Gist of EPW April Week 1, 2019

The Economic and Political Weekly (EPW) is an important source of study material for IAS, especially for the current affairs segment. In this section, we give you the gist of the EPW magazine every week. The important topics covered in the weekly are analysed and explained in a simple language, all from a UPSC perspective.

TABLE OF CONTENTS

1. A Vulnerable Election Commission
2. Dilution of the Right to Education Act
3. Understanding the NBFC Conundrum

1. A Vulnerable Election Commission

Introduction

  • The Election Commission of India (ECI) is faced with the mammoth task of organising “free and fair” elections to save democratic institutions, including itself.
  • The task is complicated because the manipulation of the functioning of some of these institutions has taken on new forms yet to be understood fully, and the ECI is at great risk of becoming helpless and eventually dissolving into partisanship.

Violation of Model Code of conduct?

  • The ECI has maintained steadfast vagueness around the release of the biopic PM Narendra Modi
  • UP Chief Minister Yogi Adityanath called the Indian army “Modi ji ki sena (Modi’s army)”, and despite the EC’s direction to parties, post-Pulwama, to desist from political propaganda involving the armed forces
  • Rajasthan Governor Kalyan Singh also crossed the lines of his institutional role and shared his fervent faith in the leadership of Narendra Modi ahead of polls.

The Model Code of Conduct, which is routinely invoked, is more spirit, less letter — primarily, a moral and ethical restraint on parties in the poll fray. Yet, it is also true that the EC has, in the past, used its subtle powers to greater effect. It has amplified its influence by its vigilance and impartiality. But currently it is EC’s own unwillingness or inability, or both, to push back at a time when the political executive is strong and overweening

Issues before the ECI

  • The ECI’s has remained ineffective at keeping pace with the scale of manipulations imagined and executed by the government machinery
  • Instead of pressing action and taking strong decision to ensure free and fair elections it has been seen as setting aside its responsibilities by issuing a show-cause notice to Air India, seeking a response from the railway ministry, and shifting responsibility to the Central Board of Film Certification (CBFC).
  • The ECI’s conduct is beginning to look partisan, and doubts over the fairness of the ECI assume particular seriousness
  • The lines between actual governance and rhetorical campaigning have been consistently blurred, allowing for the nature, sources, and quantum of manipulation to be deviously obfuscated.

What should it do?

  • ECI should take suo motu cognisance of such gross manipulations
  • Recognising the diversification of campaign media is the first step towards addressing the rampant flouting of the MCC.
  • And, the framework for understanding and addressing the various forms of voter manipulation must be fundamentally reimagined by the ECI.

2. Dilution of the Right to Education Act

Background

Right to Education is a fundamental right providing elementary education covering eight years (six to 14 years) of childhood. But this Right of Children to Free and Compulsory Education Act, 2009 is a long way off from becoming a social reality due to the reluctance to enforce many of its provisions. What has suffered the most is the autonomy and dignity of teachers, which form the core of this law’s approach.

Children rights not implemented

The case of children is worse. The children here do not have rights and cannot complain about lack of implementation of their rights to the adults or to the society or even the govt that their right is being violated. If this right is not exercised at the time that is required, compensation in the future will be of no use.  Therefore there is an urgency to bring about changes. Making laws and asking courts to enforce it is one side of view but examining if this is actually being delivered to children is another.

 

Other laws which violate Child rights

Labour and marriage laws also refer to childhood, purportedly protecting it from exploitation and early matrimony. These other laws, though a lot older than the RTE Act, are still struggling, unable to offer the protection that millions of children need in order to benefit from the RTE Act.

On the Labour Side

  • As far as the legal provision against child labour is concerned, the difficulty of implementing the law has been compounded of late.
  • The areas of legally permissible employment of children were formally expanded through an amendment passed in 2016 to cover family-owned businesses.
  • Acknowledging potential conflict with the RTE Act, the amended child labour law specifies that children below 14 years can work in a family business only after school hours. Taking away their rights post school by making them work in family business and its impact on childhood is still not understood

On the marriage front

  • RTE Act’s protection to children, especially girls, remains weak.
  • Efforts to keep girls enrolled at school are all that the state, with the help of non-governmental organisations (NGOs), is offering in many regions where child marriage is widely prevalent.
  • Recent years have not brought much relief to India’s struggling children, despite the existence—since 2005—of a specialised body called the National Commission for Protection of Child Rights (NCPCR).

 

Issues with no detention law and its changes

  • This occurred in its promise of providing detention-free progress from ages six to 14 years. Parliament has amended the RTE Act to impart freedom to state governments to detain children on the basis of an examination at the end of Classes 5 and 8.
  • Children who fail in these exams will be given a second chance shortly after failing, but if they fail again, they will have to repeat a whole year.
  • Those states that are moving ahead to avail this new procedure are the ones where the RTE Act had made the least progress in its first decade.
    • This amendment is based on the idea that the policy of no-detention encourages both children and teachers to take it easy.
    • The unstated part of this idea is that children of the poor do not pay attention to studies unless they feel that they might fail.

 

The RTE Act had challenged this view

  • It had banned annual examinations throughout the elementary years, but also by placing inside the law a policy framework for pedagogic reforms.
  • The amendment dents this framework and allows the state to meddle with the broader vision on which the framework is based.
  • The twin pillars of this framework are,
    • one, upgrading of primary-level teacher training and reorienting it towards child-centred pedagogy; and,
    • Two, implanting a continuous and Comprehensive And Evaluation (CCE) system.
  • On both fronts, the last five years show a loss of momentum and institutional coordination.
    • In teacher training, the recommendations of the Justice J S Verma Commission (appointed by the Supreme Court) had shown the way to combat commercialisation and corruption.
      • The implementing agency for these reforms, the National Council for Teacher Education (NCTE) has failed to overcome its own structural constraints, which also were pointed out by the Verma Commission.
    • On the CCE front, national resource institutions (for example, NCTE, National Council of Educational Research and Training, National Institute of Educational Planning and Administration and Central Board of Secondary Education) have made little progress towards building consensus and capacity among elementary education authorities in the states.

 

The progress on the RTE Act suffered from many other factors.

  • The financial arrangements made to facilitate the Sarva Shiksha Abhiyan (SSA) were supposed to be replaced by sustainable institutionalised procedures. This meant state-specific adjustment in old procedures to which the directorates were accustomed.
    • A committee chaired by the late Anil Bordia had recommended numerous steps to harmonise the project-mode procedures adopted under the SSA with older procedures.
    • These recommendations did not have the good luck to receive attention while the larger corpus of planning itself was mutating into the new National Institution for Transforming India (NITI) approach.
  • The adoption of the Fourteenth Finance Commission’s recommendation for increased transfer of funds to the states has been used as an excuse to reduce the centre’s responsibility to directly support the implementation of the RTE Act.
    • In states where implementation was sluggish to begin with, the centre’s withdrawal of interest has led to further dilution of the local effort.
  • Also, the general decline of institutional capacity in teacher education and research has made the RTE Act’s demands for improvement of quality more difficult to meet.
  • In a parallel development the RTE Act’s pedagogic approach, that had barely begun to find entry in the training curriculum, is being pushed out by routinised teaching that focuses on minimalist outcomes and testing. The RTE Act’s emphasis on arts and crafts has also been systemically diluted.
  • Yet another socially radical measure mooted under this law is to reserve one-fourth of the seats in private fee-charging schools for children of the poorer strata. This measure has triggered a lot of legal activity, indicating how reluctant private schools are to implement the reservation.
    • The promise to reimburse the private schools at the per child rate reflected in government’s expenditure in its own schools is also waiting to be redeemed in most cases

Conclusion

  • With over a million vacancies in teaching positions, the majority being in the northern states, the RTE Act is far from becoming a social reality.
  • The tendency to equate efficiency with procurement of pedagogic and surveillance technology has grown, clouding all other issues, including better distribution of powers to decide. What has suffered most is the teacher’s autonomy and dignity, which form the core of the RTE Act’s approach.

3. Understanding the NBFC Conundrum

 

Context

  • Till recently, non-banking financial companies were the poster boys of the financial sector, with loans from the sector growing at phenomenal rates.

What is an NBFC?

  • Non-banking financial companies (NBFCs) are companies registered under the Companies Act, 1956 and, of the Reserve Bank of India (RBI) Act, 1934.
  • NBFCs are engaged in the business of making loans, advances, and acquisition of shares, stock, bonds, debentures, or securities issued by the government or local authority or other securities of marketable nature, leasing, hire-purchase, insurance and chit business.
  • NBFCs comprise mostly private sector institutions providing a variety of financial services that are regulated by the RBI.
  • NBFCs are broadly categorised based on
    1. In terms of the type of liabilities
      • Into deposit (NBFC–D) and non-deposit accepting NBFCs
    2. Non-deposit-taking NBFCs
      • Their size into systemically important (NBFC–NDSI) and other non-deposit holding companies (NBFC–ND).
    3. By the kind of activity they conduct.
      • There are twelve categories like Asset Finance Company (AFC), Investment Company, Loan Company, etc.

NBFCs growth in India

  • Ever since the default of the Infrastructure Leasing and Financial Services (IL&FS) on its debt obligations, the spotlight is on NBFCs in India.
  • The aggregate balance sheet size of the NBFC sector was ₹ 22.1 trillion as on March 2018. Comparing with 2016 data they are growing at 25% on year-on-year basis.
  • Bank credit to NBFCs has touched the highest in three years.
  • In 2017, NBFCs increased their share in the total credit market to 16%, from 13% in 2015. The share of public sector banks (PSBs) reduced to 51%, from 57% in 2015.

Difference between NBFCs and Banks

  • Over the years, the difference between banks and NBFCs has blurred in India. More recently, NBFCs are competing with banks in providing financial services such as infrastructure and housing finance among others
  • Services provided by banks include receiving of deposits and lending of funds. NBFCs lend and make investments, and their activities are similar to those of banks.
  • However, there are differences between banks and NBFCs. These are:
    1. NBFCs cannot accept demand deposits.
    2. NBFCs do not form part of the payments and settlement system and cannot issue cheques upon themselves.
    3. Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to depositors of NBFCs.

Main characteristics of NBFCs’

  • Simpler processes and procedures in sanction and disbursement of credit.
  • Timely, friendly and flexible terms of repayment aligned to the unique features of its clientele, albeit at a higher cost.

Activities of NBFCs

  • NBFCs are largely involved in serving those classes of borrowers generally excluded from the formal banking sector.
  • NBFCs are historically involved in providing financial services such as offering of small ticket personal loans, financing of two/three wheelers, truck financing, etc.
  • Further, they also often take the lead role in providing innovative financial services to micro, small, and medium enterprises (MSMEs).
  • NBFCs have specialised in different areas: financing commercial vehicles (Shriram Transport Finance), offering loans against gold (Manappuram Finance or Muthoot Finance), infrastructure financing (IDFC Bank), etc.
  • The emergence and rapid spread of finance institutions dedicated for retail finance—like Tata Capital Financial Services, Bajaj Finserv, HDB Financial Services, etc—has given much visibility of the sector especially in urban areas.
  • The retail segment has not only expanded in the last few years, but also has been largely responsible for the impressive growth rates of credit of NBFCs.
  • NBFCs have also evolved in terms of their operations, reach and profitability.
  • They provide end-to-end online personal loans solutions, right from obtaining information, applying for the loan, assistance with eligibility criteria and documentation, approval application, and loan disbursal.
  • NBFCs also accept deposits from customers, but, unlike banks, these are in the form of insurance premiums and shares listed on stock markets or held privately.
  • They are not authorised to offer savings bank and other deposit schemes.
  • According to the Boston Consulting Group–Confederation of Indian Industries report (2015), NBFC credit growth will further accelerate in the next five to 10 years in India.
  • The NBFC sector will evolve and transform to serve the latent credit needs of the emerging India.
  • For this, NBFCs will have to embrace digital tools to dramatically enhance internal productivity (sales, operations and pricing).
  • The emerging NBFCs (called NBFC 2.0) will augment the strengths of the existing NBFCs (called NBFC 1.0) in various areas highlighted in the report.

Source of Funds

  • In the Financial Stability Report, 2018, RBI (2018) notes that in terms of inter-sectoral exposure, NBFCs were the dominant receivers of funds in the banking sector(this does not include transactions among entities of the same group).
  • Of the funds received, the highest was from scheduled commercial banks (SCBs) (44%), Asset Management Companies–Mutual Funds (33%), and insurance companies (19%).
  • Other sources of funds included long-term debt, loan-term loans and commercial papers.
  • Hence, the primary source of funds for NBFCs is debentures, followed by bank borrowings.
  • In the 2012 Financial Stability Report, it was noted that NBFCs were largely dependent on banks for their funds (RBI 2012). Since then, NBFCs have started borrowing from other sources as noted above.

Deployment of Funds

  • The deployment of funds by the NBFC segment in 2017 was largely to the industry, followed by retail loans.
  • Though housing loans and vehicle loans form the biggest chunk of the personal/retail credit sector, other loan products—like consumer durable loans, credit cards, education, individual advances, etc—are also showing impressive growth.
  • Vehicle loans, the largest component within the retail sector (41.5%), had, in fact, declined in this period, while the reason for decline of vehicle loans is largely attributed to the transient impact of demonetisation
  • Credit to agriculture and allied activities also contracted during 2016–17.
  • The current problem faced by NBFCs seems to be that of liquidity, and so the State Bank of India has stepped in to bail them out the situation by buying assets worth ₹ 45,000 crore.
  • There are indications of asset liability mismatch of some NBFCs.

Conclusion

  • Till recently, NBFCs were the poster boys of the financial sector, with loans from the sector growing at phenomenal rates.
  • The NBFC sector borrows from debentures and banks, and lends to the industry. In the latter function, they seem to be no different from banks
  • However, it is thought that NBFCs primarily lend to small, and medium-sized enterprises rather than large infrastructure projects that banks fund.
  • While NPAs of banks have growing and widely discussed, NPAs of NBFCs have also been growing. Indeed, if PSBs start buying assets of NBFCs that are stressed (while they have stressed assets of their own), it is doubtful how far this can go in solving the problem.
  • The current crisis also reflects the interconnectedness of the banking system. The latest Financial Stability Report, 2018 points out that while the SCBs are the dominant players in the financial system accounting for 46% of bilateral exposure, NBFCs were at 12%.
  • In terms of inter sectoral exposure, NBFCs were the dominant receivers of funds. Hence, repercussions of the IL&FS default were felt throughout the financial system.

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