16 Oct 2018: UPSC Exam Comprehensive News Analysis

A. GS1 Related
B. GS2 Related
INTERNATIONAL RELATIONS
1. We’ll meet your oil needs: Saudi Arabia
2. Bhutan’s not-so-happy evicted minority
C. GS3 Related
ECONOMICS
1. Higher food prices drive wholesale inflation to 5.13%
ENVIRONMENT
1. Ahead of climate talks, India in touch with 40 countries
D. GS4 Related
E. Editorials
POLITY AND GOVERNANCE
1. Hamstringing the RTI Act (RTI Act)
INTERNATIONAL RELATIONS
1. The Bhutan vote (Elections in Bhutan; India-Bhutan Relations)
ECONOMY
1. Not just liquidity: on NBFCs crisis (defaults by the IL&FS)
F. Tidbits
1. The ‘padwomen’ of Telangana
G. Prelims Fact
1. India, France in talks to conduct tri-service exercise
H. UPSC Prelims Practice Questions
I. UPSC Mains Practice Questions 

A. GS1 Related

B. GS2 Related

Context

• Saudi Arabia stands committed to meeting all of India’s energy needs, especially in oil, its Energy Minister Khalid A. Al-Falih said on Monday.
• Al-Falih said Saudi Aramco’s investment of $44 billion in the Ratnagiri refinery was “just the start” and that the company was keen to invest in an integrated downstream business, including on the retail side, as well as in storage capacity.
• According to him, the ongoing belief that the rise of electric vehicles would mean the decline of oil missed the reality of the situation.
• Conventional vehicles, he said, still represented 99.8% of all vehicles in the world. Electric vehicles, he pointed out, are in the passenger vehicle segment, which accounts for only a quarter of oil demand. “The majority of oil demand comes from sectors like heavy vehicles and commercial vehicles, and this demand will remain for a long time to come,” he said.

A look at the relation between India and Saudi Arabia

• The relation between India and Saudi Arabia is generally strong and close, especially in commercial interests.
• Saudi Arabia is India’s fourth largest trade partner after China, US and UAE. It is a major source of India’s energy security requirement that counts for almost 1/5th of India’s crude oil requirement. Saudi Arabia is India’s top supplier of crude oil.
• As of now the relations between India and Saudi Arabia revolves around two important areas – trade and investment; defense and security cooperation
• India heavily relies on the gulf countries for foreign Investments to expand the Indian market. The Indian government is focused on improving the infrastructure sector in taking efforts like – to improve the ease of doing business in the country and to simplify and rationalize existing rules and relax the foreign direct investment norms in key areas, including railways, defense and insurance has made Saudi Arabia to invest in Indian market.
• The other sector where India-Saudi relations have been strengthened significantly is in the defense and security sector. India and Saudi Arabia share common grounds when it comes to maritime security, defense cooperation, fight against extremism and terrorism.
• However, India maintains neutrality because Saudi Arabia has close military and strategic ties with Pakistan which is often a source of continuing strain for India.
• India’s major exports to Saudi Arabia include basmati rice, textiles and garments and machinery, while it imports organic and inorganic chemicals, metal scrap, leather, gold and oil from Saudi Arabia.
• Both nations are expected to expand trade and cooperation and joint ventures in telecommunications, pharmaceuticals, health services, information technology, biotechnology, agriculture, construction projects, energy and financial services. Both countries agreed to launch joint ventures for developing gas-based fertilizer plants in Saudi Arabia.

• The Himalayan nation of Bhutan, often described as a “Shangri-La” where happiness is equated to wealth, is holding elections this week. But the Lhotshampa people, brutally driven out of the small kingdom in the 1990s, won’t be voting.
• The Nepali-speaking Lhotshampa were branded as immigrants and stripped of citizenship rights when the then-king introduced a “One Nation, One People” policy in 1985.
• The edict made following the customs of the Buddhist majority mandatory, including wearing their traditional dress, and speaking Nepali was banned.
• Those who resisted were labelled as “anti-nationals”, arrested and subjected to brutal treatment including rape and torture, according to Amnesty International.
• The security forces made detainees sign declarations saying they would leave Bhutan voluntarily as a condition of their release. Some 100,000 — one sixth of Bhutan’s population — fled, ending up in refugee camps in eastern Nepal.
• Bhutan still describes the Lhotshampa as immigrants, justifying its nationalistic laws as essential for cultural identity and political stability, according to Freedom House, a think tank.

Related Concept – Bhutan’s GNH

• Gross National Happiness is a term coined by His Majesty the Fourth King of Bhutan, Jigme Singye Wangchuck in the 1970s.
• The concept implies that sustainable development should take a holistic approach towards notions of progress and give equal importance to non-economic aspects of well being.

The concept of GNH has often been explained by its four pillars:

1. Good governance,
2. Sustainable Socio-Economic Development,
3. Cultural Preservation, and
4. Environmental Conservation

Lately the four pillars have been further classified into nine domains in order to create widespread understanding of GNH and to reflect the holistic range of GNH values.

The nine domains are:

1. Psychological well being,
2. Health,
3. Education,
4. Time use,
5. Cultural diversity and resilience,
6. Good governance,
7. Community vitality,
8. Ecological diversity and resilience, and
9. Living standards.

The domains represents each of the components of well being of the Bhutanese people, and the term ‘well being’ here refers to fulfilling conditions of a ‘good life’ as per the values and principles laid down by the concept of Gross National Happiness.

C. GS3 Related

• Wholesale inflation accelerated to 5.13% in September, driven in large part by quickening inflation in the primary articles segment and stabilising food prices, according to official data released on Monday.
• Growth in the Wholesale Price Index quickened in September from 4.53% in August.
• Sequentially, out of three major groups, primary articles inflation increased sharply in September and fuel and light, and manufactured inflation moderated in September.
• The prevailing market price for most kharif crops at major mandis has remained lower than the minimum support price (MSP), suggesting procurement hasn’t picked up.
• The future inflation trajectory will depend on the response of mandi prices with respect to new MSP, and the movement of crude oil price and value of currency.

WPI

• Wholesale Price Index (WPI) is based on the price prevailing in the wholesale markets or the price at which bulk  transactions are made.

It includes three components:

• Manufactured products = 64.2%
• Primary articles = 22.6%
• Fuel and power = 13.1% now

Base year has been changed from 2004-05 to 2011-12 recently.

CPI

• Consumer Price Index (CPI) is based on the final prices of goods at the retail level.

Because of the wide disparities in the consumption baskets for different segment of consumers, India has adopted four CPIs.

• CPI (Industrial Workers)
• CPI (Urban Non- Manual Employees)
• CPI (Agricultural Labour)
• CPI (Rural Worker)

In India, RBI uses CPI (combined) released by CSO for inflation purpose with base year as 2012.

The number of items in CPI basket include 448 in rural and 460 in urban.

Why CPI is better than WPI?

• Conceptually, retail inflation—price rise driven by potential consumer demand and available supply—is a better indicator of inflation for guiding monetary policy decisions than WPI inflation.
• WPI excludes prices of services such as education, healthcare, and rents. However, services now account for nearly 60 per cent of GDP and a vast majority of these services are not traded with other countries. Conversely, the new CPI measure assigns nearly 36% weightage on services and includes price changes in housing, education, healthcare, transport and communication, personal care and entertainment.
• WPI assigns nearly 15% and 10.7% weightage for the fuel group and metal and metal products group, respectively. Any sharp movements in international prices of fuels and metals, therefore, lead to sharp changes in WPI. CPI shows the consumer trends of the common man.

• Ahead of the December climate talks in Katowice, Poland, India is having discussions with 40 countries, including China, to forge alliances and compel developed countries to make good on promises, made over the years, to provide enough finance and technology to stem runaway global warming.
• Over the years, developed countries have promised to provide $100 billion annually to developing countries to check such warming.
• “We are having talks with nearly 40 countries in various capacities,” C.K. Mishra, Secretary, Environment, Forests and Climate Change Ministry, told The Hindu on the sidelines of a conference. “Mainly, it is about firming up about how the Paris agreement is to be implemented, as well as outstanding commitments on providing finance and technology.” Over the years, India has been part of several such alliances.
• The ‘Like Minded Developing Countries’ (India, China, Venezuela and Iran) and BASIC (Brazil, South Africa, India, China) are networks that are formed to lend weight to developing country concerns.
• The Conference of Parties (COP) is a group of 200 countries which meet annually on addressing global warming.

Paris Agreement

• Paris Agreement is an international arrangement to fight against climate change. It is the world’s first comprehensive climate agreement. The governments of 195 nations gathered in Paris from 30 November to 11 December 2015 and discussed a conceivable fresh global agreement on climate change, intended at decreasing global greenhouse gas emissions.

Aim of Paris agreement

• Retain the global temperature rise this century well below 2 degrees Celsius above the pre-industrial level.
• Pursue efforts to limit the temperature upsurge even further to 1.5 degrees Celsius.
• Reinforce the ability of countries to deal with the impacts of climate change.

More about the Paris Agreement

• In French, the Paris Agreement is known as L’accord de Paris.
• The key vision of Paris Agreement is to keep global temperatures “well below” 2.0C (3.6F) above pre-industrial times and “endeavour to limit” them even more, to 1.5C.
• Paris Accord talks about limiting the amount of greenhouse gases emitted by human activity to the same levels that trees, soil and oceans can absorb naturally, beginning at some point between 2050 and 2100.
• It also mentions the need to review each country’s contribution to cutting emissions every five years so they scale up to the challenge.
• Rich countries should help poorer nations by providing “climate finance” to adapt to climate change and switch to renewable energy.
• The Paris Agreement has a ‘bottom up’ structure in contrast to most international environmental law treaties which are ‘top down.
• The agreement is binding in some elements like reporting requirements, while leaving other aspects of the deal such as the setting of emissions targets for any individual country as non-binding.

D. GS4 Related

E. Editorials

Background:

• The basic object of the Right to Information Act is to empower the citizens, promote transparency and accountability in the working of the Government,contain corruption, and make our democracy work for the people in real sense.
• It goes without saying that an informed citizen is better equipped to keep necessary vigil on the instruments of governance and make the government more accountable to the governed. The Act is a big step towards making the citizens informed about the activities of the Government.

Editorial Analysis:

The Right to Information (RTI) Act, was operationalised in October 2005. The RTI Act was seen as a powerful tool for citizen empowerment.

The Act also showed an early promise by exposing wrongdoings, such as
a) in the organisation of the Commonwealth Games,
b) the allocation of 2G spectrum and
c) coal blocks.
However, experts believe that it now faces multiple challenges.

• Experts believe that although the Act was path-breaking in many respects, it did not give adequate authority to the Information Commissions to enforce their decisions.
  It is important to note that apart from awarding compensation to an applicant for any loss suffered, the commissions can direct public authorities to take the steps necessary to comply with the Act, but are helpless if such directions are ignored.
• Although, it must be acknowledged that if an officer fails to fulfil his duty, the commission can either impose a maximum penalty of ₹25,000 or recommend disciplinary action against him. However, this deterrent works only when the piece of information lies at the lower levels.
• This deterrent is ineffective in many cases where information relates to higher levels of government. As a consequence, implementation of decisions taken by the commissions, remains a weak link.

A Look at the Recent Proposed Amendments:

• • Experts believe that the Right to Information (Amendment) Bill 2018 attempts to dilute the independence of Central and State Information Commissioners besides giving undue powers to the Government of the day to appoint Commissioners with uncertain term, status and salary. They further assert that the Bill intends to defeat very purpose of RTI Act 2005 besides being an affront to federalism enshrined as basic feature of Indian Constitution.
  • The government proposes to do away with the equivalence of the Central Information Commissioners with the Election Commissioners. The basis for doing so that has been sighted is that that the two have different mandates.  

• The government proposes to replace the existing fixed five-year tenure of the Information Commissioners with a tenure as may be prescribed by it. Experts believe that this would make the tenure subject to political interference. This would be detrimental to the independence and authority of the Information Commissions.

• Experts believe that the RTI Act struck a balance between privacy and transparency by barring the disclosure of personal information if it has no relationship to any public activity or would cause unwarranted invasion of privacy.
• However, in this regard, we must take note of the the Justice Srikrishna Committee recommendations as well. The Justice Srikrishna Committee has proposed an amendment that would broaden the definition of ‘harm’. Experts believe that this broadened definition of ‘harm’ would restrict disclosure of personal information even where it may be clearly linked to some public activity.
• It is important to also note that the Central and State Information Commissions have been functioning with less than their prescribed maximum strength of eleven. This is primarily due to an undue delay on appointing commissioners. For instance, the Central Information Commission (CIC), currently having seven members, will have only three by the end of the year if no appointments are made.
• This leads to delay in disposal of cases, which is compounded by the backlog in the High Courts, where a number of decisions of the commission are challenged. This happens invariably in high-profile cases. For example, the CIC’s decision in 2007 to cover Indraprastha Gas Ltd. under the Act was stayed by the Delhi High Court, and the stay continues to operate.

Reason for Clogging of the System:

• It is important to note that the clogging of the RTI system is also because a number of applicants, usually disgruntled employees of public institutions, ask frivolous queries.
  Further, their applications have unfortunately continued to exist alongside those of numerous RTI activists who have done commendable work, who often risk their life and limb.
• Moreover, Section 4 of the RTI Act requires suo motu disclosure of a lot of information by each public authority. However, such disclosures have remained less than satisfactory. Thus, the CIC has had to repeatedly direct regulators of the banking sector to disclose information on the wrongdoings of banks.
  This was done so as to enable the public to make informed choices about their dealings with various banks.
• In one specific case, the CIC had to direct the disclosure of the list of private persons who travelled with the Prime Minister, at government expense, during his foreign visits. Experts believe that such information should have been disclosed suo motu by the government.

A Few Specifics:

Recently, Information Commissioner Prof. Mr. Sridhar Acharyulu wrote to senior-most Commissioner Yashovardhan Azad, highlighting several deficiencies in the Bill. The letter was marked to all his fellow Commissioners, and also proposes that all of them come together to seek withdrawal of the Bill.

Here are a few excerpts and assertions from his letter:

• Sub-section (5) of section 13 of the RTI Act provided that the salaries and allowance and other terms and conditions of service of the Chief Information Commissioner (CIC) and Information Commissioners shall be same as that of the Chief Election Commissioner (CEC) and Elections Commissioners, respectively.
• Similarly, sub-section (5) of Section 16 of the Act provides that the salaries and allowances and other terms and conditions of service of the State Chief Information Commissioner (SCIC) and State Information Commissioners (SIC) shall be the same as that of the EC and the Chief Secretary to the State Government, respectively.
• The salaries and allowances and other terms and conditions of service of the CEC and EC are equal to a Judge of the Supreme Court, therefore, the CIC, IC and SCIC, SICs become equivalent to a judge of the Supreme Court in terms of their salaries and and allowances and other term and condition of service.
• The Bill not only proposes to weaken the transparency regulator but enables the central government to encroach upon the sovereignty of the State Governments. While the RTI Act of 2005 insulated Information Commissioners from political vagaries, the Bill of 2018 makes them subject to it. The Central Government will prescribe the term and salary of the Commissioners by issuing notifications from time to time. This means that the Government need not go to Parliament to amend RTI Act, but it can simply issue a notification either to reduce or increase the term of a particular batch of Commissioners and their salary.

Observations made by Minister for PMO, Jitender Singh:

Over and above this, it is also important to point out the following observation made by the Minister for PMO, Jitender Singh.
His observation is as below:
“The functions being carried out by the Election Commission of India and Central and State Information Commissions are totally different. The Election Commission is a constitution body established by clause (1) of article 324 of the Constitution and is responsible for the superintendence, direction and control of the preparation of the electoral rolls for, and the conduct of, all election to Parliament and to the Legislature of every State and of election to the office of President and Vice President held under the Constitution. On the other hand, the Central Information Commission and State Information Commissions are statutory bodies established under the provision of the Right to Information Act, 2005. Therefore, the mandate of Election Commission of India and Central and State Information Commissions are different. Hence their status and service conditions need o be rationalised accordingly”.

Concluding Remarks:

• In conclusion, the RTI Act continues to render tremendous service in providing information to citizens. Although its aim is not to create a grievance redressal mechanism, the notices from Information Commissions often spur the public authorities to redress grievances.
• Finally, thirteen years of the Act’s functioning have given us enough experience to hold a public debate on making it more effective.

Note to the Students:

This editorial covers the potential impact that the elections in Bhutan would carry, with a special focus on India. Over and above this issue in the news, students are also advised to cover the larger canvas of India-Bhutan relations.

Background:

Brief Note on India-Bhutan relations:

• Diplomatic relations between India and Bhutan were established in 1968 with the appointment of a resident representative of India in Thimphu. Before this our relations with Bhutan were looked after by our Political Officer in Sikkim.
• The basic framework of India- Bhutan bilateral relations was the Treaty of Friendship and Cooperation signed in 1949 between the two countries, which was revised in February 2007.The India-Bhutan Friendship Treaty not only reflects the contemporary nature of our relationship but also lays the foundation for their future development in the 21st century.
• There are a number of institutional mechanisms between India and Bhutan in areas such as security, border management, trade, transit, economic, hydro-power, development cooperation, water resources. There have been regular exchanges at the Ministerial and officials level, exchanges of Parliamentarian delegations to strengthen partnership in diverse areas of cooperation.
• Development of hydropower in Bhutan has been the centre-piece of the bilateral cooperation. It is an exemplary win-win partnership: surplus power generated from the hydroelectric projects (HEPs) is exported to India providing Bhutan a steady stream of revenue and providing Indian an assured supply of clean power.
• India is Bhutan’s largest trade and development partner, and source of supplies of most of the essential commodities imported by Bhutan. As Bhutan prepares its people for the information technology age, it is reaching out beyond its traditional sectors of agriculture and hydropower to expansion in tourism, IT, and education, and it offers considerable potential for mutually beneficial economic and business partnership.
• Major exports from India to Bhutan are mineral products, machinery and mechanical appliances, electrical equipments, base metals, vehicles, vegetable products, plastics and articles. The major items of import from Bhutan are electricity, ferro- silicon, Portland cement, dolomite, carbides of calcium carbides of silicon, cement clinkers, timber and wood products, potatoes, cardamom and fruit products.

Editorial Analysis:

• Experts believe that the results of Bhutan’s general election will have significant repercussions for South Asia.
• The first round of the elections were held in September, 2018.
• This round has already delivered a surprise verdict, with the ousting of the incumbent People’s Democratic Party.
• Currently, the two parties that are left in the fray represent opposites in terms of their experience. It was the Druk Nyamrup Tshogpa, that won the maximum number of votes in the first round this year (2018).
• The Druk Phuensum Tshogpa, on the other hand, won the first Bhutanese elections in 2008. The Druk Phuensum Tshogpa maintains a strong traditional base.

A Few Trends that have been Observed:

• The first round of the results also threw up some glaring trends.
• While the ordinary voter favoured the PDP, ultimately the postal ballots, used by government officials and their families as well as military personnel, swung the vote in the other direction.
• Another trend, which may be disquieting for whichever party comes to power, is that votes in the first round of elections were polarised between more prosperous Western Bhutan and less developed Eastern Bhutan.
• To illustrate this further, we need to take a few examples: The DPT, for example, won all but one constituency in the east, while winning only two in the west; the DNT and PDP won seats only in the western half.
• Experts believe that the vertical split doesn’t just denote a development divide, it points to a feeling of discontent in a country generally known as a whole for its Gross National Happiness quotient.

Concluding Remarks:

• Regardless of which party wins on the 18th of October, 2018, India-Bhutan ties are expected to be accorded their customary priority.  
• It must be noted  that Bhutan’s monarch, Jigme Khesar Namgyel Wangchuck, retains a considerable influence over the nation’s foreign policy. Along with his father, and predecessor as king, he has consistently stressed his commitment to the bilateral relationship between India and Bhutan.
• Further, the ‘China factor’ will be closely watched for its impact, a year after the India-China standoff on the Bhutanese Doklam plateau.
• In conclusion, this year marks the 50th anniversary of formal relations between India and Bhutan, built on cultural ties, mutual strategic interests, and India’s role in building roads and assisting in hydropower projects that became the mainstay of the Bhutanese economy.

Note to the Students:

This editorial coverage is takes into account the recent issue of a series of defaults by the IL&FS holding company and group outfits beginning in August, 2018 which set off a market-wide contagion.

Students are advised to go through this article as it has a relevance from the perspective of the GS-3 Paper (Indian Economy).

• Here we have suitably signposted the Editorial Analysis into multiple headings.

• “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.

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

• “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.

Background:

• Infrastructure Leasing & Financial Services Ltd. (IL&FS) was set up in 1987 by the legendary M.J. Pherwani (former chairman of Unit Trust of India, National Housing Bank, etc.) to finance and promote infrastructure projects in the country.
• This holding company is now a financial behemoth with assets of over Rs. 1,15,000 crore and a  debt of Rs. 91,000 crore.
• IL&FS Finance, which is a group company of the holding IL&FS company, defaulted in late August on a commercial paper repayment. This development was followed by a default by IL&FS on repayment of a Rs. 1,000 crore deposit to Small Industries Development Bank of India (SIDBI).
• Pursuant to this, a series of defaults by the holding company and group outfits followed. These defaults ran into the weeks leading up to the annual general meeting of IL&FS on September 29, 2018.
• Infrastructure Leasing & Financial Services Ltd. (IL&FS) is listed as “systemically important” by the Reserve Bank of India. The company has over Rs. 1,15,000 crore of assets and Rs. 91,000 crore of debt. Thus, it is too big to fail. This is further underlined by the fact that interlinkages between IL&FS and other financial sector entities such as banks, mutual funds and infrastructure players are too strong and the company would have taken them all down with it if it were allowed to fail.

A Note on IL&FS:

• IL&FS is a holding company that operates through 169 other companies.
• These 169 other companies are either subsidiaries, group companies or joint ventures with others. It has been in the past and is currently as well, associated with landmark projects.
• A few among these projects include the tunnel under the Zoji La Pass, Delhi-Noida toll bridge, Gujarat International Finance Tec-City (GIFT) and a host of road, power, water and port projects.
• Three of IL&FS’group companies are listed on the stock markets.
• These group companies are IL&FS Investment Managers Ltd., IL&FS Engineering and Construction Company Ltd. and IL&FS Transportation Networks Ltd.
• IL&FS was originally promoted by the Central Bank of India, Unit Trust of India and HDFC. Orix Corporation of Japan, Abu Dhabi Investment Authority, LIC and SBI joined in as co-promoters later.

How did this crisis take place?

Essentially, the company borrowed many times its equity. This figure is rumoured to be between 10-18 times its equity. This money was borrowed to fund its infrastructure projects, most of which bring in returns over 20-25 years.

To compound matters, IL&FS’s borrowings were all repayable in the short to medium-term of roughly 8-10 years.

The chokepoint for IL&FS came from the fact that its projects were stalling and not being completed due to various reasons. These reasons ranged from:

1. statutory approvals not coming in
2. problems of land acquisition and
3. projects simply becoming unviable as it happened in the case of power plants.

Further, with returns from these projects not coming in, IL&FS was forced to borrow more. Lenders pulled the plug leading to trouble for IL&FS.

It is important to note that assets and receivables were exaggerated in the financial statements and the top managers took home large pay-outs and continued to pay dividends to shareholders despite the financial situation. An investigation has been ordered by the Serious Fraud Investigation Office.

A Look at Certain Specifics:

• • Recently, the Centre moved to supersede the Board of Directors.
  • The decision to change the management has ushered in the appointment of experienced people, such as Uday Kotak, who has rich experience in the finance sector; G.C. Chaturvedi, former bureaucrat and non-executive chairman of ICICI Bank; and G.N. Bajpai, former chairman of the Securities and Exchange Board of India and the Life Insurance Corporation. It is believed that these appointments should lend confidence to lenders and investors.

• The Life Insurance Corporation of India is the largest shareholder in IL&FS with a 25.34% stake, followed by Orix Corporation of Japan with 23.54%.

• The Centre has explicitly stated its intent, which is to “ensure that needed liquidity is arranged for IL&FS from the financial system”.
• By doing so, the Centre has sent out an unambiguous message to the markets that it will not allow the company to fail.
• It is believed that any rescue plan for the company obviously had to begin with replacing the existing management that was responsible for mismanaging its affairs.
• Currently, the problem appears to be one of liquidity and not solvency.
• It is believed that this is a classic case of over-leveraging, and an asset-liability mismatch caused by funding projects of 20-25 years payback period with relatively short-term funds of 8-10 years.

Certain Questions that Remain:

• In conclusion, there are some important questions that need to be answered.

• If IL&FS was a systemically important company, how did its over-leveraging escape the notice of the Reserve Bank of India?
• What did the periodic inspections of the company by RBI reveal? How did the developing situation pass the attention of shareholders? Did they look the other way since their dividends were serviced?
• Finding answers to these questions is as important as rescuing IL&FS.
• Finally, it is felt that there is a need for long-term finance sources for infrastructure projects.
• Currently, the LIC and some insurance companies are the only domestic sources and they too do not lend beyond 10 to 12 years.
• Thus, the Centre and the RBI should look at ways to deepen the debt markets where infrastructure players can borrow long-term.
• Moreover, it also needs to be analysed as to how a company listed as “systemically important” managed to fly under the radar with misgovernance. It is important to note that the debt pile-up due to over-leveraging did not happen overnight.

A Deeper Insight:

• Experts believe that much before the crisis at Infrastructure Leasing & Financial Services (IL&FS) came out into the open last month, mutual funds were comfortably holding bonds – commercial paper, debentures, structured obligation – issued by the company amounting to nearly Rs. 3,500 crore.
• Further, IL&FS was a tiny part of the overall debt exposure of mutual funds to NBFCs and other brokerages, which was pegged at Rs. 11.25 trillion as on September 30, 2018.
• This is a little over 51% of the total assets under management (AUM) — Rs. 22.04 trillion — of mutual funds in India.
• However, everything changed when two IL&FS group entities were downgraded early in September that directly put around Rs. 1,000 crore worth of debt papers at risk.
• Since this development, questions have been repeatedly raised about the quality of assets that fund houses are holding and whether they need to act on them.

Why weren’t red flags raised?

It is important to note that while all fund houses have an internal valuation policy for debt instruments, it typically gets triggered only after a security is downgraded by rating agencies such as CRISIL and ICRA.

• • Once the instruments fall below investment grade, it is the call of the fund houses to value it. It is the Securities and Exchange Board of India (SEBI) which mandates that once a non-government security falls below investment grade, it has to be valued at a discount of 25% to its face value.
  • Although there is a valuation policy in place, a fund house can choose to decide whether or not it wants to gradually mark down the asset or just write it off.
  • Fund houses typically choose to write it off when the downgrades or defaults are swift and sudden.

• It is important to note that any mark-down or write-off impacts the net asset value (NAV) of the scheme and hence fund houses prefer to gradually mark down securities where there is a risk of delay in payment or even default.

Why is the rescue important?

• • It is important to note that on a standalone basis, the IL&FS may constitute a small portion of the overall debt assets of mutual funds, but a default creates a ripple effect for all NBFCs.

• Such a ripple effect is created for all NBFCs as the cost of funds goes up with mutual funds becoming wary of buying such securities.

• According to industry players, NBFCs have already seen the cost of funds going up by 20-30 basis points in the last one month. A direct quantifiable impact is visible in the stock markets wherein many of the listed NBFCs have seen their value erode by more than 50%, compared to their recent highs.
• In conclusion, it is important to note that if IL&FS had been allowed to collapse, it would have impacted the whole NBFC industry. It would have hit sectors such as:

1. housing finance,
2. capital market fund raising,
3. margin financing and even
4. retail loans to a large extent.

It is important to note that a recent report by the government sent to the Ministry of Corporate Affairs (MCA) said a default by IL&FS could have significant repercussions, including widespread redemption pressures, sell-off in the debt market, liquidity crunch and 1,500 smaller NBFCs shutting shop for lack of adequate capital.

The government further said that avoiding a default would require a combination of measures of asset sales, restructuring of some liabilities and fresh infusion of funds by investors and lenders. Currently, the RBI is believed to be looking at strengthening the regulatory framework to avoid asset liability mismatches by NBFCs.

A Look at the Current State of Affairs:

• • A new board of Infrastructure Leasing & Financial Services (IL&FS) was appointed by the Centre on October 1, 2018. This was done  after it secured the approval of the National Company Law Tribunal (NCLT) to supersede the previous board.
  • The previous board was  accused of ‘mismanagement’ and ‘compromise of corporate governance norms,’ leading to financial issues.

• The State Bank of India, which also happens to be the country’s largest lender, has also stepped in to support with liquidity as it decided to triple its target for loan purchase from NBFCs to Rs. 45,000 crore for the current financial year.

• The government also stepped in to address the governance issues at IL&FS.
• Based on a report of the Ministry of Corporate Affairs, which indicated serious deficiencies in IL&FS, the holding company, and its subsidiaries, the government moved the National Company Law Tribunal to dismantle the board and bring in new members to avoid a collapse.
• The board is expected to submit a resolution plan by October 31, 2018.

Who’m does the board comprise of?

• • The stewardship of the new board, has been entrusted to Uday Kotak, executive vice-chairman & managing director of Kotak Mahindra Bank.
  • Mr. Kotak will join hands with Vineet Nayyar, who has been named vice-chairman & managing director.
  • Vineet Nayyar had played a role in the rescue of Satyam Computer Services after its founder Ramalinga Raju admitted to a massive accounting fraud.
  • The newly constituted board also includes former banking secretary G.C. Chaturvedi and former SEBI chairman G.N. Bajpai.

• G.N. Bajpai had also served as chairman of Life Insurance Corporation of India, which is also the largest shareholder in IL&FS.

• Nand Kishore and Dr. Malini Shankar have been roped in as the other directors, while C.S. Rajan’s name was added on October 3, 2018 after seeking fresh approval from the NCLT.

Editorial Analysis:

• Experts believe that the default of Infrastructure Leasing & Financial Services (IL&FS) on several of its debt obligations over the last couple of months has raised serious questions about how regulators missed the growing debt pile of a systemically important financial institution.
• Crucially, the IL&FS saga has also exposed the underlying weaknesses in the non-banking financial company (NBFC) sector as a whole which has depended heavily on low-cost, short-term debt financing to sustain its shaky business model.
• Currently we observe that both international and domestic interest rates continue to rise. As a consequence to this, the stocks of NBFCs have been punished as investors expect the profit margins of these companies to come under pressure as their borrowing costs rise.
• Added to this, there is the further risk of NBFCs being unable to roll over their short-term debt in case of a severe credit crunch in the aftermath of the IL&FS saga. Experts believe that this is a more serious risk.
• Experts believe that the steep crash of shares of Dewan Housing Finance Ltd. has been the defining moment of the present crisis.
• Currently, we see that the Reserve Bank of India, the National Housing Bank and the State Bank of India decided last week to increase the supply of liquidity in the market to keep interest rates under control.
• We have also observed that the RBI has urged NBFCs to make use of equity rather than debt to finance their operations. This is apart from the government’s decision to replace IL&FS’s management and commitment to providing the company with sufficient liquidity.
• Experts believe that the prolonged supply of low-cost funds to the NBFC sector also creates the risk of building an unsustainable bubble in various sectors of the economy.
• Experts further assert that the defaults associated with any such bubbles will eventually only affect the loan books of lenders.
• There is a concern with State bailouts as well. It is feared that State bailouts could also fuel the problem of moral hazard as other financial institutions may expect a similar lifeline in the future.

The Way Forward:

• • Experts believe that policymakers should try to focus on taking steps to address structural problems that contributed to the crisis. This includes steps necessary to widen the borrower base of NBFCs which have been banned from accepting deposits. This step would allow NBFCs to tap into more reliable sources of funding and avoid similar liquidity crises in the future.
  • The biggest challenge for the IL&FS board is to raise funds in quick time so that fresh defaults can be avoided.

• One possible way to get money is to sell assets.

• However, a more permanent way of getting funds is to raise equity capital.

• • Capital can be raised through a rights issue.

• It is important to note that the proposal for a rights issue was mooted by the previous board too, but they were unable to convince the large shareholders.

• • Another option is to sell stakes to a new promoter. Again, that was also mooted by the previous board, but some existing shareholders could not agree on valuations. So the new board has its task cut out.
  • As Uday Kotak, the newly appointed chairman of IL&FS, indicated, the crisis is much bigger and more complex than it was initially thought.

• An example to illustrate this is the fact that the new board found that there are 348 entities in the group, significantly larger than the 169 entities it was aware of. This itself underscores the task at hand.

• It is also to be seen if the new board, which the government has thrown its weight behind, could convince the shareholders for more fund infusion.

F. Tidbits

• In Telangana’s tribal belt, since February this year, adivasi women have been running four small units that produce sanitary napkins for free distribution to students in the tribal welfare hostels and ashram schools.
• Now, the region is set to get four more sanitary napkin production units, thanks to the demand for pads among young women in the adivasi community.
• As per the Commissionerate of Tribal Welfare in Hyderabad, talks are on with NGOs and commercial sanitary napkin units to support adivasi youth in sanitary napkin production in districts where tribal population is high.
• The napkins will be supplied to women in the adivasi community who live in the tribal pockets near each manufacturing unit.
• As per the 2018 report of the National Family Health Survey, 62% of women use cloth instead of sanitary pads.
• In most of the adivasi villages in Telangana, women were found to be using cloth or ash for menstrual protection.
• The pad-making units were set up primarily to support adolescent girls and young women enrolled in schools. 

G. Prelims Fact

• India and France are in discussions for a bilateral tri-service military exercise to take forward the strategic cooperation while also exploring ways to operationalise the logistics agreement. These issues were discussed during the visit of Defence Minister Nirmala Sitharaman to Paris last week.
• This will be India’s third such joint exercise. The first joint tri-service exercise was held with Russia in October last year and has finalised one with the U.S. to be held next year.
• India and France currently hold bilateral exercises between individual services — Shakti, Varuna and Garuda respectively for the Army, Navy and Air Force.
• India and France signed a logistics pact in March this year which gives access to their militaries to each other’s bases for logistics support. While the agreement gives India access to French military bases all over the world on a “reciprocal basis,” of particular interest for New Delhi are the three French bases in the Indian Ocean — Reunion Island, Djibouti and Abu Dhabi.
• These three bases would give the Indian Navy and the Air Force operational turnaround to the far end of the Indian Ocean, improving its monitoring and surveillance of the region, in the backdrop of increased Chinese presence in the Indian Ocean Region (IOR).

H. Practice Questions for UPSC Prelims Exam

Question 1. What is the purpose of “Farmer Connect App”?

 

1. To boost farm exports from India to EU market
2. To facilitate farm registration, testing and certification
3. Connecting Farmer’s Produce with Mandis
4. Both (a) and (b)

Question 2. Which of the following organisations has “Regional Anti-Terrorist Structure
(RATS)” as the counter terrorism wing?

Question 3. Government has decided to establish a Turtle Sanctuary in which of the following 
cities?

 

1. Allahabad
2. Bharuch
3. Mumbai
4. Chennai

I. Practice Questions for UPSC Mains Exam