The Union Cabinet has approved the constitution and empowerment of an Inter Ministerial Committee (IMC) for facilitation of the “World’s Largest Grain Storage Plan in Cooperative Sector” by convergence of various schemes of the Ministry of Agriculture and Farmers Welfare, Ministry of Consumer Affairs, Food and Public Distribution and Ministry of Food Processing Industries.

Ø  Ministry of Cooperation will implement a pilot project in at least 10 selected Districts of different States/ UTs in the country. The Pilot would provide valuable insights into the various regional requirements of the project, the learnings from which will be suitably incorporated for the country-wide implementation of the Plan.

Background -

Ø  The Prime Minister of India has observed that all out efforts should be made to leverage the strength of the cooperatives and transform them into successful and vibrant business enterprises to realise the vision of “Sahakar-se-Samriddhi”.

Ø  To take this vision forward, the Ministry of Cooperation has brought out the ‘World’s Largest Grain Storage Plan in Cooperative Sector’. The plan entails setting up various types of agriinfrastructure, including warehouse, custom hiring centre, processing units, etc. at the level of PACS, thus transforming them into multipurpose societies.

Ø  Creation and modernisation of infrastructure at the level of PACS will reduce food grain wastage by creating sufficient storage capacity, strengthen food security of the country and enable farmers to realise better prices for their crops.

Ø  There are more than 1,00,000 Primary Agricultural Credit Societies (PACS) in the country with a huge member base of more than 13 crore farmers.

Implementation -

Ø  An Inter-Ministerial Committee (IMC) will be constituted under the Chairmanship of Minister of Cooperation, with Minister of Agriculture and Farmers Welfare, Minister of Consumer Affairs, Food and Public Distribution, Minister of Food Processing Industries and Secretaries concerned as members to modify guidelines/ implementation methodologies of the schemes of the respective Ministries as and when need arises, within the approved outlays and prescribed goals, for facilitation of the ‘World’s Largest Grain Storage Plan in Cooperative Sector’ by creation of infrastructure such as godowns, etc. for Agriculture and Allied purposes, at selected ‘viable’ Primary Agricultural Credit Societies (PACS).

Ø  The Plan would be implemented by utilising the available outlays provided under the identified schemes of the respective Ministries. Following schemes have been identified for convergence under the Plan —

Ministry of Agriculture and Farmers Welfare —

Ø  Agriculture Infrastructure Fund (AIF),

Ø  Agricultural Marketing Infrastructure Scheme (AMI),

Ø  Mission for Integrated Development of Horticulture (MIDH),

Ø  Sub Mission on Agricultural Mechanisation (SMAM)

Ø  Ministry of Food Processing Industries —

Ø  Pradhan Mantri Formalisation of Micro Food Processing Enterprises Scheme (PMFME),

Ø  Pradhan Mantri Kisan Sampada Yojana (PMKSY)

Ø  Ministry of Consumer Affairs, Food and Public Distribution —

Ø  Allocation of food grains under the National Food Security Act,

Ø  Procurement operations at Minimum Support Price

Benefits of the Plan -

Ø  The plan is multi-pronged – it aims to address not just the shortage of agricultural storage infrastructure in the country by facilitating establishment of godowns at the level of PACS, but would also enable PACS to undertake various other activities, viz:

Ø  Functioning as Procurement centres for State Agencies/ Food Corporation of India (FCI);

Ø  Serving as Fair Price Shops (FPS);

Ø  Setting up custom hiring centres;

Ø  Setting up common processing units, including assaying, sorting, grading units for agricultural produce, etc.

Ø  Further, creation of decentralised storage capacity at the local level would reduce food grain wastage and strengthening food security of the country.

Ø  By providing various options to the farmers, it would prevent distress sale of crops, thus enabling the farmers to realise better prices for their produce.

Ø  It would hugely reduce the cost incurred in transportation of food grains to procurement centres and again transporting the stocks back from warehouses to FPS.

Ø  Through ‘whole-of-Government’ approach, the Plan would strengthen PACS by enabling them to diversify their business activities, thus enhancing the incomes of the farmer members as well.

Time-frame and manner of implementation -

National Level Coordination Committee will be formed within one week of the Cabinet approval.

Implementation guidelines will be issued within 15 days of the Cabinet approval.

A portal for the linkage of PACS with Government of India and State Governments will be rolled out within 45 days of the Cabinet approval.

Implementation of proposal will start within 45 days of the Cabinet approval.

The Supreme Court held that the government, when entering into a contract under the President’s name, cannot claim immunity from the legal provisions of that contract under Article 299 of the Constitution.

What is Article 299 of the Indian Constitution?

Ø  Article 298 — It grants the Centre and the state governments the power to carry on trade or business, acquire, hold, and dispose of property, and make contracts for any purpose.

Ø  Article 299 — It provides that all contracts made in the exercise of the executive power of the Union or of a State shall be —

Ø  Expressed to be made by the President or by the Governor of the State.

Ø  Executed on behalf of the President or the Governor by persons in a manner as directed and authorised by them [Article 299 (1)].

Ø  Procedure to be followed for making a Contract -

Ø  In 1954, the top court held that there must be a definite procedure according to which contracts must be made by agents acting on the government’s behalf; otherwise, public funds may be depleted by illegitimate contracts.

Ø  It implies that contracts not adhering to the manner given in Article 299(1) cannot be enforced by any contracting party.

Ø  However, Article 299 (2) says that neither the President nor the Governor can be personally held liable for such contracts.

What are the requirements for government or state contracts?

Ø  In 1966, the apex court laid down essential requirements for government contracts under Article 299.

Ø  3 conditions to be met before a binding contract against the government could arise —

Ø  The contract must be expressed to be made by the Governor or the President;

Ø  It must be executed in writing, and

Ø  The execution should be by such persons and in such a manner as the Governor or the President might direct or authorise.

What was the case?

Ø  The case dealt with an application filed by Glock Asia-Pacific Limited, a pistol manufacturing company, against the Centre regarding the appointment of an arbitrator in a tender-related dispute.

Ø  According to the Arbitration and Conciliation Act, 1996, any person whose relationship with the parties or counsel of the dispute falls under the 7th Schedule (of the Act) will be ineligible to be appointed as an arbitrator.

Ø  The 7th Schedule includes relationships where the arbitrator is an employee, consultant, advisor, or has any other past or present business relationship with a party.

What is the apex court’s ruling?

Ø  Referring to the 246th Law Commission Report, the court observed that when the party appointing an arbitrator is the State, the duty to appoint an impartial and independent adjudicator is even more onerous.

Ø  Thus, the court rejected the Centre’s reliance on Article 299, saying that Article 299 only lays down the formality that is necessary to bind the government with contractual liability.

Ø  Thus, the substantial law relating to the contractual liability of the Government is to be found in the general laws of the land.

Ø  The court also appointed former SC judge Justice Indu Malhotra “as the Sole Arbitrator to adjudicate upon the disputes” in the case.

Recently, Reserve Bank of India Governor, while addressing bank board, raised concerns over banks using innovative methods for evergreening of loans. As per him, banks are covering up the real status of stressed loans of corporates – to project an artificial clean image in cahoots with corporates.

Ø  During the supervision of banks, the RBI noticed certain instances wherein banks were using innovative ways to conceal the real status of stressed loans.

Ø  This was revealed by the RBI Governor in his address to the board of directors of public sector and private lenders.

Evergreening of loans -

Evergreening of loans refers to a practice used by financial institutions to extend or renew existing loans to borrowers who are struggling to repay their debts.

Ø  It involves granting additional funds or rolling over the outstanding debt, often with modified terms or conditions.

Ø  This is done to create the appearance that the borrower is making timely repayments and maintaining a healthy credit profile.

Ø  The evergreening of loans allows borrowers to maintain the illusion of ongoing financial stability by continuously obtaining new loans to cover existing obligations.

Why do financial institutions engage in evergreening of loans?

To avoid recognising non-performing assets (NPA) on their balance sheets —

If an account turns into an NPA, banks are required to make higher provisions which will impact their profitability.

Ø  A loan turns into an NPA, if the interest or instalment remains unpaid even after the due date — and remains unpaid for a period of more than 90 days.

Ø  So, to avoid classifying a loan as an NPA, banks adopt the evergreening of loans.

Ø  To maintain a positive relationship with borrowers —

Ø  Some banks have even extended such loans to wilful defaulters to keep them out of the defaulters’ books.

Ø  By providing additional credit, financial institutions can retain clients who might otherwise default on their loans.

Risks associated with evergreening of loans -

Inflates the quality of the institution's loan portfolio —

Ø  This practice artificially inflates the quality of the institution's loan portfolio and can mislead investors, regulators, and the public about its financial health.

Can lead to a cycle of increasing debt —

Ø  This approach may be seen as a short-term solution to prevent immediate defaults.

Ø  However, it can lead to a cycle of increasing debt and further financial instability for both borrowers and lenders in the long run.

Problematic for the overall stability of the financial system —

Ø  Evergreening of loans can be problematic for the overall stability of the financial system.

Ø  It can mask the true extent of bad loans in an economy, creating systemic risks and distorting the assessment of creditworthiness.

Sign of mis-governance —

Ø  This is purely mis-governance, so that bad loans are made to look good many a time by additional lending to troubled borrowers.

Ø  It normally happens due to the unholy relationship between bankers and borrowers.

Ø  The CBI had detected several cases of fund diversion by promoters of companies from loans advanced again and again by banks in the last couple of years.

Contributes to the crowding-out effects —

Ø  In India, there is evidence of a practice called indirect evergreening.

Ø  This involves struggling companies borrowing money from weak banks through related parties, but instead of using the funds for productive investments, they increase their debt levels.

Ø  This kind of activity is often overlooked and not easily detected.

Ø  As a result, valuable resources are misallocated, which contributes to the crowding-out effects typically associated with financially vulnerable companies.

Evergreening methods used by Banks (as highlighted by the RBI Governor) -

Ø  Bringing two lenders together to evergreen each other’s loans by sale and buyback of loans or debt instruments;

Ø  Good borrowers being persuaded to enter into structured deals with a stressed borrower to conceal the stress;

Ø  In other words, financially sound and reliable borrowers are encouraged to engage in specific agreements or transactions with borrowers who are facing financial difficulties.

Ø  This is to hide or mask the financial distress of the borrower who is struggling.

Ø  By involving creditworthy borrowers in such arrangements, it creates a façade of stability and financial health for the stressed borrower.

Ø  Use of internal or office accounts to adjust borrower’s repayment obligations;

Ø  Renewal of loans or disbursement of new/additional loans to the stressed borrower or related entities closer to the repayment date of the earlier loans.

How can evergreening be stopped?

As per the Committee to Review Governance of Boards of Banks in India headed by PJ Nayak, wherever significant evergreening in a bank is detected by the RBI —

penalties should be levied through cancellations of unvested stock options;

claw-back of monetary bonuses on officers concerned and on all whole-time directors;

the Chairman of the audit committee be asked to step down from the board.

The primary defence against evergreening must however come from the CEO, the audit committee and the board.

The audit committee, in particular, needs to be particularly vigilant.

If significant evergreening is detected, it must mean that evergreening is wilful, with support from sections of the senior management of the bank.

During 2020-21 and 2021-22, India has become a net exporter of toys, ending a long import dominance. However, whether this turnaround represents a sustained rise in investment or a short-term outcome of protectionism and COVID-19 pandemic-related global disruptions is a matter of debate.

Indian toy industry -

Ø  In 2015-16, the industry had about 15,000 enterprises or establishments (organised and unorganised combined).

Ø  The production stood at ₹1,688 crores using fixed capital of ₹626 crores at current prices and employing 35,000 workers.

Ø  Registered factories (those employing 10 or more workers regularly) accounted for 1% of the number of factories and enterprises, employed 20% of workers, used 63% of fixed capital, and produced 77% of the value of output.

Ø  However, during the one-and-half decades between 2000 and 2016, industry output was halved in real terms (net of inflation) with job losses.

Ø  Domestic market size currently stands at an estimated value of $ 1.5 billion.

Ø  Labour-intensive toy categories like dolls, soft toys and board games offer significant

Ø  manufacturing potential in India due to inherent cost competitiveness and growing demand.

Ø  The sector is dominated by small & medium sized manufacturers.

Ø  Over 4,000 toy units in the MSME Sector significantly contribute to both manufacturing and exports to large global & domestic brands.

Indian toy industry share in global market -

Ø  India’s exports stand at a mere half-a-percentage point.

Ø  Between 2014-19, the Indian toy industry witnessed negative productivity growth.

Ø  Imports accounted for up to 80% of domestic sales until recently. Between 2000 and 2018-19, imports rose by nearly three times as much as exports.

Ø  But in recent years, the Indian toy industry is expanding its global presence, with increased high-value exports to Middle East and African countries.

Ø  The Indian toy industry is among the fastest-growing globally, projected to reach $3 Bn by 2028, growing at a CAGR of 12% between 2022- 28.

What explains India's negligible share in global toy market?

Inward-Oriented Industrial Policy —

Ø  Asia’s successful industrialising nations promoted toy exports for job creation, starting with Japan about a century ago, China since the 1980s, and currently Vietnam following in their footsteps.

Ø  In contrast, India followed an inward-oriented industrial policy in the Planning-era, which sheltered domestic production by providing a “double protection” by imports tariffs and reservation of the product for exclusive production in the small-scale sector known as the “reservation policy.”

Ø  As a result, Toy manufacturing remained stagnant, archaic, and fragmented, even as imports of modern, safe, and branded toys boomed.

The Export turnaround and import contraction -

Ø  There has been a sixfold increase in Indian toy exports in 2021-22 compared to 2013-14.

Ø  Toys have been recognised as one of the champion sectors with significant export potential.

Ø  Toy exports increased from $109 million (₹812 crore) to $177 million (₹1,237 crore) between 2018-19 and 2021-22.

Ø  Imports declined from $371 million (₹2,593 crore) to $110 million (₹819 crore).

Reason behind import contraction -

Ø  Increased Custom Duty — Imports contracted as the basic custom duty on toys tripled from 20% to 60% in February, 2020.

Ø  Numerous non-tariff barriers were imposed as well such as production registration orders and safety regulation codes, which contributed to import contraction.

Ø  Is the export turnaround a sign of sustained growth due to government policies?

Ø  The turnaround in toy exports is based on data from just two recent years, and during the COVID-19 pandemic, it is perhaps too premature to claim policy success.

Ø  The potential for sustaining net exports appears slim as the industry has hardly made sustained investment to boost output and exports.

Ø  The turnaround does not seem to be the outcome of strengthening domestic investment and production on a sustained basis.

Ø  Since around 2000, the industry has shrunk with rising imports, until two years ago.

Government’s policy initiatives impact on the toy industry -

Impact of “Make in India” —

Ø  The annual value of output and fixed investment at constant prices (net of inflation) after peaking in 2007-08, have trended downwards with considerable fluctuations (except for 2019-20).

Ø  Apparently, there is no evidence of ‘Make in India’ positively affecting these indicators on a sustained basis.

Ø  The output of the informal or unorganised sector shrank, though it continues to account for most establishments and employment.

Industry De-reservation Effect —

Ø  In 1997, in the wake of liberal reforms, the reservation policy was abolished.

Ø  New firms entered the organised sector, but only for a while, and productivity growth improved.

Ø  Despite early positive trends, industry de-reservation failed to sustain output, investment, and productivity growth after 2007-08.

Some other government schemes to strengthen the toy industry -

Central Government Schemes —

Ø  Scheme For Granting Recognition & Registration to In-House R&D Units

Ø  Remission Of Duties & Taxes on Exported Products (RoDTEP)

Ø  Duty Drawback Scheme

Ø  Export Promotion Capital Goods (EPCG) Scheme

Ø  Custom Bonded Warehouse Scheme

Ø  Increase in basic custom duty (BCD) for Electronic Toys from 5% to 15% to encourage domestic manufacturing

Ø  State Incentives —

Ø  Capital subsidy

Ø  Stamp duty exemption

Ø  Interest subsidy

Ø  Tax reimbursement

Ø  Electrical duty exemption 

Way forward -

Ø  The policymakers should look beyond simplistic binaries; planning versus reforms.

Ø  There is a need to examine the ground reality of industrial locations and clusters to tailor policies and institutions to nurture such industries.