Daily Editorial Analysis for 14th July 2021

GS PAPER II EDITORIAL

The upcoming crisis in Indian federalism

Why in News

• The Indian Constitution may face an unprecedented crisis in 2026 when there will be a dramatic change in the composition of the Lok Sabha.
• Since 1976, seats in the Lok Sabha have reflected the 1971 census and have not taken into account changes in the
• population.
• The primary reason for this has been unequal population growth among States. India’s most highly developed and prosperous States have been successful at family planning, while the poorer States continue to expand.
• The freeze was thus a chance to ensure that India’s most successful States are not punished politically for their success.
• Post 2026, when this compact end, there will be a seismic shift in national power towards India’s poorest and most populated States, which is sure to generate much resentment among the States that, will lose political and economic, power and influence.
• This calls for a realignment in the balance between the democratic principle and the federal principle in the Indian Constitution.

The essence of the Union

• As Article 1 of the Indian Constitution says, India is a Union of States. The choice of words is deliberate: it is the several States that, together, make up the Indian Union.
• Admittedly, unlike in other federations, there is no separate State citizenship or State Constitutions.
• However, one need only study the history that led up to the linguistic re-organisation of States in 1956, and to subsequent movements for Statehood afterwards, to understand that States are distinct associative communities, within the federal structure of the Indian Union.
• Indeed, in a polity as plural as ours – linguistically, culturally, and ethnically – it could not be any other way.

Big versus small States

• Having established, thus, that States are important, self-contained units within the Indian constitutional scheme, we must turn to an inherent contradiction between the principles of democracy and federalism, when federal units are unequal in size, population and economics.
• In a democratic set up, all citizens are equal and are thus entitled to equal representation in governance. But this would imply that bigger States are likely to dominate the national conversation over smaller States.
• Small States fear that they would get a smaller share of the pie economically, a much reduced say in national issues, and be irrelevant in the political governance of the country.
• In order to assuage this legitimate fear, federal democracies have incorporated into their governing structures various kinds of compromises to ensure a balance between democratic principles and federal ones.
• For example, when the Americans adopted their Constitution, they protected smaller States in four ways:
• First, national powers over the States were limited.
• Second, each State regardless of size had two seats in the Senate, giving smaller States an outsized role in national governance.
• Third, Presidents are elected by electoral votes, which means they must win States rather than the total national population.
• Fourth, and deplorably, the slave­owning States which did not confer citizenship on slaves were allowed to count the slaves for purposes of representation, with each slave being counted as three­fifths of a person.
• This essential structure remains the bedrock of the American Constitution today, though the Americans have rid themselves of slavery (fortunately) and have dramatically increased the scope of federal intervention.
• This federal structure has led to the severing of causational links between the national vote and presidential elections.
• The current movement to remove the power of a minority to filibuster legislation is based on democratic principles seeking to mitigate the pathology of excessive federalism: indeed, the American structures of government go so far in the other direction, that they have been accused of essentially facilitating and entrenching minority rule through the Senate, which favors rural, sparsely populated States that are also predominantly white.

The Indian structure

• Other federations, like Switzerland and Belgium, have adopted other, less extreme, forms of reconciliation.
• However, India’s quasi­federal structure has always been sui generis. Founders of India knew that India’s diversity made federalism inevitable, but, fearing fissiparous tendencies among States that had never been a single political unit, they also created a strong centre.
• While history has been chequered, the fears for Indian national unity simply on the basis of giving States greater powers have proven to be unfounded — and if at all, it has been the other way.
• The 1956 re-organisation of States on linguistic lines was a popular recognition of federal principles and yet did not result in separatist tendencies.
• Since then, new States within the Union have been created in response to the demands of people for greater autonomy.
• In India, any clash between federal principles and democracy will inevitably also have linguistic, religious and cultural implications and may result in new forms of sub­regional chauvinism.
• Thus, there is an urgent need to reimagine our national compact — another freeze will only kick this thorny issue down the road and will continue to perpetuate an increasingly undemocratic set up.

Fine-tune these elements

• We have the components of such a new balance that need to be fine-tuned to Indian realities.
• First, the powers of States vis-à-vis the Centre contained in the Lists and in the provisions dealing with altering boundaries of States must be increased to assuage the fear of smaller States that they will be dominated by bigger ones.
• There is no reason to believe that empowering our States would cause national disintegration.
• On the contrary, more localised decision-making is bound to increase national prosperity.
• Indeed, this was the entire goal of the creation of Panchayat governance through the 73rd and 74^th Amendments to the Constitution, whose promise remains — unfortunately — unrealised.
• Second, the role and composition of the Rajya Sabha, our House of States, must be expanded.
• This would allow smaller States a kind of brake over national majoritarian politics that adversely impact them.
• Third, constitutional change and the change in financial redistribution between the States must require the consent of all or nearly all States (the fate of the Goods and Services Tax, or GST, serves as a salutary warning in this regard).
• Constitutional provisions dealing with language and religion must also be inviolate.
• If India is a joint venture between majority and minority shareholders, the minority must be protected by a comprehensive list of “consensus items” that require unanimity — or at least, a super­majority — and not simple majority.
• Fourth, serious thought must be given to breaking up the biggest States into smaller units that will not by themselves dominate the national conversation.

Competing claims

• The unity of India is, of course, the fundamental premise underlying this discussion; but this unity does not depend on an overbearing Centre for its survival.
• National bonds of affection and patriotism will not be severed by devolution of powers though they will be at least severely strained when one part of the country is empowered over another.
• Lampedusa’s Il Gattopardo contains the memorable quote, everything must change for everything to remain the same.
• This includes the question of how we are to balance the competing claims of democracy and federalism, in the years to come.

GS PAPER III

Regulations must remove the fetters on asset reconstruction companies

ARCs buy assets underlying bad loans

• To make the Insolvency and Bankruptcy Code (IBC) work efficiently, regulation must remove the fetters on asset reconstruction companies (ARCs) buying stressed assets of failed companies.
• The committee that RBI has set up to review the role of ARCs in resolving bad loans under IBC should, ideally, recommend redefining an ARC as a corporate entity engaged primarily in the business of reconstructing bad loans, governed by the Companies Act 2013, and take it out of the purview of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (Sarfaesi) Act altogether.
• This is necessary to give it the operational freedom an ARC needs to realise its full potential in resolving bad loans under IBC.
• An ARC should not be limited to buying and selling financial securities, but must be free to buy and sell the underlying assets of bad loans as well, a role RBI has deemed it fit to deny it, notwithstanding the express mandate of Section 5(3) of the Sarfaesi Act that all the rights of the lender over the borrower flowing from the credit relationship will be transferred to the ARC when the ARC takes over the bad loan from the original lender.
• The job of an ARC is to resolve bad loans. So, any restriction on an ARC buying an asset underlying a bad loan and being forced to purchase only bad loans from banks is plain irrational. It restricts the market for stressed assets and increases the eventual haircuts that banks have to take.
• Take RBI’s reported rejection of UV Asset Reconstruction Co Ltd’s (UVARCL) resolution plan to buy the assets of the bankrupt telecom operator Aircel Group, saying that the plan does not conform to Sarfaesi guidelines.

Conclusion

• As the resolution of bad loans takes time, it must be entrusted to patient capital that can get most of the assets placed in their care.
• ARCs are or should represent patient capital that can buy bankrupt companies, run portions that can be run profitably and sell off bits to buyers looking to buy just those bits and nothing more, to get the optimal value of the assets.