9th June – Editorials/Opinions Analyses

Contents

1. Interest-free moratorium on loans: Criticism
2. Mild earthquakes in Delhi
3. The critical role of decentralised responses
4. Monetisation of the deficit

INTEREST-FREE MORATORIUM ON LOANS: CRITICISM

Focus: GS-III Indian Economy  

Why in news?

Recently, the Supreme court asked the finance ministry for its opinion on an interest-free moratorium.

Why is Moratorium on loans unattractive?

• This is because the interest on the loan under moratorium accumulates and needs to be paid by the borrower.
• The interest on the loan for the moratorium period is added to the loan outstanding at the end of the moratorium.
• Hence, there have been demands that banks and NBFCs should not charge interest for the moratorium period.

Should interest not be charged on these loans?

• The Reserve Bank of India (RBI) has estimated that if interest is not charged on loans under moratorium, around ₹2 trillion will be lost across banks.
• Deposits that a bank borrows at a certain rate of interest are lent at a higher rate of interest.
• Only when interest on loans is paid can interest on deposits be paid. Thus, not charging interest on loans under moratorium is a bad idea as it breaks down the functionality of the banks.

Other Repercussions

• Around half of the household finance savings are held in the form of deposits.
• Any move to not charge interest on loans under moratorium can only be financed if no or lower interest is paid on deposits or if the government offers compensation to banks.
• If no interest is paid on deposits, it can lead to a complete breakdown of trust in the banking system, which must be avoided at all cost.

Farm loans are waived, why not interest?

• When farm loans are waived, the state government needs to compensate the banks.
• With many borrowers withholding repayment in anticipation of a waiver, the credit history of borrowers and their future prospects of availing fresh loan is affected and it becomes sort of a moral hazard.

-Source: Livemint

MILD EARTHQUAKES IN DELHI

Focus: GS-I Geography

Introduction

An earthquake of magnitude 2.1 was detected near Delhi on June 2020.

• It was the eleventh minor earthquake recorded in and around Delhi in a month.
• These recent earthquakes have triggered discussions on the possibility of increased seismicity around Delhi, and fears of an impending big earthquake sometime soon.

Is it unusual to have so man minor Earthquakes in Delhi?

• Scientists are unequivocal in asserting that no unusual seismic activity is taking place around Delhi in the last few months.
• Delhi and its surrounding areas, and this would extend till Jaipur, Ajmer, Mount Abut and the Aravallis, usually experience between two and three earthquakes of magnitude 2.5 and above every month.
• The area around Delhi has the densest concentration of seismometers anywhere in India as a result, even the earthquakes of smaller magnitude, those that are not even felt by most people, are recorded, and this information is publicly accessible.

Do these small earthquakes foretell a bigger one?

• Earthquakes of magnitude four or below hardly cause any damage anywhere and are mostly inconsequential for practical purposes.
• Thousands of such earthquakes are recorded around the world every year, and most of them are uneventful.
• And, they certainly do not signal any big upcoming event.

What a signal to an upcoming earthquake?

• Some special earthquakes, the ones that are triggered by volcanic activity, can be predicted to some extent.
• But so far, we have not successfully identified “precursors” to an earthquake.

Is a big one is coming to the Himalayan region?

• The Himalayan region, extending from the Hindu Kush to the Northeast and going south to Southeast Asia, is seismically one of the most active regions in the world.
• The region has experienced several big earthquakes in the past, most recently in 2015 in Nepal.
• Scientists say that the Himalayan region is due for a big earthquake, of magnitude 8 or even higher.

Measurement of earthquakes

The earthquake events are scaled either according to the magnitude or intensity of the shock.

Richter scale – The magnitude scale is known as the Richter scale. The magnitude relates to the energy released during the quake. The magnitude is expressed in absolute numbers, 0-10.

Mercalli scale – The intensity scale is named after Mercalli, an Italian seismologist. The intensity scale takes into account the visible damage caused by the event. The range of intensity scale is from 1-12.

More about Richter Scale

The Richter scale, developed in the 1930s, is a base-10 logarithmic scale, which defines magnitude as the logarithm of the ratio of the amplitude of the seismic waves to an arbitrary, minor amplitude.

To understand Logarithmic Scale: an earthquake that registers 5.0 on the Richter scale has a shaking amplitude 10 times that of an earthquake that registered 4.0, and thus corresponds to a release of energy 31.6 times that released by the lesser earthquake. A magnitude 6 earthquake is typically associated with the kind of energy that was released by the atom bomb in Hiroshima.

-Source: Indian Express

THE CRITICAL ROLE OF DECENTRALISED RESPONSES

Focus: GS-II Governance

Introduction

• In terms of information, monitoring and immediate action, local governments are at an advantage, and eminently, to meet any disaster.
• The recognition that local governments should be fiscally empowered immediately is a valid signal for the future of local governance.

Core Issues

Economic, health, welfare/livelihood and resource mobilisation challenges have to be addressed by all tiers of government in the federal polity, jointly and severally.

1. The new normal demands a paradigm shift in the delivery of health care at the cutting-edge level.
2. The parallel bodies (Municipalities and Panchayats) that have come up after the 73rd/74th Constitutional Amendments have considerably distorted the functions-fund flow matrix at the lower level of governance.
3. There is yet no clarity in the assignment of functions, functionaries and financial responsibilities to local governments.

Local Finances

• A few suggestions for resource mobilisation are given under three heads: local finance, Members of Parliament Local Area Development Scheme, or MPLADs, and the Fifteenth Finance Commission (FFC).
• Property tax collection with appropriate exemptions should be a compulsory levy and preferably must cover land.
• There is a widening gap between tax potential and actual collection, resulting in colossal underperformance.

Way Forwards

• The decision of not to operate Members of Parliament Local Area Development Scheme (MPLADS) for two years from 2020, allows for funds to be assigned to local governments, preferably to panchayats on the basis of well-defined criteria.
• Building health infrastructure and disease control strategies at the local level find no mention in the five tranches of the packages announced.
• The ratio of basic to tied grant is fixed at 50:50 by the commission. In the context of the crisis under way, all grants must be untied for freely evolving proper COVID-19 containment strategies locally.

Local Self Government in India

• The acts of 1992 added two new parts IX and IX-A to the constitution.
• It also added two new schedules – 11 and 12 which contains the lists of functional items of Panchayats and Municipalities.
• It provides for a three-tier system of Panchayati Raj in every state – at the village, intermediate and district levels.
• Panchayat and Municipality are the generic terms for the governing body at the local level.

The 73rd Constitutional Amendment act provides for a Gram Sabha as the foundation of the Panchayati Raj system.

• It is essentially a village assembly consisting of all the registered voters in the area of the panchayat.
• The state has the power to determine what kind of powers it can exercise, and what functions it has to perform at the village level.

The 74th Constitutional Amendment act provides for three types of Municipalities:

1. Nagar Panchayat for a transitional area between a rural and urban area.
2. Municipal Council for a small urban area.
3. Municipal Corporation for a large urban area.

-Source: The Hindu

MONETISATION OF THE DEFICIT

Focus: GS-III Indian Economy

Rating and fundamentals – Time to worry?

• The decision of the rating agency, Moody’s, to downgrade India from Baa2 to Baa3, is just one notch above the ‘junk’ category.
• If India is downgraded to junk status, foreign institutional investors, or FIIs, will flee in droves.
• The stock and bond markets will take a severe beating.
• The rupee will depreciate hugely and the central bank will have its hands full trying to stave off a foreign exchange crisis.

Work towards an upgrade

• Key concerns that Moody’s has cited in effecting the present downgrade to our rating are: slowing growth, rising debt and financial sector weakness.
• Keeping the fiscal deficit on a leash addresses the concerns of rating agencies about a rise in the public debt to GDP ratio but it does not address their concerns about growth.
• The debt to GDP ratio will worsen and financial stress will accentuate if growth fails to recover quickly enough.

Clearing misapprehensions

• In order to increase the discretionary fiscal stimulus without increasing public debt, the way is monetisation of the deficit.
• This means the central bank providing funds (by printing notes or buying Treasury bills etc.,) to the government.
• The central bank typically funds the government by buying Treasury bills.
• In any case monetisation results in an expansion of money supply, however, it is not the same as printing money.
• RBI and other Central banks in the world have resorted to massive purchases of government bonds in the secondary market which are carried out under Open Market Operations (OMO).

Open market operations

• Open market operations is the sale and purchase of government securities and treasury bills by RBI or the central bank of the country.
• The objective of OMO is to regulate the money supply in the economy.
• When the RBI wants to increase the money supply in the economy, it purchases the government securities from the market and it sells government securities to suck out liquidity from the system.
• RBI carries out the OMO through commercial banks and does not directly deal with the public.
• OMO is one of the tools that RBI uses to smoothen the liquidity conditions through the year and minimise its impact on the interest rate and inflation rate levels.

-Source: The Hindu