current -2019 csb ias cademy economythe independent jurisdiction, sovereignty, and au-thority of the...

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CURRENT BULLETIN-2019

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ECONOMYSignificance of Cross-Border Insol-vencyContext:

The Insolvency and Bankruptcy Code has faced grave implementation challenges in recent times.

Insolvency and Bankruptcy Code:

The Insolvency and Bankruptcy Code, 2016 (IBC) is the bankruptcy law of India which seeks to consol-idate the existing framework by creating a single law for insolvency and bankruptcy.

When a default in repayment occurs, creditors gain control over the debtor’s assets and must make decisions to resolve insolvency within a 180-day period.

To ensure an uninterrupted resolution process, the Code also provides immunity to debtors from reso-lution claims of creditors during this period.

The Code also consolidates provisions of the cur-rent legislative framework to form a common fo-rum for debtors and creditors of all classes to re-solve insolvency.

The Insolvency Professionals, Insolvency Profes-sional Agencies, Adjudicating authorities like NCLT, Debt recovery tribunals facilitates the insolvency resolution under the Code.

Implementation Challenges:

It was widely expected that the cross-border insol-vency provisions would be part of the IBC or enacted soon after.

However, Insolvency and Bankruptcy Bill in the year 2016 did not address this.

Many large cases undergoing insolvency, such as, Amtek Auto, Videocon Industries, Essar Steel, Jet Airways and others are confronted with complex cross-border issues.

Absence of a framework to deal with cross-border in-solvency is likely to result in significant loss in value of assets of such companies.

The government has shown no urgency to enact the law.

Measures taken on Cross-Border Insolvency:

Eventually, the judiciary had to step in to plug the gap in cross border insolvency through the case of Jet Air-ways insolvency.

In May this year, a Dutch Court passed an order of insolvency of Jet Airways on a petition of creditors based in Netherlands and appointed a Trustee.

Jet Airways has its regional hub in Schiphol Airport, following this the NCLT directed the Interim Resolu-tion Professional to ignore the order of Dutch Court and Trustee.

Recognizing the threat ignoring Dutch Court and Trustee pose to a sustainable insolvency resolution outcome of Jet Airways, the NCLAT advised explora-tion of a framework of cooperation.

After extensive negotiations, a Cross Border Insol-vency Protocol (Protocol) was agreed upon.

Designed on the principles of UNCITRAL Cross Border Insolvency Model Law, the Protocol provides a frame-work of international coordination, while respecting the independent jurisdiction, sovereignty, and au-thority of the NCLT/NCLAT and the Dutch Court.

The Protocol recognized that given Jet Airways was an Indian company with its center of main interest in India, the IBC proceedings are the main insolvency proceedings and the Dutch Proceedings are the non-main insolvency proceedings.

The Protocol seeks to promote international co-operation and coordination of activities to

1. Provide for their orderly and timely adminis-tration in order to reduce cost.

2. Promote communication among the parties and the committee of creditors.

3. Provide, wherever possible, for direct com-munication among NCLT, NCLAT and Dutch Court.

4. Provide for the sharing of relevant informa-tion and data among the parties to avoid duplication of effort and activities.

5. To identify, preserve, and maximize the value of Jet Airway’s worldwide assets for collective bene-fit of all.

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The Protocol was approved by the NCLAT in Septem-ber and viewed as a historical development by the international community and signals a rapidly matur-ing insolvency market in India.

It is likely to benefit the outcomes in Jet Airways and set a healthy precedent for similar cases.

Way forward:

While the Protocol plugs a huge gap, it is in no way a substitute for a comprehensive cross-border insol-vency law.

Most sophisticated economies have well developed cross-border insolvency laws.

Adoption of the UNCITRAL Model Law is a necessity and not an option for India.

Thus provisions for cross-border insolvency cannot be ignored if India is to have a comprehensive and long-lasting insolvency law.

Draft Rules Code on Wages, 2019Context:

The Ministry of Labour and Employment recently published the draft rules for implementing the pro-visions of Code on Wages, 2019 earlier given assent by the President.

Draft rules:

The Code on Wages replaces four laws:

1. the Payment of Wages Act, 1936

2. the Minimum Wages Act, 1948

3. the Payment of Bonus Act, 1965

4. the Equal Remuneration Act,1976

It seeks to regulate wages and bonuses for all work-ers employed by any industry, trade, business or manufacturer.

While the Code is now law, the Ministry has published the draft rules for implementing the provisions, seek-ing comments.

Following the consultation, the Centre will notify the rules that will create the mechanisms to fix a floor wage.

This would then materialise the minimum wages

for different categories of workers - unskilled, semi-skilled, skilled and highly skilled.

The States and Central government would then have to set and enforce them.

Code significance:

Minimum wages are accepted globally to be a vital means to combat poverty.

It equally crucially, ensures the vibrancy of any econ-omy.

The International Labour Conference’s Global Jobs Pact of 2009 identified the importance of wage reg-ulation.

It saw the regular adjustment of wages, in consulta-tion with the social partners as a means of -

i. reducing inequality

ii. increasing demand

iii. contributing to economic stability

The Pact came in the aftermath of the 2008 global financial crisis and the erosion of purchasing power worldwide.

key provisions :

The Code acknowledges that the aim in setting the floor wage is to ensure “minimum living standards” for workers.

The draft rules incorporate criteria declared in a land-mark judgment of the Supreme Court in 1992 as well as recommendations of the 15th Indian Labour Con-ference.

These include the -

• net calorific needs for a working class family set at 2,700 calories per day per consumption unit

• annual clothing requirements at 66 metres per family

• house rent expenses assumed at 10% of food and clothing expenditure

• expenses on children’s education, medical needs, recreation and contingencies

A working class family is defined as the earning work-er, spouse and two children or the equivalent of three adult consumption units.

The rules, similarly, cover almost the entire gamut of

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wage-related norms.

These include -

i. the number of hours of work that would con-stitute a normal working day (set at 9 hours)

ii. time interval for revision of dearness allow-ance

iii. night shifts and overtime

iv. criteria for making deductions

A separate chapter of the draft rules deals with the payment of bonus.

Also dealt in detail are the guidelines for the forma-tion of the Central Advisory Board as well as its func-tioning.

Earlier recommendations :

A national minimum wage of Rs. 176 per day had been recommended in 2017.

An expert committee had in 2019 recommended that a ‘need based national minimum wage for India’ ought to be fixed at Rs. 375 per day (Rs. 9,750 per month).

Additionally, the committee had suggested payment of a city compensatory allowance averaging up to Rs. 55 per day for urban workers.

Earlier, in 2015, the 7th Central Pay Commission had recommended setting the minimum pay for govern-ment employees at Rs. 18,000 per month.

Recently, the Delhi government set a minimum wage of Rs. 14,842 per month for unskilled workers.

This came after the Supreme Court ruled in favour of the local government, leaving aside the objections raised by many employers’ associations.

The Economic Survey too emphasized on the impor-tance of establishing an effective minimum wage sys-tem.

Code impact :

A lot will depend on the final floor wage or wages that the Centre will choose to set.

A statutory national minimum wage would have mul-tiple impacts including helping lift wage levels and reducing wage inequality.

It would thus go a long way in ensuring inclusive growth.

For India to reap the ‘demographic dividend’, robust wage expansion would be essential to help sustain consumption-led economic growth.

Way forward:

Trade unions have voiced their reservations with multiple aspects of the Code and plan to submit de-tailed feedback.

The points of contention include -

i. the 9-hour working day definition

ii. a lack of clarity in the rules on scope for upgradation of workers’ skill category

iii. the lack of representation for trade unions in the wage fixation committee

The ultimate success of the Code will be determined by the extent to which the minimum wage set is both fair and actually implemented.

It would, ultimately, have to benefit the millions of workers in the unorganised sectors of the economy.

SEBI’s New Rule on DefaultContext:

SEBI (Securities and Exchange Board of India) had asked listed companies to publicly disclose any de-fault beyond 30 days.

New Rule:

Default in repayment of principal or interest on loans from banks and financial institutions are to be dis-closed.

Such disclosure shall be made promptly, but not later than 24 hours from the 30th day of such default.

In August, 2017, SEBI had issued a similar circular.

It asked all listed entities to make such “disclosures within one working day from the date of default at the first instance of default.”

However, SEBI had deferred the implementation of that rule hours before it was to come into effect on October 1 2017.

The new default rule made now will come into force on January 1, 2020.

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SEBI’s rationale:

There is a gap in the availability of information, to different classes of investors, on defaults on loans by listed companies.

Investors come to know of such defaults much later.

Unlike this, a default on repayment of a bond or a similar instrument issued by a company has to be dis-closed immediately.

SEBI thus says the change was necessary to address this information asymmetry.

An early disclosure can act as an early warning sys-tem.

This can help investors make considered decisions on whether to stay on or sell the stock and exit, reducing their losses.

In the current scenario, a meltdown such as those at IL&FS, DHFL, or PMC Bank, can leave many inves-tors wary.

It is thus expected that SEBI’s move will lead to great-er credit discipline in the banking industry.

RBI’s move - The February , 2018 circular directed banks to start the process of resolution or restructuring of a loan even if the default was for only a day.

The April 2, 2019 ruling of the Supreme Court striked down the circular.

Following this, the RBI revised its rule in June 2019 offering a 30-day window to classify an account as a Non Performing Account.

SEBI’s circular now could be seen as a sign of regula-tory synergy with the RBI.

Investments - In 2017, SEBI restrained at the last minute on implementing the disclosure norms on default.

But, 2018 and 2019 have seen the collapse of several corporates.

Little was known about the true state of such compa-nies before they went into bankruptcy.

That too was based on anecdotal evidence with cred-it rating agencies way behind the curve.

Resultantly, the erosion of faith could be detrimental to boosting fresh investment.

It is now essential for both SEBI and the government to hold firm on the decision taken to instill confi-dence in investors and other stakeholders.

Rural Poverty in India - Studying the last 5 yearsContext:

There are discussions in the country about India’s ru-ral poverty considering the period of last 5 years.

Most of these discussions fail to factor in multi-di-mensional changes.

Background:

Low increase in prices of agricultural commodities and the slower increase in rural agricultural wages have been seen by some as signs of a crisis for the rural poor.

Many acknowledge the role of pro-poor public wel-fare programmes over the last 5 years.

Others have recorded sharp declines in chronic pov-erty as also multi-dimensional poverty between 2005-06 and 2015-16.

Indicators like nutrition, child mortality, years of schooling, cooking fuel, sanitation, drinking water, electricity, housing, and assets determine multi-di-mensional poverty.

If that is the case, the performance between 2015-16 and now would be even more spectacular, consider-ing the pro-poor public welfare thrust.

Findings of Study:

Inflation - The inflation rates have been very low, and inflation on agricultural produce even lower during the last 5 years.

NFSA - Availability of Rs 2/kg wheat and Rs 3/kg rice has become a reality across the country under the National Food Security Act (NFSA), which was under implementation only in 11 states 5 years ago.

Public subsidy - The public subsidy for the NFSA is as high as Rs 1.76 lakh crore every year.

This means that 75% rural households that get NFSA food grains are able to buy at much below the market price.

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This needs to be factored in when understanding the lower increases in agriculture wages.

Public Welfare Programmes - This has been a period when public welfare programmes like rural housing, rural toilets, LPG and electricity connections to households, etc., have all happened on a larger scale.

Pro-poor welfare programmes - These programmes often involve households contributing from their side.

This is quite large in the case of rural housing as poor households make aspirational homes, pulling togeth-er all their savings/borrowings for it.

Likewise, Swachh Bharat Mission toilets or enrol-ment in Ujjwala, Saubhagya also draws on incomes/savings.

It is bound to affect demand for goods purchased by the poor.

Up in the allocation - This has been the period when the allocation for rural development pro-grammes has gone up considerably from Rs 50,162 crore in 2012-13 to Rs 1.18 lakh crore in 2019-20.

Add to this the state shares, which have increased to 60:40 instead of 75:25 or 100% (in the case of the Pradhan Mantri Gram Sadak Yojana) from the central government for non-Himalayan states.

Finance Commission’s (FC) grants - This has been the period when the 14th FC’s grants to gram panchayats have been released on an unprecedented scale.

The annual releases are over 3 to 4 times the previ-ous grants.

Over Rs.2 lakh crore is to be released in 5 years, of which over Rs 1.44 lakh crore has already been pro-vided and works done under it.

Extra budgetary resources (EBRs) have also been mo-bilised for the housing programme.

These figures need to be understood in their full con-text before coming to a conclusion on rural poverty.

Factors to increase the financial resources in ru-ral areas:

MGNREGS - Works under the Mahatma Gandhi National Rural Employment Guarantee Scheme have continued to be in demand.

This is continuing even though the wage rates fixed every year on the basis of the Consumer Price Index for Agricultural Labour (CPI-AL) have grown modestly on account of the cheap price of food grains.

In 2018-19, over 268 crore person days of work was carried out, the second-highest ever.

In the three preceding years, the demand for work was about 235 crore person days every year.

DAY-NRLM - Another major increase of financial resources in rural areas has been through the Deendayal Antyodaya Yojana-National Rural Livelihood Mission programme.

Under this programmes, over Rs.2,12,000 crore has been provided as loans in the last 5 years.

NPA has come down from over 7% in 2013-14 to 2.2% in 2018-19, clearly establishing that DAY-NRLM SHG women borrow and return on time.

Significant and diverse livelihoods have been gener-ated through such loans leading to higher incomes, more productive assets, and larger number of village enterprises.

Decrease in Urban migration:

The improvement in rural road connectivity has been a significant development of this period.

This has led to 97% eligible and feasible habitations getting all weather road connectivity.

Clearly, rural households do not migrate to urban ar-eas for very low paid jobs as survival is possible with improved rural infrastructure, housing, etc., in rural areas now more than before.

This explains the continuously high demand for work under the MGNREGS.

This period has also witnessed a significant increase in individual beneficiary schemes like farm ponds, dug wells, animal sheds, vermi-composting etc under the MGNREGS.

This created durable assets and is providing opportu-nities for higher incomes.

Over 15 million hectares of land has benefited from water conservation works.

The larger labour force available for the MGNREGA reflects the unwillingness of a rural household with better infrastructure to go in for a distress migration with very low incomes in urban areas.

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Conclusion:

A lot more needs to be done to improve livelihoods in rural areas.

But the last 5 years have witnessed an unprecedent-ed pace in improving the ease of living of very poor households through public welfare programmes reaching them through better identification.

This better identification was done through the Socio Economic Census (SECC 2011), IT/DBT, geo-tagging, improved financial management and governance re-forms.

PSU DisinvestmentContext:

The cabinet committee on economic affairs (CCEA) has approved strategic disinvestment in BPCL and four other PSUs.

What is Disinvestment?

Disinvestment is the action of an organization or government selling or liquidating an asset or sub-sidiary.

Absent of sale of an asset, it refers to capital expen-diture reductions, which can facilitate the re-allo-cation of resources to more productive areas with-in an organization or government-funded project.

PSUs - The government will disinvest its shareholding in 5 PSUs.

1. Bharat Petroleum Corporation Limited (BPCL),

2. Shipping Corporation of India (SCI),

3. Container Corporation of India (CONCOR),

4. Tehri Hydro Power Complex (THDC) India Limited and

5. North Eastern Electric Power Corporation (NEEPCO).

Government’s rationale:

The government faces a massive shortfall in revenue and capital receipts.

As of September 30, 2019, net tax revenue had only reached 36.8% of the budget estimate of Rs. 16.5 lakh crore for the full year.

The non-debt capital receipts were at 17.2% of the fiscal’s target of about Rs. 1.2 lakh crore.

Given this, the share sale is aimed at helping the gov-ernment narrow the widening fiscal gap.

Concerns :

It is understandable if the government’s aim was to exit unprofitable, non-strategic businesses.

However, BPCL is a profitable refiner and oil market-ing company that has consistently paid a healthy dividend.

BPCL has also made investments in upstream energy resources and holds interests in overseas hydrocar-bon blocks.

To that extent, a full sale now deprives the govern-ment of all upside potential.

The BPCL stake could fetch the exchequer about Rs. 59,000 crore.

But, the decision to carve out and exclude the compa-ny’s 62% holding in Assam’s 3-million metric tonnes per annum Numaligarh refinery is disputable.

[In the case of BPCL, the strategic disinvestment will be for BPCL minus Numaligarh Refinery, which will be retained by the government.]

This would surely affect the price the government could get from a prospective buyer.

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Also, the lack of an explanation for the logic behind the move hints at politics taking precedence over any economic interest.

Challenges ahead:

There is just a little over four months left in the finan-cial year (2019-20).

Given this, how the government intends to actually complete the transaction is uncertain.

The process includes appointment of advisers, decid-ing on the pricing mechanism and initiating a trans-parent bidding process before finalising a buyer.

Of the Rs. 1.05 lakh crore disinvestment target, just Rs. 17,364 crore has been realised so far.

So, the Centre has little choice but to expedite these strategic sale proposals in double-quick time.

Moody’s negative rating for IndiaContext:

Rating agency Moody’s has revised the outlook on its sovereign rating for India from stable to negative.

Imporatnce:

Moody’s India rating is a notch higher than that of Standard & Poor’s (S&P).

The outlook revision of the rating now may well be to compensate for its past optimism on India.

Yet, the outlook revision has to be seen as a warn-ing that if the economy fails to bounce back soon enough, the sovereign rating could be up for an unfavourable review.

With due respect to Moody’s, none of the issues that it has highlighted is unknown.

Concerns:

The growth slowdown and its effects on the fiscal deficit and borrowings are the main worries.

Tax revenue growth is nowhere near budgeted levels.

With the slowdown extending into the third quarter of 2019, it is clear that tax revenues will undershoot by a wide margin.

The government has been forced to spend more to give a leg up to the economy.

Projections:

Efforts - The government pushed its expenditure on capital projects.

In October 2019, it gave away corporate tax conces-sions amounting to a whopping ₹1.45 lakh crore.

Even with the boost from the dividend payout of ₹1.76 lakh crore from the Reserve Bank of India, the budget arithmetic is optimistic.

Fiscal deficit - It now appears certain that the gov-ernment will miss the fiscal deficit target of 3.3% of GDP.

Moody’s has projected that the deficit will slip to 3.7% of GDP this fiscal year 0f 2019-2020.

Rating agencies are ultra-sensitive to fiscal deficit overruns but the positive factor here is that India’s borrowings are wholly domestic.

External debt to GDP - It is just 2 % but the ratings do have an impact on investor sentiment.

When will the revival take place?

Moody’s outlook revision comes when there are faint signs of a revival in the economy.

It may be another quarter or two before growth picks up - the second-quarter numbers due in November 2019 may show GDP growing at less than %5.

But the festive season uptick in sales of automobiles and white goods does point to the return of the con-sumer to the market.

Of course, the possibility that it was an artificial boost driven by the big discounts that were on offer cannot be ruled out.

There are other positive signals such as the increase in bank credit off-take reported by the RBI for the second successive fortnight.

Way forward:

The government needs to press the pedal harder on reforms and in debugging GST.

It may also have little option than to go big on disin-vestment in the remaining 4 months of this fiscal.

The target of ₹1.05 lakh crore that it set for itself in the budget has to be bested by a wide margin if the fiscal deficit slippage is to be contained.

The supportive measures announced in the last 2

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months should be closely monitored for implemen-tation.

INDUSTRIAL RELATIONS CODE BILL, 2019Context

The Minister of State (I/C) for Labour and Employ-ment introduced The Industrial Relations Code Bill, 2019 in the Lok Sabha. The draft code on Industrial Relations has been prepared after amalgamating and simplifying the relevant provisions of following three Central Labour Acts:

• The Trade Unions Act, 1926

• The Industrial Employment (Standing Orders) Act, 1946

• The Industrial Disputes Act, 1947

Details:

Setting up of two-member tribunal (in place of one member) and introducing a concept that some of the important cases will be adjudicated jointly and the rest by a single member resulting speedier disposal of cases.

To impart flexibility to the exit provisions, for which, the threshold for prior approval of appropriate Gov-ernment has been kept unchanged at 100 employ-ees, but added a provision for changing ‘such num-ber of employees’ through notification.

The re-skilling fund, is to be utilised for crediting to workers in the manner to be prescribed.

Definition of Fixed Term Employment and that it would not lead to any notice period and payment of compensation on retrenchment excluded.

Vesting of powers with the government officers for adjudication of disputes involving penalty as fines thereby lessening the burden on tribunal.

Framework on CURRENCY SWAP Arrangement for SAARCContext

To further economic cooperation within the SAARC region, the Reserve Bank of India (RBI) has put in place a revised Framework on Currency Swap Ar-rangement for SAARC countries for the period 2019 to 2022.

Details:

Under the framework for 2019-22, RBI will continue to offer swap arrangement within the overall corpus of $2 billion.

The RBI would enter into bilateral swap agreements with SAARC central banks, who want to avail swap facility.

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The withdrawals can be made in US Dollar, Euro or Indian Rupee.

The Framework provides certain concessions for swap withdrawals in Indian Rupee.

The Currency Swap Facility will be available to all SAARC member countries, subject to their signing the bilateral swap agreements.

The new Framework is valid from November 14, 2019 to November 13, 2022.

Earlier, the SAARC currency swap facility came into operation on November 15, 2012 with an intention to provide a backstop line of funding for short term foreign exchange liquidity requirements or balance of payment crises till longer term arrangements are made.

CHIT FUNDS (AMENDMENT) BILL, 2019Context

Lok Sabha passed the Chit Funds (Amendment) Bill, 2019.

The Bill seeks to amend the Chit Funds Act, 1982. The 1982 Act regulates chit funds, and prohibits a fund from being created without the prior sanction of the state government.

Salient features of the bill

Names for a chit fund: The Act specifies various names which may be used to refer to a chit fund. These include chit, chit fund, and kuri. The Bill addi-tionally inserts ‘fraternity fund’ and ‘rotating savings and credit institution’ to this list.

Substitution of terms: The amendment bill defines –

‘gross chit amount’ as the sum of subscriptions pay-able by all the subscribers of a chit;

‘share of discount’ as the share of the subscriber in the amount kept apart for running the chit; and

‘net chit amount’ as the difference between chit amount and the amount kept apart for running the chit.

Presence of subscribers through video-conferenc-ing: The Act specifies that a chit will be drawn in the presence of at least two subscribers. The Bill seeks to allow these subscribers to join via video-conferencing.

Foreman’s commission: Under the Act, the ‘foreman’ is responsible for managing the chit fund.

He is entitled to a maximum commission of 5% of the chit amount. The Bill seeks to increase the commis-sion to 7%.

The Bill allows the foreman a right to lien against the credit balance from subscribers.

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Aggregate amount of chits: The Bill increases the maximum amount of chit funds which may be col-lected to (i) 3 lakh rupees for chits conducted by individuals, and for every individual in a firm with less than four partners, and (ii) 18 lakh rupees for firms with four or more partners.

Application of the Act: Currently, the Act does not apply to any chit where the amount is less than Rs 100. The Bill removes the limit of Rs 100, and allows the state governments to specify the base amount over which the provisions of the Act will apply.

Under a chit fund, people agree to pay a certain amount from time to time into a fund. Periodically, one of the subscribers is chosen by drawing a chit to receive the prize amount from the fund.

INDIAN PERFORMING RIGHT SO-CIETY (IPRS)Context

The Economic Offences Wing (EOW) of the Mumbai Police has registered an FIR against Yash Raj Films (YRF) Pvt Ltd for alleged criminal breach of trust and failure to pay an estimated Rs 100 crore in royalty to several music composers and writers since 2012. The FIR was registered on a complaint by the Indian Per-forming Right Society (IPRS).

About The Indian Performing Right Society (IPRS)

The Indian Performing Right Society (IPRS) is a rep-resentative body of artists, including music owners, composers, lyricists, and publishers of music, which collects royalties due to the artists if their work is used anywhere from a wedding to a New Year func-tion or on radio or TV.

The body was set up in 1969, and re-registered as a copyright society in 2017 under the amended Copy-right Act, 1957.

The IPRS has its offices in Mumbai.

IPRS has both civil and criminal remedies available to it under The Copyright Act.

It has filed civil suits in 20-25 cases earlier, but the move against YRF was the IPRS’s first criminal com-plaint.

Details:

A 2012 amendment in The Copyright Act, 1957 laid down that artists would get 50% of royalties every time their work was used, even if the copyright re-mained with the production house or the music brand.

The IPRS is responsible for collecting the 50% royalty that is due to artists involved in “literary work accom-panied to music” — meaning lyricists, music compos-ers, and publishers of music.

Index of Industrial Production (IIP)Context:

The Index of Industrial Production (IIP) estimates from the National Statistical Office show that output shrank by 4.3% in September, 2019.

All the three component sectors in the index - man-ufacturing, mining and electricity - post contractions.

IIP:

IIP is a composite indicator measuring changes in the volume of production of a basket of industrial products over a period of time, with respect to a chosen base period.

It is compiled and published on a monthly basis by the Central Statistics Office (CSO) under the Na-tional Statistical Office (NSO).

It is published with a time lag of six weeks from the reference month.

Significance:

This is yet another set of economic data from the NSO that reaffirms both the depth and all-pervasive width of the ongoing economic slowdown.

This was the sharpest contraction in output since April 2012, before which the data was referenced to a different base year.

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Five of the six categories on the IIP’s use-based clas-sification of goods registered declines, with only in-termediate goods bucking the trend.

The prolonged slump in the output of capital goods (a proxy for investment activity by businesses) extend-ed into a 9th straight month as production contracted by about 21 %for the 2nd month in a row.

Consumer durables also posted a 4th straight contraction, with the 9.9% decline which is in stark contrast to September 2018’s 5.4% growth.

Clearly, manufacturers of white goods are struggling to find demand for their wares and the sliding pro-duction points to an absence of the traditional festi-val-eve restocking bump.

The second successive shrinkage in infrastructure and construction goods reflects the challenges beset-ting the two primary sectors.

Here, the Centre’s announcement of a funding initia-tive to help stalled housing projects ought to provide some fillip in the coming months.

But a stretched fiscal situation is likely to keep gov-ernment spending on other big-ticket infrastructure projects muted for the foreseeable future.

Industry perspective:

From an industry perspective, 17 of the 23 industry groups that comprise the manufacturing sector con-tracted.

Leading the slump was the motor vehicles industry, which posted a 25% contraction.

SIAM -

The wholesale data from the Society of Indian Automobile Manufacturers (SIAM) can be an indicator of trends for this industry.

In this, there is certainly more pain ahead as overall shipments fell almost 13% from a year earlier in Oc-tober 2019.

Demand for newly introduced utility vehicles was the saving grace, as it propelled a marginal uptick in pas-senger vehicle deliveries.

SIAM’s figures on commercial vehicles, show that the 23% year-on-year decline, particularly underscore the demand vacuum in the rural hinterland and the wariness on the part of fleet operators to invest in new haulage capacity.

With manufacturing having a weight of almost 78%

in the IIP, the latest report from IHS Markit gives little room for optimism.

Purchasing Managers’ Index – This is a survey-based index that revealed continuing manufacturing sector weakness in October 2019 as weakening demand hurt new orders and business sentiment.

The business confidence had slipped to its lowest lev-el in more than 2½ years.

In Future - All signs now point to the central bank cut-ting interest rates again at its next meeting, in order to help spur a revival.

Relook at Deposit Insurance in IndiaContext:

The RBI recently capped withdrawals from the Pun-jab and Maharashtra Cooperative (PMC) Bank at Rs. 1,000.

In this context, here is an overview at the nature of deposit insurance in India and the working of Depos-it Insurance and Credit Guarantee Corporation (DIC-GC).

Crisis at PMC:

The PMC bank allegedly enabled frauds worth Rs.6,500 crore by promoters of Housing Develop-ment Infrastructure Ltd (HDIL).

More than 70% of PMC Bank’s total loan book has exposure to HDIL.

HDIL’s inability to repay its debt may lead to shutting down of the lender.

This has placed thousands of depositors’ money at risk.

Denying people the right over their hard-earned money is a fatal hazard for the financial system, which runs on the trust of depositors.

Deposit Insurance:

Deposit insurance is a measure to protect bank de-positors, in full or in part, from losses caused by a bank’s inability to pay its debts when due.

The Centre has set up Deposit Insurance and Credit Guarantee Corporation under RBI to protect deposi-tors if a bank fails.

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The deposit insurance scheme is mandatory for all banks and no bank can voluntarily withdraw from it.

Compared to other BRICS nations, India today has the lowest deposit insurance cover to per capita in-come ratio.

Reforms needed:

Insurance limit - A limit is the highest amount an insurer will pay for a claim that an insurance policy covers.

Most people agree that the insurance limit of Rs.1 lakh, set in 1993, needs to be raised to a higher amount.

Suggestions are being made to raise it to Rs. 15 lakh, which will cover 90% of the accounts completely.

Coverage - Customers who want more coverage than the statutory cover on their deposits should be able to purchase it by paying additional premium.

This option should be extended directly to banks that wish to increase the coverage of deposits to above the statutory requirements.

NBFCs - The lack of DICGC coverage for deposits at NBFCs (many of whom the RBI regulates) and primary cooperative societies is one such aspect.

These entities often serve vulnerable sections and their depositors must not be left stranded in case of a crisis.

Withdrawal - Another deficiency in the current DIC-GC cover is that the Rs.1 lakh insurance amount only needs to be released if there is a bankrupt.

Without liquidation of the bank, no liability accrues on the insurance company to pay such a claim.

The flaw in this scheme is obvious as the ‘freezes’ in withdrawal directed by the RBI essentially cut the de-positor’s access to his/her money.

Hence, during such periods (freezes), at least the statutory amount should be released.

This will go a long way in preventing bank runs, which could be triggered when customers get alarmed about the ability of banks to repay their deposits.

Premium - Currently the DICGC charges a flat 0.1 % insurance premium on the deposits of banks.

However, as suggested by an RBI panel in 2015, pre-mium should be based on differential risk based on the lending practices of the bank, among other things.

An SBI report states that 93% of the premium collect-ed by the DICGC in 2018-19 came from commercial banks (public sector: 75%, private sector: 18%).

But, over 94% of the claims settled (ever since the inception of the DICGC) have been those of cooper-ative banks.

Clearly, poor governance in cooperative banks has been cross-subsidised by the better-performing com-mercial banks.

The DICGC must thus draw inspiration from standard insurance practices.

It should charge higher premiums from banks with a past history of higher claims.

This will also provide a level-playing field for PSBs which are often disadvantaged due to tight govern-ment control and inflexibility.

Private insurers - Another possibility to be analysed is that of bringing private sector insurers and re-

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insurers into the deposit insurance segment.

This could drive down the premium prices.

In FY19, the DICGC collected Rs. 12,043 crore as pre-mium and settled Rs. 37 crore worth claims.

Clearly, this is a lucrative area for private players who can bring in more accurate risk-based pricing of these policies.

Notably, underwriting such policies entails significant risk-bearing on which the country’s economy thrives.

So, it needs to be reinsured by credible entities.

Given all these, the government must take purpose-ful steps in expanding and rectifying the deposit in-surance scheme as a safety net of the financial sys-tem.

Focus on enforcing contracts, land administrationContext:

The World Bank’s Doing Business 2020 study, showed that India improved 14 places from 77 to 63 out of 190 countries in the Ease of Doing Business (EODB) rankings.

Doubts regarding the approach to EODB rank-ings:

The ability of the Doing Business indicators to portray the overall economic situation in India. The EODB rankings have improved considerably over the years but the economic growth has been decreasing.

The report measures regulations that are more at mi-cro level and not at the macro level. So, there are lit-tle things that can impact the business environment of a country that are not covered by Doing Business.

Security, the level of education of workers in a given country, infrastructure etc are not covered under Do-ing Business. Business regulations that affect local, small companies are given primacy in the study.

The process of reform that the government under-takes, takes years to fructify. Just big ticket govern-ment reforms might not lead to actual benefits given that there might be some lacunae’s in their imple-mentation. The failure of the EODB study to consider the actual results of the reforms initiated is a draw-back.

The study considers data collected from the largest and second-largest business cities in the country.

There are questions on the representability of the two biggest cities for the country’s business regula-tions.

Challenges for India:

India has set itself an ambitious target of breaking into top 50 nations on the World Bank’s ease of doing business ranking.

India has considerably improved its rankings over the years but the higher you go, the more difficult it is to improve. The dual areas where India could do the most progress are maybe some of the most difficult ones to reform in the Indian context.

Though India has made remarkable progress over the years in EODB rankings there is still potential for improvements given that India’s rank is below 100 on five parameters: “starting a business” (137), “enforcing contracts” (163), “registering property” (166), “paying taxes” (121) and “resolving insolven-cy” (108).

India’s score in the Doing Business 2020 ‘enforcing contracts’ indicator is one of the country’s lowest scores. That’s an indicator that looks at commercial disputes and the efficiency of courts. For example, in Mumbai it takes three times longer than in other cit-ies of high income economies to solve commercial disputes through courts.

Another area for improvement would be the land administration system, the registered property indi-cator, where India also ranks pretty low and where there is a lot of room for improvement. It takes 58 days and costs on average 7.8% of a property’s value to register it, longer and at greater cost than among OECD high-income economies.

Way forward:

There is scope for improvement for India especially with respect to two parameters of ‘Enforcing con-tracts’ and ‘registering property’. Addressing these parameters would require some structural changes. The government needs to adopt a calibrated but time bound approach with respect to these parameters.

By amending the Commercial Courts Act, the gov-ernment facilitated the establishment of commercial courts in 250 districts. If these courts dispose of cas-es faster, India may rank higher on this parameter in the coming edition of EODB. Additionally digitization of the courts, increasing the judge: population ratio, better regulations to avoid intentional delays, judicial impact assessment of new laws and better framing of

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agreements in case of PPPs would also help.

To improve on ‘registering property’ parameter, own-ership and titles need to be online. This comes under the local government and the states have to chip in with effective laws and rules.

Post the passage of the Insolvency and bankruptcy code India can accept improvement in the resolving insolvency parameter though the implementation challenges need to be taken care of.

Considering that the EODB considers limited param-eters, India apart from focusing on just these param-eters must take the extra step of considering other potential factors which will ease the doing of busi-ness in India keeping in mind the local factors at play.

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