Brief of newspaper articles for the day bearing
relevance to Civil Services preparation
- GS PAPER 2
- India rejects charge on institute’s ties with North Korea {Foreign Policy}
- Solution is the problem {Society}
- GS PAPER 3
- A stitch in time {Economy}
- Torpid airports may convert into SEZs {Economy}
- Fixing public sector banks | Montek Singh Ahluwalia {Economy}
GS PAPER 2
[1]India rejects charge on institute’s ties with North Korea
Issue
- Allegations over India’s institute for “training” North Korean scientists.
Who put the allegations?
- An article in the Qatar-based media outlet, suggested that North Korean scientists benefited from the courses taught at the Dehradun-based CSSTEAP (Centre for Space Science and Technology Education in Asia and Pacific).
- The U.N. Panel of Experts that deals with U.N. Sanctions on DPRK (Democratic People’s Republic of Korea) has made references in its report to DPRK’s participation in courses in the Dehradun-based CSSTEAP which ‘could’ have implications for its proscribed activities.
Response from India
- The topics covered in the courses offered by CSSTEAP are very general and cover basic principles in the respective areas.
- The course material offered to the participants is available in open-source.
- The United Nations Office of Outer Space Affairs was associated with the centre.
- The report is subjective and based on the limited understanding of the ‘expert(s) who have authored it.
Additional points:-
- CSSTEAP was set up on November 1, 1995 and has since then trained a number of North Koreans.
[2]Solution is the problem
Issue
- Caste based reservations in the government jobs.
Why caste based groups are asking for reservation in government jobs?
- Indian economy is not creating as many jobs as before.
- Wages in the private sector are much lower than in the public sector.
- The gap will increase after the recommendations of the 7th Pay Commission are implemented.
- Government jobs are less demanding, more stable and provide many social benefits.
But can a government job really solve the problem?
- Public sector is itself shrinking.
- It is also true that among government workers, groups A and B have continued to grow, but groups C and D have declined over the same period.
- Government jobs may not be the right solution for the dominant castes because an increasingly large percentage of these jobs are occupied by contract workers who earn at least twice less than the directly employed ones.
- Not only are their wages almost as low as those of the contract workers of the private sector, but they are deprived of social security benefits.
- The dominant caste groups Patels, Marathas, Jats and Kapus, which are demanding reservation enjoy a prestigious status in the village and their expectations are still high.
- They might not settle for what they get after their demands are met.
- There is also a gap between expectations and skills of the job seekers.
Different groups perceive reservation as per their convenience
- Dominant castes see reservation as a problem because of the advantages they give to OBCs who, according to some dominant caste leaders, do not deserve them.
- Those who are asking for reservation (Patels, Marathas, Jats and Kapus) would prefer reservations to be abolished — if they cannot benefit from them.
- OBCs claim that they have not achieved their mission yet and are not prepared to share their quota with other groups.
Conclusion
- Reservation is a complicated matter in our country.
- But, there should be some alternative solution that should be accepted to all stakeholders.
GS PAPER 3
[1]A stitch in time + A material change
News
- Special package for the textile and apparel sector.
- It has already been covered , refer to Textiles get tax sops in output impetus.
Additional points:-
- Earlier, India’s misguided policy kept the small-scale character of traditional handlooms,
- Indian policymakers ruled out fast domestic industrial expansion — all garments, they mandated, must remain within the so-called small scale sector.
- While India’s competitors built up massive capacities to meet global demand, India was stuck with debilitating rules and regulations.
- By 2005, when trade quotas were relaxed, India was in no shape to take advantage of freer trading norms.
- But, the change is inevitable and this time it is more than welcome.
- While the measures that are announced in the package will help, far more needs to be done if India wants to corner a large part of the market share that China may relinquish.
- China, like most countries before it such as Japan or Korea, has reached a stage where factor costs have increased and this is forcing it to opt for more technology-intensive methods.
- India, with labour costs still low, has a decade in hand, at best. India must quickly improve its infrastructure — ports, roads, electricity — to ensure that these new measures come to fruition.
[2]Torpid airports may convert into SEZs
News
- The Centre is considering a plan to convert unused airports in India into special economic zones (SEZ) for aircraft leasing companies to park their aircraft and showcase them to potential customers.
Key points:
- Leasing companies can park 50-100 aircraft.
- The companies can then come, take test flights and place orders.
- If we allow leasing and aircraft breaking to happen at abandoned airports, MROs (maintenance, repair and overhaul) will automatically come.
- Like ship-breaking, he said, even dismantling an aircraft could be made possible at dormant airports.
- Recently, the government allowed foreign investors to own up to 100 per cent stake in domestic carriers.
- However, the new FDI norm allows a foreign carrier to invest only up to 49 per cent to set up an airline in India. The rest can come from either local or foreign investors.
[3]Fixing public sector banks | Montek Singh Ahluwalia
Issue
- How to restart lending in the public sector banking system?
- Note:- This article has been written by Montek Singh Ahluwalia, who was the deputy chairman of the erstwhile Planning Commission.
- It comprehensively deals with the problem of stress in the banking sector and ways to revive it. So, read it with due attention.
Major problems in the banking system
- There are too many non performing loans.
- Credit expansion has slowed dramatically
- Banking sector stress has emerged as one of the critical risks which could jeopardize growth.
Nature of the problem
- Assets that should have been classified as non-performing were not being recognized as such.
- When banks started to recognise Non performing loans and made provisions for them.They discovered their losses.
What if the problem was confined to 1 or 2 banks?
- There is a standard protocol which would have followed.
- The erring banks would have to recognize the non-performing assets (NPAs) and make full provisions and if, as a result, their capital base shrank, they would have to shrink lending to stay within the capital adequacy norms.
- Other banks which have been more efficient, including both public sector banks and private banks, would expand to take up the space.
- The banking system as a whole would become healthier, and the economy would get the credit expansion it needs to sustain growth.
But unfortunately, the public sector banking system as a whole is in difficulty.
- If we want to ensure healthy growth in the economy, we need to ensure that the public sector banking system can restart lending.
This requires action on three fronts:
- recapitalization of the public sector banks to support expanded lending
- cleaning up the NPAs accumulated from the past and
- improving the quality of lending in future.
RECAPITALISATION OF PUBLIC SECTOR BANKS
There are 3 sources for capital infusion:-
Budget allocation:- The budgetary allocation for the capital infusion will have to be reworked as, PSBs have reported large losses for 2015-16, which more than offset the capital infusion from the budget.
Profits:-Both restructured assets and stressed assets are currently shown as performing, but a large part could well turn into NPAs in the next two years. In that case, the contribution of profits to building up capital is likely to be very small.
From the market by new issues of capital:-The prospects for raising capital from the markets also need to be revised downwards because PSU bank shares have taken a beating in the markets.
If substantial amount of capital is infused, it will affect the fiscal deficit, how to take care of this?
- The government can do it via a special declaration of dividends from the built-up reserves in RBI.
- This could be offset by lower dividends declared in future, allowing the government to make the fiscal adjustment needed over time.
- Alternatively, the government could hand over government bonds in the required quantity in exchange for equity.
- International fiscal accounting does not treat contributions to capital of banks as affecting the fiscal deficit in the year it takes place.
- There would, of course, be an impact over time via the interest payments on these bonds.
Better distribution of capital among the banks
- Instead of dividing capital uniformly, each bank should be assured only of enough capital to avoid an actual contraction in lending.
- The rest of the capital should be distributed across banks according to some criterion of performance, so the better-performing banks get more capital while the weaker banks are forced to contain lending until their performance can improve.
- Such an approach would produce a stronger public sector banking system and incentivise efficiency.
RESOLVING THE NPA PROBLEM
- Assets which are recognised as loss assets, should be written off.
- Till the time we, see some tangible benefits from the Bankruptcy Code, our bankers will have to do the best they can to recover whatever value they can recovered through liquidation.
- Strategic debt restructuring (SDR) scheme :- It allows banks to convert their debt into equity according to a predetermined formula, take control of the company and then induct new management to turn it around.
- Scheme for Sustainable Structuring of Stressed Assets (S4A)
Under this scheme, banks can offer existing managements an opportunity to rehabilitate the project by dividing the debt into two parts: a “sustainable’’ component, which can be serviced by the project based on some assumptions about revenue, and the “excess’’ component which can be converted into equity or redeemable preference shares.
Problem:-With respect to asset reconstruction companies (ARCs) and National Infrastructure and Investment Fund (NIIF), questions might be asked whether banks are willing to take a large enough haircut on existing debt to make the restructured project attractive.
It might lead to “banking paralysis’ as the top managers will hesitate to offer large cuts to private players. There might be questions raised over their decisions in the future.
Solution:- This problem could be solved by creating a government-owned “bad bank” which purchases problem loans from the banks, and concentrates on turning the projects around, possibly with the help of private ARCs.
Bank managements will be much more willing to sell assets at a discounted price to another public sector company, which will then undertake the task of negotiating the best deal with potential new owners.
The terms of reference of the new entity can be sufficiently clarified to encourage it to negotiate the best possible deal with new private managements. It could work in partnership with ARCs to fulfil this mandate.
IMPROVING THE QUALITY OF LENDING
- A key issue is how to increase the autonomy of the banks to operate as commercial entities. One way of achieving commercial autonomy is to privatize public sector banks but there is no support for privatization of banks in any political party.
- A more practical approach would be to reduce the government’s shareholding to say 33%, with the remainder dispersed among the public.
- The P.J. Nayak committee had suggested that if the dilution of shareholding is not acceptable, it should be possible to distance the government from the managements of the banks by creating a public sector holding company and vesting the government’s shares in the holding company.
- The newly created Banks Board Bureau is a first step in this direction.
There are two key elements in any effort to distance government.
- One is that the public sector banks should deal with only one regulator, RBI, and the extensive quasi-regulatory control exercised by the department of financial services should be ended
- The role of the government as owner would be performed by the holding company and the government would deal only with the holding company on all issues.
- A second requirement is that public sector banks should become board-managed institutions, with the board responsible for all appointments, including that of the chief executive officer (CEO).
- If the shares of the government are actually transferred to a holding company, then decisions regarding appointments could be taken by the board of the new company on the recommendation of the board of the bank.
CONCLUSION
- The objective of creating a genuinely commercial environment in which public sector banks can function and managements are made accountable can only be achieved if the government is willing to step back from exercising direct control.
- Unless strong action is taken along these lines, we can assume that things will continue as they have.
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