Editorial Simplified: Safety Nets| GS – III

Relevance: GS Paper III (Economy)


Theme of the article

New rules on unregulated deposit schemes need to be backed up with proper checks.


Why has this issue cropped up?

President  promulgated the Banning of Unregulated Deposit Schemes Ordinance.


What does the ordinance aim at?

The ordinance bars all deposit schemes in the country that are not officially registered with the government from either seeking or accepting deposits from customers.


How will the ordinance help?

  • The savings of low-income Indian households have traditionally remained unprotected by the government when compared to those of the more affluent economic groups. But that may change now after the promulgation of the ordinance.
  • This attempt to curb unregulated deposit schemes through an ordinance reflects a timely recognition of the need for greater legal protection to be offered for those depositors with inadequate financial literacy.

Provisions of the ordinance

  • The ordinance will help in the creation of a central repository of all deposit schemes under operation, thus making it easier for the Centre to regulate their activities and prevent fraud from being committed against ordinary people.
  • The ordinance allows for compensation to be offered to victims through the liquidation of the assets of those offering illegal deposit schemes.

Popular deposit schemes

  • Popular deposit schemes such as chit funds and gold schemes, which as part of the huge shadow banking system usually do not come under the purview of government regulators, have served as important instruments of saving for people in the unorganised sector.
  • But these unregulated schemes have also been misused by some miscreants to swindle the money of depositors with the promise of unbelievably high returns in a short period of time.
  • The Saradha chit fund scam in West Bengal is just one example of such a heinous financial crime against depositors.

The challenge posed by the ordinance

A potential risk involved when the government, as in this case, takes it upon itself to guarantee the legitimacy of various deposit schemes is that it dissuades depositors from conducting the necessary due diligence before choosing to deposit their money.


Way forward

  • While the intent of the ordinance, which is to protect small depositors, is indeed commendable, the benefits that depositors will eventually derive from the new legislation will depend largely on its proper implementation.
  • Policymakers will have to make sure that the bureaucrats responsible for the on-ground implementation of the ordinance are keen on protecting the savings of low-income households.
  • There must also be checks against persons in power misusing the new rules to derecognise genuine deposit schemes that offer useful financial services to customers in the unorganised sector.

Conclusion

The passing of tough laws may thus be the easiest of battles in the larger war against illicit deposit schemes.


 

Editorial Simplified: Harmonising NBFCs| GS – III

Relevance: GS Paper III (Economy)


Why has this issue cropped up?

The RBI recently spoke about working towards harmonisation of the various categories of NBFCs involved in credit intermediation. This is a welcome step.


Categories of NBFCs in India

  • Of the more than 10,000 NBFCs operating in India, 95 per cent are non-deposit taking.
  • The others include asset financing, micro-finance, and core investment companies.

Problem with categorisation of NBFCs

Too many categories increase compliance cost for the industry and monitoring cost for the regulator.


Harmonization

  • When the RBI releases the guidelines for harmonised entities later this month, it will recognise only two categories, NBFCs and CICs.
  • The effects of the harmonised regulations could have far-reaching implications for the future growth and business direction of NBFCs.

The issues that need to be addressed

The key questions that the RBI should address are:

  • Should we have the same set of regulations for all NBFCs even as they vary widely in their business focus and sources of funding?
  • How do you enforce prudential risk measures for each asset class, while preventing distortionary anomalies from arising post implementation of ‘activity based’ regulations?
  • And, should banks and NBFCs engaged in similar activities operate under equitable, non-discriminatory regulations?

Way forward

  • Separate regulations for each activity that an entity is involved in would increase compliance cost, which will hit smaller players more.
  • On activity-based regulations, there is a need to differentiate between assets based on inherent risks. Risk weights could then be prescribed based on the quality of asset and tenure.
  • A risk weight mechanism based on the expected losses considering the probability of default, the loss given default, duration and exposure at default is the need of the hour.
  • The RBI must allow the poor to monetise their meagre gold assets better by doing away with the cap.
  • Gold loans given to farmers by banks are classified as priority sector lending whereas gold loans by NBFCs do not get the benefit. Ideally, the RBI can bring all such lending into the priority sector ambit, whether the exposure is by banks directly, or indirectly through NBFCs.
  • There is also a case for considering small ticket gold loans as micro-credit and, therefore, priority sector lending.
  • Lastly, while the RBI is the lender of last resort for banks, the NBFCs currently do not have any such institutional mechanism. To protect the interests of the marginalised borrowers, the RBI should open a direct source of funds for NBFCs, even as a short-term measure till the debt market returns to normalcy.

Editorial Simplified: To Create Jobs| GS – III


Relevance: GS Paper III (Economy)


Theme of the article

To create jobs, focus on the small sector Improving the ease of doing business for small and medium business is key to job creation.


Introduction

The Indian economy is the fastest growing among all major economies in the world. However, last year the unemployment rate touched a four-decade high.


Present economic situation offers no hope to provide jobs

  • With every new generation coming in, fragmentation of farm holdings will continue and migration to urban areas will increase. A sustainable agriculture will have to make do with fewer and fewer cultivators.
  • Large-scale manufacturing projects attract big ticket investments and incorporate latest technologies. Cost of capital to cost of labour has drastically come down in recent years, thus raising the attractiveness of bringing in new technology which will kill jobs.
  • The current rise in digital technologies, automation and robotics has strengthened these trends further.
  • The government sector was once a key source of formal jobs but extensive use of contract employment and outsourcing to private firms, which also hire contract workers, has dealt a severe blow to quality jobs.
  • By far the most potent policy weapon for creating new jobs at the bottom of the pyramid which reduces distress is the rural employment guarantee programme (MGNREGA). But here also allocation as well as attention to glitches are inadequate.

How to address this crisis of joblessness?

  • The place to look for new jobs is businesses at the bottom of the pyramid and the place to begin is small units, even unincorporated ones where the business and the proprietor are financially undifferentiated. A favourable policy environment needs to be created for them.
  • The same potential for growth and job creation exists among the small-scale sector.
  • Thereafter come the small to medium size units which are incorporated and form the bottom rung of the corporate sector.
  • The maximum policy focus has to be on improving the ease of doing business for small and medium business, contrary to the focus so far on the demands of the corporate sector which wields substantial lobbying power.
  • Infrastructure for small businesses has to be available at a minimum. Without adequate and affordable power, water and access to roads, neither business nor jobs can prosper. Here local governments have to take the initiative.
  • While the job potential in agriculture and industry is limited, it is the opposite in the case of services. Accounting for the largest chunk of India’s GDP service sector jobs exist not just in urban and semi urban areas but in the countryside too. Infrastructure is needed to take these urban amenities to rural areas.
  • The one magic key to job creation is skills creation. In this the Indian administrative system has proved to be woefully inadequate. So policies and programmes are there waiting to be implemented.

Editorial Simplified: Interim Solution | GS – III

Relevance: GS Paper III (Economy)


Theme of the article

A framework agreement on capital, surplus transfers from RBI to government will smoothen ties between the two.


Surplus transfers by the RBI

  • FOR the second year running, the RBI has agreed to transfer an interim dividend or surplus profits to the government, with the pay out — at Rs 28,000 crore this time, more than double the Rs 10,000 it transferred to the exchequer last year.
  • The early payout by the central bank and the mounting pressure on the RBI to transfer a much higher surplus is a reflection on fiscal management and government finances in an election year, with extra spending commitments and fiscal slippages.

Is the demand of surplus transfer by the govt justified?

  • As the owner or controlling shareholder, it is natural, and justifiably so, for any government to seek a reasonable or fair return on the capital deployed by the sovereign, especially in the commercial enterprises promoted by it.
  • But a distinction needs to be made when it comes to the central bank, even if the government is the sole owner, considering that the state of the bank’s balance sheet is intrinsic to delivering on its objectives of monetary and financial stability and also to boost credibility, not just in the financial markets but also among credit rating agencies.
  • As the experience of the 2008 financial crisis and subsequent events show, there has been a dramatic change in the risk environment under which central banks operate. There is a recognition that these banks should be equipped to provide huge liquidity commitments and also build strong capital buffers as a cushion against unforeseen risks and potential losses.

Way forward

  • A committee headed by former governor Bimal Jalan is now reviewing the RBI’s economic capital framework.
  • As the monetary policy committee agreement has shown, a similar legislative framework agreement on capital and rules on surplus transfer can help narrow differences and smoothen ties between two critical arms of the government.

 

Editorial Simplified: The Solution Is Universal| GS – III


Relevance: GS Paper III


Theme of the article

Strengthening the MGNREGA would be more prudent than a targeted cash transfer plan like PM-KISAN.


Why has this issue cropped up?

Rural distress has hit unprecedented levels. To allay  the distress, one of the announcements in the Budget was the cash transfer scheme called Pradhan Mantri Kisan Samman Nidhi (PM-KISAN).


Is PM-KISAN a reasonable solution?

  • Comparison with MGNREGA
    •  A month of MGNREGA earnings for a household is more than a year’s income support through PM-KISAN anywhere in the country.
    • PM-KISAN is a targeted cash transfer programme and MGNREGA is a universal programme.
    • Around 40% of rural households are landless and depend on manual labour. The landless can earn through the MGNREGA but are not eligible for the PM-KISAN scheme.
  • Notwithstanding the meagre amount, the PM-KISAN might be pitting the landless against a small farmer.
  • Further, it is unclear how tenant farmers, those without titles, and women farmers would be within the ambit of the scheme.
  • There is also substantial evidence to demonstrate that universal schemes are less prone to corruption than targeted schemes.

Problems with  implementation of MGNREGA

  • The Centre has frequently tinkered with the wage payments system in the MGNREGA. Less than a third of the payments were made on time.
  • Repeated changes in processes result in a hurried bureaucratic reorientation on the ground, and much chaos among workers and field functionaries alike.
  • Field functionaries are pushed to meet stiff targets. Being short-staffed and inadequately trained, this results in many technical and unforeseen errors.
  • A case in point is the rushed manner in which Aadhaar has been implemented for the MGNREGA. Several MGNREGA payments have been rejected, diverted, or frozen as a consequence.
  • In the last four years alone, more than ₹1,300 crore of the MGNREGS wage payments have been rejected due to technical errors such as incorrect account numbers or faulty Aadhaar mapping. There have been no clear national guidelines to rectify these.
  • There are numerous cases of MGNREGS payments getting diverted to Airtel wallets and ICICI bank accounts.
  • In a recently concluded survey on common service centres in Jharkhand for Aadhaar-based payments, it was found that 42% of the biometric authentications failed in the first attempt, compelling them to come later.

Way forward

  • Strengthening an existing universal programme such as the MGNREGA would have been a prudent move instead of introducing a hasty targeted cash transfer programme.
  • The success of the PM-KISAN is contingent on there being reliable digital land records and reliable rural banking infrastructure.

Conclusion

At a time of such acute distress, the Central government needs to improve the existing      universal infrastructure of the MGNREGA before plunging into a programme pretending to augment farmers’ income.


Editorial Simplified: Corporate Taxes Must Be Rationalised| GS – III


Relevance: GS Paper III


Theme of the article

For kick-starting the investment cycle, the Centre has to cut tax rates for large companies.


Introduction

While the government can take pride in having pushed through the landmark indirect tax reform, it has fallen short in its efforts to rationalise corporate tax rate in the country.


Corporate tax issues

  • The corporate tax rates in India are too high when compared to those in other countries and there is widespread tax evasion, with larger companies paying lower taxes than smaller ones.
  • The gov had embarked on a roadmap for bringing down the corporate tax rate in the country from 30 per cent to 25 per cent over the next four years. However, the corporate tax rate was lowered to 25 per cent only for some companies.
  • In the tax-cut exercise, larger companies — with turnover exceeding ₹250 crore — have not seen any change in the tax rate. The tax burden for these companies has in fact moved higher.
  • Withdrawal of some of the corporate tax incentives is also increasing tax incidence for larger companies.
  • Given the inability of GST to reach its full potential in garnering tax revenue yet, the Centre is in no position to slash corporate tax rates as of now. It has instead adopted a calibrated approach to rationalising rates, in a bid to please the largest number of companies.

Global comparison 

  • Countries across the globe are moving towards lower corporate tax rates. The average corporate tax rate globally has declined from 30.19 per cent in 2003 to 20.6 currently.
  • The current peak corporate tax rate in India, at 35 per cent, is the highest among the BRIC as well as the Asia-Pacific countries.

Way forward

  • Tax on income of companies needs to gradually slide lower so that the surplus available to invest in capacity expansion and augmenting business, increases.
  • The Centre has been trying to ward off the impending cut in corporate tax rate for larger companies, it needs to do so soon. Reduction in rates for smaller companies may be beneficial to these entities, but is unlikely to have the impact that similar cuts for larger companies is likely to have in boosting private investments.
  • Corporate taxes account for around one-third of total tax collections. But instead of trying to increase revenue by holding higher rates, it could try to reduce rates, which, in some circumstances, can result in higher compliance.

Editorial Simplified: Remove The Roots Of Farmers’ Distress | GS – III

The next issue is the low productivity of Indian agriculture. Basics such as seeds, fertilizers, credit, land and water management and technology are important and should not be forgotten.


Relevance: GS Paper III


Theme of the article

Steps like limited procurement, boosting productivity and consolidating land holdings can help reduce agrarian distress.


Why has this issue cropped up?

Recently, there has been active discussion on the strategies addressing farm distress.


The farm problems

Agrarian distress, in the present context, is mainly in terms of

  • low agricultural prices
  • poor farm incomes
  • Low productivity in agriculture
  • supply side factors
  • declining average size of farm holdings

Prices And Incomes

  • Prices play a key role in affecting the incomes of farmers.
  • Therise in prices for agriculture was much lower than general inflation in recent years.
  • Market prices for several agricultural commodities have been lower than those of minimum support prices (MSP).
  • When output increases well beyond the market demand market prices decline. And in the absence of an effective price support policy, farmers are faced with a loss in income.
  • A few schemes have been suggested to address the problem of managing declining output prices when output increases significantly.
  • The scheme of ‘price deficiency compensation’ is one such mechanism which amounts to paying the difference between market price and the MSP.
  • At the other extreme is the ‘open procurement system’ that has been in vogue quite effectively in the case of rice and wheat, where procurement is open ended at the MSP.
  • A ‘price deficiency’ scheme may compensate farmers when prices decrease below a certain specified level. However, market prices may continue to fall as supply exceeds ‘normal demand’.
  • An alternative is the limited procurement scheme. Under this scheme, the government will procure the ‘excess’, leaving the normal production level to clear the market at a remunerative price. Thus, procurement will continue until the market price rises to touch the MSP.
  • Some States have introduced farm support schemes, examples being the RythuBandhu Scheme (Telangana) and the Krushak Assistance for Livelihood and Income Augmentation (KALIA) scheme (Odisha). One problem with the Telangana model is that it does not cover tenants, who are the actual cultivators.
  • Thus, raising the MSP, price deficiency payments or income support schemes can only be a partial solution to the problem of providing remunerative returns to farmers.
  • A sustainable solution is market reforms to enable better price discovery combined with long-term trade policies favourable to exports.
  • The creation of a competitive, stable and unified national market is needed for farmers to get better prices.
  • For better price for farmers, agriculture has to go beyond farming and develop a value chain comprising farming, wholesaling, warehousing, logistics, processing and retailing.

Low productivity

  • The next issue is the low productivity of Indian agriculture. Basics such as seeds, fertilizers, credit, land and water management and technology are important and should not be forgotten.
  • Similarly, investment in infrastructure and research and development are needed.
  • Water is the leading input in agriculture.Basically, it is not investment alone but efficiency in water management in both canal and groundwater that is important.
  • India uses upto three times the water used to produce one tonne of grain in countries such as Brazil, China and the U.S. This implies that water-use efficiency can be improved significantly with better use of technologies that include drip irrigation.
  • Yields of several crops are lower in India when compared to several other countries. Technology can help to reduce ‘yield gaps’ and thus improve productivity.
  • Government policies have been biased towards cereals particularly rice and wheat. There is a need to make a shift from rice and wheat-centric policies to millets, pulses, fruits, vegetables, livestock and fish.

Land size

  • Another major issue relates to the shrinking size of farms which is also responsible for low incomes and farmers’ distress.
  • The average size of farm holdings declined from 2.3 hectares in 1970-71 to 1.08 hectares in 2015-16.
  • The share of small and marginal farmers increased from 70% in 1980-81 to 86% in 2015-16.
  • The average size of marginal holdings is only 0.38 hectares (less than one acre) in 2015-16.
  • The monthly income of small and marginal farmers from all sources is only around ₹4,000 and ₹5,000 as compared to ₹41,000 for large farmers.
  • Thus, the viability of marginal and small farmers is a major challenge for Indian agriculture.
  • Many small farmers cannot leave agriculture because of a lack of opportunities in the non-farm sector. They can get only partial income from the non-farm sector.
  • In this context, a consolidation of land holdings becomes important to raise farmer incomes.
  • We need to have policies for land consolidation along with land development activities in order to tackle the challenge of the low average size of holdings.
  • Farmers can voluntarily come together and pool land to gain the benefits of size.
  • Through consolidation, farmers can reap the economies of scale both in input procurement and output marketing.

Conclusion
To conclude, farmers’ distress is due to low prices and low productivity. The suggestions we have made, such as limited procurement, measures to improve low productivity, and consolidation of land holdings to gain the benefits of size, can help in reducing agrarian distress. We need a long-term policy to tackle the situation.


 

Editorial Simplified: Examining Farm Loan Waivers | GS – III

Economists and bankers are sharply divided on whether farm loan waivers are desirable. One section of economists and hard-nosed bankers argues that loan waivers represent poor policy for a variety of reasons.


Relevance: GS Paper III


Theme of the article

The solution lies in better schemes that ensure universal coverage for small, marginal and medium-sized farmers.


Why has this issue cropped up?

Till now, at least 11 States have announced schemes to waive outstanding farm loans. The pitch for waivers among States has added to the pressure on the Central government for a nationwide farm loan waiver.


Problems with loan waivers

  • REPAYMENT: Loan waivers have “reputational consequences”; that is, they adversely affect the repayment discipline of farmers, leading to a rise in defaults in future.
  • PRODUCTIVITY: Earlier debt waiver schemes have not led to increases in investment or productivity in agriculture.
  • CREDIT: After the implementation of debt waiver schemes, a farmer’s access to formal sector lenders declines, leading to a rise in his dependence on informal sector lenders; in other words, waivers lead to the shrinkage of a farmer’s future access to formal sector credit.

Critical assessment of above arguments

  • REPAYMENT: Farmers are most disciplined in their repayment behaviour. In September 2018, agricultural NPAs (about 8%) were far lower than in industry (about 21%).
  • DEFAULT: There is no evidence to argue that the 2008 loan waiver led to a rise in default rates among farmers.
  • PRODUCTIVITY: The argument that loan waivers do not promote investment or raise productivity is a bit absurd because nowhere has investment or productivity figured as the official objectives of these schemes.
  • CREDIT: The argument that loan waivers shrink access to formal credit sector for farmers is only partly true. But the culprits here are banks and not farmers. After every waiver, banks become conservative in issuing fresh loans to beneficiaries, as they are perceived to be less creditworthy.

Arguments for loan waivers

Firms have always received debt waivers. Just as for firms, farms also need a reduction of debt burden, followed by fresh infusion of credit, when their economic cycle is on a downturn. The demand for loan waivers in India is absolutely logical when viewed from such a standpoint.


Not a panacea

  • To consider loan waivers as a panacea for the agrarian distress would be wrong.
  • Access to India’s rural banks is skewed in favour of large farmers.
  • While public banks actively service the credit needs of large farmers, a majority of small and marginal farmers are not proportionately included.
  • The latter are forced to rely on informal sources, particularly moneylenders, for much of their credit needs.
  • As a result, the benefits of loan waivers accrue disproportionately to large farmers while only marginally benefiting the small and marginal farmers.

The solution

  • The solution lies in carefully designing waiver schemes that ensure universal coverage for small, marginal and medium-sized farmers while covering both the formal and informal sources of debt.
  • The Kerala Farmers’ Debt Relief Commission Act, 2006 is an excellent model in this regard. This scheme defines debt as “any sum borrowed by a farmer from the creditor”, with the creditor defined as “any person engaged in money lending, whether under a licence or not”.
  • Legislations such as Kerala’s are blueprints to design comprehensive, inclusive and less-leaky loan waiver schemes in other States.
  • While loan waiver schemes are like a band-aid on a wound, it is the larger agrarian distress that demands urgent policy attention.
  • Unless there are steps to raise productivity, reduce costs of cultivation, provide remunerative prices, ensure assured procurement of output, expand access to institutional credit, enhance public investment, institute effective crop insurance systems and establish affordable scientific storage facilities and agro-processing industries for value addition, etc, farmers will continue to be bonded to low income equilibrium and repeated debt traps.

Editorial Simplified: A tragedy that was long in the making | GS – III


Relevance: GS Paper III


Why has this issue cropped up?

The efforts to reach the 15 miners trapped in an illegal coal mine in the East Jaintia hills of Meghalaya since December 13 continue.


Issues with illegal coal mining in Meghalaya

  • The Meghalaya government has no idea what happens inside these rat-hole mines, which are barely 2 ft wide, since mining is a private activity.
  • Despite the National Green Tribunal ban of April 2014, mining continues in the State.

Was the recent disaster managed well?

  • The district administration assumed the miners to be dead on the very day of the tragedy.
  • The socio-economic profile also worked against them. They were the poorest of the poor who took a huge risk to enter a mine and dig for coal without any safety gear.
  • When a mine is flooded, the immediate response is to stop further flow of water into it. This requires a hydrologist. In this case, a hydrologist arrived only two weeks after the disaster. So did the divers from the Indian Navy and the 100 HP water pumps.So did the geologists from Hyderabad.
  • All these delays happened because there was no one person or agency to coordinate the rescue mission. This shows the kind of disaster preparedness we have in our country.

Questions that arise

There are many questions that arise with respect to rat-hole mining of coal.

  • One, why does the state allow this archaic mining system, which has complete disregard for human life and safety?
  • And two, why is Meghalaya exempted from national mining laws?
  • Rat-hole mining, which started in the 1980s, has poisoned three rivers in the Jaintia hills: the Myntdu, Lunar and Lukha.
  • These rivers have very high acidic levels. pH of the water and sulphate and iron concentrations indicate significant deterioration of the rivers.
  • Acid mine drainage from abandoned mines was a major cause for water pollution.
  • Acid mine drainage has rendered even agricultural land non-productive.

Arguments given for coal mining

  • The coal mine owners say that rat-hole mining should continue because no other form of mining is viable.
  • They claim that coal mining provides livelihoods for many.
  • The other troubling factor is that coal mine owners are insisting that since Meghalaya is a State under the Sixth Schedule of the Constitution, national mining laws should be exempted here.

 The scale of the coal mining problem

  • The scale of the problem is clear in this one fact: there are 3,923 coal mines in one district with a geographical area of 2126 sq. km.
  • Coal mine owners have left thousands of abandoned mines as human graves. The State does not insist that they reclaim and afforest those mines.
  • In 40 years of mining and profiteering, the mine owners have till date not constructed a single hospital or even a school. There is complete disregard for corporate social responsibility because the mines are privately owned by the tribals.

 What people of Meghalaya want?

  • The tribes of Meghalaya are divided on the issue of rat-hole mining.
  • Those who care for the environment and for a future for their children and grandchildren have been clamouring for an end to the practice of rat-hole mining and reckless limestone mining.
  • On the other hand, the mining elite have mobilised forces to demonise environmental activists. A community of just over a million is now fragmented.

 Should Meghalaya be exempted of national laws?

The Sixth Schedule was enacted to protect the community rights of tribals from any form of exploitation of their land and resources. How can it now be used as an instrument to protect an activity that is a private enterprise, that is inhuman, and that violates Article 21 of the Constitution?


 Conclusion

 The  Central government and the highest court of the land  should not allow this to carry on in one part of the country when strict laws are applied elsewhere.


 

Value Added Article: The City in the Constitution | EPW

Relevance: GS Paper I & II (Local Government / Urbanization)

Source

economic-and-political-weekly


 

Introduction

The Constitution of India considers states to be the smallest unit of governance, leaving further devolution of powers at their discretion. Even the 73rd and 74th Constitutional Amendments do not sufficiently empower the panchayati raj institutions or urban local bodies to respond to the needs of citizens in a democratic manner. With growing urbanization, the problem of democratic deficit in the cities is going to become even more acute.


 The weak position of ULBs

  • Could a state government, by law, strip all urban local bodies (ULBs) in the state of their powers and hand it over to an administrator nominated by it? The answer is – Yes.The state government can do this, and it would not be unconstitutional.
  • Nothing in the articles introduced into the Constitution under the 74th Amendment mandates that ULBs should enjoy certain powers at all costs.
  • Articles 243W and 243X do not mandate that the state legislature has to bestow lawmaking or taxing powers upon the ULBs.
  • This position of law reflects a situation that has existed since the Consti­tution has come into force: it has no ­conception of the city as a unit of governance.
  • Whereas state legislatures and governments have been vested with legislative and executive powers under the Constitution, there is nothing in the Constitution which does the same for ULBs.

Increasing Urbanization

  • More and more Indians are choosing to live in cities. This is a trend that is only going to increase as jobs become scarce in rural areas and opportunities beckon in megacities sprouting across the country.
  • Unlike in the past where much migration from rural to urban areas was temporary and seasonal—with men moving to the cities for jobs and returning to the village—India is, perhaps, finally seeing the mass movement of families from rural areas to urban areas on a permanent basis.
  • As of 2018, 54% of the world’s population lives in urban areas, with the figure expected to go up to 68% in 2050.
  • By 2030 India will be home to seven cities with 10 million or more inhabitants, though—given that five cities already match this criterion—it is possible that many more may join the club.

Benefits of Urbanization

  • While unplanned urbanization is definitely hazardous and could lead to environmental damage, well-planned urbanization can have positive impacts on the environment.
  • Urbanization has many benefits, including more efficient resource use, reduced carbon footprints, and an opportunity to escape oppressive social structures.

Imagining the City

  • One solution, perhaps, to address the absence of the city in the Constitution is to grant cities plenary legislative and executive powers in the same manner as has been granted to the union and state governments.
  • This would mean replacing the existing provisions, enabling the state to grant such powers by a clause that directly vests such powers with the ULBs or PRIs.
  • This would also entail a separate list for ULBs and PRIs in the Seventh Schedule and/or a potential second concurrent list where states share legislative power with such bodies.
  • However, this suggestion only goes some way towards addressing the problem of the absence of the city in the Constitution. At the heart of the problem is a democratic deficit and a power–accountability imbalance.

The Democratic Deficit

The democratic deficit is evident in two ways.

  • On the one hand, cities and urban areas are severely under-represented in the state and national legislatures relative to rural areas.
  • There is another aspect to this democratic deficit, though it is not exclusive to cities alone. Although the Constitution mandates that ULB elections should be held every five years, in reality, several states have had much longer gaps between elections to ULBs.

Way Forward

  • If the powers of the municipal corporation are simply a gift of the state government, voters might assume that it would make better sense to hold the state government directly responsible. Redressing this, therefore, requires framing the city and its place in governance under the Constitution in a holistic manner.
  • This will require an acknowledgement of the role of the city in economic and social development in India.
  • This will also require the strengthening of institutions like the state election commissions and the state finance commissions to ensure that they are able to carry out their mandate in an impartial and timely manner.
  • This will require ­conceptualizing federalism under the Constitution as a three-tier structure, where each tier performs its constitutional roles and responsibilities, and is independently accountable to the citizens.

Conclusion

As India urbanizes rapidly, it is going to face challenges when it comes to governance of vast urban agglomerations. Placing the city within the framework of the Constitution will provide a path to deepen India’s democracy and federalism.