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1.Enhancing the state capacity (Live Mint)

2.Women in workplace (Live Mint)

3.FRDI bill: What and why (Indian Express)

1.Enhancing the state capacity (Live Mint)

Synoptic line: It throws light on how almost all of India’s governance problems can find links to the lack of manpower in state services. (GS paper III)

Overview

  • Lately, there has been renewed interest in India’s lack of state capacity. One hardly need explain the dysfunction arising from this problem to the average Indian citizen. It is as pervasive and embedded as any other social, cultural or economic facet of Indian life.
  • Yet, we continue to chug along and sometimes even manage to surprise ourselves conducting free and fair elections for hundreds of millions of voters, or providing unique biometric identification to close to a billion people. So, it is not a complete failure.
  • Lant Pritchett famously labelled India a flailing state one where the head, that is the elite institutions at the national (and in some states) level remain sound and functional but that this head is no longer reliably connected via nerves and sinews to its own limbs.

The problem

  • This problem of state capacity has an element of truth and urgency. Almost all of India’s governance problems can find links to the lack of manpower in state services. India has only 12-15 judges per million compared to the US’ 110 per million. The immediate goal is to reach the law commission’s 50-judges-per-million recommendation.
  • Similarly, India has about 129 policemen per 100,000 citizens only Uganda fares worse. In order to meet the UN recommended ratio, India is short of half-a-million policemen. The situation for judges and the police also holds true for firemen, traffic police, garbage collectors, inspectors, engineers, bureaucrats, and so on.
  • This crisis in state capacity cannot be solved anytime soon. Though India’s population, especially the youth, should be in line for these jobs, there are two major problems. First is the old problem of state budgets. India has a very small tax base, with a minuscule fraction of its citizens paying income tax. There needs to be a reduction in government spending in other areas and an increase in revenue to support the much needed manpower.
  • Second, the Indian workforce is not skilled enough to be recruited for these jobs. Though a million new workers join the workforce each month, it is still difficult to find half-a-million skilled enough to be recruited for the police force or the fire service. Matters are far worse in the case of judges, engineers and regulators.

What can be done?

  • Essentially, both streamlining and shrinking the ambit of the regulatory state to a size that can actually be effectively enforced. The size of the Indian state in terms of its manpower may be small, but its size in terms of regulation is gigantic, and most of this regulation is either unenforced, or selectively and perniciously enforced.
  • An example, discussed a few months ago in these pages, is of the archaic posts of salt commissioner and his four deputies, who oftentimes pose problems for businesses, but do not collect enough cess to even cover the wage bill of the organization.
  • The frequent tendency of statutes to criminalize actions without giving any thought to the capacity of the criminal justice system to handle the enforcement of rules has been criticized. For instance, a cheque bouncing due to insufficient funds is a criminal offence in India. It is unclear why a contractual matter that can be resolved between two parties should impose on the already strained police, prisons and magistrates by criminalizing the offence.
  • Similarly, the Telegraph Wires (Unlawful Possession) Act, 1950 makes it a criminal offence for anyone to possess a 2.43mm- to 3.52mm-diameter copper wire. One can scarcely fathom any circumstance where this provision was actually required and now it is particularly unnecessary given that the telegraph service was permanently closed in July 2013. A joint report by the Centre for Civil Society, in collaboration with the National Institute of Public Finance and Policy (NIPFP) and Vidhi Legal Centre, has recommended the repeal of a hundred other such laws.
  • Repealing obsolete laws is both obvious and relatively easy, and will free up some state capacity. The government has taken small steps in this direction. But the bigger gains will come from structural reform to streamline the regulatory process.
  • Labour regulation is a particularly messy and entangled regulatory system. Currently, there are 44 labour-related statutes enacted by the Central government dealing with welfare, wages, occupational safety and health, social security, and industrial relations.

Way ahead

  • States have their own statutes as well as amendments attached to Central statutes. The result is a system of overlapping and inconsistent rules, making it impossible for most businesses to know, let alone follow, all these laws. There is an opportunity to reduce the burden on the state by streamlining the current labour law system. Service law and tax codes are also obvious areas for reform. A rupee saved is a rupee earned, and state capacity freed is state capacity built.

Question What type of interventions is needed at the part of government to free-up the capacity of state towards more useful purposes?

2.Women in workplace (Live Mint)

Synoptic line: It throws light on why to take the Indian economy to a higher growth rate in the long run, we need to bring back the women in the workplace. (GS paper III)

Overview

  • Recently, the successful hosting of the Global Entrepreneurship Summit 2017 in Hyderabad, its first outing in South Asia, was a significant achievement for India, the theme of “Women First, Prosperity for All” also perhaps brought into focus a great anomaly in the Indian workforce the under-representation of women.

Closing the gap

  • US President Donald Trump’s senior adviser, Ivanka Trump, highlighted in her keynote address that increasing the participation of women in the labour force would significantly boost the Indian economy. Just consider, if India closes the labour force gender gap by half, your economy could grow by over $150 billion in the next three years.
  • She was talking about a problem India may be quite familiar with but is finding hard to tackle. In the “Global Gender Gap Report” (2017) released recently by the World Economic Forum (WEF), India has been ranked a low 108 out of 144 countries on the gender equality scale, slipping from 87 last year.

Gender gap

  • Earlier this year, a World Bank report had said that India has among the lowest female labour force participation rates (LFPRs) in the world. In particular, low female LFPR is a drag on gross domestic product (GDP) growth and an obstacle towards reaching a higher growth path.
  • China has 64% of its women working, one of the highest rates in the world. In the US, it is over 56%. In the subcontinent, Nepal and Bangladesh do much better than India; only Pakistan has a lower rate.
  • It is not for lack of intent. There is evidence that a vast number of educated women do want to get back to their careers but are held back by impediments, such as societal norms and structural problems in labour markers and employment policies.
  • Personal experiences recounted by many women suggest that employers are sometimes not ready, or not prepared, to take back women who have been on a career break and jobs often do not lend themselves to the elusive work-life balance. So they end up taking prolonged breaks.
  • However, such career breaks also put the brakes on the national economy. The lives and fortune of women affect everyone.

Policy or intent

  • The issue is not just about equality and opportunity any more. Many young women are highly educated and their qualifications are on par with those of their male counterparts. They then also work hard to build a career but as family life and home responsibilities take precedence, they end up dropping out of the workforce.
  • Those who do decide to get back to work are often harrowed with questions about how, if at all, they would be able to manage home and work. Some of the assumptions about “returning women” are not just discriminatory but also disheartening.
  • Corporate India is struggling to maintain gender diversity in companies. It perhaps needs a stronger will and determined policy changes to bring women back to work. While it may be crucial for a working woman to take a break for some reason, be it family or children, she needs support and policy changes to enable her to come back to full-time or part-time work.
  • Many companies now have a diversity and inclusion (D&I) mandate which makes them look to hire more women. Few women actually get hired on a salary and position commensurate with their education and experience, notwithstanding whether they took a break or not.
  • While this issue is close to the heart of many corporate leaders, and there is a determined effort to address the problem, it remains a struggle. “Newly available data reveals the scale of India’s gender gap in women’s share among legislators, senior officials and managers, as well as professional and technical workers for the first time in recent years, highlighting that continued efforts will be needed to achieve parity in Economic Opportunity and Participation,” the WEF report has highlighted.

Missing societal support

  • Women do have the dual responsibility of home and work. With no strict guidelines about daycare centres, and often bearing the responsibility of ailing and aged parents, women make the difficult choice of staying home and not going back to work.
  • There is the other issue of security and, sometimes, the societal stigma about working late hours and travelling. Office work conditions are geared for a male workforce and are often not conducive to female employees. And in the absence of quality control in crèches or reliable childcare options, many women seek employment opportunities with flexible hours or part-time work.
  • Taking a break from a career cannot be held against a competent and talented woman aiming to get back to work but, unfortunately, it seems to be a roadblock which only a few are able to surmount.

Way ahead

  • The Global Entrepreneurship Summit saw many women leaders from around the world discussing and sharing ideas. This, surely, is a step in the right direction to motivate and empower women and bring them into the labour force. With two-thirds of the female population not working, India is missing out on a vast pool of resources, which is affecting its growth prospects. To take the Indian economy to a higher growth rate in the long run, we need to bring the women back.

Question– How India should respond to the challenges of low women LFPR? What steps have been taken by govt. in this regard?

3.FRDI bill: What and why (Indian Express)

Synoptic line: It throws light on the proposed FRDI bill and issue associated with it. (GS paper II)

Overview

  • Some provisions of The Financial Resolution and Deposit Insurance Bill, 2017, popularly referred to as the FRDI Bill, which was tabled in Parliament this August, have given rise to concerns over protection for bank deposits in the proposed law. An online petition had attracted almost 90,000 signatures by Saturday night. The government has been forced to issue a statement saying the law is, in fact, aimed at protecting the interests of depositors in a more transparent manner.

Context of the bill

  • India now has a law to swiftly address the issue of insolvency of companies in the manufacturing sector. Essentially, that law aims at finding and finalising a resolution plan to get a troubled company back on track, or, in the event of failure, ensure a quick winding up.
  • The plan is to have a similar law for firms in the financial sector so that if a bank, a Non Banking Finance Company (NBFC), an insurance company, a pension fund or a mutual fund run by an asset management company, fails, a quick solution is available to either sell that firm, merge it with another firm, or close it down, with the least disruption to the system, to the economy, and to investors and other stakeholders.
  • This is to be done through a new entity, a Financial Resolution Corporation envisaged as an agency that will classify firms according to the risks they pose, carry out inspections and, at a later stage, take over control. This was recommended by the Financial Sector Legislative Reforms Commission (FSLRC) headed by Justice B N Srikrishna.

What is the “bail-in” provision in the proposed law that is causing all anxiety?

  • Everyone has long been used to the word “bailout”, where governments step in to protect the interests of savers or depositors like in the UK when there was a run on the deposits of banks.
  • There were cases in the US and other parts of Europe, too. The fact that huge public funds were used for such support, and criticism that bailouts incentivised bank managements to take risky bets called “moral hazard” by economists led governments to seek other solutions.
  • Regulators put in place laws and rules to discourage or prevent such bailouts with new resolution regimes. Losses of these financial firms had to be borne by shareholders and creditors rather than taxpayers. One of the tools for such resolution is “bail-in”.
  • It allows resolution agencies to override the rights of the shareholders of the firm this could mean writing down of a company’s equity and debt to absorb losses, or converting debt into equity.
  • This could also mean overriding requirements such as approvals by shareholders and disposing of the firms’s assets. The G20 at its Cannes Summit in 2011 endorsed some of the key attributes of such resolution, including transfer or sale of assets and liabilities, and legal rights and obligations including deposits liabilities and ownership in shares, to a third party without any requirement for consent. In other words, deposit holders do not have any superior claims.

What is bail-in provision

  • The principal aim, is to minimise the cost of any such failures of financial firms to taxpayers. The other objective, as the EU’s Bank Recovery and Resolution Directive, 2014, indicates, is that shareholders of banks and creditors must also pay their share of costs, rather than governments or taxpayers absorbing all losses.
  • The Bank of England has been pushing banks in the UK to set aside more funds to cover for potential failures. The aim, the UK central bank says, is to ensure banks no longer remain “too big to fail”, and to make sure that the risks that banks take are properly priced by investors who know they will suffer if things go wrong.

What is the worry that depositors and others have regarding the provision in the proposed Indian law?

  • India’s financial sector is bank-dominated, and bank deposits make up the dominant share of financial savings. The fear is Indian policymakers may want to nudge savers on the same path as in many other parts of the world to ultimately lower risks and the potential burden on taxpayers, although there is no explicit mention of this in the proposed law.
  • In India, deposits in banks are insured for a maximum of Rs 1 lakh by the Deposit Insurance and Credit Guarantee Corporation, which is now an arm of the RBI. There are concerns that the Bill may not clearly lay down the quantum of protection for deposits, or classify deposits separately.

Government’s response

  • The government has said that India’s FRDI Bill is more depositor-friendly than that of many other jurisdictions that provide for statutory bail-ins, where the consent of creditors or depositors is not required for bail-ins. It has also said that it does not propose in any way to limit the scope of powers to extend financing and resolution support to banks, including public sector banks.
  • The government’s implicit guarantee for public sector banks remains unaffected, the Finance Ministry has said. That is perhaps an indication that the sovereign may not want to foreclose the option to back a failed bank. In the United Kingdom too, the Treasury retains the power to transfer a failing firm into public ownership, or make a public equity injection as the last resort.

What other changes could the proposed law set off?

  • Like elsewhere, once this kicks in, banks, insurers, pension funds, asset management companies, all will have to put in place resolution plans or “living wills” that will address a potential failure of the firm in the least costly manner.
  • This plan will be continuously reviewed by the proposed Resolution Corporation, like the Federal Deposit Insurance Corporation (FDIC) in the US, which has handled 527 bank failures since 2008, including seven in 2017 so far. Resolution corporations in the US, UK and Canada classify the risks of firms they supervise, review them periodically, and carry out simulation tests and mock drills of resolution plans. The Bank of England is going one step ahead with plans to publish the summaries of resolution plans of banks while they are “alive”, or healthy. In cases of bank failures, the announcement of a shutdown is typically made on a Friday evening, and by Monday, cheques reach customers, or money is credited to their accounts in two working days. A closure or shutdown will be the final option the first option would be to transfer the assets and liabilities to another firm, or to create a “bridge service provider” to which they would be transferred until eventual sale, revival, merger, or acquisition.

Question– What are the salient provisions of the FRDI bill? What are the contentions associated with it?