09 Nov 2018: UPSC Exam Comprehensive News Analysis

TABLE OF CONTENTS

A. GS1 Related
B. GS2 Related
POLITY AND GOVERNANCE
1. SC issues notices to EC, ED
INTERNATIONAL RELATIONS
1. India to join Afghanistan peace talks today
C. GS3 Related
ECONOMICS
1. Flipkart, Amazon not violating norms: CCI
DEFENCE
1. Rafale fighter made for India takes maiden flight
D. GS4 Related
E. Editorials
ECONOMY
1. Independence and accountability (RBI  and the Government) 
WORLD HISTORY
1. A sacrifice remembered (World History: World War I)
F. Tidbits
1. SC recalls order enhancing life term to death
2. Ahmedabad may turn Karnavati
G. Prelims Fact
1. Six airports set to be privatized
H. UPSC Prelims Practice Questions
I. UPSC Mains Practice Questions 

Nothing here for today!!!

Category: POLITY AND GOVERNANCE

1. SC issues notices to EC, ED

Category: INTERNATIONAL RELATIONS

1. India to join Afghanistan peace talks today

Category: ECONOMICS

1. Flipkart, Amazon not violating norms: CCI

Category: DEFENCE

1. Rafale fighter made for India takes maiden flight

Nothing here for today!!!

Category: ECONOMY

1. Independence and accountability (RBI and the Government)

Larger Background:

Note to Students:

This particular editorial analysis takes into account the larger issue of the ongoing turf war between the RBI and the Central Government on a few issues that have caused considerable friction. It also takes into account a recent development where the RBI has been asked to share details sought by the Central Information Commission.

• In fact, this is a very relevant topic for students to prepare from the perspective of Indian Economy. Here we have suitably signposted the Editorial Analysis into multiple headings.

1.      “Larger Background”: This particular section talks about the broader background of the issue, taking into consideration specific points that may have been featured in previous editions of The Hindu. The thought process behind including this section is to give a ‘storyline’ approach to an aspirant when he/she goes through this topic.

2.      “Editorial Analysis”: This particular section gives an insight towards the specific points covered in the specific editorial that is the subject of our study.

3.      “The Way Forward/Concluding Remarks”: This sections gives aspirants concluding points that are taken from the article in question as well as some forwarding looking points taken from other articles, as and when required.

The important aspect to note here is that the issue being discussed in the news assumes priority over just the article.

Larger Background:

The Government at loggerheads with the RBI:

• The government and RBI have been at loggerheads over a few issues for some time now.

• The government believed that easing of lending rules for the banks under the prompt corrective action (PCA) framework could help reduce pressure on MSMEs.
• However, the regulator stood its ground arguing that such a move would put the clock back and undo clean-up efforts.
• Further, with the credit markets tightening after the IL&FS default in September, 2018, non-banking finance companies lobbied the government for more liquidity.
• However, the RBI maintained its position since the banking system did not witness any spike in borrowing costs and the market was just repricing risk in an evolving situation.
• Reportedly, the government and the RBI disagree on a large number of important issues such as classification of non-performing assets (NPAs) and setting up of a payments regulator independent of the RBI.

A look at the issue concerning setting up of a payments regulator independent of the RBI:

• Recently, the Reserve Bank of India (RBI) said there is no case for having a regulator for payment systems outside the central bank.
• The RBI had submitted a dissent note, against certain recommendations of the inter-ministerial committee for finalization of amendments to the Payment & Settlement Systems Act, 2007.
• The draft Payment and Settlement System Bill, 2018 had made an important observation. It said that an independent payments regulatory board (PRB) needs to be established to regulate the payments sector aimed at fostering competition, consumer protection, systemic stability and resilience in the payments sector.
• However, according to the RBI’s dissent note, the central bank believes that the PRB must remain with the central bank and headed by the RBI governor. The RBI and the government may nominate three members each to the board, with a casting vote for the governor.
• Crucially, the RBI had cited the report of the Ratan Watal Committee on digital payments as recommending the establishment of the PRB within the overall structure of the RBI, arguing therefore that there is no need for any deviation.

A Note on the Ratan Watal Committee on digital payments:

• This Committee on Digital Payments was constituted by the Ministry of Finance, Department of Economic Affairs under the Chairmanship of Shri. Ratan P. Watal, Principal Advisor, NITI Aayog and former Finance Secretary to the Government of India.
• In its Report, the Committee had recommended a medium term strategy for accelerating growth of Digital Payments in India with a regulatory regime which is conducive to bridging the Digital divide by promoting competition, open access & interoperability in payments.
• The Report recommended inclusion of financially and socially excluded groups and assimilation of emerging technologies in the market, while safeguarding security of Digital Transactions and providing level playing to all stakeholders and new players who will enter this new transaction space.
• It had suggested inter-operability of the payments system between banks and non-banks, up-gradation of the digital payment infrastructure and institutions and a framework to reward innovations and for leading efforts in enabling digital payments.

A Closer Look:

• The RBI observed that it would prefer the Payments Regulatory Board to function under the purview of the RBI Governor.
• “There is no case of having a regulator for payment systems outside the RBI,” the note read.
• In support of its stance, the RBI stated that the activities of payments banks come well within the purview of the traditional banking system, which the central bank oversees as the overarching financial regulator.
• Thus, according to this logic, it might make better sense to have the RBI oversee the activities of payments banks as well instead of creating a brand new regulator for the growing industry.
• The RBI, in essence, is pointing to the interconnection between the payments industry and the banking system to back the extension of its regulatory powers.
• In conclusion, the RBI’s case makes good sense when seen from the perspective of the cost of regulatory compliance.
• As stated above, there is definite overlapping between the current regulatory powers of the RBI and the proposed regulations for the payments industry.
• Further, it is important to note that a unified regulator can thus help in lowering the compliance costs and enabling the seamless implementation of rules.
• Also, there is the real risk that a brand new regulator may be unable to match the expertise of the RBI in carrying out necessary regulatory duties.
• As a consequence of this, it makes better sense to have the RBI take charge of the rapidly growing payments industry which can ill-afford regulatory errors at this point.
• The fact that the RBI has made public its dissent against the Union government’s idea, suggests that the central bank has serious problems with the dilution of its current powers over the financial sector.
• However, the RBI’s demand for the centralisation of regulatory powers also brings with it the need for exercising a greater degree of responsibility.
• One must note that when we are at a time where there are increasing risks to the stability of the domestic financial system, both the government and the RBI must look to work together to tackle these risks instead of battling over regulatory powers.

A Brief Note on Section 7:

The RBI is an entity independent of the government as it takes its own decisions. However, in certain instances, it has to listen to the government. This provision in the RBI Act is contained in its Section 7 which says:

(1) The Central Government may from time to time give such directions to the Bank as it may, after consultation with the Governor of the Bank, consider necessary in the public interest.

(2) Subject to any such directions, the general superintendence and direction of the affairs and business of the Bank shall be entrusted to a Central Board of Directors which may exercise all powers and do all acts and things which may be exercised or done by the Bank.

(3) Save as otherwise provided in regulations made by the Central Board, the Governor and in his absence the Deputy Governor nominated by him in this behalf, shall also have powers of general superintendence and direction of the affairs and the business of the Bank, and may exercise all powers and do all acts and things which may be exercised or done by the Bank.

Thus, it is clear from the above that this section empowers the government to issue directions in public interest to the central bank, which otherwise does not take orders from the government.

Why is it that Section 7 is seen as an extreme measure?

• It is important to note that Section 7 has never been used till now.
• It was not used even when the country was close to default in the dark days of 1991, nor in the aftermath of the 2008 global financial crisis.
• Importantly, it is not clear how this Section operates since it has never been used.
• Some sections believe that this aggressive move could scandalise a section of academia and experts, while raising questions about the government’s intentions and the impact on the RBI’s autonomy.
• A speech made last week by Viral Acharya, the deputy governor of the RBI, which brought the tensions between the RBI and the government to the fore, might have been provoked by the government’s invocation of Section 7.

Position Taken by the RBI:

• The RBI recently came out with a statement.
• The recent statement put out by the government underlines that the RBI is autonomous but within the framework of the RBI Act.
• It is thus clear that the central bank cannot claim absolute autonomy.
• It is autonomy within the limits set by the government and its extent depends on the subject and the context.
• It is important to note that in a democracy, it is unthinkable that we will have an institution that is so autonomous that it is not answerable to the people.
• Experts point out that the risk of such an institution is that it will impose its preferences on society against the latter’s will, which is undemocratic.
• Experts further add that when seen from this perspective, the limits to the RBI’s autonomy will be clear.
• It is autonomous and accountable to the people ultimately, through the government.
• The onus is thus on responsible behaviour by both sides.

A Closer Look:

• Experts have pointed out that Central bank-government tensions are a common phenomenon.

• Successive governments have been in provocative situations with the RBI. On each occasion, the individuals involved defused tensions and found durable solutions outside the Section 7 consultation process.

• Experts assert that never before in the 83 years of the RBI’s history, has the Section 7 consultation process been initiated for managing intractable disputes in not one or two, but three policy matters. Post-consultations, the government can give written directions to the RBI in ‘public interest’.

• Some experts also assert that the disagreements relate to the RBI’s stringent restrictions on government-run banks whose non-performing assets (NPAs) have grown so much, that the only way of preventing risk spilling from them into the whole financial system is to quarantine their lending.

• Another source of friction is

  government’s

  insistence that the RBI go soft on power companies defaulting on loan repayments.

• The third source of friction is seigniorage, an eternal conflict. The RBI generates surpluses in the various money markets operations it runs. The RBI transfers part of the surpluses to the government, and with the rest it maintains various reserves to draw from in times of financial instability or contingencies. The Finance Ministry wants the RBI to reset the formulae so that larger surpluses become free for transfer to the government. Determined moves of this kind were resisted most recently by Governors Y.V. Reddy and D. Subbarao, both ex-IAS and old Ministry hands.

A Brief History of the long-standing battle:

• It is important to note that the long-standing battle between the RBI and the government escalated in 2015.
• As a matter of fact, the differences were so sharp that a substitute for the Finance Secretary was nominated to attend the RBI’s Board meetings.
• Experts have pointed out that for the first time, an interview with a panel headed by Cabinet Secretary was instituted in the selection process for appointing the RBI Governor. Dr. Patel was chosen through this revamped process. Jaitley was not a member on the selection committee headed by the Cabinet Secretary or of the Appointments Committee of the Cabinet (ACC). His views were taken onboard informally.
• It is important to note that the RBI has in recent years passed on its surpluses in totality to the government, transferring nothing to its own reserves. It is working on a framework that will assess its risk-buffer requirements in a systematic way for determining the transferable surpluses every year.
• Still not satisfied, the Ministry has initiated Section 7 consultations for dipping into the RBI’s war chest for ₹3.6 lakh crore. It is believed that for Ministry mandarins, pressuring the RBI comes easier than raising resources through privatisation or expenditure reforms.
• Questions arise:Would plugging those with the RBI’s surpluses serve ‘public interest’? Experts have argued that this is political convenience masquerading as public interest.

Some other pressing issues:

• One also observes that the RBI is being blamed for the NPAs crisis — though at the height of public outrage over the Nirav Modi scam, critics argue that the government dragged its feet on filling the vacancy of the Deputy Governor in charge of bank supervision and inspections.
• Patel was of the view that after decades of relying on public-sector banking background profiles, the job should be opened to a wider, global field of expertise. The panel that shortlisted candidates for approval by the ACC concurred with his opinion. Overcoming the IAS lobby’s resistance, applicants who combined exposure to public-sector banking system with experience at prestigious global banks were included in the shortlist.
• But the ACC headed by the Prime Minister returned the shortlist, with a demand for more names, forcing re-advertisement of the vacancy and restarting of the process afresh.
• The previous Deputy Governor had retired in mid-2017. The successor was appointed in June 2018. The position remained vacant for nearly 12 months.

Another Tangle- Issue surrounding the CIC and the RBI:

• The Reserve Bank of India finds itself in the midst of another tangle.
• The Central Information Commission (CIC) has recently directed RBI Governor Urjit Patel to show cause “why maximum penalty should not be imposed on him for” the central bank’s ostensible “defiance” of Supreme Court orders on disclosing the names of wilful defaulters on bank loans worth hundreds of crores of rupees.
• One must take note that at the heart of the matter is the issue of burgeoning bad loans at the country’s commercial banks, which by the RBI’s own admission had, at the gross level, surged to 11.6% of all advances as on March 31, 2018, from September 2017’s 10.2% level.

What the charge against the central bank is all about?

• It is important to note that in his order dated November 2, Information Commissioner M. Sridhar Acharyulu has come down heavily on the RBI and its chief for failing to uphold the interest of the public at large and not fulfilling its statutory duty to the depositors, the economy and the banking sector, by privileging individual banks’ interests over its obligation to ensure transparency.
• While the central bank has repeatedly acknowledged the gravity of the problem it faces, including in ensuring more accountability from the more numerous public sector banks over which it wants greater control, it has consistently invoked both the risk to the country’s “economic interest” and its “fiduciary” relationship with lenders to avoid sharing information on the largest defaulters with RTI applicants.

A few more assertions made by the CIC:

• The CIC order is also unsparing of the government for not being more forthcoming. Acharyulu has also asked the Finance Ministry why it should not explain to the people the action taken, or contemplated, to recover dues from wilful defaulters, who owe banks more than Rs. 50 crore, and, where warranted, the criminal proceedings initiated.
• Experts assert that while it is no one’s argument that all large unpaid loans are by-products of mala fide borrowing, the onus is on the RBI and the government to make as clean a breast of it as is legally possible, in order to retain public trust.
• Given that the RBI has initiated steps to set up a digital Public Credit Registry that would include details of all borrowers including wilful defaulters, it would behove the banking regulator to meet the CIC’s November 16 deadline for furnishing the information sought about those owing Rs. 1,000 crore or more, to start with.

Editorial Analysis:

●       As the RBI’s autonomy is debated, experts believe that it needs to revisit its exclusive focus on inflation-targeting.

• Recently, we observe that the RBI suggests that its independence is being violated while the government rationalises its intervention in terms of its concern for the economy. However, how does one make sense of these positions?

Understanding the idea of Autonomy:

• Experts point out that even at the time when the idea of central bank independence began to germinate some two decades ago, this was understood to mean a ‘functional’ independence.
• ‘Functional Independence’ suggests that the bank would be unconstrained by the government in its functioning, which includes both the instruments it uses and how it uses them.
• However, its autonomy was not to extend to ‘goal’ independence.
• Further, what the goals of the central bank should be were to be chosen by the government without reference to the bank.
• The main issue here was whether the bank should focus on inflation alone or also on the level of employment. Within a decade of this debate, it had been conceded that the focus would be exclusively on the former, and monetary policy came to be identified with ‘inflation targeting’.
• Having said this, there are two important narratives that emerge.

1. Firstly, the discourse was solely among interlocutors from Western democracies, ensuring the issues were those related to their economies.
2. Secondly, even as the major central banks of the world shifted to inflation targeting, in yet another example of American exceptionalism, the U.S. did not revise the goals of the Federal Reserve.

Further, it was to continue focus on maximising employment while keeping prices stable, a sensible recognition of a possible trade-off between these goals.

However, in India where for close to a quarter century political parties of all hues appear to suggest ‘what is good for America is the best for India’, this has been missed. In 2015 the RBI was by law, in line with a “modern monetary policy”, expected to target inflation. It was to remain the banking regulator though.

A Reflection on the Current Issues of Contention:

• The issues of contention happen to be the following:

1. the corrective action to be taken for stressed banks,
2. the prudential norms to be adopted by financial institutions,
3. the easing of liquidity and
4. the sharing of the surplus generated by the RBI.

It is important to note that, with the exception of the last, all others are in the RBI’s sphere of operations.

• However, on the other hand, on the sharing of the surplus, it is understood that the Government of India, legally is the owner of the surplus generated by the country’s public institutions.
• Experts have pointed out that even under this architecture, though, all care must be taken to ensure that the central bank’s reserves are of a level commensurate with the extent of the financial sector and the potential degree of systemic risk from its malfunctioning, which can vary.
• Experts have also pointed out that apart from the issue of sharing the surplus, the RBI should be left alone by the government to decide on the right course of action. This derives not so much from a notion of central bank independence as it does from the point of view of a credible governance policy.
• The RBI is the banking regulator after all, and for the government to attempt to direct it would constitute micro-management.

The Issue of Stability of the Economy:

• Further, there is reason to believe that some of the actions being sought to be imposed on the RBI today could jeopardise the stability of the economy.
• It is important to note that while acting as the lender of last resort can be stabilising, under no circumstances would it be advisable to lower prudential norms in the presence of stressed banks.
• Also, the government’s concern for the health of the medium and small enterprises is well-founded. After all, the medium and small enterprises were among the most affected sections following the demonetisation of 2016.
• If, in the spirit of contriteness as it were, the government wants to reach out to them, the right course would be to provide interest rate subvention, rather than to force the RBI to tweak its lending norms. There is a severe lack of judgment in loan melas promising online sanction in less than an hour. There is the suggestion in this of the political business cycle, a government trying to nudge the economy prior to an election. The resistance of the RBI top brass to this desperate action is understandable.
• Whatever may be the misfeasance of the government in its recent dealings with the RBI, however, it would yet be acceptable to review its own performance in the sphere in which it has an untrammelled independence, namely monetary policy. Under this arrangement it has control over the interest rate.
• Over 2013-2018 there has been a 5 percentage point swing in the real interest rate in India, moving from a negative to a positive level, making it among the highest in the world, much higher than that of China.
• This is clearly the consequence of an exclusive policy focus on inflation from even before inflation targeting was formally adopted by Parliament in India.
• It may well have contributed to slow industrial and export growth, due to a real appreciation of the rupee, and a rise in NPAs even after their existence had been recognised. If this is the monetary policy that central bank independence brings with it, we might just be a little sceptical of the value of the independence itself.

Enabling the objective of job creation:

• There is a certain populism inherent in privileging inflation control to justify extraordinarily high interest rates.
• It is important to note that the absence of inflation by itself only benefits those in employment, it does not assure jobs to the unemployed.
• Thus a monetary policy that ignores the impact of its actions on unemployment is not credible.
• Interestingly, the government and the RBI have always been on the same page as far as inflation targeting is concerned. The populist message that inflation erodes the income of the poor, conceals the possibility that in the implementation, such a policy could hold back job creation by restricting investment.

Concluding Remarks:

• In conclusion, the rising current account deficit, the slow growth of employment and the disappointing performance of manufacturing, the sector most closely affected by high interest rates, should prompt us to review how monetary policy is conducted in India.
• Further, experts believe that the latest tussle between the executive and the central bank will eventually end, in all probability with a compromise.
• However, its purpose would have been served if the debate leads to greater awareness on both sides of the other’s compulsions.
• However, what if the Government and the RBI do have fundamental disagreements, as they seem to be having now, and are unable to arrive at a common ground?
• It is important to note that the option of Section 7 is certainly available to the more powerful side; but Section 7 is a deterrent never to be used.
• In conclusion, it is to avoid situations such as the one we are seeing now that former RBI Governor Raghuram Rajan argued for a clear enunciation of the RBI’s responsibilities.
• In his book, “I Do What I Do”, former RBI Governor Raghuram Rajan points out that the position of the RBI Governor in the government hierarchy is not defined.
• Lastly, the Governor has to be conscious of the limits to his autonomy at all times, and the government has to consider the advice coming from Mint Street in all seriousness, as indeed Dr. Reddy and Dr. Subbarao have also pointed out.

Category: WORLD HISTORY

1. A sacrifice remembered (World History: World War I)

Larger Background:

• India was one of the largest contributors of soldiers during World War I. India’s participation at the Armistice Centenary ceremony will be a befitting tribute to the sacrifices made by these soldiers, underlining India’s historical contribution to global peace and security.

• In a recent development, the Vice President of India, Shri M. Venkaiah Naidu, at the invitation of the Government of the Republic of France, will be visiting Paris from 9 to 11 November 2018, to represent Government of India in the activities commemorating the centenary of the Armistice of World War I.

• As part of the Armistice Centenary, the French Government will also be hosting the Paris Peace Forum, which will take place in Paris from 11-13 November 2018.

• The aim of the Paris Peace Forum is to establish a global platform to reaffirm the importance of multilateralism, international cooperation and reform of global governance institutions.

• Further, the Forum provides a platform for discussion and debate with special emphasis on civil society initiatives and shares experiences and innovative solutions involving all the stakeholders in governance.

Editorial Analysis:

●       The contribution that Indians of all faiths made to the victory of good over evil in the First World War is little known, but it was crucial.

●       Rushed to the Western Front, Indian soldiers fought tenaciously to stop a German breakthrough.

●       Certain examples stand out like that of Darwan Singh Negi.

●       Darwan Singh Negi won one of the first Victoria Crosses, fighting to retake British trenches from the enemy although he had been seriously wounded in the head and the arm. Without men like him, the war might quickly have been lost.

●       In all, over one million Indians served overseas during the First World War.

●       Over 74,000 never returned. It is this fact that makes India’s choice of the marigold to symbolise remembrance an apt one, given the secular association of saffron with sacrifice.

Significance of the Centenary:

●       The centenary of the war has provided a welcome opportunity to recognise India’s role.

●       The United Services Institution, backed by the Ministry of External Affairs, has taken the initiative, launching a commemoration project.

●       Crucially, this has unearthed contemporary accounts by Indian soldiers, which will change how future histories of India’s war are written.

●       These accounts confirm what might seem a surprising fact. The Indians who volunteered, just like their British counterparts, believed profoundly that the cause they fought for was just.

Concluding Remarks:

• In conclusion, we must note that new threats to freedom and the world order confront us today, especially in the increasingly important Indo-Pacific region.

Question 1. Which of the following is/are listed as critically endangered in the IUCN Red List?

Question 2. What is NavIC?

Question 3. The term ‘Gross Non-Performing Assets (NPA)’ includes such assets as those of

I. Practice Questions for UPSC Mains Exam

1. In the light of the National River Ganga (Rejuvenation, Conservation and Management) Bill, 2018, discuss the advantages and challenges of waterways. (200 Words)

2. “Supreme Court ending the Sabarimala ban is a victory of constitutional morality over regressive social and religious practices. Critically examine. (200 words)

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