Daily The Hindu Editorials Notes- Mains sure shot ( 28th August 2019)  

GS-3 Mains

Question – What are development banks? Analyse their various aspects.(250 words)

Context – Finance Minister Nirmala Sitharaman’s press conference on August 23, indicated setting up of a development bank.

What are Development Banks?

• Development banks are the banks that provide ‘long-term’ credit to companies that invest in capital intensive sectors (i.e. sectors which require huge investment) and yield low rates of return, like – urban infrastructure, mining and heavy industry, and irrigation systems.
• These are also called long-term lending institutions or industrial banks. In India these long-term capital lending institutions are collectively called development banks.
• These are in contrast to German type universal banks, which provide both short-term and long-term credit.
• Some of the long-term capital lending institutions in India are:

1. Industrial Finance Corporation of India (IFCI), 1948
2. Industrial Credit and Investment Corporation of India (ICICI), 1955
3. Industrial Development Bank of India (IDBI), 1964
4. State Finance Corporation (SFC), 1951
5. Small Industries Development Bank of India (SIDBI), 1990
6. Export Import Bank (EXIM)
7. Small Industries Development Corporation (SIDCO)
8. National Bank for Agriculture and Development (NABARD)

Difference between Commercial Bank and Development Bank are as follows:

COMMERCIAL BANKS	DEVELOPMENT BANKS
Provide short term loans.	Provide long term loans.
Accept deposits from the public.	Accept deposits from commercial banks, Central and State governments.
Direct finance to customers.	Provide refinancing facilities to commercial banks.
Plays an important role in the money market	Play an important role in hire purchase, lease finance, housing loan.
Public sector banks have their share capital contributed by the government while private sector banks have share capital contributed by the public.	Central and Statement governments contribute capital.
Promote savings among the public and help commercial activities.	They promote economic growth of the country.

Why are development Banks required?

1. They are vital for the sustained economic growth of any economy because the commercial banks mainly give loans to customers and small businesses that yield immediate result, for example, to a biscuit manufacturing company. This kind of companies require much less capital (ie. money) and the production doesn’t take much time and they start making profit easily  in a less span of time.
2. But development banks banks give huge amounts of money (as loan) to companies that want to build bridges or start a mining industry for example. These projects require a large scale investment and it takes more time to complete these projects and start earning profits.
3. While a biscuit manufacturing company is required in an economy to generate revenue and increase the GDP, a bridge or a railway tract or a mining firm are required for long-term holistic development. These are the main pillars of an economy.
4. Alexander Gerschenkron, a Ukrainian economist at Harvard University, famously said that the greater the economic backwardness of a country, the greater the role of the state in economic development, particularly in providing long-term finance to develop the economy and catch up with the developed economies. As we have seen the state is the main contributor of finance to the development banks. In brief it is like the state directly does not give money to the entrepreneurs of capital intensive companies. It gives the money to development banks and these development banks give it to these entrepreneurs.
5. In the context of the Great Depression in the 1930s, John Maynard Keynes argued that when business confidence is low on account of an uncertain future with low-interest rates, the government can set up a National Investment Bank to mop up the society’s savings and make it available for long-term development by the private sector and local governments.
6. Seeing the sluggish state of the economy, this is exactly what the Finance Minister suggested yesterday.

The experience with development banks in the past:

• In India, in the past most of the development banks were discredited because of mounting non-performing assets, allegedly caused by politically motivated lending and inadequate professionalism in assessing investment projects for economic, technical and financial viability.
• China’s development banks — the Agricultural Development Bank of China, China Development Bank, and the Export-Import Bank of China — have been at the forefront of financing its industrial prowess. After the global financial crisis, these institutions have underwritten China’s risky technological investments helping it gain global dominance in IT hardware and software companies.
•  Germany’s development bank, KfW, has been spearheading long-term investment in green technologies and for sustainable development efforts requiring long-term capital.

Conclusion/Way ahead:

• The FM has again proposed setting up an organisation to provide long-term credit i.e. development banks, and this is a welcome step noting the present economic slowdown.
• However, a few questions need to be kept in mind like- how will it be financed? 
• If foreign private capital is expected to contribute equity capital (i.e. buy shares of these development banks) it will mean giving a part ownership to them. They can pull out any moment. So such an option needs to be carefully analysed, especially in the current political juncture.

 

 

Note: there is another article titled ‘Cooking with gs, not wood’. There are not many points but these are the possible highlights:

GS-2 or 3 Mains 

• The article shows two cases studies: one of a wealthy man who can afford to hire labour to cut wood from the forest and uses it as fuel to cook food in traditional chulha. But on the opposite end is a lady who doesn’t own any land and in rainy season can’t even get enough wood to cook.
• Both of them have got LPG cylinders as a part of Pradhan Mantri Ujjawala Yojna. But they still cannot use it and stick to their traditional ways of cooking using chulha.
• Both have different reasons for it. The wealthy man feels that cooking food on Chulha is healthy and tastier. It causes exercise for the ladies as they blow into the chulha and cleanses their eyes as they water from the smoke.
• The woman on the other hand doesn’t have enough money to refuel the cylinder that she had received.
• The study found that this was not an isolated event. The 127 villages across four States — Bihar, M.P., Rajasthan, and Uttar Pradesh — we found that the rich were less likely to use a chulha for cooking compared to the poor, but not by much: more than 60% of the richest households had used a chulha yesterday.

What can be done?/ way ahead:

1. The perception that food cooked on chulhas were tastier compared to LPG needs to be broken by several campaigns initiated by the government and the NGO’s.
2. Most of the people who agreed that cooking on chulha caused harm to health of the person cooking it believed that the harm was to the eyes and no the lungs. So the government can take campaigns like advertisements to s[read the awareness that just like tobacco can cause lung related problems so can the inhaling smoke from chulhas.
3.  If priority households could become eligible for even higher subsidies in a revamped LPG pricing regime, and Antyodaya households could become eligible for LPG cylinders free of cost, exclusive LPG use would likely be higher.
4. Finally, the survey found that most of the cooking on chulha are done by women and the food on chulha is tasty and healthy is advocated by men. currently the advertisements focus on the advantages of clean fuel but advertisements showing that gas is so good that even men can cook with it will challenge both misinformation on LPG and gender inequalities in household tasks.