12 Jun 2024: UPSC Exam Comprehensive News Analysis

B. GS 2 Related

Category: POLITY

1. Bihar’s call for special category status

Syllabus: Issues and Challenges Pertaining to the Federal Structure

Mains: Need for ‘Special Category Status’ State

Special Category Status: Overview and Benefits

• Introduced in 1969 based on the Fifth Finance Commission’s recommendations.
• Aims to help states disadvantaged in terms of geography, social, or economic status.
• Criteria for qualification include hilly terrain and a sizable tribal population.
• Benefits include higher central funding (90% for centrally sponsored schemes) and tax concessions.
• Initially granted to Jammu & Kashmir, Assam, and Nagaland; now 11 out of 28 States have this status.

Bihar’s Demand for Special Category Status:

• Bihar’s politicians, including Chief Minister Nitish Kumar, have long demanded this status.
• Cited reasons include economic backwardness, low per capita income (~₹60,000), and poor human development indicators.
• Factors affecting Bihar’s economy: State bifurcation, industrial migration to Jharkhand, insufficient irrigation water, and frequent natural disasters.
• A recent caste-based survey (2022) indicates nearly a third of Bihar’s population lives below the poverty line.

Challenges and Political Implications:

• Successive Union governments have resisted granting special status due to financial burden concerns.
• Increased tax devolution from 32% to 42% based on the Fourteenth Finance Commission’s recommendation is a counter-argument against special status.
• Fear that granting special status to Bihar may lead to similar demands from other states.
• Political considerations play a significant role; States with strong political bargaining may receive more funds through other means.
• Competitive populism risk: Political parties may promise special status to gain power, worsening the Centre’s finances.

Economic Debate on Bihar’s Need:

• Some analysts argue Bihar’s economic backwardness justifies special status for welfare and infrastructure spending.
• Bihar government estimates special status would provide an additional ₹2.5 lakh crore over five years for welfare.
• Others argue it may incentivize bad policies in poorer States and penalize developed States with better policies.
• Historically, poor rule of law in Bihar and Uttar Pradesh discouraged investments, leading to slow growth and high poverty.
• Recent growth: Bihar’s GDP grew at 10.6% in 2022-23, higher than the national average of 7.2%; real per capita income grew by 9.4%.
• Analysts suggest Bihar needs a stronger rule of law for long-term economic improvement rather than short-term fiscal relief from the Centre.

Nut Graf: Bihar’s demand for special category status seeks increased central funding due to economic backwardness. While beneficial for welfare and infrastructure, granting it poses financial and political challenges, with debates on its necessity given Bihar’s recent economic growth and need for stronger governance.

E. Editorials

Category: ECONOMY

1. India’s looming financial crisis

Syllabus: GS-3, Indian Economy and issues relating to Planning, Mobilization of Resources, Growth, Development and Employment

Mains: Fear of  financial crisis in the backdrop of rising household debt 

Introduction: Rapid Credit Growth and Financial Innovation

• Credit Boom and Financial Folly: Rapid credit growth is alluring but often leads to financial crises, a pattern noted by economists like Robert Shiller and Carmen Reinhart.
• India’s Digital Hype: India’s policymakers promote the narrative that digital infrastructure will drive financial innovation and inclusion, leading to growth and equality.
• Applause for Credit Surge: Both international and domestic analysts praise India’s financial sector for robust bank lending and low non-performing assets.

Dangerous Expansion of Household Lending:

• Household Debt Boom: The surge in household lending, growing at 25-30% annually, is concerning. Lower- and middle-income households borrow for consumption, not investment.
• Unsecured Loans and Credit Cards: A significant share of household loans is unsecured, and credit card debt is rising rapidly, with many individuals struggling to repay.
• Debt-Service Burden: Indian households’ debt-service-to-income ratio is high, similar to levels seen in the US and Spain before their 2008 financial crises.

Chaotic Financial Services Industry:

• Liberalisation and Scams: Economic liberalisation since 1991 has led to a large, chaotic financial services industry with many rogue players.
• Profit Pressure: Financial institutions face pressure to generate profits as lending opportunities narrow, leading to risky lending practices.
• Fintechs and High-Interest Loans: Fintech companies offer loans at high interest rates, preying on desperate households.

Looming Financial Crisis:

• Macroeconomic Threat: Slow household consumption growth, high debt-service ratios, and interconnected financial institutions create a crisis risk.
• Potential Solutions: Downsizing the financial services industry, weakening the rupee to boost exports, and aligning lending with productive needs are potential solutions.
• Policy Challenges: Policymakers’ commitment to rapid credit growth and a strong exchange rate complicates crisis prevention efforts.
• Economic Vulnerability: The impending crisis will disproportionately affect the weak and vulnerable, exacerbating employment issues and inequalities.

Nut Graf: India’s rapid credit growth and digital infrastructure hype mask a looming financial crisis driven by unsustainable household debt and a chaotic financial services industry, risking severe economic downturns and exacerbating existing inequalities.