Editorial 1 : Bihar’s call for special category status
Context
Notably, the Bihar Cabinet had passed a resolution late last year demanding special category status to the State.
What is the special category status?
- The special category status was introduced in 1969 based on the recommendations of the Fifth Finance Commission.
- The intent was to help States that are disadvantaged in terms of their geographic, social or economic status to improve their position on par with other, more developed Indian States.
- Criteria such as having a hilly terrain and a sizable tribal population can entitle a State to be granted the special category status.
- A State that is granted the special category status would be able to claim more funds from the Centre than otherwise and can also enjoy various tax-related concessions.
- For example, a State with special category status would receive 90% of funds from the Centre when it comes to schemes sponsored by the Union government, as against other States which receive only around 60% to 80% of funds from the Centre.
- Initially, Jammu & Kashmir, Assam and Nagaland were granted the special category status to aid their economic development.
- Subsequently, eight other States including Himachal Pradesh and Uttarakhand were granted the special status. Thus, 11 out of 28 States, or more than a third of Indian States, already enjoy the special category status.
Case of Bihar
- Bihar’s politicians have for a long time demanded special category status for the State pointing to its economic backwardness.
- Bihar’s per capita income of around ₹60,000 is among the lowest in the country and the State lags behind the national average in several human development indicators as well.
- Bihar has also noted that the State’s fiscal situation has been adversely affected by the bifurcation of the State that caused industries to move to Jharkhand, lack of sufficient water resources for irrigation, and frequent natural disasters.
- The most recent Bihar caste based survey of 2022 indicates that nearly a third of the State’s people live under the poverty line.
- Particularly, it has been noted that there is now greater devolution of taxes to the States from 32% of the total divisible pool to 42% based on the recommendation of the Fourteenth Finance Commission.
- Hence, the demand for special category status from Bihar is simply seen as a ploy by State governments to demand even more funds from the Centre.
- The Centre may also fear that granting the special category status to certain States will encourage others to demand the same from the Centre.
- It should also be noted that political considerations play a large role in the granting of special status to States.
- States with better political bargaining power with the Centre may manage to receive more funds either through a special status or by other means.
Does Bihar need the special category status?
- Politicians at the State level generally have an incentive to compete for funds from the Centre as this would allow them to spend more.
- So it is not surprising that not just Bihar but many other States too, including Andhra Pradesh and Odisha which is prone to floods and has a significant tribal population, have demanded the special category status that would entitle them to more funds from the Centre’s treasury.
- Bihar’s economic backwardness has been cited as the primary reason for the need for the granting of the special category status to the State.
- Many analysts say this demand based on economic backwardness is very well justified as they believe that the State government will have to spend on welfare projects to uplift the poor and to invest in boosting the State’s infrastructure.
Conclusion
In other words, while more funds from the Centre might offer Bihar some short-term relief, its long-term economic prospects will depend on the State’s ability to further strengthen rule of law.
Editorial 2 : India’s looming financial crisis
Introduction
Rapid credit growth is akin to a siren song. It lures economies with the promise of prosperity only to lead them into crises. Each financial boom is framed as a story of financial innovation and good times.
A lofty and dangerous narrative
- India is in the midst of similar folly, driven by policymakers wedded to an unhinged hype about the country’s performance and prospects.
- The ‘this-time-is-different’ theme touts India’s digital infrastructure as the catalyst for financial innovation and inclusion, promising growth and equality.
- Ironically, this lofty narrative has enabled a poorly regulated financial sector and consumers living beyond their means to generate a lending surge.
- This recent celebration of credit growth deflects attention from the deep-rooted jobs’ and human capital deficit; and it extends the hype into dangerous territory.
- The truth is that when lending expands, the financial sector looks in good health as new loans pay off old ones.
- But the house of cards collapses when lending slows and options for more loans to repay earlier obligations get shut.
- The IMF knows this history well: heavily indebted households and businesses sharply reduce spending to repay their debt, causing an economic crunch.
- This distressing script is set to repeat for India especially because of the feverish expansion of households lending at between 25% and 30% a year.
- As financial intermediaries have pushed their loans, many lower- and middle-income households have viewed the funds as easy cash to make ends meet or to buy homes, gadgets and cars, pay for education, and indulge in ‘lifestyle’ spending, including vacations and elective medical procedures.
Household debt
- A household debt boom is a quintessentially “bad” boom. It does not add to productive capacity but, instead, bids up domestic prices, making the country less competitive.
- The higher the household debt burden, the steeper the crash that follows.
- The financial crisis will cause not just economic pain but will also degrade the economy’s long-term well-being.
- Unable to generate job-rich manufacturing growth, successive policymakers have pushed the financial services industry to raise headline GDP growth rates: in the last decade, the financial sector has contributed over a quarter of GDP growth.
A chaotic financial services industry
- Making matters worse, Indian-style liberalisation has promoted a large and chaotic financial services industry.
- At the top are 30-odd large providers — scheduled commercial banks and major non-banking financial institutions (NBFCs), all with a history of rogue behaviour.
- Alongside, thousands of smaller players, including fly-by-night NBFCs and new fintechs operate in dubious ways.
- The problem is simple. There are too many financial services’ providers with too few options to lend for productivity-enhancement projects.
- Indeed, over time, lending opportunities have narrowed as the Indian corporate sector has reduced its investment-GDP ratio and borrowing pace. Financial institutions have, therefore, been under great pressure to generate profits.
- From the start of economic liberalisation in 1991, the search for easy profits spawned scams.
- But especially after COVID-19, financial services providers redirected lending toward households eager to borrow in lieu of stagnant incomes.
- The newly emergent fintechs led this charge by offering loans to desperate households at extortionary interest rates. A new set of scammers preyed on the gullible. Yet, some borrowers became addicted to such loans.
- Today, a dangerously growing share (approaching a quarter) of household loans is “unsecured,” backed by no collateral. The poster child for unsecured consumer borrowing is credit card debt.
- Indian household debt, at 40% of GDP, is low by international standards, but household debt-service-to-income ratio, at 12%, is among the highest in the world because of high interest rates and predominantly short duration loans.
- Indeed, the Indian household debt-service ratio is alarmingly similar to that in the United States and Spain just before their 2008 financial crises, when high household debt-service burdens precipitated major economic downturns.
A solution
- Preventing the crisis requires surgically downsizing the financial services industry to better match lending capacity and productive borrowing needs, and weakening the rupee to help expand exports and cushion the downturn when it comes.
- But policy change is unlikely. In opposition to Joan Robinson’s dictum that finance must follow growth, Indian policymakers have committed themselves to the notion that finance will spur growth and help overcome the country’s severe developmental handicaps in human capital and other public goods.
- Policymakers are also committed to a strong exchange rate as a metric of the nation’s virility.
- Meanwhile, as the risks of a financial crisis grow, an acute job shortage persists, reflected most poignantly in a catastrophic regression of the workforce back to agriculture.
Conclusion
India’s heavily credit-reliant economic strategy is akin to a car speeding toward a cliff’s edge without brakes. Sadly, the nation’s financial and policy elite has adopted a see-no-evil attitude. After all, the weak and vulnerable will bear the burden of the crisis, as the dire employment situation becomes worse — and stark inequalities become starker.
