Author: Explains

Context

• Tshering Tobgay will be new Prime Minister of Bhutan. Druk Nyamrup Tshogpa Party has won the recent general elections in Bhutan.
• The National Assembly is the lower house of Bhutan Parliament. This is the third general election after democracy was adopted in Bhutan in 2008.

BHUTAN ELECTION BACKGROUND

• Election to the House of Representatives also called the National Assembly, occurs in two rounds: the Primary Round and the General Round.
• The first round, called the Primary Round, is contested by multiple parties. This year, four parties contested, two of which have existed from the first parliamentary elections.
• The People Democratic Party (PDP) was led by a Harvard-educated former civil servant who was viewed as a popular political leader.
• Opposing him was the Druk Phuensum Tshogpa (DPT), which formed the first democratic government, and was the opposition party in the last parliament.
• The two new parties were the Druk Nyamrup Tshogpa (DNT), which was led by a popular medical doctor and social activist, and Bhutan Kuen-nyam Party (BKP), which is headed by the former chairperson of the Anti-Corruption Commission.
• The parties did not vary substantially in terms of ideology or manifestos, but they represented their respective party leaders’ expertise and personal values.

India Bhutan Relations

• India and Bhutan have had long-standing diplomatic, economic and cultural relations
• Bhutan and India relations are governed by a friendship treaty that was renegotiated only in 2007, subjecting the Himalayan nation’s security needs to supervision.
• Treaty of Friendship in 2007, which brought into the India-Bhutan relationship “an element of equality.”
• The Treaty provides for perpetual peace and friendship, free trade and commerce, and equal justice to each other’s citizens.

India-Bhutan treaty of Friendship timeline

• On August 8, 1949, Bhutan and India signed the Treaty of Friendship, calling for peace between the two nations and non-interference in each other’s internal affairs.
• India re-negotiated the 1949 treaty with Bhutan and signed a new treaty of friendship in 2007.
• The new treaty replaced the provision requiring Bhutan to take India’s guidance on foreign policy with broader sovereignty and not require Bhutan to obtain India’s permission over arms imports.
• Under the 2007 India-Bhutan Friendship Treaty, the two sides have agreed to “cooperate closely with each other on issues relating to their national interests.”
• Neither Government shall allow the use of its territory for activities harmful to the national security and interest of the other
• A scheme titled “Comprehensive Scheme for Establishment of Hydro-meteorological and Flood Forecasting Network on rivers Common to India and Bhutan” is in operation.
• The network consists of 32 Hydro-meteorological/ meteorological stations located in Bhutan and being maintained by the Royal Government of Bhutan with funding from India. The data received from these stations are utilized in India for formulating flood forecasts.

Importance of Bhutan

• Bhutan in a buffer state between India and china. Bhutan shares a 470 km long border with China.
• Strategic importance: The Chumbi Valley is situated at the trijunction of Bhutan, India and China and is 500 km away from the “Chicken’s neck” in North Bengal, which connects the northeast with rest of the country.
• To contain the insurgency in North-East: Bhutan has in the past cooperated with India and helped to flush out militant groups like United Liberation Front of Asom (ULFA) and National Democratic Front of Bodoland (NDFB) from the Himalayan nation.
• To check Chinese inroad in Bhutan: China is interested in establishing formal ties with Thimphu, where it does not yet have a diplomatic mission. Bhutan is strategically important for both India and China. Chinese territorial claims in western Bhutan are close to the Siliguri Corridor.
• Beijing is reportedly insisting on Bhutan establishing trade and diplomatic relations as a quid pro quo for a border settlement.
• A Joint Group of Expert (JGE) on Flood Management has been constituted between India and Bhutan to discuss and assess the probable causes and effects of the recurring floods and erosion in the southern foothills of Bhutan and adjoining plains in India and recommend to both Governments appropriate and mutually acceptable remedial measures.
• Bhutan is currently India’s only neighbour who has stayed away from joining China’s Belt and Road Initiative (BRI), but that may change if India can’t make itself an attractive ally and neighbour.
• In the aftermath of the Doklam incident, Chinese vice foreign minister visited Thimphu to discuss a range of issues. It was at this meeting that Bhutan was invited to join the BRI and reap the “development dividends” – surely a tempting offer for a country looking to diversify its heavily India-dependent economy.

Commercial Relations between India and Bhutan

• India is Bhutan’s largest trading partner. India and Bhutan have signed an Agreement on Trade, Commerce and Transit on 12^th November 2016, which provides for a free trade regime between the two countries aimed at boosting the bilateral trade for mutual benefit.
• The Agreement also aims at facilitating Bhutan’s trade with countries through an improved procedure for containerised cargo, striving towards use of electronic means to facilitate the movement of transit cargo, additional entry/exit points in India, etc.
• Imports from India were Rs5,650cr accounting for 80% of Bhutan’s total imports. Bhutan’s exports to India stood at Rs3,270 cr (including electricity) and constituted 90% of its total exports. One-third of Bhutan’s exports to India is electricity.
• Other items of export include minerals such as ferro-silica (the Bhutanese have been complaining that these exports have been declining), cement and dolomite.
• The Government is planning to build a mini dry port in the border town of Phuntsholing to promote exports, that are plagued by logistical difficulties due to the difficult terrain and poor connectivity. Bhutan sources the majority of its import requirements from India.

Impact of the election

India not a factor this time

• In contrast to the 2013 elections, Bhutan’s relations with India did not figure prominently during the campaign by the four parties.
• In the run-up to the 2013 polls, Bhutan was hit suddenly by high fuel prices, after India withdrew subsidies over kerosene and cooking gas. The Indian government claimed that the withdrawal was an “unfortunate technical lapse” due to the non-renewal of an agreement.
• Despite Indian denials, the perception persisted that New Delhi wanted to ‘punish’ the ruling DPT for taking steps like the meeting of then prime minister Jigme Thinley with Chinese premier Wen Jiabao at Rio de Janeiro in 2012.
• During that campaign, the PDP had accused the DPT of presiding over “deteriorating” ties with India. The DPT pushed back by asserting that relations with India should be kept “beyond and above party politics at all times”.
• Five years later, India did not figure at all in the elections, beyond the general political consensus that relations have to be strengthened. This despite Bhutan having witnessed the armies of China and India standing eye-ball to eye-ball on its border region for 73 days in 2017.
• In the DPT’s manifesto for the 2018 elections, the separate section on foreign policy mentions that the party “remains committed to maintaining and furthering the excellent relations with the people and the Government of India”.
• If elected, the DPT had also pledged to execute at least three hydropower projects and “pursue others with the government of India”, with an emphasis on more balanced regional distribution of the mega projects. It has proposed to ramp up electricity generation from 1606 MW to a minimum of 10,000 MW in 2030.
• The DPT had also stated that it would explore the “feasibility of using the Brahmaputra river port in India as a third-country exports and imports route for Eastern Bhutan”.
• The DNT’s manifesto does not have a separate section on external relations, but India gets mentioned several times, especially in the context of diversification of the economy.
• In the section on the economy, the DNT expressed concern over the export basket, with hydropower exports dominating this sector. The party claimed that since Bhutan’s economy is “driven by investments in the hydropower sector”, economic growth remains narrowly based and unable to create jobs for a young aspiring population. The party had also pointed out over 75% of Bhutan’s expanding external debt is accounted by hydropower loans.
• “We are determined more than any other party to diversify the economy by accelerating private sector growth and investing in agriculture, mining, manufacturing and service,” said the DNT manifesto.
• A similar concern in parallel with trade debt is the huge external debt, which currently stands at 170 billion BTN, or Bhutanese ngultrum, as of today. Of this amount, as per the State of the Nation Report (2018), hydropower loans comprise 132 billion BTN, while the rest is non-hydropower loan of 37 billion BTN. One ngultrum is worth one Indian rupee.
• The DNT pointed to India accounting for an 80% share of exports from Bhutan as a weak point for the economy, which made it “highly vulnerable to exogenous shocks”.
• The party also promised to review current fuel imports from India, so as to reduce dependence on fossil fuel and improve the balance of payment situation.
• All the parties were silent over the BBIN motor vehicles agreement in their manifestos. The PDP government had tried to pass the relevant legislation, but it was defeated in the National Council. With popular opposition against the agreement, Bhutan withdrew from the agreement.

China factor

• Until 2007, India had oversight over Bhutan’s relations with other countries. This changed after the two countries amended their friendship treaty, giving Bhutan full freedom to pursue ties with other countries.
• While people in Bhutan are appreciative of the country’s close ties with India, there are those who feel that Bhutan also needs to establish diplomatic links with China, which has been trying to make inroads into the small country.
• The debate on ties with China deepened following the Doklam crisis in June last year, which led to a standoff between India and China on the Doklam plateau.
• The row arose when Indian border guards intervened as China was building a road in an area claimed by both it and Bhutan, close to a narrow stretch of land in India known as the Siliguri corridor.
• The corridor connects seven north-eastern Indian states to the mainland. The issue was resolved after nearly a month.
• China, of course, has so far been frustrated in wanting to have close diplomatic ties with Bhutan. But sooner or later Bhutan, despite the traditional friendship (with India), has to chart its own course in international affairs.
• The sentiment echoes even today and Bhutan continues to dodge China’s courtship for formal diplomatic relations and a residential embassy in Thimphu. Bhutan’s leaders and policymakers are cautious about speaking openly about China.

Investing in trust

• Bhutan has always been India’s most trusted ally in South Asia and has often put India’s security at the forefront. Come to think of it, in December 2003, Bhutan’s fourth king personally led the army to throw out Indian militants living in Bhutan’s jungles.
• Bhutan was also the only South Asian country besides India not to attend China’s Belt and Road Initiative forum in May 2017. In other words, Bhutan has held its end of the bargain.
• Unsurprisingly then, belligerent messages from Indian officials only serve to anger the Bhutanese who are now openly questioning India’s level of trust in its so-called best friend. Indian officials who claim the Chinese influence is increasing in Bhutan are wrong.
• Bhutan’s contact with China remain the same, mainly to discuss the border issues. Bhutan, in fact, has never been tempted by the Chinese offers of development and technical assistance.
• What India gives Bhutan in development aid is there for all to see, but what Bhutan offers India in strategic benefit, as a buffer along the northern border, cannot be put in figures.
• Indeed, those in the corridors of power in Delhi do understand that Bhutan has saved India billions of rupees in defence spending.
• Yet, India has not invested in Bhutan and other smaller neighbours that modicum of trust which is critical in building genuine goodwill.
• This means not only increasing people-to-people contact but also being sensitive to Bhutan’s desire for a wider engagement beyond India’s borders. This means respecting Bhutan as an equal, sovereign nation state.

Conclusion

• Bhutan’s leadership regards the Indo-Bhutan friendship as one “built on shared values and aspirations, trust and mutual respect, and a common dream of peace and prosperity for the people of the two countries”.
• This means Bhutan’s foreign policy framework, which holds the relationship with India as being integral to its national interest, will not change no matter which party takes power in Thimphu.
• The Indian approach to Bhutan has necessarily to be tailored while being sensitive to the growing Bhutanese aspirations of being considered as an equal.
• The Bhutanese will also be loathed to be considered as just a pawn in the great game between India and China.
• In the years ahead, their aspirations to have an independent strategic opinion as a sovereign state will recur more often.
• Obviously, they will need to be treated as equals and as such integrated economically to ensure a better balance in mutual trade.

Context

• Voters in the Maldives delivered a stunning defeat for President Abdulla Yameen in a contentious presidential election, an outcome regarded as a victory for democracy over authoritarianism in the Indian Ocean island nation.
• The people of the small archipelago in the Indian Ocean voted for change and brought to power the Opposition candidate, Ibrahim Mohamed Solih. They came out in huge numbers with the turnout being 89.2%.

BACKGROUND

Crisis in the Maldives 

• In October 2008, a popular opposition movement instigated by a coalition of parties challenged the power of incumbent leader Maumoon Abdul Gayoom (half-brother of Yameen Abdul Gayoom), forcing him to hold the Maldives’ first multiparty presidential vote.

• In the country’s first free elections, Mohamed Nasheed, backed by a coalition of opposition parties, defeated Gayoom in a runoff and became the Maldives’ first freely elected president in 2008. Two years later, the international watchdog Freedom House listed the country as an electoral democracy for the first time.

• However, in 2012, Nasheed was forced to resign from the office following a police mutiny and a political turmoil in the country better known for its exotic honeymoon resorts.

• It was Yameen Abdul Gayoom’s election as President in 2013 that ended the political turmoil. However, this trouble only intensified under Yameen.

• Recently in February 2018, Yameen declared a 45-day state of emergency in the country, ordering security forces into the Supreme Court and got former president Maumoon Abdul Gayoom arrested. On his orders, Maldives police arrested Chief Justice Abdulla Saeed and another Supreme Court judge Ali Hameed.

• He had pulled the Maldives out of the Commonwealth in 2016 and fostered closer ties with China and Saudi Arabia over traditional allies India and the United Kingdom.

Importance of Maldives

• The Maldives, long a popular tourist destination, has grown in strategic importance in recent years as China and India to establish their influence in the region, and as Beijing pushes ahead with its global trade and infrastructure plan.
• Spread over nearly 1,200 islands spanning more than 90,000 sq km, key shipping lanes where Beijing and New Delhi compete to pursue their often-conflicting maritime strategies pass through this tiny Indian Ocean nation.
• Though small, the Maldives is India’s important neighbour. India’s Prime Minister Narendra Modi called the Maldives “a valued partner in the Indian Ocean neighbourhood”.
• India-Maldives “ties are built on a very strong foundation” the contours of which are defined by shared strategic, security, economic and developmental goals.

However, the bilateral ties are not without irritants, which can be seen in two broad areas: political and strategic.

How is China engaging with the Maldives?

• Beijing has made large investments in infrastructure projects in the Maldives during Yameen’s time in office.
• They include a US$830 million investment to upgrade the Maldives airport and build a 2km bridge to link the airport island with the capital Male, according to the Centre for Global Development.
• Chinese are also building a 25-storey apartment complex and hospital in the Maldives.
• Meanwhile, some 306,000 Chinese tourists visited the Maldives last year accounting for 21 per cent of the country’s total number of visitors. When three Chinese naval ships docked in Male in August last year, it only amplified India’s concerns.

The tilt towards China

• Mr.Yameen’s China visit last year, the two nations signed 12 pacts, including a free trade agreement (FTA).
• Mr. Yameen not only fully endorsed China’s ambitious Maritime Silk Road initiative but also made the Maldives the second country in South Asia, after Pakistan, to enter into an FTA with China.
• The Yameen government pushed the FTA through the nation’s Parliament, the Majlis, stealthily, with the opposition not attending the parliamentary session.

Chinese Investments: Massive Debt trap, according to the opposition

• The opposition accused the Yameen government of allowing a Chinese ‘land grab’ of Maldivian islands, key infrastructure, and even essential utilities, which “not only undermines the independence of the Maldives, but the security of the entire Indian Ocean region.
• The massive infrastructure growth funded by Chinese debt was a key part of Mr. Yameen’s election campaign but the massive debt trap made it a difficult proposition to be accepted.

How have the Maldives ties with India fared under Yameen?

• Bilateral ties between India and the Maldives have deteriorated during Yameen’s time in power.
• In March 2015, Indian Prime Minister Narendra Modi cancelled his state visit to the island nation over the treatment of Mohamed Nasheed, the former pro-India Maldivian president who had been jailed.
• The Maldives also declined India’s invitation to take part in its biennial eight-day naval exercise, Milan, this year.
• Yameen’s government has also rejected visa renewals for Indians who were legally working in the Maldives, without giving any explanation.

Concern areas that need to be improved between India and Maldives 

• No FTA with India: Maldives and India do not have a Free Trade Agreement. However Maldives and China entered into Free Trade Agreement.
• Maldives growing “closeness” with China: Both China and Pakistan stepping up their strategic inroads into the Maldives
• Religious radicalization: The Maldives is being radicalized by the Saudi funds and influence
• ISIS threat: Growing Islamic radicalisation in the tiny island-nation of about four lakh people once known for its tolerant practices has many foreign governments, including India, deeply concerned.
• Yameen government had asked India to remove its Dhruv advanced light helicopters from Maldives(which India had gifted in 2013).
• Yameen government has alleged that tensions over the presence of the two Indian helicopters in two strategically important locations in the Laamu and Addu atolls have been growing.
• Work permits are not currently being issued to Indian Nationals.

By changing to more democratic form of government in Maldives, India can engage with Maldives to establish much more friendly relations than previous government era to protect the safety and security of entire Indian Ocean region. During his inaugural address, Solih outlined priorities-

1. On foreign policy, Solih said that he would work to “fortify” Male’s existing relationship with India, which had grown strained under Yameen, but has historically been strong.
2. The geopolitical overtones of the change in leadership in the Maldives were clear during the inaugural address, when Solih referenced the cause for the government’s poor fiscal state as the previous’ government’s decision to pursue “reckless mega development projects undertaken purely for political gains.”
3. Modi and Solih met, with Solih asking for Indian assistance on infrastructure development in the country.

What Solih means to India?

1. Ibrahim Mohamed Solih and Mohamed Nasheed are considered as brothers in arms in Maldivian politics. Nasheed is seen as pro-India unlike Yameen Abdul Gayoom, under whose reign, China has outpaced India in the island nation.
2. China was seen as dictating the foreign policy of Maldives under Yameen Abdul Gayoom making India’s strategic position vulnerable in the Indian Ocean.
3. During his door-to-door campaign, Ibrahim Mohamed Solih promised that he would repair relations with the neighbours and India First foreign policy would be reinstated.
4. His campaign was getting traction days ahead of the Sunday polls forcing Yameen Abdul Gayoom to say in his interviews that Maldives still maintained India First policy. Maldives was just opening up to other countries, Yameen Abdul Gayoom argued.
5. India has been critical of the Yameen Abdul Gayoom administration for suppressing human rights and crushing the opposition political forces. During his campaign, Solih said that he would promote human rights and follow the rule of law if elected to the office of the president.
6. India’s relations Maldives received a blow when Yameen Abdul Gayoom declared Emergency in the country in February this year.
7. The Maldivian Supreme Court had ordered the release of jailed Opposition leaders calling the trials as a sham. Yameen Abdul Gayoom refused to execute the Supreme Court order.
8. The Emergency was lifted 45 days later but the relations with India have suffered a lot since. With Ibrahim Mohamed Solih winning the majority in Maldives, the bilateral relations with India are expected to be restored and hawkish Chinese influence wane.

Way Forward

• Many of the challenges the Maldives faces linger. The opposition may have been united in its desire to oust Mr. Yameen but this unity will be tested in governance.
• Democratic institutions have been weakened and a fragile democracy can also be susceptible to radical ideologies if not effectively governed. Its economic presence in the Maldives is a reality that all governments will have to contend with.
• Mr. Yameen’s defeat has certainly produced a favourable outcome for New Delhi and it should seize the moment to rebuild ties with Male.
• If there is one lesson out of the Maldives crisis, it is that political elites in India’s neighbours will come and go.
• But if India can stand together with the aspirations of citizens of neighbouring countries, then the prospects of a long-term sustainable relationship will be much brighter.

CONTEXT

• India has declared that its nuclear triad, stated in its nuclear doctrine, is operational
• This was after indigenous ballistic missile nuclear submarine INS Arihant achieved a milestone by conducting its first deterrence patrol
• It essentially means that Arihant is now prowling the deep seas carrying ballistic missiles equipped with nuclear warheads
• The second submarine in the series, Arighat is now undergoing sea trials after which it will be inducted into service

Introduction

• Nuclear Triad means the capability of delivering nuclear weapons by aircraft, land based ballistic missiles and submarine launched missiles.
• Specifically, these components are land-based intercontinental ballistic missiles (ICBMs), submarine-launched ballistic missiles (SLBMs), and strategic bombers.
• The purpose of having this three-branched nuclear capability is to significantly reduce the possibility that an enemy can destroy all of a nation’s nuclear forces in a first-strike attack. This, in turn, ensures a credible threat, and capability, of a retaliatory second strike, thus increasing a nation’s nuclear deterrence.

Nuclear Command

• India has put in place a robust nuclear command and control structure, effective safety assurance architecture and strict political control, under its Nuclear Command Authority.
• Operationally, the Command is headed by a three-star military officer, but the authority to launch it rests with the Prime Minister, the Head of the Government.
• It also means that the Prime Minister – and his Office – has the capability 24 x 7 to be in touch with the nuclear submarines irrespective of where they are, on India’s East or West coasts.
• However, India remains committed to the doctrine of credible minimum deterrence and No First Use, as enshrined in the decision taken by the Cabinet Committee on Security (CCS) in its meeting chaired by the then Prime Minister Vajpayee on January 04, 2003.

INS Arihant

• The Arihant is the lead ship of India’s Arihant class of nuclear-powered ballistic missile submarines.
• These will form a potent and formidable weapons system which will ensure national security.
• Arihant is India’s first indigenously designed and built nuclear-powered submarine.
• Arihant is armed with K-15 Sagarika missiles with a range of 750 km.
• It will carry the longer 3,500 km range K-4 missiles being developed by the Defence Research and Development Organisation (DRDO).
• This is the longest in the Navy’s fleet of submarines.
• The second submarine in the series, Arighat is now undergoing sea trials after which it will be inducted into service.
• INS Arihant is India’s first indigenous nuclear submarine. The Arihant was launched on 26 July 2009, the anniversary of Vijay Diwas (Kargil War Victory Day) by former Prime Minister Dr Manmohan Singh’s wife Gursharan Kaur.
• Russia has provided extensive design assistance in the development of the INS Arihant.
• INS Arihant is a part of Indian Navy’s secretive Advanced Technology Vessel (ATV) project operated under the supervision of the Prime Minister’s Office and closely monitored by agencies such as the Department of Atomic Energy and the Submarine Design Group of the Directorate of Naval Design.
• India has now become part of an elite club of countries – Russia, the US, China, France and the UK that possess nuclear ballistic missile submarines.

Reliability of INS Arihant

1. It comes directly under the Nuclear Command Authority headed by the Prime Minister
2. Given India’s stated position of ‘No-First-Use’ (NFU) in launching nuclear weapons, the SSBN is the most dependable platform for a second-strike
3. Because they are powered by nuclear reactors, these submarines can stay underwater indefinitely without the adversary detecting it. The other two platforms — land-based and air-launched are far easier to detect
4. This places India in the league of the few countries that can design, construct and operate SSBN

Significance

• INS Arihant, which is equipped with nuclear-tipped ballistic missiles completed a nearly month-long nuclear deterrence patrol.
• INS Arihant will enable India to assert its rights on water, besides land and air.
• It now joins a small group of countries — the United States, Russia, China, France and the United Kingdom — that have this capability.
• Arihant’s successful nuclear deterrence patrol signifies India’s attainment of complete mastery over all the highly complex systems and procedures.
• India’s nuclear deterrence 20 years after the country went nuclear is now secure as it rests on a triad of land, air and undersea vectors.
• The success of INS Arihant enhances India’s security needs.
• Given India’s ‘No-First-Use’ (NFU) in launching nuclear weapons, the SSBN is the most dependable platform for a second-strike.
• SSBNs are designed to prowl the deep ocean waters and carry nuclear weapons.
• Because they are powered by nuclear reactors, these submarines can stay underwater indefinitely without the adversary detecting it.
• The other two platforms — land-based and air-launched are far easier to detect.

Landmark Development

• It demonstrates that India, apart from its capability to deliver nuclear weapons both from land and from air, can now also do so from under water.
• It provides the ultimate credibility to nuclear deterrence.
• It sends out an unambiguous message that nuclear blackmail will not work.
• The nuclear deterrence patrol signifies India having come off age as a mature nuclear-armed state.
• This exercise is testimony to India’s technological prowess.
• It shows a high degree of engineering skill and workmanship with substantial indigenous component.

India’s Approach To Nuclear Weapons

• Arihant’s nuclear deterrence patrol does not constitute any shift in India’s approach towards nuclear weapons.
• India remains committed to “the goal of a nuclear weapon free world, through global, verifiable and non-discriminatory nuclear disarmament”.
• India follows no first use of nuclear weapons, and non-use of nuclear weapons against non-nuclear weapon states.
• In the absence of a nuclear-free world, India continues to regard nuclear weapons as a deterrent designed to prevent a nuclear attack against it.
• Accordingly, as per its doctrine, India has sought to ensure that its deterrent is “credible”.

NFU POLICY

• No first use (NFU) refers to a pledge or a policy by a nuclear power not to use nuclear weapons as a means of warfare unless first attacked by an adversary using nuclear weapons. Earlier, the concept had also been applied to chemical and biological warfare.
• India’s Nuclear Doctrine

1. Building and maintaining a credible minimum deterrent
2. Posture of ‘No First Use’, nuclear weapons will only be used in retaliation against a nuclear attack on Indian Territory or on Indian forces anywhere
3. Nuclear retaliation to a first strike will be massive and designed to inflict unacceptable damage d) Non-use of nuclear weapons against non-nuclear weapon states e) In the event of a major attack against India, or Indian forces anywhere, by biological or chemical weapons, India will retain the option of retaliating with nuclear weapons
4. “Credible minimum deterrent” and “no first use” — were first articulated by Prime Minister Atal Bihari Vajpayee on May 27, 1998, days after India had undertaken a series of five nuclear tests in Pokhran and declared it a nuclear weapon state.
5. India did not see nuclear weapons as weapons of war; that their role was to ensure that India is not subjected to nuclear threats or coercion

ISSUES

1. However, India’s nuclear sub is equipped to carry short-range missiles, which limits its deterrence potential. Clearly, subsequent additions to the navy’s arsenal will focus on longer-range missiles and larger submarines capable of carrying them. Augmenting capability, however, will require higher allocation of funds.
2. Even if the defence gets more funds, rejigging the defence budget is inevitable. Too much of the defence budget goes to manpower costs: salaries and pensions. Defence allocation in Budget 2018-19 was to the tune of Rs 4,04,365 crore, of this, defence pensions accounted for Rs 1,08,853 crore.
3. It is imperative that the government revisit manpower costs, particularly pensions and benefits, if it is to increase funding for defence research and development. Indigenising defence production is another way to get more bang for every defence rupee.

• India needs to address serious issues on the archaic structure of the Ministry of Defence.
• E.g. the key military figure in the Nuclear Command structure, the Chairman of the Joint Chiefs of Staff Committee, generally holds office for less than a year
• This is hardly the time adequate to become fully familiar with the complexities of India’s Strategic Nuclear Command.
• There have been repeated proposals for appointment of a full time “Chief or Defence Staff”, or “Chairman Chiefs of Staff Committee”.
• S/he will hold charge of the Nuclear “Strategic Forces Command” and report to the political authority.
• But the proposals have gathered dust for years in the offices of the generalist bureaucracy of the Defence Ministry.
• Recommendations for such change even from the Parliament Standing Committee of Defence lie unimplemented.
• The present set up of the Defence Ministry thus needs to be drastically reorganised.

Way Forward

• Augmenting naval strategic capabilities is an imperative for India, especially considering the strategic importance of the Indian Ocean region.
• It is imperative that the government revisit manpower costs, particularly pensions and benefits, if it is to increase funding for defence research and development.
• Experts believe a real sea-based deterrence requires at least three atomic-powered submarines.
• India now needs to focus ahead and move fast, if it is to fully secure and advance its cherished strategic autonomy.
• The submarines will also need to be armed with missiles with a range of up to 5,000 km to give India the wherewithal to counter regional powers; China has a force of more than 60 undersea vessels, including SSBNs.
• The distance between India officially unveiling its plans for a nuclear triad and the first deterrence patrol took 15 years. Other milestones in this important programme shouldn’t take as long.

CONCLUSION

• Augmenting naval strategic capabilities is imperative for India, especially considering the strategic importance of the Indian Ocean region. The region is central from a strategic and security point of view, given China’s growing ambitions and activities, as well as from India’s own rise as a key player in the region, in Africa and as a strategic partner to other key countries.
• INS Arihant is a major achievement, but India now needs to focus ahead and move fast, if it is to fully secure and advance its cherished strategic autonomy.

Why in News?

• In May 2018, Union Cabinet approved a National Policy on Biofuels – 2018.
• It replaces earlier policy made by Ministry of New and Renewable Energy in 2009.

What are Biofuels?

• A biofuel is a fuel that is produced through contemporary biological processes, such as agriculture and anaerobic digestion, rather than a fuel produced by geological processes such as those involved in the formation of fossil fuels, such as coal and petroleum, from prehistoric biological matter.
• Biofuels can be derived directly from plants, or indirectly from agricultural, commercial, domestic, and/or industrial wastes.

Salient Features of the Policy

• The policy categories biofuels into the following 3 categories :-
  • First Generation (1G) : Also called as ‘basic fuels’, it includes bioethanol and biodiesel
  • Second Generation(2G): It includes ethanol, Municipal Solid Waste (MSW) to drop-in fuels and is also known as ‘advanced fuels’
  • Third Generation(3G) : Biofuels like bio-CNG

The categorization is done to enable the extension of appropriate financial and fiscal incentives under each category.

• Expands the scope of raw material: The policy allows the use of Sugarcane Juice, Sugar-containing materials like Sugar Beet, starch containing materials like Corn, Cassava, Damaged food grains like wheat, Rotten Potatoes, unfit for human consumption for ethanol production.
• Use of surplus food grains : To avoid wastage and to provide farmers appropriate prices, the policy proposes the use of surplus food grains for production of ethanol for blending with petrol with the approval of National Biofuel Coordination Committee.
• Viability Gap Funding : Policy indicates a viability gap funding scheme for 2G ethanol Bio refineries of Rs.5000 crore in 6 years.
• It encourages setting up of supply chain mechanisms for biodiesel production from non-edible oil seeds, Used Cooking Oil, short gestation crops.

Expected Benefits

• With the upswing in the oil price putting pressure on the economy, even small steps to encourage the use of biofuels are welcome.
• Reduced Import Dependency : The ethanol supply for year 2017-18 is expected to be around 150 crore liters of ethanol which will result in savings of over Rs.4000 crore of forex.
• Cleaner Environment : By reducing crop burning & conversion of agricultural residues/wastes to biofuels it will help in abetting Greenhouse Gas emissions.
• Municipal Solid Waste(MSW) management : Around 62 MMT of MSW is generated in India annually. With existing technology, there is potential to provide around 20% of drop in biofuels from one ton of MSW waste.
• Additional Income to Farmers: The otherwise burnt agricultural residues/waste can be commercialized augmenting the farmers’ income.

Implementation Challenges

• Technical Challenges : The technology for production of biofuels is still in its nascent stage and further research is needed for making it more economically viable.
• Supply Chain Management : For streamlining the movement of agricultural waste and other raw material for biofuel from source to industrial gates, robust supply chain is required which is still not well-developed.
• Limited Private Sector investment : Accelerated investment is needed in the sector which can only be achieved with the involvement of private sector whose participation has been hampered because of financial constraints and lack of cohesive support from central to local level.
• Food vs Fuel Challenge :There is the risk of diverting farmland or crops for biofuels production in detriment of the food supply which can lead to food inflation.
• Environmental Challenges : There is a risk of farmers opting for mono cropping preferring crops used for biofuel production which can disbalance local ecology as well.

Conclusion

• The Policy has the potential to transform India’s fuel market, mitigating environmental pollution, diversify farmers income and much more.
• However, the government need to take steps to remove policy barriers that have discouraged private investment in building supply chains and also need to channelise more research in new technology so as to make the production of biofuels more economically viable.

Introduction

The Parliament has recently passed the Insolvency and Bankruptcy Code Bill, 2016. It was first passed in Lok Sabha and later in Rajya Sabha in the month of May 2016.

• The bill will replace the existing bankruptcy laws to make it easy for investors to exit within a fixed time frame, in an effort to improve the ease of doing business in India.
• The Code creates time-bound processes for insolvency resolution of companies and individuals.

The bill introduced as a money bill

The Insolvency and Bankruptcy Bill, 2015 was introduced as a money bill in the Lok Sabha.

• In case of money bills, the Rajya Sabha can only make recommendations that are not binding on the Lok Sabha.
• The president has no power to return a money bill.

What is Insolvency?

• Simply speaking, insolvency is a financial state of being – one that is reached when you are unable to pay off your debts on time.
• Insolvency is essentially the state of being that prompts one to file for bankruptcy. An entity – a person, family, or company – becomes insolvent when it cannot pay its lenders back on time.
• Typically, those who become insolvent will take certain steps toward a resolution. One of the most common solutions for insolvency is bankruptcy.

What is Bankruptcy?

• Bankruptcy, on the other hand, is a legal process that serves the purpose of resolving the issue of insolvency.
• Bankruptcy is a legal declaration of one’s inability to pay off debts. When one files for bankruptcy, one obliges to pay off what is owed with help from the government.
• In general, there are two main forms of bankruptcy –

1. Reorganization: Under reorganization bankruptcy, debtors restructure their repayment plans to make them more easily met.
2. Liquidation bankruptcy: Under liquidation bankruptcy, debtors sell certain assets in order to make money they can use to pay off their creditors.

It should be noted here that while insolvency is a financial situation and bankruptcy is a legal condition. Insolvency may or may not lead to bankruptcy.

Bankruptcy laws across the world:

USA

• The US has a Bankruptcy Code that provides for fairly quick liquidation or reorganisation of business with what is popularly known as Chapter 7, with cases being filed in bankruptcy courts; Chapter 11, which deals with reorganisation of businesses; and Chapter 15, on cross-border insolvencies. Individual bankruptcies are dealt with separately.

UK

• In the UK, once cases are filed for bankruptcies, after 12 months, there is either discharge with part of the assets being used to pay off debts, or, in situations where companies can be turned around, court-appointed administrators handle cases.

Germany

• The German insolvency law is applicable to both individuals and firms, with independent court-appointed insolvency practitioners helping in realising assets or reorganising the business.

Why does India need a bankruptcy law?

• India is a capital-starved country and therefore it is essential that capital isn’t frittered away on weak and unviable businesses. Quick resolution of bankruptcy can ensure this.
• Today, bankruptcy proceedings in India are governed by multiple laws — the Companies Act, SARFAESI Act, Sick Industrial Companies Act, and so on. The entire process of winding up is also very long-winded, with courts, debt recovery tribunals and the Board for Industrial and Financial Reconstruction all having a say in the process.
• According to the World Bank’s Doing Business 2016 report,

1. On average, secured creditors in India recover only 25.7 cents for every dollar of credit from an insolvent firm at the end of insolvency proceedings. This contrasts poorly with the OECD countries where creditors recover 72.3 cents.
2. The whole insolvency process takes 4.3 years to conclude in India whereas it takes just 1.7 years in OECD countries.
3. Because of the above reasons, India ranks an abysmal 136 out of 189 countries with respect to “resolving insolvency”.

Previous Bankruptcy Laws in India

• There are several laws that deal with insolvency for companies, such as the Sick Industrial Companies Act, the Recovery of Debt Due to Banks and Financial Institutions Act, and Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI).
• There are also a couple of laws dating from the time of the British Raj for dealing with individual debtors like Presidency Towns Insolvency Act, 1909 and the Provincial Insolvency Act, 1920.

The Bankruptcy Law Reform Committee

• To fix the issues with the current insolvency regime, the government had set up a high-level Bankruptcy Law Reform Committee (BLRC) in August 2014 under T. K. Viswanathan.
• This committee had submitted its report in November 2015 while suggesting new institutions and structures to modernize the present outdated system.
• After consultation with stakeholders about the committee recommendations, the government prepared a draft bill and introduced it in the Parliament.

Salient Features of the Insolvency and Bankruptcy Code, 2015

The bill contains a clear speedy mechanism for early identification of financial distress and initiates revival/re-organisation of the company if it is viable.

Timeline

• The bill proposes a timeline of 180 days to deal with the applications for insolvency resolution with an option of extending it by 90 days for exceptional cases.

Insolvency Resolution Plan

• The insolvency resolution plan has to be approved by 75% of the creditors. If the plan is approved, then the adjudicating authority will give its sanction. In case of rejection of insolvency resolution plan, the adjudicating authority will pass an order for liquidation.

Insolvency Professionals (IPs) & Insolvency Professional Agencies (IPAs)

• The resolution processes will be conducted by licensed insolvency professionals (IPs).  These IPs will be members of insolvency professional agencies (IPAs).  IPAs will also furnish performance bonds equal to the assets of a company under insolvency resolution.

Information Utilities

• Information utilities (IUs) will be established to collect, collate and disseminate financial information to facilitate insolvency resolution.

Bankruptcy and Insolvency Adjudicator

• The National Company Law Tribunal (NCLT) will adjudicate insolvency resolution for companies.  The Debt Recovery Tribunal (DRT) will adjudicate insolvency resolution for individuals.
• The Debt Recovery Tribunal (DRT), which has jurisdiction over individuals and unlimited liability partnership firms. Appeals from the order of DRT shall lie to the Debt Recovery Appellate Tribunal (DRAT).

Insolvency regulators

• The Insolvency and Bankruptcy Board of India will be set up to regulate functioning of IPs, IPAs and IUs.

What about financial sector insolvencies?

The Financial Sector Legislative Reforms Commission (FSLRC) has recommended the creation of a resolution corporation to monitor financial firms, and intervene before they go bust.

• The aim is to either close firms that can’t be revived or change their management to protect investors or depositors.
• This is important because the failure of large banks or institutions imposes costs on taxpayers in the form of bailouts or capital infusion.
• The proposal is to promote the Deposit Insurance and Credit Guarantee Corporation (DICGC) as resolution corporation.

Critical Analysis of the Code

• Time-bound insolvency resolution will require the establishment of several new entities.  Also, given the pendency and disposal rate of DRTs, their current capacity may be inadequate to take up the additional role.
• IPAs, regulated by the Board, will be created for regulating the functioning of IPs.  This approach of having regulated entities further regulate professionals may be contrary to the current practice of regulating licensed professionals.  Further, requiring a high value of performance bond may deter the formation of IPAs.
• The Code provides an order of priority to distribute assets during liquidation.  It is unclear why:

1. Secured creditors will receive their entire outstanding amount, rather than up to their collateral value,
2. Unsecured creditors have priority over trade creditors, and
3. Government dues will be repaid after unsecured creditors.

• The Code provides for the creation of multiple IUs. However, it does not specify that full information about a company will be accessible through a single query from any IU.  This may lead to financial information being scattered across these IUs.
• The Code creates an Insolvency and Bankruptcy Fund.  However, it does not specify the manner in which the Fund will be used.

Importance of the bankruptcy code

The Insolvency and Bankruptcy Code would provide such an environment to ensure easy exit for sick companies and help the country to improve its position in ease of doing business.

• The bankruptcy code will make it easier for companies to wind up failed businesses and bring India on a par with developed nations in terms of resolving bankruptcy issues.
• A stated objective of the new law is to promote entrepreneurship, availability of credit, and balance the interests of all stakeholders.
• Once the code will come into place it will minimize the problem of delay as there are strict timelines within which the case has to be disposed off.
• The code will also consolidate the existing laws thus making the process simpler.
• Quick disposal of cases will maximize the recovery amount.
• Establishment of information utilities will help in creating a database to provide information on the insolvency status of individuals. In addition to this, specialized insolvency professionals will help in guiding through the process.
• Easy process of claim by the creditors also encourages financial institutions to extend credit facilities thus strengthening the financial markets with increased availability of credit for business.

Panel for adopting UN model on cross-border insolvency

• The Insolvency Law Committee (ILC), tasked with suggesting amendments to the Insolvency and Bankruptcy Code of India, has recommended that India adopt the United Nations’ model to handle cross-border insolvency cases.
• “The ILC has recommended the adoption of the United Nations Commission on International Trade Law (UNCITRAL) Model Law of Cross Border Insolvency, 1997, as it provides for a comprehensive framework to deal with cross-border insolvency issues,” the government said in a statement.
• “The committee has also recommended a few carve-outs to ensure that there is no inconsistency between the domestic insolvency framework and the proposed cross border insolvency framework.”
• The UNCITRAL Model Law has been adopted in 44 countries and, therefore, forms part of international best practices in dealing with cross border insolvency issues, the government said.

UNCITRAL

• UNCITRAL was established by the UN General Assembly in 1966 to promote the progressive harmonisation and unification of international trade law.
• It is the core legal body of the United Nations system in the field of international trade law.
• It also aims to modernize and harmonize rules on international business.
• The Commission comprises 60 member States elected by the United Nations General Assembly for a term of six years. Membership is structured to ensure representation of the world’s various geographic regions and its principal economic and legal systems.
• India is a founding member of UNCITRAL.
• India is only one of eight countries which have been a member of UNCITRAL since its inception.

The necessity of amending the IBC

• The current law related to IBC applies to domestic companies only.
• Moreover many Indian companies have a global footprint and many foreign companies have a presence in multiple countries, including India, which calls for amending IBC.              

Advantages of bringing Model Law

• It will enhance the ease of doing business and protect creditors in the global scenario by providing increased predictability and certainty of the insolvency framework.
• Provide greater confidence generation among foreign investors.
• Provides a robust mechanism for international cooperation.

Conclusion

• However, enactment of the code is just a beginning. For effective results, the government will have to ensure that its so-called pillars — insolvency professionals, information utilities, a strengthened adjudication mechanism, and a regulator — are institutionalised.

Context

• The publication of central bank’s annual report for fiscal year 2016-17 (RBI follows a July-June fiscal year) which put the estimated value of the currency that returned to the system at Rs 15.28 trillion or close to 99% of the currency notes demonetised in November-December 2016.
• Currency in circulation in India stood at Rs 19.3 lakh crore as on 1 June, reaching 98.94% of the pre demonetisation level, according to the latest data released by the Reserve Bank of India (RBI).

Demonetization technically is a liquidity shock; a sudden stop in terms of currency availability. It created a situation where lack of currencies jams consumption, investment, production, employment etc. The intensity of demonetization effects clearly depends upon the duration of the liquidity shocks.

2016 Indian banknote demonetization

• On 8 November 2016, the Government of India announced the demonetisation of all Rs. 500 and Rs. 1,000 bank notes of the Mahatma Gandhi Series. The government claimed that the action would curtail the shadow economy and crack down on the use of illicit and counterfeit cash to fund illegal activity and terrorism.
• The sudden nature of the announcement—and the prolonged cash shortages in the weeks that followed—created significant disruption throughout the economy, threatening economic output.
• The Specified Bank Notes (Cessation of Liabilities) Ordinance, 2016 was issued by the Government of India on 28 December 2016 ceasing the liability of the government for the banned bank notes.

Following are the main impacts

• Currency crunch in our economy
• Welfare loss for the currency using population.
• Consumption was adversely affected

Consumption ↓→ Production ↓→ Employment ↓→ Growth ↓→ Tax revenue ↓

• Loss of Growth momentum
• Increase in bank deposits and reduced interest rate
• Countering of black money
• Check on counterfeit currency

A changed narrative from Black money to a cashless economy

• The original intent of demonetisation was to address the issue of black money. There is enough work that suggests that people with black money hold a very small proportion of it in cash.
• Most of it is usually invested in gold, or real estate, or in the stock market, or abroad, and the share of black cash is 6% of the total black economy.
• The primary pitch and narrative of the demonetisation drive by Prime Minister seems to have taken a major shift to cashless economy from the initial key highlights of war against black money, corruption and counterfeit currency.
• Now Government says that idle money has come into the system, the cash-to-GDP ratio will decline; the tax base will expand. But none of these required demonetisation and could have been implemented independently.
• The government now also said that demonetisation is only one of the many steps to tackle the black economy.
• The government’s argument that cash coming back to the banks will enable it to catch the generators of black income, and there will be formalisation of the economy, may not hold.
• Then the goalposts started shifting when it became apparent that the main reason was not justified by what was happening. First it was cashless, then less cash economy, then formalisation of the economy. The final step was in saying this would give IT authorities the information to go after people who had deposited black money.

Who mostly have borne the brunt?

Large deposits by businesses do not automatically become black. The Income Tax department has to prove that the sums deposited resulted from generation of black income. According to the Finance Minister, big data analytics would track black money holders who have deposited cash in their bank accounts.

• The negative effect of demonetisation can be seen in terms of big losses to the unorganised sector, farmers and traders.
• The start-up world has seen a drop in investment activity
• The brunt of this move actually has been borne by those who never had any black money. The note shortage is slowly waning and the long-term economic and social effects are becoming evident.

Short-term costs inevitable

There were always going to be costs in the short run — people would be short of currency, businesses would be disrupted, consumption would fall, and GDP growth would take a hit.

• The government announced the Pradhan Mantri Garib Kalyan Yojana where cash could be declared, deposited, and a hefty penalty paid. For those determined to deposit their illicit wealth without disclosure, the cash has not become white. It will be scrutinised by the tax authorities and penalties levied.
• The gains may accrue in the coming year once tax authorities have scrutinized through accounts with suspiciously large deposits.
• According to Finance Minister, between November 8 and December 31, 2016, deposits between Rs. 2 lakh and RS. 80 lakh, and deposits of more than Rs. 80 lakh amount to some two-thirds of the value of the demonetised currency. The holders of these suspicious accounts will now be in the tax net for perpetuity.
• However, not all of that money deposited is black. Perfectly white cash holdings were common. To able to distinguish the black from the non-black would be the responsibility of the IT authorities. They have to analyse the deposits and correlate them with the tax payment records, which is relatively easy to do.

Gains from demonetization

• Nobel laureate Kailash Satyarthi and others working to fight human trafficking said that the note ban had led to a huge fall in sex trafficking.
• The Demonetisation has badly hit Maoist and Naxalites as well. The surrender rate has reached its highest since the demonetisation is announced. It is said that the money these organisations have collected over the years have left with no value and it has caused them to reach to this decision.
• Mumbai Police reported a setback to Hawala operations. Hawala dealers in Kerala were also affected. The Jammu and Kashmir Police reported the effect of demonetisation on hawala transactions of separatists.
• Several e-commerce companies hailed the demonetisation decision as an impetus to an increase in digital payments, hoping that it would lead to a decline in COD returns which could cut down their costs.
• The demand for point of sales (POS) or card swipe machines increased. E-payment options like PayTM and Instamojo Payment Gateway, PayUMoney also saw a rise.
• The number of I-T returns filed for 2016-17 grew by 25 per cent and the advance tax collections during that period rose 41.8% over the 1-year period, as increased number of individuals filed their tax returns post demonetization

Why Demonetisation alone is not responsible for slow GDP growth?

There are multiple villains to blame, though, the most immediate being the damper of demonetisation of November 2016 and the implementation of the goods and services tax (GST) in July 2017

Following may also be the reasons for slow GDP growth.

• There has been a sign of distrust in financial investments.
• While GST pushed up gold buying, it pushed down manufacturing. Manufacturing companies sent out their old stocks to market, holding back on production. It brought down manufacturing sector growth from 5.3% in January-March to 1.2% in April-June.
• In the post-rabi-season quarter, we expected strong agricultural growth but it was pulled down by the animal husbandry sector. In fact, animal husbandry, specifically buffalo meat exports, has been the leading contributor to growth among all the areas that are clubbed under agriculture.
• Uttar Pradesh, India’s largest meat processing state faced huge shutdowns from end-March. Livestock contributes a little over 4% to GDP and roughly a quarter of total agricultural GDP.
• Agri-sector growth dropped to 2.3% in April-June quarter against 2.5% in the same quarter of 2016.
• Robust government expenditure rose 27% in the April-June quarter, to 6.5 lakh crore. The not so good news: fiscal deficit touched 92% of its budget estimates by July.
• At the same time, some of the government’s revenue-generating plans have not being implemented. While disinvestment and spectrum sales have yet to make significant headway.
• Lack of PPP projects is clearly our biggest problem. Implementing the Kelkar Committee report and tackling the institutional bottlenecks that constrain PPP in India are the need of the hour.
• There is an institutional capacity issue. With an NPA overhang, corporates are wary and lack appetite to take risks.
• Savings from physical assets were being moved from gold and real estate to financial assets. Gold (valuable) imports go up sharply. Household savings moving away from physical assets, especially real estate may not be a good thing for the economy.
• The second largest job creator after agriculture is real estate and construction growth has already tapered.

The economy has overcome note ban impact: World Bank

• However, in what would have come as music to the ears of the government, the World Bank in April said the Indian economy appeared to have recovered from the temporary disruptions caused by demonetisation and the introduction of the GST.
• The World Bank said the country was projected to grow by 7.3 per cent in 2018 and 7.5 per cent in 2019 but pointed out that despite growth, India was not creating enough jobs.

Criticism against demonetisation

Critics say, the Demonetisation as a means of tackling the black economy, carried out on the incorrect premise that black money means cash. It was thought that if cash was squeezed out, the black economy would be eliminated. But cash is only one component of black wealth: about 1% of it.

• Black money is a result of black income generation. This is produced by various means which are not affected by the one-shot squeezing out of cash.
• Any black cash squeezed out by demonetisation would then quickly get regenerated.
• So, there is little impact of demonetisation on the black economy, on either wealth or incomes.

99% of demonetised notes back with RBI-

• Opposition criticism intensified after the RBI, in its annual report for 2017-18 on August 29, 2018, said that nearly all the money that was withdrawn returned to the banking system.
• The RBI said it had received Rs 15.31 lakh crore of Rs 500 and Rs 1,000 notes, or 99.3 per cent of the Rs 15.417 lakh crore worth of notes which were in circulation as on November 8, 2016.
• This meant that just Rs 10,720 crore of Rs 500 and Rs 1,000 notes failed to come back to the RBI, as against government expectations that well over Rs 3 lakh crore of black money would not return to the banking system.

Demonetisation proved to be not just an unnecessary disruptor — growth slipped to 7.1 per cent in 2016-17 and 6.5 per cent in the following fiscal — but also took the eyes of policymakers off the real problem inherited from UPA: The mountain of bad loans weighing down public sector banks.

Demonetisation turned out to be a diverter in the case of IBC; bankruptcy resolutions have started happening only in the last year of this government. GST’s rollout, too, would have been far smoother had it not been preceded by demonetisation.

More than 105 people had died in the post-demonetisation rush for cash across the country. Demonetisation also hit small-scale businesses.

According to the Centre for Monitoring Indian Economy (CMIE), demonetisation caused loss of about 15 lakh jobs. The CMIE compared the employment data for January-April 2017 with the figures for the September-December quarter of 2016, when demonetisation was implemented.

High spending on note printing (Rs 7,965 crore was spent in 2016-17 as against Rs 3,421 crore, in 2015-16) impacted the profit of the RBI which reflected in the dividend that it paid to the government.

The RBI had transferred a surplus of Rs 65,876 crore to the government in 2015-16 which declined by more than half in 2016-17 when demonetisation was implemented. The RBI paid a dividend of Rs 30,659 crore.

Way Forward

• The government should focus on ensuring growth, job creation and investment. The urgent need is to get the private sector to start investing. One way to avoid winds of deflation is to kick-start private investments.
• Reviving the investment cycle and tackling bad loans will be the key challenges to be tackled on a priority basis in the current fiscal.
• The government has launched a multipronged attack on corruption and black money. Government discretion has been reduced particularly in the allocation of natural resources.
• There is a concerted attempt to improve ease of doing business, and technology is being used to deliver public services without leakages.
• It is far too early to write-off any of these efforts, and demonetisation. There is a future beyond the present.

Conclusion

• Data available so far shows that cash remains king in the economy, even post demonetisation and that the government’s digital drive cannot easily dethrone cash from Asia’s third-largest economy.
• But more than slowing growth and derailing reforms, demonetisation inflicted avoidable pain on farmers, daily wage labourers and informal enterprises used to transacting in cash.
• Nor did it deal a body blow to black money. The promised windfall of Rs 4-5 lakh crore proved a chimaera
• There is a disturbing irony in that two years after demonetisation, expectations have mounted of the RBI delivering over Rs 3 lakh crore to the government — this time from its own reserves.

 WHY IN NEWS

• The stand-off between the government and the RBI has reached a flashpoint.

Introduction

• The Reserve Bank of India (RBI) and the government give the impression that they are not on the same page even as far as an understanding of their roles is concerned.
• The RBI suggests that its independence is being violated while the government rationalises its intervention in terms of its concern for the economy.

How was the relationship between the central government and RBI?

• Since it is clear that the government and the central bank are not on the same page on these issues, their relationship is being widely debated. It has often been argued that the RBI is not an independent central bank.
• However, the real question is: should the RBI not have the operational independence to attain the objectives given to it? Former RBI governor Raghuram Rajan has explained what RBI does with the analogy of a seat belt.
• The driver—in this case, the government—has the option of not putting on the seatbelt, but in case of an accident, the damage could be severe.
• Put differently, it is in the interest of the government to respect the central bank’s mandate of maintaining financial stability.

The dispute between the Government and RBI-

• The rift between the Central Government and the RBI grew after the RBI Deputy Governor Viral Acharya said in a speech on October 26, 2018, that undermining a central bank’s independence could be “potentially catastrophic”, an indication that the regulator is pushing back hard against government pressure to relax its policies and reduce its powers.
• Acharya also said that “Governments that do not respect central bank independence will sooner or later incur the wrath of financial markets, ignite an economic fire, and come to rue the day they undermined an important regulatory institution…”

  SIX CRITICAL AREAS OF CONFLICT 

CASH GRAB

• The government has made repeated calls for the RBI to hand over more money from its reserves to help fund its fiscal deficit.
• The RBI currently hands over its profits earned from various activities in the form of a dividend. But the government also wants to tap a share of the RBI’s Rs. 3.6 lakh crore ($48.73 billion) of capital reserves.
• The RBI has consistently pushed back against the demand.

The aim of keeping reserves by RBI: what’s the objective of these reserves?

• The CGRA (currency and gold revaluation account) is meant to cover a situation where the rupee appreciates against one or more of the currencies in the basket.
• The basket has several currencies ranging from the dollar to the euro and the yen or if there is a decline in the rupee value of gold.
• The level of CGRA now covers about a quarter of the total currency reserves of the RBI.
• The CGRA, which serves as a risk management technique for the RBI, has shown large variations over the years due to revaluation of foreign exchange assets.
• The contingency reserve is meant to cover depreciation in the value of the RBI’s holdings of government bonds– domestic and foreign– if yields rise and their prices fall.
• The reserve is also meant to cover expenses from extraordinary events such as demonetisation, money market operations and currency printing expenses in a year of insufficient income.
• Most important of all, the contingency reserve supports the mother of all guarantees the central bank’s role as the lender of the last resort.
• The reserve is also a cover for the deposit insurance fund given that the Deposit Insurance and the Credit Guarantee Corporation (DICGC) is a wholly-owned subsidiary of the RBI.

OUT OF THE SHADOWS

• The government wants the RBI to provide more liquidity to the shadow banking sector, which has been hurt by the defaults of major financing company, Infrastructure Leasing & Financial Services (IL&FS).
• Those defaults triggered a sell-off in bonds and stocks of non-banking financial companies. The government has been asking the RBI for a dedicated liquidity window for these lenders similar to the one allowed during the 2008-2009 global financial crisis.

JUST RELAX

• The government has also been urging the RBI to relax its lending restrictions on 11 state-run banks. The curbs were imposed because the banks had a low capital base and major bad debt problems.
• The 11 public sector banks are barred from lending unless they reduce their bad debt levels, improve their capital ratios and become profitable.
• The government says the restrictions have gone too far and have reduced the availability of loans for small- and medium-sized businesses.

ENCROACHING

• The RBI is also irked by the government’s efforts to trim the central bank’s regulatory powers by proposing to set up an independent payments regulator.
• Currently, the RBI regulates all payments and settlements in the economy. The government says it wants a separate payment regulator which will be able to adapt to rapid changes in technology.

BOARD INFLUENCE

• The government appointed S Gurumurthy, a prominent BJP supporter and an affiliate of the Rashtriya Swayamsevak Sangh (RSS), to the RBI board earlier this year along with Satish Marathe, a former banker with ties to the RSS.
• Such political appointments have been unusual in the past as the RBI board’s external members have mostly been economists and industrialists.
• Traditionally, the RBI’s board has approved decisions related to internal functions of the central bank and it has not interfered in its supervisory and monetary policy functions.

KEEPING MUM

Senior government officials, as well as BJP and RSS officials, are angry that the RBI decided to go public over the quarrels. Acharya made it clear he had been asked to address the independence question by Patel and in a show of unity the three other deputy governors attended his speech. In its statement concerning autonomy, the government stressed that it will keep discussions confidential.

The fuse that lit this tension is said to be Section 7 of the Reserve Bank of India Act or RBI Act, which empowers the government to issue directions to the “lender of last resort”

Section 7 of the Reserve Bank of India (RBI) Act, 1934

The Section 7 of the RBI Act empowers the Central Government to consult and give instructions to the Governor of the Reserve Bank of India (RBI) to act on certain issues, that the government considers serious and in public interest. The Central Government may give such directions to the Bank from time to time, after consultation with the Governor of the Bank, consider necessary in the public interest. Once the Section 7 is invoked, the general superintendence and direction of the affairs and business of the Bank is entrusted to a Central Board of Directors which may exercise all powers and do all acts exercised or done by the Bank. It is considered that such a move could be a last resort for the Government to increase liquidity, ease pressure on banks and businesses, and boost economic growth. Has the Section 7 been invoked earlier? The Section 7 had never been used in independent India till now. It was neither even used when the country was close to economic crisis in 1991 and nor in the aftermath of the 2008 recession crisis. Allahabad High Court’s ruling in context of Section 7 The talks of invoking Section 7 began for the first time during the matter related to power generation which was taken up by the Allahabad High Court in which a case was filed by power producers challenging the RBI’s February 12 circular. The High Court at that time ruled that invoking of the section could be considered. However, the government at that point did not invoke the section. How this Section operates? It is not yet clear how this Section operates since it has never been used till now.

CENTRAL BANK’S INDEPENDENCE A WESTERN CONCEPT: RSS AFFILIATED BODY

• Matters took a political turn after the RSS-affiliated Swadeshi Jagran Manch’s leader Ashwani Mahajan said the “Reserve Bank of India governor should work in sync with the government or otherwise resign.”
• He said, “This entire talk of central bank’s independence is a Western concept.
• It is not acceptable and feasible here. India is a developing country our main priority is employment and growth of small-scale industries.
•  RBI should stand with the government on these issues.” The Congress has also accused the Prime Minister Narendra Modi government of undermining the RBI’s independence.

Where Does RBI Stand in Terms of Autonomy?

• According to a paper published in the International Journal of Central Banking in 2014, RBI was listed as the least independent among 89 central banks considered under the study.
• These rankings are likely to have improved since the adoption of inflation targeting in February 2015 and the formation of Monetary policy committee in October 2016.
• However, vacancies in RBI’s board and government’s reluctance to fill them up raises questions about the decisions taken and whether proper deliberations on those decisions are being held.
• During the previous government, a Financial Sector Legislative Reforms Commission was formed which made various recommendations to cut down RBI’s powers.
• In 2013, a financial sector monitoring body, called Financial Stability Development Council was established which was to be chaired by the Finance Minister.
• In essence, the RBI Act 1934, does not empower RBI absolute autonomy. However, it does enjoy some independence when it comes to performing its regulatory and monetary functions

WHY IT MATTERS

FOR PM MODI

• The Modi government has been under pressure ahead of regional polls due at the end of 2018 because of weak farm prices and surging fuel costs, which have been hurting rural incomes. The government recently cut excise duty on gasoline and diesel, adding to pressure on its deficit.
• The budget is also being undermined by muted revenue collection from a recently introduced goods and service tax.
• Added to this, IL&FS woes have led to a liquidity crunch across much of the shadow banking sector and throttled off some lending.
• All of this could slow a $2.6 trillion economy, the world’s sixth largest, only months before the general election.
• To prevent that from happening, PM Modi is expected to spend more on populist programmes, including boosts to rural wages, fuel subsidies and buying crops at a guaranteed minimum price.

FOR INVESTORS

• The rift has created political and economic uncertainty. Investors want policy continuity from both the RBI and the government to ensure inflation is kept in check and economic stability is maintained.
• A persistent fall in the inflation rate since 2014 in a country that was used to volatile price pressures instilled confidence in the central bank and attracted investors. However, investors fear such hard-earned economic gains could be at risk if the government can pull the RBI’s strings.

Way Forward

•  The RBI governor should be responsible and accountable to Parliament and not to a particular government or the ministry of finance, or minister.  He can testify to Parliament twice a year. In separate testimony in both houses of Parliament, the lawmakers can ask questions of the RBI Governor and the latter can respond.
• A better way to sort out these differences and to come to a conclusion is to have a larger debate with technical experts weighing in.
• On issues of operational autonomy, the central government needs to lay off its pressure on the RBI.
• On macro issues such as exchange rate management and RBI’s dividend policy, written agreements that clearly demarcate roles and responsibilities can be thrashed out.
• The Monetary Policy Framework Agreement and the FRBM Act are good illustrations of how a mutually agreed rule-based framework can broker peace between the central bank and the executive arm of government.
• If the issues are not resolved, the tussle will undermine investor confidence and strengthens fears about institutional erosion when India is already experiencing economic turmoil.

Conclusion

• There is need to pay due regard to both autonomy and accountability. There has to be a forum within our democratic structure where the RBI is obligated to explain and defend its position.
• Different countries have taken different routes and by and large each model is appropriately tuned to their specific contexts.
• The oft-quoted US example is a good model to work upon.
• Presentation by the chairman of the Federal Reserve to the Congress makes for public exposure and transparency but does not take away the chairman’s autonomy.
• We need an appropriate and structured forum to strike a balance between unrestrained autonomy and blatant political intervention

India ease of doing business rank jumps 23 places to 77 in World Bank’s Doing Business 2019 survey

Context

• India’s rank in the World Bank’s Ease of Doing Business 2019 survey climbed 23 places to 77 among 190 countries surveyed, making it the only country to rank among the top 10 improvers for the second consecutive year.
• Last year, India saw a record jump of 30 places to reach the 100th position in the rankings.
• New Zealand topped the list of 190 countries in ease of doing business, followed by Singapore, Denmark, and Hong Kong.
• The United States is placed eight and China has been ranked 46th. Neighbouring Pakistan is placed at 136.

Areas where Ease of Doing Business Concentrate

• Ease of doing business: Harmonization of laws, procedures and rates of tax, will improve the environment of compliance as all returns to be filed online, input credits to be verified online reducing need to deal with different tax authorities. It would also discourage mere ‘invoice shopping’.
• This is a dynamic process and it reflects performance in various parameters for doing business in comparison to other countries.

Ease of Doing Business Index Indicators

• Starting a business
• Dealing with construction permits
• Getting electricity
• Registering property
• Getting credit
• Protecting minority investors
• Paying taxes
• Trading across borders
• Enforcing contracts
• Resolving insolvency

(Each one of these indicators carries equal weightage.)

What is measured

• The EODB study tries to capture the experience of small and mid-sized companies in a country with their regulators, by measuring the time, costs and red tape they deal with.
• To collect data, it empanels experts from the largest business cities in each country, with Mumbai and Delhi surveyed in India. It has many rounds of interactions with them — typically lawyers, business consultants, accountants, freight forwarders, government officials — who can capture the experience of multiple businesses.
• Over 13,800 experts participated in the 2019 study, from June 2, 2017 to May 1, 2018. Each country is assigned a rank out of 190 based on the total score it earns on 10 key aspects of doing business.
• The indicators considered now are: starting a business, getting construction permits, securing electricity, registering property, getting credit, protecting minority investors, paying taxes, cross-border trade, enforcing contracts and resolving insolvency.
• In short, the World Bank’s intent is to measure a country’s progress on a few ‘doing business’ indicators in great depth, without trying to be comprehensive about the indicators or striving for a statistically large sample.
• The above facts make the shortcomings of the study obvious. In India, it may not reflect the experience of partnership or proprietorship firms that dominate the small business space, or those located in tier 2 or tier 3 towns.
• With the ten indicators measured by the study well-known, it is also easy for governments to specially target these areas for reforms.
• But the EODB rankings do serve as the most trusted ready-reckoner for foreign investors looking to set up shop in a country. For that reason, this is an achievement for India to celebrate.

What improved

India’s climb in the 2019 rankings seems to have come mainly from sharply higher scores on two ‘doing business’ indicators — securing construction permits and trading across the borders. It also made smaller improvements in starting a business and getting credit.

The sharp rise in the ranking will burnish the reformist credentials of the present government.

• The number of days taken to Start a Business dropped from 30 to 16.
• The number of days taken to obtain Construction Permits dropped from 144 to 95.
• Border compliance for exports dropped from 106 to 66 hours.
• Border compliance for imports dropped from 264 hours to 96 hours.
• In the electricity sector, the time taken for obtaining a new connection has reduced from 105 to 55 days.

Further, India now ranks in the top 25 in the world on three indicators–

• Getting electricity,
• Getting credit and protecting minority investors,
• Department of industrial policy and promotion.
• In dealing with construction permits, India has implemented an online single window system, introduced deemed approvals and reduced the cost for obtaining these permits.
• For resolving insolvency, India has put in place a new Insolvency and Bankruptcy Code and time bound reorganization procedure for corporate debtors.
• Upgrades in port infrastructure, a move to online documentation and facilities for exporters to seal their containers on their own, helped.

What didn’t change

• While India managed dramatic changes in some indicators, there were others where its scores barely budged.
• Its score remains dismal on registering property, where it ranks 166. While it takes 69 days to register a piece of property and costs about 8% of its value in India, the norm for OECD countries is just 20 days at half that cost. New Zealand gets this done in a single day.
• The other vexatious aspect that most business folk will readily identify with, is paying taxes. Despite the advent of GST, India has remained a back-bencher on this at a rank of 121. A typical Mumbai-based firm makes 13 tax payments a year, spends 278 hours on this and coughs up 52% of its profits.
• But businessmen in Hong Kong make just three payments a year, those in Singapore spend just 49 hours paying taxes. The average tax rate across global economies is less than half of the Indian rate!
• India also fares poorly, at rank 163, on enforcing contracts. While enforcing a claim through the courts in Mumbai takes 1,445 days and costs 31% of claim value, OECD nations manage this feat in 582 days at a cost of 21%.

 What will be the outcome of this Ease of Doing Business Index report?

• It is significant for countries like India, where foreign investors and Governments look at the investor-friendly measures and this index is considered to be the one which reflects the ground reality.
• In today’s capitalistic society (market economy with safeguards for vulnerable sections), this assumes significance as FDI flows are considered necessary for the growth of emerging economies.
• Multilateral lending institutions like World Bank, IMF look at these parameters and suggest measures for improvement before giving financial help to the emerging economies/underdeveloped countries.
• Simplifying FDI process by abolishing FIPB (Foreign Investment Promotion Board) as a result, more than 90% of FDI inflows are now through automatic route.

However, the report does not truly represent the status of economic reforms taken by India

For instance:

• One particular change in the ranking methodology seems to have done considerable damage to India’s improvement prospects.
• India ranks fourth from the bottom under the header “paying taxes”. Inclusion of new criterion ‘post-filing index’ has much to contribute to this.
• The rankings cover only the two cities of Delhi and Mumbai. However, the reforms are being carried on all across India. In fact, states like Andhra Pradesh, Telangana have done remarkable efforts in economic reforms.
• There is increasing competition from other countries who are trying to improve their rankings as well.
• India has recommended the World Bank that reforms undertaken in the entire country and not just in Delhi and Mumbai be considered for the “Ease of Doing Business” Index.

To improve ranking, there must be an additional effort in strengthening our weakest areas:

Dealing with Construction Permits (181/190)

• States have aimed to reduce time and costs for obtaining building and construction permits and introduced the provision of deemed approvals.
• To expedite the building plan approvals, inspections are being integrated and made risk-based.

Enforcing Contracts (164/190) – Enforcing Contracts has suffered owing to lack of a well-defined system for dispute resolution.

• National Judicial Data Grid is being introduced which serves as a monitoring tool to identify, manage and reduce pendency of cases.
• Several states have established dedicated Commercial Courts at the district level to ensure speedy resolution of commercial disputes and have published model contract templates.
• They are also implementing e-Courts, entailing facilities such as e-cause lists, e-payments, e-filing and e-summons.

Starting a Business (156/190)

• Supply side reform is important – focussing on the micro regulatory regime — such as making it easy to start or close down business. It is here that India still has a lot of ground to cover, as local entrepreneurs would testify.
• The World Bank report flags the areas where the country lags — local entrepreneurs need to go through 12 procedures to start a business in India’s commercial capital, which is way higher than many high-income economies, besides cumbersome procedures for construction permits, registration of property and enforcement of contracts.

Institutional Challenges in the Indian system

A mismatch between the intent of reforms and quality of actual enforcement and transparency on the ground, — the governance challenge

• A high level of discretion still exists with the officer enforcing rules on the ground.
• Aggravated by the lack of a time-bound grievance redress mechanism, and the absence of independent ‘auditors’ who monitor on-ground enforcement quality and ensure there is accountability for poor decisions made in the field.

Design challenge: Procedures are often designed to cater to the few instances of failure or non-compliance and not for efficiency and facilitation.

Management challenge: There is a tendency to blame poor quality of government services on lack of infrastructure or human resources. This often overlooks the fact that there are many examples of better services with effectively fewer resources.

Way Ahead

While vigilance is the call of the hour, we should also recognize that an improved in ranking is not an end in and of itself.

For attracting new investment, both foreign and domestic, several macroeconomic issues have to be addressed.

These include political and economic stability, law and order maintenance, quality physical infrastructure, and buoyancy in financial markets.

Major institutional and governance reforms not covered in the World Bank study remain prerequisites for new businesses to start and grow.

India may have the advantage of a large domestic market, and our efforts to improve our ease of doing business rankings may be finally yielding results, but there is still a lot of work ahead.

Conclusion

India saw a similar improvement in the “trading across borders” section to 80th position from 146th a year ago.

Other Initiatives like digitization, e-visas, infrastructure status to Logistics, Start-up India, announcement of National Intellectual Property Rights (IPR) policy.

This improvement was made possible by:

• Reducing the time and cost to export and import through various initiatives, including the implementation of electronic sealing of containers,
• Upgrading of port infrastructure and allowing electronic submission of supporting documents with digital signatures under its National Trade Facilitation Action Plan 2017-2020.

India is one of only nine countries around the world and only one in BRICS to feature in this list