Gist of EPW December Week 4, 2021

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 analyzed and explained in a simple language, all from a UPSC perspective.
TABLE OF CONTENTS

1. Market-induced Global Inequalities
2. AFSPA: The Misuse of Power
3. Reviving the Lending Appetite of Banks

1. Market-induced Global Inequalities

Context:

The recently released World Inequality Report 2022 has both positive and negative indications on the state of Society.

World Inequality Report 2022

• The World Inequality Report 2022 is released by the World Inequality Lab.
• The report presents the most up-to-date synthesis of international research efforts to track global inequalities. 
• The data and analysis presented in the report are based on the work of over a hundred researchers over four years, located across all continents and contributing to the World Inequality Database (WID.world), maintained by the World Inequality Lab.
• The aim of the World Inequality Report 2022 is to present the latest and most complete data available on inequality to inform democratic debate worldwide.

Image source: https://wir2022.wid.world/

Positive Indicators

• The report disproves the assumption that industrialized nations experience an initial rise and subsequent decline in income inequality, characterised by an inverted “U” curve, called the Kuznets curve. 
• The inequality report throws up clear evidence that the growing income inequality is not unavoidable and that these trends can be reversed.
• The fact that the growth of inequalities was paused or even slightly reversed in the 1910–60 period, and especially in the immediate period after World War II, is evidence for this. 
• The advent of socialism and communist governments, progressive taxation, huge government investments in infrastructure such as health, and education, and the emergence of welfare states, all contributed to the cause.
• The growth of productivity and decline in inequalities in the last 30 years after WWII, including in the US, the UK, France, India, and China remain unmatched. 
• Marginal income tax rates were well above 50%, with the rates in the US and the UK even soaring above 90%. 
• It is in this context that the inequality report advocates a global wealth tax to boost government tax resources. This can be notable as the total wealth of 62 million millionaires is a huge $174 trillion worldwide.
• Such progressive taxation would be beneficial to countries like India, which is now among the most unequal nations.
• The poverty concentrated policies such as the five-year plans had reduced the income share of the top 10% of the population from 50% to 35%–40% by the mid-1980s. 

Negative Indications

• The global income inequality has remained constant at high levels for around a century and even rising in countries like the United States (US).
• The number of billionaires is growing rapidly.
• Between the years 1980 and 2020, the share of the top 10% in India’s national income has gone up to 57%, while that of the bottom half has gone down to 13%. 
• The total size of the private wealth in India increased twofold from 290% of the national income to 560%. 
• Currently, the top 10% of the population holds 65% of the household wealth. 
• India has also been affected by a substantial gender inequality with the share of women in the workforce coming down to 18% as compared to 46% (France) and 33% (China).
• On the global level, the share of income of the top 10% has surged to 55% by 2020. 
• On the other hand, the share of income of the lowest 50% shrunk to 7%.
• The wealth inequalities of the rich countries are even more asymmetric.
• The growth of private wealth in rich economies has zoomed from between 200% and 400% of their national income in the 1970s to above 600% by 2020. 
• The intra-country inequalities are at their peak. 

Conclusion

The data from the World Inequality Report 2022 shows that political, institutional factors and the competition between social classes shape up the trends in inequality. It is required to levy wealth taxation on the top 10% to gather wealth to fund investments in social and economic infrastructure to boost growth as well as ensure redistribution of wealth. Over-dependence on markets can only result in even greater inequality and deliver twisted results.

2. AFSPA: The Misuse of Power

Context

The article talks about the Armed Forces (Special Powers) Act, 1958, its constitutionality, validity and misuse of the powers under the law, as there is a strong growing demand in states to repeal the act.

Armed Forces (Special Powers) Act, 1958 (AFSPA)

Historical Background

• AFSPA gives special powers to the army, state and central police forces to shoot to kill, search houses and destroy any property that is “likely” to be used by insurgents in areas declared as “disturbed” by the home ministry.
• The AFSPA – like many other controversial laws – is of a colonial origin. The AFSPA was first enacted as an ordinance in the backdrop of the Quit India Movement in 1942.
• Again in 1947 on the backdrop of partition, special powers were conferred on the armed forces through ordinances to deal with the situation arising in the provinces of Bengal, Assam, East Punjab and Delhi, and the United Province.
• These ordinances were replaced by the AFSPA, 1948. 
• The law which was temporary legislation enacted for one year was extended till 1958 and it was replaced by the AFSPA, 1958, which was initially intended for Assam and Manipur but later extended to the entire northeast region.

Provisions

• The law contains six sections.
• Section 1 –  It mentions the title of the act and mentions the regions it is extended to.
• Section 2 – 
  • Defines “armed forces” as, the military forces and the air forces operating as land forces, and includes any other armed forces of the Union operating. 
  • Defines “disturbed area” as, an area that is for the time being declared by notification under section 3 to be a disturbed area
• Section 3 – Provides powers to declare an area as a “disturbed area” to the governor of a state or the administrator of a union territory or the central government.
• Section 4 – 
  • Empowers officers to fire upon or use force (even to the causing of death) against any person who is acting in contravention of any law or order for the time being in force in the disturbed area. 
  • The officer must give due warning before using force.
  • It also prohibits the assembly of five or more persons or the carrying of any weapons.
• Section 5 – Mentions that any person arrested and taken into custody under this Act shall be handed over to the officer in charge of the nearest police station with the least possible delay, together with a report of the circumstances occasioning the arrest.
• Section 6 –  Provides immunity to persons from prosecution or other legal proceedings in respect of anything done in exercise of the powers conferred by the act, except with the prior consent of the central government. 

Criticism

The criticism is mainly focused on the three sections, namely

• Section 3
  • The power to declare an area as a “disturbed area” under section 3 of the Act is discretionary.
  • Further, it fails to mention the basis of subjective satisfaction or material evidence that a region is declared as a “disturbed area” by the concerned authority.
  • It is compared to the misuse of the President’s Rule in the past before the Supreme Court’s intervention.
  • Till now, there is no instance of any declaration being struck down in judicial review or challenged in the courts.
  • The Supreme Court has held that the issuance of repeated ordinances would be a fraud on the Constitution. In the same context; repeated declarations of an area as a “disturbed area”  should also be a fraud on the AFSPA.

• Section 4
  • The discretionary powers that have been awarded to the officer to form an opinion that it is necessary to use force for the maintenance of public order are criticized widely.
• Section 6
  • The section provides blanket immunity to officials even if there is excessive use of force without adhering to the requirements of Section 4 of the act.
  • The concerned officer could get away without being prosecuted for his/her excesses.
  • A recent article points out that sanction has not been granted for prosecution in any case over the last 63 years.

Conclusion

The above points from the critics suggest that the implementation of the AFSPA deserves to be completely rewritten or restructured to address the issues in the act that give discretionary powers to the officials and also provide them with immunity against prosecution.

3. Reviving the Lending Appetite of Banks

Context

The fear of potential asset quality distress has reduced the risk appetite of the banks. In response to the economic distress, banks are unable to aggressively lend. The flow of bank credit is crucial in reviving the economy and in this regard, the banks need policy support to tackle the unprecedented economic crisis of the banking sector caused by the pandemic.

Details

Like many other sectors, the damage to the banking sector is complex and prolonged. The COVID pandemic has resulted in a rise in the Non-Performing Assets (NPAs) of the banks.

Non-Performing Assets (NPAs)

• When a person delays the payment of the loan or an amount which was due on him through the delay in payment in either interests or installments or principal amount, that particular loan or amount is termed as Non-Performing Asset.
• NPAs can be classified into,
  • Substandard Assets – These are the assets that have remained NPA for a period of less than or equal to 12 months.
  • Doubtful Assets – If the asset is in the substandard category for a period of 12 months.
  • Loss Assets – These assets are of little value, they can no longer continue as bankable assets, there could be some recovery value.

Read more about Non-Performing Assets (NPAs).

Historical Background

The fluctuations in the levels of NPAs are not only linked to macroeconomic disruptions but also to policy shifts.

• The Gross NPAs peaked at 23.2% in 1993 during the banking sector reforms.
• The Gross NPAs reduced to 7.26% by 2003–04 and to 3.83% by 2013–14.
• Gross NPAs started to increase to reach a new height of 11.18% by 2017–18 when RBI undertook Asset Quality Review (AQR) in 2015.
• The outstanding bank credit (NPAs) went down from 103.2 trillion in March 2020 to 102.11 trillion in August 2020.
• The general reduction in NPAs during the current times does not look likely as most of the borrowers are in distress.

Challenges by the COVID pandemic

• Before the pandemic, the NPAs of banks had improved from 9.3% in March 2019 to 9% by March 2020.
• The RBI in its Financial Stability Report (FSR) for June 2020 estimated that NPAs are to rise to 14.7% by March 2021 triggered by the pandemic.
• Liquidity and capital adequacy are the instant drivers to activate lending. 
• The capital-to-risk (weighted) assets ratio (CRAR) of the banking system was 14.6% in March 2020 and went down by 133 basis points in a baseline scenario to reach 13.3% and to 11.8% in March 2021.
• The implementation of the Basel III framework was postponed from March 2020 to 30 September 2020. It sets the benchmark of minimum capital conservation buffer (CCB) at 1.875% of risk-weighted assets against the requirement of 2.5% taking the minimum CRAR to 10.875%. The default in a loan account will increase the risk-weighted assets, forcing banks to reach closer to the minimum benchmark of CRAR.
• Many individual banks may even cross the levels, hence, leading to the breach of CRAR compliance resulting in regulatory action.
• This results in banks hesitating to lend with the fear that NPAs will consume their fine capital base. 

Response by RBI

• The RBI noted that banks are not responding to the crisis and are unable to induce credit flows despite abundant liquidity and an accommodative monetary policy stance.
• The interest rate on the reverse repo was brought down to 3.35% to encourage banks to lend and infuse liquidity.
• The RBI infused liquidity from time to time using many methods.
• The RBI-appointed Kamath panel for the 26 sectors of the economy, the panel identified five parameters related to leverage, liquidity, and debt serviceability that will influence the loan reconstruction.
• The RBI allowed zero risk weight against loans extended under the Emergency Credit Line Guarantee (ECLG) Scheme and left out the moratorium period in identifying an asset as NPA.
• It also extended timelines for the implementation of the Basel III framework till January 2023.

Way Forward

For the Government and RBI

• The government and RBI should consider policy support going beyond previous trends to enable banks to lend. 
• The government’s move to raise Rs. 20,000 crores through recapitalisation bonds without burdening the exchequer is a step in the right direction.
• More action is needed to relax the stringent guidelines with fixed timelines for the steady restoration to pre-COVID-19 levels.
• Reduce risk weights on incremental bank credit granted during COVID-19 times with a cut-off date to conserve capital.
• Explore the reduction of CAR requirements from 9% to 8% as an emergency response measure that will still be in line with the Basel Committee norms.
• Reduce the provision requirements against newly restructured general loan portfolios from 10% to 5%. 

For the Banks

• Banks need to frame a separate “COVID-19 loan policy” to extend loans to “existing standard borrowers” whose credit history is already with the banks. 
• Introduction of COVID-19 loan schemes for existing borrowers to provide quick capital to continue their economic activities.
• The banks can initiate another “COVID-19 restructuring policy” that explores supporting stressed existing loan accounts on broader parameters on the lines of the Kamath panel recommendations.
• Banks must take commercial calls to restructure loans if they are convinced about the reasons for stress. 
• Banks should identify borrowers with a positive history and proactively support and help contribute to the revival of the economy.
• Banks should work with a vision that a potential performing borrower is more important than holding NPAs. 
• Procedural reforms, increased digitisation of lending, and documentation of process should be used in loan processing. 

Conclusion

Banks should be prepared to fight a prolonged pandemic. Banks in collaboration with the RBI and government should be able to tackle the COVID-19-induced distress by increasing credit growth. Fearing the rise in the NPA levels is not the right strategy and there is a need for never-before policy interventions to handle a never-before crisis by all the stakeholders in the value chain.

Read previous EPW articles in the link.

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