion in PSBs.

• EASE - Enhanced Access and Service Excellence: It is a reform agenda focusing on six themes of customer responsiveness, responsible banking, credit off take, PSBs as Udyami Mitra, deepening financial inclusion & digitalisation and developing personnel for brand PSB.

• RBI has introduced prompt corrective action (PCA) framework as a measure to check banks' financial health. Under the PCA, banks are prohibited from distributing dividends and remitting profits, expanding their branch networks, maintaining higher provisions, etc.

• The government had formed the Sunil Mehta Committee to look into the faster resolution of stressed assets. It has suggested five-pronged strategy to resolve stressed assets called Project Sashakt.

• The merger will not cause any job loss in any of these banks and no employee of the banks would have service conditions that are adverse to their present one.

• The disparity in wages for bank staff members will get reduced and service conditions would become uniform.

 

Arguments against consolidation

• Setback to corporate governance perspective:

• The merger sends out a poor signal of a dominant shareholder (the government) dictating decisions that impact the minority shareholders.

• Forced mergers of the stronger banks with the weaker banks tend take a toll on the operations of the strong banks. For example: Bank of Baroda’s shares took a nosedive in wake of the announcement.

• Meaningless without implementing governance reforms: The new entity will face similar problems unless significant reforms take place in the overall functioning of public sector banks. Merger could only give a temporary relief but not real remedies to problems like bad loans and bad governance in public sector banks.

 

Setback to financial inclusion:

• Consolidation may lead to large scale shutting down of overlapping branches of the entities being merged.

• Many banks have a regional audience to cater to and merger destroys the idea of decentralisation.

• Systemic risks: There is a global consensus that banks that are “too big to fail” are sources of serious risk to financial stability and consolidation might lead to such a scenario.

• Protests: Addressing the concerns of unions and shareholders can prove to be a major roadblock.

• Varying work culture: Aligning contrasting HR practices will also pose a challenge to the new management.

• Harmonization of Technology: It is a big challenge as various banks are currently operating on different technology platforms.

 

Way Forward

• Clear rationale:

• The consolidation process among banks should be driven primarily by synergies, efficiency, cost saving, and economies of scale.

• It is essential to evaluate the merger of banks by assessing the benefits such as cost rationalization, additional business, etc. against the likely future costs.

• Non-Imposition:

• Mergers must happen on commercial considerations and must not be politically imposed.

• While PSBs are promoted by the government, they are run by their respective professional boards, which should take such decisions.

• Twin-fold Governance reforms:

• Independence from political interference

• More regulatory power to RBI over PSBs

• Creating a healthy entity: It should be ensured that these mergers do not create an entity that is weaker than the original pre-merger strong bank.

• Training for HR: Human resource from the smaller bank should undergo training programs to get acquainted with the new processes, technology and environment.

• Allow “non risky” failures: Failures are the essence of free market so sometimes we also need measures that allow banks to fail safely without causing systemic shocks.

 

3. Payments Regulator

​​Background

• Growing Digital Payment: According to Google and Boston Consulting Group (BCG) titled Digital Payments 2020 study, digital payments in India will exceed $500 billion by 2020, up from $50 billion in 2016, which required a comprehensive review of payments sector with an objective to promote access and competition in the payments industry.

• Nachiket Mor Committee Report (2013) observed that despite significant progress in bank-led payment systems, there remained a vast gap in the availability of basic payment services for small business, and low-income households.

• Watal committee (2016) recommended constituting a Payment Regulatory Board (independent of RBI) to promote competition and innovation in the payment ecosystem in India.

• Budget 2017, proposed to create a Payments Regulatory Board in the Reserve Bank of India by replacing the existing Board for Regulation and Supervision of Payment and Settlement Systems, which overlooks the payment ecosystem in India.

 

Provision of Payment and Settlement System Bill, 2018

• Aim: Draft bill seeks to consolidate laws relating to payments.

• Setting up Independent Payments Regulatory Board (PRB): Bill seeks changes to the composition of the PRB and recommended that the chairperson appointed by the government in consultation with RBI.

• Objectives for the PRB:

• Consumer protection:

• (i) Protect the interest of consumers,

• (ii) ensure safety and soundness of the payment systems, and

• (iii) create trust and confidence in the payment systems.

• Systemic stability and resilience: Control of systemic risk and systemic efficiency, stability and resilience.

• Competition and innovation: To enable, in the interest of consumers,

• (i) system participants to access payment systems based on objective, ownership neutral and proportionate standards,

• (ii) interoperability among system participants and among payment systems,

• (iii) payments systems and payment services to be developed and operated in a manner that promotes their ease of use, and

• (iv) improvements in the quality, efficiency and economy of payment systems and payment services.

 

Defining Role of RBI:

• Bill provides role of RBI as an infrastructure institution in relation to its function of Payment and Settlement Systems Act, 2007.

• It was enacted to regulate and supervise payment systems in India.

• Empower RBI: Act provide necessary statutory backing to the Reserve Bank of India for undertaking the Oversight function over the payment and settlement systems in the country. These systems include inter-bank transfers such as the National Electronics Funds Transfer (NEFT) system, the Real Time Gross Settlement (RTGS) System, ATMs, credit cards, etc.

• Board for Regulation and Supervision of Payment and Settlement Systems

• It's a statutory body as per Payment and Settlement Systems Act 2007.

• It is the highest policy making body on payment systems.

• It is empowered to authorize, prescribe policies and set standards to regulate and supervise all the payment and settlement systems in the country.

• The Department of Payment and Settlement Systems of the RBI serves as the Secretariat to the Board and executes its directions.

• providing settlement system and payment system.

• Parity Between Banks and Non-Banks: It provides that the authorization criteria should be risk based and ownership neutral for different classes of payment systems.

 

Significance

• Shifting of Power from RBI to PRB: Bill proposes a major change in the payment industry which seems necessary because it was observed that central banks deal with matters of systematic importance only and their main aim is to promote financial stability.

• Improving Efficiency as PRB will only issue two types of instruments, regulations and orders, thereby, reducing multiplicity of instruments.

• Restoring Requisite RBI Power: Bill provides the RBI with the powers to make a reference to the PRB to consider any matter, which in the opinion of the RBI, was important in the context of monetary policy.

• Improving Confidence: An independent regulator will instill confidence among users and investors.

• Improving Financial Inclusion: A robust Payment regulator will boost digital transactions in India, which is currently close to 90 million.

 

Challenges

• Another Bureaucratic Level: Board could be made a scapegoat for policy failures in payments and settlement, by interfering in monitoring and regulatory function.

• Crypto currency transactions still function under grey area and haven’t been brought under the legal purview.

• Against the Majority Views: Independent PRB is in contrast with the view of RBI, which wants the chairperson of the new regulator to be from the central bank with a casting vote. It also sidelined Watal Panel recommendation which had pitched for establishing PRB within the structure of RBI with a majority of non-RBI members nominated by the centre.

• Cyber Breach Cost: Cyber attacks cost India an estimated $4 billion annually, and could rise to USD 20 billion by 2025, with the digitisation of payments presenting new challenges for cybersecurity.

 

Way Forward

• The Financial Sector Legislative Reforms Commission (FSLRC) recommended draft Indian Financial Code which seeks to move away from the current sector-wise regulation to a system where the RBI regulates the banking and payments system and a Unified Financial Agency subsumes existing regulators like SEBI, IRDA, PFRDA and FMC, to regulate the rest of the financial markets.

• FSLRC also envisages a unified Financial Sector Appellate Tribunal (FSAT), subsuming the existing Securities Appellate Tribunal (SAT), to hear all appeals in finance.

 

4. India Post Payments Bank (Ippb)

​About IPPB

• India Post Payments Bank has been incorporated as a public sector company under the department of posts, with 100% government equity and is governed by the Reserve Bank of India.

• It started operations on 30 January, 2017, by opening two pilot branches one in Jaipur and the other in Ranchi.

• It will focus on providing banking and financial services to people in rural areas, by linking all the 1.55 lakh post office branches with India Post Payments Bank services by the end of 2018. This will create the country’s largest banking network with a direct presence at the village level.

• It will offer a range of products—savings and current accounts, money transfer, direct benefit transfer, bill and utility payments, enterprise and merchant payments. These products, and services, will be offered across multiple channels (counter services, micro-ATM, mobile banking app, SMS and IVR).

• It will also provide access to third-party financial services such as insurance, mutual funds, pension,

 

How IPPB is different from traditional banks?

• A payments bank is a differentiated bank, offering a limited range of products.

• It can accept deposits of up to ₹ 1 lakh per customer.

• Unlike traditional banks, it cannot issue loans and credit cards.

• It will offer three types of savings accounts—regular, digital and basic—at an interest rate of 4% per annum.

• It will provide doorstep banking facility at a charge of ₹15-35 per transaction. The limit for doorstep banking is ₹ 10,000.

• Other payments banks that have started operations are Airtel Payments Bank Ltd, Paytm Payments Bank Ltd and Fino Payments Bank Ltd.

• credit products and forex.

• It will not offer any ATM debit card. Instead, it will provide its customers a QR Code-based biometric card. The card will have the customer’s account number embedded and the customer does not have to remember his/her account number to access the account.

• IPPB has also partnered with different financial organisations to provide loans, investments and insurance products.

 

Analysis

• There are various issues and challenges facing the IPPB, viz-

• Charges and restrictions: There are 80 different charges and restrictions (including charges to get cash delivered at doorstep, transactions, withdrawals and deposits, etc) which could prove to be challenges in its objective of financial inclusion.

• Limited manpower in post offices- Clients might find it difficult to withdraw cash from rural post offices because these are managed by one or two people, who are unlikely to have a lot of money with them.

• Limited accessibility- IPPB is unable to offer ATM cards yet. As a result clients can’t use the united payments interface service.

• Technical Issues- It’s necessary that the customer’s fingerprints match the UIDAI database for each transaction. The problem is that the UIDAI told the Supreme Court that it can’t ensure 100 per cent biometric matching.

• Limited appeal- For Urban customers who have easy access to private banks offering purely digital accounts with more services, interest rates of up to 6 per cent and latest technologies like UPI.

• Even in rural areas, it is unlikely to make much sense since Jan Dhan Yojana has already provided zero balance bank accounts with RuPay debit cards with full-scale banks.

• Bad health of postal department- Department of posts isn’t in good health as its deficit doubled in the year

• Other initiatives taken for promoting Financial Inclusion in the country

• Pradhan Mantri Jan-Dhan Yojana

• Relaxation on Know Your Customer (KYC) norms.

• Engaging business correspondents (BCs) as intermediaries for providing financial and banking services.

• Opening of bank branches in unbanked rural centres.

• 2016-17 and only 55 post offices have been added in the country in the last five years.

• Competition with Private players- IPPB is also likely to face stiff competition from private companies, which are generally nimbler in adapting to business realities and far more customer-friendly compared to the government-owned ones.

• However, despite these challenges there is also a need to understand various advantages of establishing IPPB-

• Department of Posts and IPPB will work in tandem to take the benefits of government schemes and financial services that are not easily available in rural areas to customers across the country and to the marginalized population in urban and rural areas alike. The objective of IPPB will be public service rather than promoting commercial interests.

• While many other banks and financial institutions are working on the same theme, the USP of IPPB will be its ability to ease access and handhold the adoption of new age banking and payments instruments among citizen of all walks of life through the delivery by postmen and Grameen Dak sevaks, savings agents and other franchisees who will take banking to door steps. IPPB thus aspires to the most accessible, affordable and trusted bank for the common man with the motto - “No customer is too small, no transaction too insignificant, and no deposit too little”.

• If it succeeds, the new payments bank could usher in a new era of rapid financial inclusion across rural India.

 

5. Reining In Cad And Rupee

About Masala Bonds:

• Masala bonds are rupee-denominated debt securities issued outside India by Indian companies.

• The bonds are directly pegged to the Indian currency. So, investors directly take the currency risk or exchange rate risks.

 

External Commercial Borrowings

• It is the financial instrument used to borrow money from the foreign sources of financing to invest in the commercial activities of the domestic country. Simply, borrowing money from the non-resident lenders and investing it in the commercial activities of India is called as external commercial borrowings.

 

Withholding Tax

• It is an amount that an employer withholds from employees' wages and pays directly to the government. The amount withheld is a credit against the income taxes the employee must pay during the year. It also is a tax levied on income (interest and dividends) from securities owned by a non-resident as well as other income paid to nonresidents of a country.

• To contain the widening current account deficit (CAD) and check the fall of the rupee, the government recently announced specific steps to attract dollars and address volatility in the financial markets.

 

Background

• The recent fall in the value of Rupee has been mainly caused by pulling out of Foreign Portfolio Investors (FPIs) and decline in demands of Indian exports, along with the rising crude prices, fears of an escalating trade war and higher US interest rates.

• India’s CAD jumped to 2.4 per cent of Gross Domestic Product in the first quarter of 2018-19, from 1.9 per cent in March 2018.

• Data shows India’s foreign exchange reserves have been falling steadily over the past five months.

 

Recent Steps taken to attract dollars

• Enabling more companies to raise External Commercial Borrowings (ECBs).

• Manufacturing firms can get ECBs up to $50 m with minimum maturity of 1 year as compared to earlier three.

• Removal of exposure limit of 20% of FPI’s corporate bond portfolio to a single corporate group.

• Masala bonds issued in 2018-19 exempt from withholding tax.

• Easing of curbs on marketing, underwriting of Masala bonds.

 

Way Forward

• Until the RBI can rein in domestic inflation and the government can take steps to boost exports and curb imports, emergency measures like the issuance of NRI bonds can only offer temporary respite to the rupee.

• The government will also take steps to cut imports of non-essential items such as steel, furniture, etc. and to boost exports.

• The government is also looking to expand the phased manufacturing plan to include some sections of the consumer durables industry.

 

6. PRADHAN MANTRI JAN DHAN YOJANA

​New incentives

• The overdraft facility has been doubled from Rs. 5,000 to Rs. 10,000.

• There will be no conditions attached for over-draft of up to Rs 2,000. Also, the upper age limit for availing the facility has been hiked to 65 from the earlier 60 years.

• Accidental insurance cover for new RuPay Cardholders has been raised from Rs 1 lakh to Rs 2 lakh.

• The government decided to make the Pradhan Mantri Jan Dhan Yojana (PMJDY) an open-ended scheme, meaning that it will continue indefinitely.

 

Pradhan Mantri Jan Dhan Yojana

• It is a financial inclusion program of Government of India, that aims to expand and make affordable access to financial services such as bank accounts, remittances, credit, insurance and pensions.

• It focuses on coverage of households as against the earlier plan which focused on coverage of villages. It focuses on coverage of rural as well as urban areas. Any individual above the age of 10 years can open BSBDA Account.

• The plan envisages universal access to banking facilities with at least one basic banking account for every household, financial literacy, access to credit, insurance and pension facility. In addition, the beneficiaries would get RuPay Debit card having inbuilt accident insurance cover of Rs. 1 lakh.

• The plan also envisages channelling all Government benefits (from Centre / State / Local Body) to the beneficiary’s accounts and pushing the Direct Benefits Transfer (DBT) scheme of the Union Government. The technological issues like poor connectivity, on-line transactions will be addressed.

 

Significance

• In spite of a strong position on world economic map India suffers from the problem of poverty and poor financial inclusiveness. Census, 2011 estimates that only 58.7% of the households have access to banking services.

• Poor households in India, in the absence of access to formal credit, have to deal with moneylenders who charge exorbitant rates of interest. Household Survey on India’s Citizen Environment and Consumer Economy, 2016, shows that within the poorest section of the population two in three taking credit from informal sources.

• Though access to formal financial institutions has improved over time but still thousands of villages not have a bank branch and less than 10 percent of all commercial bank credit goes to rural area which is the dwelling area for around 70 percent of the total population of India.

 

Achievements

• Reducing Percentage of Zero Balance Accounts: Share of zero-balance accounts which indicates lack of activity has fallen from 67% of the 125.47 million Jan Dhan Accounts in 2015 to only 28.88% of the 210 million Jan Dhan Accounts in 2016.

• Rising Deposits in Accounts: From 2016-17 the total deposits in these accounts has increased more than thrice. This shows the build-up of confidence which the government has succeeded to develop among the poor.

• Plugging Leakages from Subsidy: According to the Economic Survey for 2015-16 leakages in LPG subsidy transfers fell 24% and the exclusion of beneficiaries had been greatly reduced, due to forced banking infrastructure created by Jan Dhan Accounts, Aadhaar and Mobile networks, the combination named as JAM trinity.

 

Challenges

• Internet Connectivity Problem: The inadequate infrastructure base for internet facilities basically in tribal and hilly areas making it difficult for Business Correspondents to deliver the required basic banking services

• Diversion of Funds for Overdraft Facility: The overdraft facility that the Jan Dhan scheme commits could be valuable for the poor but clarity has still not emerged on where the funds would be diverted from to finance it.

• Increasing Cost of Business Correspondents: If these accounts have to be functional and not remain dormant then the density of banking correspondent has to be increased, which will increase the cost of delivering the banking services.

• Managing Multiple Saving Bank Accounts: Many of the individuals who already have savings bank accounts in other banks opened account under PMJDY for benefiting from the Rs. 1 Lakh accident insurance and overdraft. As per norms PMJDY is only for those who do not have any bank account either in public or private sector banking setup

• Tackling Unaccounted Money Deposited During Notebandi: After the announcement of Demonetization total deposits in 255 million Jan Dhan accounts have increased to Rs 642521 million by November 2016.

 

Way forward

• Launching massive campaign programmes among the poor households and also focus on improving the level of financial literacy and education that can help them recognize the benefits they can avail under the scheme and the responsibilities associated with it.

• The network of post offices which spread across the nation even in the remotest areas can be utilised for effective implementation of the Jan Dhan Yojana. Introduction of Indian Post Payment Banks is a way forward.

• The policy focus should shift from the quantity of inclusion to the quality of inclusion. The measure of success of the scheme should include clearly-defined targets for usage and transactions.

• The trust mechanism should be improved between people and bank officials as there seems to be lack of trust in banking correspondents due to which borrowing from money lenders is still prevalent.

• It is recommended that internet connectivity and speed should be increased in tribal and hilly areas so that the confidence and ease of doing banking transactions can be entertained.

 

7. Pradhan Mantri Annadata Aay Sanrakshan Abhiyan (Pm-Aasha)

​Background

• Minimum Support Price (MSP) system suffers from various shortfalls such as limited geographical reach and crop coverage (for instance it excludes oilseeds). It works well only where there was direct procurement by industries. Also, prices of key agricultural commodities have fallen below their MSP due to which there is increasing farmer unrest across the country.

• PM-AASHA scheme thus aims to plug the gaps in procurement system, address issues in MSP system and give better returns to farmers.

 

About the scheme

• It has three components complementing the existing schemes of the Department of Food and Public Distribution for procurement of paddy, wheat and other cereals and coarse grains where procurement takes place at MSP:

• Price Support Scheme (PSS): Under this, physical procurement of pulses, oilseeds and copra will be done by Central Nodal Agencies. Besides National Agricultural Cooperative Marketing Federation of India Ltd (NAFED), FCI will also take up procurement of crops under PSS. The expenditure and losses due to procurement would be borne by the Centre.

• Price Deficiency Payment Scheme (PDPS): This will cover all oilseeds for which MSP is notified and Centre will pay the difference between the MSP and actual selling/ model price to the farmer directly into his bank account. Farmers who sell their crops in recognized mandis within the notified period can benefit from it.

• Pilot of Private Procurement and Stockiest Scheme (PPSS): In the case of oilseeds, the States will have the option to roll out PPSS in select districts where a private player can procure crops at MSP when market prices drop below MSP. The private player will then be compensated through a service charge up to a maximum of 15% of the MSP of the crop.

 

Significance of the Scheme

• An innovative MSP-plus approach to the problem of non-remunerative prices: The three different components of the scheme will cover gaps in the procurement and compensation mechanism for crops, thus ensuring remunerative prices for farmers and help reviving rural economy.

• Ensure crop diversification and reduce stress on soil and water: Unlike the current system where farmers repeatedly go for the few crops, such as paddy, wheat and sugarcane, the new scheme would ensure crop diversification and reduce stress on soil and water.

• Savings for the Centre: Under the current physical procurement, government agencies end up stockpiling food grains leading to high storage costs and significant wastage and leakages. This would be addressed in the new scheme.

• Better translation of increased MSP to farmer’s income: Government has recently increased the MSP of Kharif crops by following the principle of 1.5 times the cost of production, which will get translated to increased farmer’s income by way of robust procurement mechanism in coordination with State Governments.

• Increased financial provisions: the centre has made a provision of Rs. 16,550 Crore as a bank guarantee for central agencies to directly procure from farmers under PSS, while budgetary allocations for PM-AASHA has been raised to Rs. 15,053 Crore.

• It is a significant step towards enhancing productivity, reducing the cost of cultivation and strengthening post harvesting management, including market structure.

 

Challenges

• Agricultural markets must function transparently and government must take steps to break the traders’ cartel: Experience of Madhya Pradesh which implemented the PDPS under Bhavantar Bhugtaan Yojana revealed that the traders plotted with each other and depressed the prices at mandis. They forced farmers to sell at lower prices and pocketed the compensation from the government.

• Small and marginal farmers face double burden of lowered price and no compensation: Many small and marginal farmers were unable to sell their produce under Bhavantar scheme due to double burden of lowered price and no compensation. Government must come up with mechanisms to provide income transfer to farmers.

• Providing funds for PSS would be a key challenge for Centre as State Governments consider it financially burdensome. If all states apply to NAFED/FCI for procurement of oilseeds or pulses, the agencies would fall short of funds.

• Only 25% of the marketable surplus would be procured under the scheme: Instead of just 25% procurement, the Commission for Agricultural Costs and Prices (CACP) must be redesigned and renamed to ‘Commission for Farmers’ income and Welfare’ with a mandate to work out the minimum living income for a family and clearly defining means to provide it.

• Warehousing and storage infrastructure shortage not addressed: Many States such as Bihar, Jharkhand, West Bengal and almost entire North-East are unlikely to procure a substantial quantity of paddy at MSP due to weak financial resources and infrastructure constraints of the organizations responsible for paddy procurement.

• States would also find it hard to implement the scheme from the current Kharif marketing season which begins soon.

 

Way Forward

• E-NAM and inter-market competition must be promoted: Centre must break the trader lobbies by widening the competition by inter-linking mandis, and States must proactively undertake regulatory reforms. Also, a robust pro-farmer export policy must be considered. Simultaneously, market reforms including Model Agricultural Produce and Livestock Marketing Act, 2017 and Model Contract Farming and Services Act, 2018 should also be replicated by all the State Governments.

• Successful implementation and effective private participation is the key to overall success of the scheme. Guidelines for private participation in consultation with state governments must be formed.

 

8. Dairy Processing & Infrastructure Development Fund

​Background

• Operation Flood

• A project of India's National Dairy Development Board (NDDB), it was launched in 1970 as the world’s biggest dairy development programme, also responsible for white revolution in the country.

• It transformed India from a milk-deficient nation into the world's largest milk producer, surpassing the USA in 1998, with about 17 percent of global output in 2010–11.

• In 30 years it doubled milk available per person, and made dairy farming India’s largest self-sustainable rural employment generator.

• Its major objectives included-

• Increase milk production

• Augment rural incomes

• Fair prices for consumers

• Large number of dairy processing plants with India’s Dairy Cooperatives were commissioned during Operation Flood which ended in 1996.

• Majority of these plants have never been expanded or modernised thereafter. These plants are operating with old & obsolete technologies, which may not be energy efficient.

• In order to improve efficiencies as well as increase production of products with higher value addition, Government of India had announced creation of DIDF in the Union Budget of 2017-18.

 

About the Fund

• Objectives

• It will focus on building an efficient milk procurement system by setting up of chilling infrastructure & installation of electronic milk adulteration testing equipment.

• Creation/modernization/expansion of processing infrastructure and manufacturing faculties for Value Added Products for the Milk Unions/ Milk Producer Companies.

• Management:

• The project will be implemented by National Dairy Development Board (NDDB) and National Dairy Development Cooperation (NCDC) directly through the End Borrowers such as Milk Unions, State Dairy Federations, Milk Producer Companies etc.

• Funding:

• The fund will be used to provide loan for building an efficient milk procurement system and other processing infrastructure. The end borrowers will get the loan @ 6.5% per annum. The period of repayment will be 10 years with initial two years moratorium.

• Under the DIDF, Rs 8,004 crore loan will be provided by NABARD to the NDDB and the NCDC. The remaining amount will be the contribution by end-borrowers, the NDDB and the NCDC, and by the agriculture ministry towards interest subvention for the next 10 years.

• Apart from benefiting the farmers the fund is expected to create employment in various regions of the country.

 

9. Multidimensional Poverty Index-2018

• The Oxford Poverty and Human Development Initiative (OPHI) is an economic research centre within the Oxford Department of International Development at the University of Oxford.

• OPHI aims to build and advance a more systematic methodological and economic framework for reducing multidimensional poverty, grounded in people’s experiences and values. OPHI works towards this by:

• Broadening poverty measurement.

• Improving data on poverty

• Building capacity

• Impacting policy

• OPHI’s work is grounded in Amartya Sen’s capability approach. OPHI works to implement this approach by creating real tools that inform policies to reduce poverty.

 

News Hightlight

• The 2018 global Multidimensional Poverty Index was released by the United Nations Development Programme (UNDP) and the Oxford Poverty and Human Development Initiative (OPHI).

• Key findings of MPI 2018

• The global Multidimensional Poverty Index (MPI)-2018 covers 105 countries in total, which are home to 75 per cent of the world’s population, or 5.7 billion people.

• A total of 1.34 billion people from 105 countries are multidimensionally poor i.e. 23.3% of the people living in these countries. They are the MPI measures

• Incidence of poverty: the proportion of the population who are poor according to the MPI (those who are deprived in at least one third of the weighted indicators).

• Average intensity of poverty: the average share of deprivations people experience at the same time.

• MPI value: The MPI value, which ranges from zero to one, is calculated by multiplying the incidence of poverty by the average intensity of poverty. It shows the proportion of deprivations that a countries’ poor people experience out of the total possible deprivations that would be experienced if every person in the society were poor and deprived in every indicator.

• deprived in at least one-third of overlapping deprivations in health, education, and living standards, lacking such things as clean water, sanitation, adequate nutrition, or primary education.

• 83% of multidimensionally poor people (more than 1.1 billion people) live in either Sub-Saharan Africa or South Asia.

• Two-thirds of all MPI poor people (nearly 892 million) live in middle-income countries.

• Multidimensional poverty is much more intense in rural areas than urban areas; globally there are 1.1 billion people living in multidimensional poverty in rural areas, compared to 0.2 billion people living in multidimensional poverty in urban areas.

• About 612 million people – 46% of those who are multidimensionally poor – live in severe poverty, that is, they are deprived in at least half of the weighted indicators in health, education, and living standards. Sub-Saharan Africa accounts for 56% of world’s severely poor.

• In India, 271 million people moved out of poverty between 2005-06 and 2015-16, but the country still has the largest number of people living in multidimensional poverty in the world (364 million people). Even so, India has cut its poverty rate from 55% to 28% in ten years.

• After India, the countries with the largest number of people living in multidimensional poverty are Nigeria (97 million), Ethiopia (86 million), Pakistan (85 million), and Bangladesh (67 million).

 

What is the global MPI?

• The global Multidimensional Poverty Index (MPI) is an international measure of acute poverty covering over 100 developing countries. It complements traditional income-based poverty measures by capturing the severe deprivations that each person faces at the same time with respect to education, health and living standards.

• The MPI measures multiple deprivations in the same households in education, health and living standards and 10 indicators, namely nutrition, child mortality, years of schooling, school attendance, sanitation, cooking fuel, drinking water, electricity, housing and assets.

• A person is identified as multidimensionally poor (or ‘MPI poor’) if deprived in at least one third of the dimensions. The MPI is calculated by multiplying the incidence of poverty (the percentage of people identified as MPI poor) by the average intensity of poverty across the poor. So, it reflects both the share of people in poverty and the degree to which they are deprived.

• The global MPI was developed by OPHI with the UNDP for inclusion in UNDP’s flagship Human Development Report (HDR) in 2010. It has been published in the HDR ever since.

 

How MPI is better than Income Poverty?

• Why are there such wide discrepancies between MPI poverty estimates and $1.90/day poverty estimates in so many countries?

• The MPI complements income poverty measures. It measures various deprivations directly. In practice, although there is a clear overall relationship between MPI and $1.90/day poverty, the estimates do differ for many countries. Possibilities can include public services, as well as different abilities to convert income into outcomes such as good nutrition.

• The fact that there are differences does not mean that the national poverty number, or the MPI headcount is wrong – these simply measure different conceptions of poverty. At the same time, just as national poverty measures, in contrast, are designed to reflect the national situation more accurately and often differ in very useful ways from the $1.90 measure, some countries may wish to build a national multidimensional poverty index that is tailored to their context, to complement the global MPI.

• The relationship between these measures, as well as their policy implications and methodological improvement, are priorities for further research.

• As per World Bank, international poverty line is currently valued at $1.90 in terms of 2011 purchasing power parity. Income allows people to meet basic needs but at a practical level we find income does not always provide a sufficient representation of poverty.

• For example: People may be above the poverty line but still deprived of needs such as housing. So, another way to measure poverty is to measure it directly in terms of the ability to meet a number of basic human needs such as access to housing, healthcare, sanitation and

 

What’s new in MPI-2018?

• The new global MPI has changes in five of the ten indicators from the original MPI: nutrition, child mortality, and years of schooling, housing and assets.

• The new threshold for nutrition includes BMI (Body Mass Index)-for-age, and stunting as well as underweight for children.

• For child mortality, it considers whether a child has, sadly, perished in the household in the last five years preceding the interview date.

• For years of schooling, the new threshold requires six years, rather than five years, of schooling.

• A household is deprived in the housing indicator if the floor is made of natural materials; or the roof or walls are made of natural or rudimentary materials.

• Finally, the assets indicator now includes ownership of computers and animal carts.

• MPI 2018 have been revised to better align with the SDGs. The MPI shows how deprivations related to SDGs 1,2,3,4,6,7, and 11 are concretely interlinked in poor people’s lives. The global MPI reflects deprivations each person faces in multiple SDG areas – education, water and sanitation, health, housing, etc. Connecting to at least seven SDGs, the MPI brings many concerns together into one headline measure. And, since people are MPI poor if they are deprived in one-third of the weighted indicators, the MPI focuses on people who are being left behind in multiple SDGs at the same time.

• education. This is a multidimensional approach.

• From this perspective, income is the means to ends, while the ends themselves are the satisfaction of basic human needs. The multidimensional approach has a direct focus on the ends.

 

Limitations of the MPI

• The indicators include both outputs, such as years of schooling, and inputs, such as cooking fuel. It also includes both stock and flow indicators. A stock indicator is measured at a particular point in time, and it may have accumulated in the past. On the contrary, a flow indicator is measured per unit of time. Surveys do not have flow indicators for all dimensions.

• The health data are relatively weak and overlook some groups’ deprivations especially for nutrition, though the patterns that emerge areplausible and familiar. For example, in many countries there is no nutritional information for women. In other countries, there is no nutritional information for men, in others still, for children.

• Although the MPI indicators were selected in order to guarantee as much cross-country comparability as possible, indicators’ comparability is still imperfect for two reasons.

• As detailed above in the case of nutrition, the information differs across the surveys used.

• Even when they collect the same information, the minimum acceptable standards on certain indicators, such as some of the living standard ones, may vary greatly according to the culture.

• Intra-household inequalities may be severe, but, for the moment, these cannot be reflected in the global MPI, precisely because there is no individual-level information for all the indicators.

• While the MPI goes well beyond a headcount ratio to include the intensity of poverty experienced, it does not measure the depth of poverty—how far away, on average, from the deprivation cut-off in each indicator poor people are. Nor does it measure inequality among the poor—how deprivation is distributed among the poor.

• The estimates presented are based on publicly available data and cover various years between 2005 and 2015, which limits direct cross-country comparability.