Mitras Analysis of News : 18-05-2017

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  1. The State’s debt issue (The Hindu)
  1. The emerging trend of Solar Tariff War (Live Mint)
  1. Article 142 and the need for judicial restraint (The Hindu)

 

 

The State’s debt issue (The Hindu)

 Synoptic line: It throws light on the ever increasing fiscal deficit of the states and certain possible reasons for such a trend (GS paper III)

Overview

  • The health of public finances in India greatly depends upon the fiscal morality of state governments.
  • The states’ fiscal deficit in the financial year 2015-16 (revised estimate, RE) as a percent of gross domestic product (GDP) rose to the highest since financial year 2003-04 which may concern the health of Indian economy.

Present Issue

  • Investors have been raising concerns lately on the increasing fiscal deficit of the state governments. According to the latest RBI’s publication, combined fiscal deficit of the states in FY16 (RE) has increased to 3.6 percent of GDP, highest since FY04 (4.2 percent of GDP).
  • The aggregate fiscal deficit of states has been trending upwards over the past few years. At a time when the Union government has been bringing down its fiscal deficit-GDP ratio, state governments seem to be on an expansionary mode.
  • The sharp deterioration in state finances over the past couple of years is partly because of the restructuring of state-run power utilities under the Ujwal Discom Assurance Yojana (UDAY).
  • For the first time in 11 years, in 2015-16 the combined fiscal deficit of India’s 29 States as a proportion of the size of their economies breached the 3% threshold recommended as a fiscally prudent limit by successive Finance Commissions.

Impact of UDAY scheme on state finances

  • UDAY Scheme has been launched by Union Ministry of Power for financial restructuring of debt of power distribution companies. It aims for financial revival and turnaround of Power Distribution companies (DISCOMs) and also ensures a sustainable permanent solution to the problem. By becoming part of it, states power DISCOMs can convert their debt into state bonds as well as roll out number of measures to improve efficiency at power plants.
  • The sharp deterioration in state finances over the past couple of years is partly because of the restructuring of state-run power utilities under the Ujwal Discom Assurance Yojana (UDAY).
  • While the debt created on account of UDAY is a one-time cost, the resultant increase in interest burden would persist in the coming years.
  • Moreover, states’ increased wages and pension bill on account of their respective Pay Commission revisions could inflate their total deficit by another 0.2% of the GDP this year (2017-18).
  • Ironically, the deterioration in state finances has coincided with the implementation of the 14th Finance Commission recommendations, which have led to an increase in aggregate transfers from the Centre to the states.
  • Indeed the Centre to states transfers were more than expected (or budgeted) in 2016-17. However, they were offset by lower-than-expected own tax collections by the states (mainly indirect taxes) and higher-than-expected expenditure, leading to deficits exceeding the initial budget estimates for the year.

Prudence of increasing deficits

  • The excessive spending by states is not just on account of schemes such as UDAY or linked to pay and pension expenses. Aggregate deficits have gone up also because states have stepped in to invest in social infrastructure such as health and education. With the Centre is curtailing expenditure on these areas over the past few years, states have had to step in to fill the gap, raising spending on these sectors (more on this issue in the next part of this series).

Way ahead

  • In the recent times, with private investment remaining obscure, the States’ focus on bolstering capital expenditure in sectors such as transport, irrigation and power is welcome (States’ capital expenditure as a proportion of their GDP has been higher than the Centre’s since 2011-12). But it is important that such funding remains sustainable and States stay solvent. Tepid economic growth hasn’t helped, and States have had to resort to higher market borrowings even after the Centre hiked their share from tax inflows to 42% from 32%, starting 2015-16.
  • Moreover, N.K. Singh panel on fiscal consolidation has recommended a focus on overall government debt along with fiscal deficit and a 20% debt-to-GDP ratio for States by 2022-23. Hence, not just the Centre, but States (with outstanding liabilities to GDP of around 24% as of March 2017) also need to tighten their fiscal belts considerably

Question: What reforms should be ushered by the government in order to take on board the rising fiscal adventures of the states?

 

 

The emerging trend of Solar Tariff War (Live Mint)

 Synoptic line: It throws light on the trend of declining solar tariffs and its possible implications on the electricity front. (GS paper III)

Overview

  • Average solar tariffs in India have fallen by about 73 per cent since 2010, almost in line with Chinese spot module prices, which have fallen by about 80 per cent during the period.
  • A new tariff war is playing out in the Indian solar power space. Tariffs plunged to a new low of Rs2.44 per kilowatt-hour (kWh) last week during an auction for 500 megawatt (MW) capacity at the Bhadla solar park in Rajasthan.

Reasons for declining tariffs

  • Tariffs in the solar space have declined significantly over the years and have come down from levels in excess of Rs10 per kWh at the beginning of this decade to the present record lows, as capacity is being added at a record pace.
  • Multiple factors are at play in the sector, resulting in the decline in tariffs, such as:
  1. The government has set an ambitious target of attaining 100 GW of solar power capacity by 2022. Consequently, the total installed capacity in this space has gone up by over three times in the last three years. According to government data, the share of renewable energy in the total installed capacity was 13% at the end of financial year 2016. But it is expected to increase significantly in the coming years, with solar a big driver.
  1. Private sector participants want to be part of this big opportunity. It appears that they may be looking at scale even if it means lower returns on investments.
  1. Developments in the sector, such as the fall in price of solar panels and the availability of finance, are also helping state-owned power producers.

Impending challenges due to such a trend

  • However, increasing solar capacity and a transition in favour of solar or renewable energy in general is not guaranteed to be smooth. The fall in tariffs may make adjustments difficult for conventional power producers.
  • The rise in cheap supply from renewable sources would affect the demand from conventional power suppliers in India as well. A hit in revenue will hurt the ability of thermal power companies to repay loans, which would mean more trouble for the banking sector.
  • Progress is also unlikely to be smooth for all solar power producers. Aggressive bidding has been seen in the past in a number of sectors which has had an adverse impact on financials. The latest rates in the solar power space are among the lowest in the world; it remains to be seen if they can be sustained in the long run.

Way ahead

  • The power sector is being disrupted and outcomes in the near to medium term will depend, to an extent, on technological progress and how well Indian power producers are able to adapt. A big breakthrough in storage capacity, for example, will change the dynamics for the sector and can make things difficult for conventional power producers.
  • Moreover, developments in the solar space will help India meet its energy demand in a more environmentally sustainable manner. However, it remains to been seen as to how low the solar power tariff can go and whether producers are actually able to deliver at that rate on a sustainable basis.

Question What can be the implications of ongoing solar tariff war on the pledge that India has taken to meet Paris target?

 

Article 142 and the need for judicial restraint (The Hindu)

 Synoptic line: It throws light on critical analysis of article 142 of the Indian constitution. (GS paper II)

 

Overview

  • Recently Supreme Court has given judgement on public interest litigation petition, filed by NGO Arrive Safe, for ban of the sale of alcohol, of a distance of 500metres along National and State highways by invoking Article 142. As a result of the order, thousands of hotels, restaurants, bars and liquor stores were forced to close down or discontinue the sale of liquor, resulting in lakhs of employees being thrown out of employment.
  • However according to the court statistics of 2015, the total percentage of accidental deaths caused due to drunken driving was only 4.2% as against the 44.2% caused by over-speeding.
  • Its order of banning the sale of alcohol along highways attributed to the loss of employment to lakhs of people, where Supreme court had itself held that the Right to Employment is a basic right traceable to Article 21.
  • Article 142 has been invoked for the purpose of doing tremendous good to large sections of the population and indeed to the nation as a whole. The Supreme Court has perceived its role as one which would require it to ‘wipe away every tear from every eye’, but perhaps it is time that the use of this vast, unlimited power included checks and balances.

Article 142 of the Indian constitution

  • Article 142 of Constitution of India deals with Enforcement of decrees and orders of Supreme Court. It states that the Supreme Court in the exercise of its jurisdiction may pass such decree or make such order as is necessary for doing complete justice in any cause or matter pending before it.

Separation of power Vs. Judicial activism

  • According to the doctrine of separation of powers the Legislature, Executive and judiciary have to function within their own spheres demarcated under the Constitution and no organ can assume a function assigned to another. The framers of the Constitution have reposed ultimate trust in each organ to perform its functions as per the duties and powers conferred upon it by the Constitution.
  • The need for judicial activism, or creative interpretation of laws by the judiciary arises when laws are not framed for purposes or situations which demand the immediate attention of the government or if such laws are framed, they are insufficient to meet the situation.
  • However, in recent years there has been several judgments of the Supreme Court, wherein it has been foraying into areas which had long been forbidden to the judiciary by reason of the doctrine of ‘separation of powers’, which is part of the basic structure of the Constitution. These judgments have created an uncertainty about the discretion vested in the court to invoke Article 142 where even fundamental rights of individuals are being ignored.

Supreme Court in Article 142

  • In the Union Carbide case relating to the victims of the Bhopal gas tragedy, the Court felt a need to deviate from existing law to bring relief to the thousands of persons affected by the gas leak. The Supreme Court has awarded compensation of $470 million to the victims and stated that- to do complete justice, it could even override the laws made by Parliament by holding that, “prohibitions or limitations or provisions contained in ordinary laws cannot, ipso facto, act as prohibitions or limitations on the constitutional powers under Article 142.” By this statement the Supreme Court of India placed itself above the laws made by Parliament or the legislatures of the States.
  • However later in Supreme Court Bar Association vs. Union of India. It mentioned that the said article could not be used to supplant the existing law, but only to supplement the law.

Way ahead

  • In Indian Constitution the functions of different organs of the Government have been sufficiently differentiated, so that one organ of the Government could not usurp the function of another. The doctrine of Separation of Powers has been included in our basic structure doctrine as has been ruled and upheld by the Supreme Court in a number of cases. Thus it holds a position of utmost importance.
  • Judicial activism may be a welcome measure on in a short run where it helps in maintaining the rule of law and allows one organ to sustain the administration of the country when other organs are not performing. If it is practiced for a long time it may dilute the theory of separation of power and the doctrine of checks and balances.
  • There is time to institute checks and balances for the Supreme Court to introspect on whether the use of Article 142 as an independent source of power or should be regulated by strict guidelines, so that arbitrariness takes place judicial activism, will remain within the purview of doctrine of separation of powers and checks and balances.

Question What has been the utility for Article 142 in Indian framework. Throw light on some important judgments in this regard.

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