Economic Development - 5 | Current Affairs & Hindu Analysis: Daily, Weekly & Monthly - UPSC PDF Download

Digital Public Infrastructure (DPI)

Context

India has effectively utilized Digital Public Infrastructure (DPI) as a significant tool in its commitment to providing social protection to all its citizens. During its G20 presidency, India emphasized the pivotal role of DPI in the future international development framework. The country showcased distinctive DPI initiatives, including the digital identification system (Aadhaar) and the Unified Payment Infrastructure (UPI), in discussions within the G20 Digital Economy Working Group (DEWG).

What is Digital Public Infrastructure (DPI)?  

• Digital Public Infrastructure (DPI) is defined as a collection of "shared digital systems" utilized for advancing development, inclusion, innovation, trust, competition, and upholding human rights and fundamental freedoms, as per the G-20 Framework for Systems of Digital Public Infrastructure.
• While the term "Digital Public Infrastructure" is relatively recent, the underlying concept is not new, as evident in existing examples:
  • The internet, characterized by common protocols such as HTTP, HTML, and SMTP, serves as a prominent instance of DPI.
  • Telecommunications, incorporating standards like GSM, SMS, CDMA, and IEEE 802.11, is another manifestation of DPI.
• DPI is structured around three fundamental pillars: identity, payments, and data management. India, through its India Stack Platform, has achieved the distinction of being the first country to establish all three foundational pillars of DPI.

Use of DPI Architecture in Government Initiatives

• Digital India: The Digital India initiative encompasses projects like Digital Locker, the e-sign framework, and the National Scholarship Portal.
• BharatNet: BharatNet is a high-speed broadband network project with the goal of providing affordable internet connectivity to rural areas in India.
• National Health Stack: The National Health Stack serves as a digital infrastructure for the healthcare sector in India, aiming to establish a common platform for health data exchange and interoperability.
• National Knowledge Network (NKN): NKN facilitates the sharing of knowledge and resources, fostering collaborative research and innovation.
• UMANG (Unified Mobile Application for New-age Governance): UMANG is a mobile app introduced by the Indian government, offering access to various government services and schemes.
• Government e-Marketplace (GeM): GeM is an online platform that enables government departments and agencies to procure goods and services from registered vendors.
• India’s Modular Open Source Identity Platform (MOSIP): MOSIP aids governments and other user organizations in implementing a digital, foundational identity system in a cost-effective manner. Nations can freely utilize MOSIP to build their own identity systems.

What has been the advantage of use of Digital Public Infrastructure in India?  

• Bridging the Digital Divide: The National Family Health Survey (NFHS) Report indicates that only 57.1% of males and 33.3% of females have used the internet. Digital Public Infrastructure (DPI) in India has played a crucial role in creating an accessible, efficient, and transparent digital ecosystem, empowering citizens to participate in the digital economy.
• Extending Social Security to Vulnerable Sections: DPI has enabled the government to broaden social security coverage for vulnerable sections. For instance, The World Bank Group’s G2Px initiative report highlights that linking financial accounts with identification or phone numbers facilitated the swift rollout of cash assistance during the COVID-19 pandemic.
• Digital Financial Inclusion: DPI has contributed to the expansion of financial access for the unbanked population in India. Notably, the utilization of mobile wallets and digital payment platforms has played a pivotal role in this regard.
• Enhanced Access in Remote Areas: DPI has positively impacted access to services for individuals residing in remote areas. Digital learning platforms, for example, have provided students in rural areas with the opportunity to access quality education.
• Improved Efficiency, Transparency, and Service Quality: Digital Public Infrastructure has led to the streamlining and automation of processes, reducing the time and effort required to access services. Online portals for government services, such as passport applications and income tax filing, exemplify the increased efficiency, transparency, and service quality facilitated by DPI.

What are the challenges associated with Digital Public Infrastructure in India?  

• Rise in Cyberattacks: Digital Public Infrastructure has faced vulnerability to cyberattacks, resulting in financial losses. An illustration is the State of Application Security Report, which highlights an increase in hacking attacks on online payment gateways and digital wallets in India.
• Data Leaks: Concerns about data privacy have arisen with instances of increased data leaks and thefts within Digital Public Infrastructure. An example is the ICMR data leak incident.
• Interoperability Challenges: The lack of interoperability among different digital platforms and systems in India poses challenges for users in accessing services seamlessly. Instances of interoperability issues have been observed in Indian e-Wallets.
• Digital Divide and Digital Illiteracy: A significant digital divide exists in India, with many individuals lacking access to digital infrastructure such as smartphones and internet connectivity. The India Inequality report for 2022 reveals that only 31 percent of the rural population uses the Internet compared to 67 percent of their urban counterparts.

What should be done to improve India’s Digital Public Infrastructure further?  

• Development of a Robust Cybersecurity Framework: There is a need to establish a robust cybersecurity framework, leveraging emerging technologies like blockchain, artificial intelligence, and quantum technology. For instance, the implementation of Quantum Key Distribution (QKD) can enhance the security of digital assets.
• Improved Internet Connectivity and Digital Literacy Promotion: Initiatives should focus on enhancing internet connectivity speed, expanding broadband infrastructure, and ensuring affordable internet services in rural areas. Additionally, promoting digital literacy through training programs and awareness campaigns is crucial. An example is the completion of the BharatNet program to connect gram panchayats.
• Enhanced Collaboration Between Countries: Collaborative efforts with countries such as Brazil, Norway, and others in the Digital Public Goods Alliance (DPGA) are essential. This collaboration is necessary for making strategic decisions related to choice, data portability, and interoperability. A new model for digital cooperation needs to be evolved.
• Regulatory Regime to Avoid Monopolization and Digital Colonization: India should establish a robust digital infrastructure and legal framework to harness the benefits of the digital world and prevent digital colonization. Implementation of measures like data localization serves as an example in this context.

Global debt of developing countries

Context

• According to the Institute of International Finance (IIF), global debt reached a record high of USD 307 trillion in the second quarter of 2023.
• Over the past decade, global debt has increased by approximately USD 100 trillion. Despite experiencing a significant decline for seven consecutive quarters, global debt as a percentage of Gross Domestic Product (GDP) has started to rise again, reaching 336%.

What is Global Debt?

• About:
  • Global debt refers to the borrowings of governments as well as private businesses and individuals.
  • Governments borrow to meet various expenditures that they are unable to meet through tax and other revenues.
  • Governments may also borrow to pay interest on the money that they have already borrowed to fund past expenditures.
  • The private sector borrows predominantly to make investments.
• Regional Contributors to Debt Growth:
  • In the first half of 2023, advanced economies, including the US, U.K, Japan, and France, accounted for over 80% of the rise in global debt.
  • Emerging market economies like China, India, and Brazil also witnessed substantial debt growth during this period.
• Reasons Behind Rising Global Debt:
  • Economic growth, population expansion, and increased government spending drive the need for borrowing. During economic downturns, governments intensify borrowing to stimulate economic activity and provide financial support.
  • During the first half of 2023, total global debt rose by USD10 trillion. This has happened amid rising interest rates, which was expected to adversely affect demand for loans.
  • But a rise in debt levels over time is to be expected since the total money supply usually steadily rises each year in countries across the globe.

Why is the Growing Global Debt a Cause for Concern?

• Debt Sustainability and Fiscal Imbalance:
  • The sustainability of rising debt is a concern when it outpaces economic growth, making it challenging to service without extreme measures.
  • High debt levels strain a nation's fiscal health, diverting substantial revenue towards interest payments and reducing funds for essential public services and social welfare programs.
• Reduced Economic Flexibility:
  • High debt limits a government's ability to effectively respond to economic downturns, constraining fiscal policy options for implementing stimulus measures during recessions.
  • Excessive debt can lead to a recession if it becomes unmanageable, causing reduced consumer spending, business investments, and overall economic growth.
• Financial System Risks:
  • Concentrated debt in the financial system poses systemic risks, especially if held by a few major institutions, potentially triggering a chain reaction affecting the stability of the entire financial system.
  • Global financial markets' interconnectedness increases the potential for a global financial crisis if a major economy faces severe debt issues, as seen in the 2008 global financial crisis.
• Impact on Interest Rates:
  • Rising debt levels may result in higher interest rates for governments on new borrowings, exacerbating debt burdens.
  • Elevated interest rates can also increase borrowing costs for businesses and individuals, hindering investment and consumption.
• Potential for Defaults and Inflation:
  • In extreme cases, governments burdened by high debt may default on obligations, causing a loss of confidence in financial markets and affecting global economic stability.
  • Governments may resort to inflationary measures to manage debt, devaluing currencies and eroding the real value of debt. However, this approach can lead to higher prices for goods and services, negatively impacting consumers and businesses.

What can be Done to Tackle Debt Growth?

The International Monetary Fund (IMF) during the G20 Finance Ministers and Central Bank Governors potential actions and methods to enhance the Global Debt Architecture.

• Debt Resolution and Restructuring:
  • Conducting a fair, objective, and in-depth analysis of global debt issues is crucial. This analysis should guide debt restructuring decisions, including potential debt haircuts or accepting losses on loans to ensure sustainability and fairness.
• Strengthening Financial Architecture:
  • Implement urgent reforms to strengthen the international financial architecture, especially in the area of debt resolution.
  • This includes enhancing frameworks for debt restructuring, promoting transparency in debt-related transactions, and improving the efficiency and effectiveness of debt resolution mechanisms.
• Support for Vulnerable Economies:
  • Focus on developing and low-income countries facing acute economic stress and limited policy space.
  • Provide targeted financial support, debt relief, or restructuring mechanisms tailored to their specific needs and circumstances.
• Global Financial Safety Net:
  • Strengthen and improve the global financial safety net to respond effectively to economic shocks and crises. This involves optimizing lending mechanisms, ensuring rapid disbursement of funds, and increasing access to financial assistance for countries in need.
• International Collaboration and Cooperation:
  • Encourage collaboration and cooperation among nations, international organizations, and financial institutions to develop comprehensive solutions. Multilateral efforts can foster coordinated action, knowledge sharing, and the pooling of resources to address debt challenges effectively.

Conclusion

• A balanced approach to managing global debt is imperative to ensure economic stability and sustainable growth.
• Monitoring debt levels, implementing prudent fiscal and monetary policies, and fortifying international financial systems are vital steps in mitigating risks associated with burgeoning global debt.
• Striking the right balance between debt accumulation and economic growth remains essential for long-term economic prosperity.

Exchange Rate Management in India

Context

LERMS (Liberalized Exchange Rate Management System) was introduced as a new exchange rate management system. Under this system, the Reserve Bank of India (RBI) bought 40 percent of the proceeds from exports and inward remittances at the official exchange rate for official use.

What is Liberalized Exchange Rate Management System?

• In March 1992, the Indian government implemented the Liberalized Exchange Rate Management System (LERMS).
• Dr Manmohan Singh revealed the new approach in his 1992 budget, and the Reserve Bank of India announced it in early March (RBI).
• This was the first step toward making the switch to a market-determined exchange rate system possible.
• It allowed exporters to realize 60% of their revenues or earnings at market rates while surrendering the rest at the government rate.
• To put it another way, India made the transition from a fixed to a dual exchange rate system.
• Essential materials or products, such as petroleum, fertilizers, and life-saving pharmaceuticals, were imported using foreign exchange surrendered at the official rate.

Features of Liberalized Exchange Rate Management System

• Market-Determined Exchange Rate: The exchange rate of the Indian rupee is determined by market forces of demand and supply. LERMS is often referred to as a "market determination exchange rate system."
• All-Inclusive Market Rate: All receipts, whether related to the current or capital account, and whether from the government or private entities, are exchanged at the prevailing market rate.
• Residents Foreign Currency Account (RFCA): Non-Resident Indians (NRIs) have the option to open Residents Foreign Currency Accounts (RFCA), where they can deposit all the foreign currency they bring in.
• Choice for Receipts from Abroad: Indians receiving receipts from abroad have the choice of receiving the entire foreign currency credit at market rates.
• Elimination of Mandatory Sale to RBI: Authorized dealers are not obligated to sell a percentage of their foreign currency receipts directly to the Reserve Bank of India (RBI) as was the case before LERMS. They can sell these receipts in the Indian market to other approved dealers or for legal transactions.
• Exchange Control Restrictions on Remittances: Foreign currency remittances outside of India are subject to exchange control restrictions. However, this doesn't imply that authorization from the Reserve Bank of India is required in every case.
• Reserve Bank's Intervention Currency: The US dollar remains the intervention currency for the Reserve Bank. The RBI has the discretion to buy and sell US dollars with various approved dealers.

Modified Liberalized Exchange Rate Management System

• The process of liberalization progressed, and on March 1, 1993, it was agreed to make the Rupee fully floating.
• Modified Liberalized Exchange Rate Management System, or Modified LERMS, is the name of the new system.
• All foreign exchange transactions, receipts, and payments, both in the current and capital accounts of the balance of payments, are routed through authorized dealers at market-determined exchange rates as of March 1, 1993.
• Authorized dealers are free to keep all foreign exchange surrendered to them for sale in permitted transactions and are not obligated to transfer any share of such revenues to the Reserve Bank.
• Foreign exchange receipts must be returned to authorized dealers unless the residents have been granted permission by the RBI to keep them with banks in India or overseas.
• The Reserve Bank of India was required to buy and sell foreign exchange to approved dealers under Section 40 of the RBI Act, 1934.
• The Reserve Bank is now required to sell US Dollars to any authorized individual at its offices/branches for fulfilling foreign exchange payments at market prices only for purposes permitted by the Central Government.

Advantages of New System

• With respect to a wide subset of external transactions, the system tries to keep demand and supply equilibrium.
• It has permitted the lifting of various trade restrictions as well as exchange control liberalization (under current account transactions).
• It is a step toward full convertibility of current account transactions, which will allow India to receive the full benefits of economic integration with the rest of the globe.
• Exporters will receive greater incentives, particularly those whose exports are not heavily dependent on imports. Exports will be appealing to agricultural product exporters.

Conclusion

Due to swift policy liberalization, the Liberalized Exchange Rate Management System (LERMS) has gained increased importance in the realm of international finance. Full convertibility of the rupee has already been achieved on the current account. The primary objective of the government is to move the rupee towards complete convertibility to boost export activities.

Insolvency and Bankruptcy Code (IBC) 2016

Context

Introduced in 2016, the Insolvency and Bankruptcy Code (IBC) has played a transformative role in addressing distressed assets and enhancing the credit culture in India. Nevertheless, a recent CRISIL Rating report underscores specific challenges that are affecting the effectiveness of the IBC as it marks its seventh year.

What's Hampering the IBC's Success?

Falling Recovery Rates:

• Recovery rates have witnessed a significant decline from 43% to 32% between March 2019 and September 2023.
  • The recovery rate is the percentage of the admitted claims that the creditors recover from the resolution or liquidation of the corporate debtor under the IBC.
• Root Causes:
  • Limited Judicial Bench Strength: The IBC resolution process is impeded by a shortage of judges, resulting in a deceleration of case processing. This, in turn, contributes to prolonged resolution times.
  • Delays in Default Identification: Time-consuming processes for identifying and acknowledging defaults contribute to reduced recovery rates. It hampers the timely initiation of resolution proceedings, contributing to reduced recovery rates.
• Impact:
  • Diminution in asset values.
  • Sub-optimal recoveries, affecting creditors and stakeholders.
• Increased Resolution Time:
  • The average resolution time has surged from 324 to 653 days, well beyond the stipulated 330 days.
    • Resolution time is the duration between the admission of the insolvency application and the approval of the resolution plan or the order of liquidation by the National Company Law Tribunal (NCLT).
• Root Causes:
  • Prolonged Pre-IBC Admission Stage: Significant delays in this stage, lasting 650 days in fiscal 2022 (up from about 450 days in fiscal 2019).
• Impact:
  • Slower resolution processes.
  • Suppression of recovery rates due to delays in initiating proceedings.

What is the Insolvency and Bankruptcy Code (IBC), 2016?

• About:
  • The Insolvency and Bankruptcy Code (IBC) of 2016 is India's bankruptcy law, consolidating and amending existing laws related to insolvency and bankruptcy for corporate entities, partnership firms, and individuals.
  • Insolvency occurs when an individual or organization's liabilities exceed its assets, making it unable to generate sufficient funds to meet its obligations or debts as they come due.
  • Bankruptcy is a legal declaration of an individual or company's incapability to pay their due and payable bills.
  • The IBC aims to establish a time-bound and creditor-driven process for insolvency resolution, enhancing the credit culture and business environment in the country.
  • The Insolvency and Bankruptcy Board of India (IBBI) was established under the IBC in 2016, serving as a statutory body responsible for formulating and implementing rules and regulations for insolvency and bankruptcy resolution across various entities in India.
  • The IBBI comprises 10 members, representing the Ministry of Finance, Ministry of Corporate Affairs, and the Reserve Bank of India.
  • The National Company Law Tribunal (NCLT) has jurisdiction over companies and other limited liability entities, while the Debt Recovery Tribunal (DRT) has jurisdiction over individuals and partnership firms (excluding Limited Liability Partnerships).
• Amendments in the IBC:
  • The IBC has undergone significant amendments in the past 12 months to address emerging challenges and enhance its effectiveness.
  • Key amendments include approval for the sale of assets or resolution plans on a segregated basis, an increase in the number of NCLT benches to 16, and extended timelines for filing claims.
  • Sector-specific amendments, provisions for the audit of corporate debtors, and modifications in Form G2 have been introduced to address unique challenges.
• Achievements:
  • Since its inception in 2016, the IBC has resolved Rs. 3.16 lakh crore of debt stuck in 808 cases in seven years, according to CRISIL.
  • It has resolved a substantial amount of stressed assets with better recovery rates compared to previous mechanisms like the Debt Recovery Tribunal, the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, and Lok Adalat.
  • The IBC has achieved higher recovery rates, with creditors realizing 32% of admitted claims on average and 169% of the liquidation value, contrasting with other mechanisms' recovery rates ranging from 5-20%.
  • The IBC's deterrent effect is evident as borrowers, fearing the loss of companies, have proactively settled over Rs. 9 lakh crore in debt before cases entered the insolvency process, showcasing a significant behavioral change among borrowers and the efficacy of the Insolvency and Bankruptcy Code.

How Can the IBC Overcome Challenges?

CRISIL Rating suggested a CDE approach to enhance the IBC’s performance, where C stands for Capacity augmentation, D for Digitalisation and E for Expansion of pre-pack resolutions to large corporates.

• Capacity augmentation involves enhancing the infrastructure and human resources of key institutions like the NCLT, responsible for IBC implementation.
  • This aims to boost case throughput, mitigating the backlog of 13,000 cases in different stages of resolution.
• Digitalisation refers to creating a digital platform for connecting all the stakeholders involved in the IBC process.
  • This will help eliminate data asymmetry, enhance transparency, and facilitate faster decision-making.
• Expansion of the pre-packaged insolvency resolution process (PPIRP) to large corporates will help in preventing value erosion due to time.

PM Gati Shakti Initiative

Context

Recently, the Indian government introduced the ambitious Gati Shakti scheme, also known as the National Master Plan for multi-modal connectivity. This initiative is designed to facilitate coordinated planning and execution of infrastructure projects, with the overarching goal of reducing logistics costs across the country.

Key Points

About the Scheme

• Aim: To ensure integrated planning and implementation of infrastructure projects in the next four years, with focus on expediting works on the ground, saving costs and creating jobs.
  • The Gati Shakti scheme will subsume the Rs 110 lakh crore National Infrastructure Pipeline that was launched in 2019.
  • Besides cutting logistics costs, the scheme is also aimed at increasing cargo handling capacity and reducing the turnaround time at ports to boost trade.
  • It also aims to have 11 industrial corridors and two new defence corridors - one in Tamil Nadu and other in Uttar Pradesh. Extending 4G connectivity to all villages is another aim. Adding 17,000 kms to the gas pipeline network is being planned.
  • It will help in fulfilling the ambitious targets set by the government for 2024-25, including expanding the length of the national highway network to 2 lakh kms, creation of more than 200 new airports, heliports and water aerodromes.
• Integrated Approach: It intends to bring together 16 infrastructure related Ministries.
  • This will help in removing long-standing issues such as disjointed planning, lack of standardisation, problems with clearances, and timely creation and utilisation of infrastructure capacities.
• Gati Shakti Digital Platform: It involves the creation of a common umbrella platform through which infrastructure projects can be planned and implemented in an efficacious manner by way of coordination between various ministries/departments on a real-time basis.
• Expected Outcomes
  • The scheme will help mapping the existing and proposed connectivity projects.
  • Also, there will be immense clarity on how different regions and industrial hubs in the country are linked, particularly for last mile connectivity.
  • A holistic and integrated transport connectivity strategy will greatly support Make in India and integrate different modes of transport.
  • It will help India become the business capital of the world.
• Need for Integrated Infrastructure Development:
  • There exists a wide gap between macro planning and micro implementation due to the lack of coordination and advanced information sharing as departments think and work in silos.
  • According to a study, the logistical cost in India is about 13% of GDP, which is higher than developed countries.
    • Due to this high logistical cost, the competitiveness of India’s exports is greatly reduced.
  • It is globally accepted that the creation of quality infrastructure for Sustainable Development is a proven way, which gives rise to many economic activities and creates employment on a large scale.
  • The scheme is in synergy with the National Monetisation Pipeline (NMP).
    • The NMP has been announced to provide a clear framework for monetisation and give potential investors a ready list of assets to generate investment interest.
• Associated Concerns
  • Low Credit Off-take: Although the government had taken up ‘strong’ banking sector reforms and the Insolvency and Bankruptcy Code had yielded about Rs. 2.4 lakh crore of recoveries on bad loans, there are concerns about declining credit offtake trends.
    • Banks give credit off-takes to help businesses acquire financing for future projects through the promise of future income and proof of an existing market.
  • Lack of Demand: In the post-Covid-19 scenario,there is a lack of private demand and investment demand.
  • Structural Problems: Due to land acquisition delays and litigation issues, the rate of implementation of projects is very slow on global standards.
    • Getting approvals is very difficult in terms of land access, environmental clearances; also impending litigation in court delays the infrastructure projects.

Way Forward

• PM Gati Shakti is a step in the right direction. However, it needs to address structural and macroeconomic stability concerns, emanating from high public expenditure.
• Thus, it is imperative that this initiative is underpinned by a stable and predictable regulatory and institutional framework.