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GS - Week 7 Day 2

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GS - Week 7 Day 2

Uploaded by

kutturj95
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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GS Mains Daily Answer Writing

Week 7 Day 2
Model Structures

1. Highlighting the issues associated with power discoms in India, discuss whether
privatizing discoms can help in this regard. (150 words)

Model Structure
Introduction
● India became the third largest electricity generator in the world. However, the discoms
i.e. power distribution companies, continue to be faced with following issues:
Main Body
● Operational inefficiencies due to huge technical and commercial losses (AT&C) at 21.4%
which are primarily caused by power theft, poor payment collection procedures, and
inadequate tariff hikes.
● Increasing open access transactions: Big commercial customers who pay higher tariffs are
engaging in private power purchase through open access i.e. directly buying from the
suppliers bypassing discoms.
● Lack of political will and transparency in dealing with phasing out of energy subsidies for
the consumers.
● Decline in demand during lockdown: Revenue of discoms have fallen due to halt in
commercial activities while domestic users pay lower tariffs.
● Increased Power Purchase Cost: After the one-time measures under UDAY, the power
purchase costs have now increased by 5 per cent in the first nine months of 2018-19.
Further the input costs of coal and freight have gone up.
● Indebtedness: According to the PRAAPTI portal, power producers' total outstanding dues
owed by discoms rose over 47% year-on-year to Rs. 1.33 lakh crore in June 2020.
● Financial incompetence: DISCOMs have delayed payments owed to solar and wind
energy developers making investments into the sector extremely challenging.
Privatization of discoms is being seen as a measure to revitalize discoms due to following
reasons-
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● Past experiences: There are sufficient case studies when private players have been proved
to run cash strapped discoms successfully via more efficiency, increased revenue and
improved consumer services. For e.g. the AT&C losses in Delhi after the privatization in
2002 has been brought down from a high of 53% to around 8%.
● Operational autonomy: Due to improved network efficiency and lack of political
interference.
● Operational efficiencies: Privatization will eliminate issues such as payment delays,
power cuts, and lack of market-based electricity pricing and stimulate economic activity.
● Generating private sector appetite: Amongst Indian and international investors, various
PPP models will be tested and it will also provide confidence to larger states and utilities
to undertake privatisation based on improvements achieved.
Conclusion
● However, privatization of discoms needs to be accompanied by other measures such as
providing autonomy to regulatory bodies; cooperative federalism between centre and
state; reinventing the revenue model of discoms which should be conducive to the growth
of rooftop solar and open access power.

2. The Union Budget 2021 has proposed setting up a National bad bank to restore banks’
health. Critically discuss the idea for ameliorating the banking sector’s stress. (250 words)

Model Structure
Introduction
● A bad bank is an entity that acts as an aggregator of bad loans or non-performing assets
(NPA’s) and purchases them from across the banking sector at a discounted price and then
works towards their recovery and resolution
● The bad bank is similar to an Asset Reconstruction Company (ARC), where they absorb
these loans from the banks and then manage them to recover as much amount as possible.
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Main Body
● Arguments For Bad Banks
○ Providing Lending Leverage to Banks: The benefits of bad bank include the
recovered value, and significant lending leverage because of three factors:
■ Capital being freed up from less than fully provisioned bad assets.
■ Capital freed up from security receipts because of a sovereign guarantee.
■ Cash receipts that come back to the banks and can be leveraged for
lending, also freeing up provisions from the balance sheet.
○ International Precedent: eg. The US implemented the Troubled Asset Relief
Program (TARP) after the 2008 financial crisis, which helped the US economy
after the subprime crisis.
○ Revival of Credit Flow Post-Covid: Some experts believe that a bad bank can
help free capital of over Rs. 5 lakh crore that is locked in by banks as provisions
against the bad loans.
● Arguments Against Bad Bank:
○ Structural issues in banking sector will not be resolved by creation of bad bank
■ Not a Panacea: It is argued that creating a bad bank is just shifting the
problem from one place to another.
○ Tight Fiscal Position: It’s difficult to gather needed funds
○ There is no clear procedure to determine at what price and which loans should be
transferred to the bad bank.
○ Moral Hazard: Former Governor of the reserve bank, Raghuram Rajan believes
that setting up a bad bank may also create moral hazard problems among the
banks that would enable them to continue with their reckless lending practices,
further exacerbating the NPA problem.
Conclusion
● Therefore, a bad bank is a good idea, but the main challenge lies with tackling the
underlying structural problems in the banking system and making reforms to improve the
public sector banks.

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