15 June 2024 : The Hindu Editorial Analysis

1. Reimagining Indian federalism

(Source – The Hindu, International Edition – Page No. – 6)

Topic: GS2 – Indian Polity – Federal Structure

Context

The article critiques the present government’s tendency of centralization of power and challenges to India’s federal structure. The article also addresses regional concerns over demographic shifts and fiscal imbalances, emphasising the need for coalition governance to restore balance and strengthen cooperative federalism.

Political Context and Coalition Governance

• The Bharatiya Janata Party (BJP) fell short of a majority in the Lok Sabha on June 4, 2024, leading it to rely heavily on regional parties within the National Democratic Alliance (NDA).
• Coalition governance is seen as a check on the central government’s unitary power and it’s move towards majoritarian autocracy.
• There is hope that this return to coalition governance could revive India’s federal structure, which has been weakened over the past decade.

Critique on Federalism

• Since 2014, there has been a trend towards centralising power at the expense of states, contrary to the rhetoric of cooperative federalism.
• Instances include attempts to impose Hindi on southern states, misuse of central investigative agencies against political opponents, and unilateral decisions like imposing nationwide lockdowns without consulting states.
• Fiscal federalism has been disrupted, with the misuse of funds like the PM CARES Fund, which diverted resources from state-run relief efforts.

Impending Challenges: 91st Amendment and Delimitation

• The 91st Amendment, expiring in 2026, ensures equitable representation based on the 1971 Census data, protecting states that have made progress in human development indicators.
• The government’s reluctance to renew this amendment could lead to a demographic shift favouring Hindi-speaking states, potentially disenfranchising southern states.
• Changes in the Finance Commission’s terms, favouring states with larger populations over performance-based criteria, have exacerbated regional imbalances.

Concerns of Southern States

• Southern states are concerned about upcoming delimitation exercises that could disproportionately favour states with higher populations, like Uttar Pradesh and Bihar.
• There is apprehension that this could lead to a permanent majority for certain regions, undermining the federal balance and democratic principles.

Role of Regional Parties

• Regional parties within the NDA have secured cabinet positions but are primarily focused on securing benefits for their states rather than advancing cooperative federalism.
• The reduction in BJP’s majority may restrain the Hindutva agenda but does not necessarily promote a stronger federal structure.

Historical Perspective and Recommendations

• Historically, India promoted decentralisation and competitive federalism to accommodate diverse needs, a principle now under strain.
• Reviving the Inter-State Council, originally intended for consultation and coordination among states, could be pivotal in restoring federal balance.
• The Council, despite its potential, has been marginalised and needs restructuring to serve as an effective platform for state-level deliberations and dispute resolutions.

Conclusion

• India’s federalism faces challenges from centralised tendencies and demographic shifts that could marginalise certain regions.
• To preserve unity amidst diversity, it is crucial to strengthen cooperative federalism, ensuring all states have equitable representation and resources.
• The revival of forums like the Inter-State Council could foster dialogue and consensus-building among states, crucial for maintaining India’s federal structure.

PYQ: The concept of cooperative federalism has been increasingly emphasised in recent years. Highlight the drawbacks in the existing structure and the extent to which cooperative federalism would answer the shortcomings. (200 words/12.5m) (UPSC CSE (M) GS-2 2015)

Practice Question:  Discuss the evolution and contemporary challenges of India’s federal structure. How has the balance of power between the Union and State governments evolved over time, and what are the key challenges faced in maintaining cooperative federalism? (250 Words /15 marks)

2. India growth story has a ‘beneficial ownership’ hurdle

(Source – The Hindu, International Edition – Page No. – 6)

Topic: GS2 – Governance

Context

The article discusses the impact of amendments to the Indian Foreign Exchange Management (Non-debt Instruments) Rules, 2019, which require prior government approval for foreign investments from neighbouring countries. This has created significant challenges for Indian companies, particularly start-ups, by introducing uncertainty and regulatory hurdles that could deter foreign investment and hinder India’s economic growth goals.

Importance of Foreign Investments for Economic Goals

• Foreign investments are essential for India to achieve its goal of a $5 trillion economy by the financial year 2025-26.
• Removing barriers for Indian companies receiving foreign investments and for foreign investors is crucial to attract these investments.

Amendment Conundrum

• The amendment to the Indian Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (FEMA NDI) through press note number 3 of 2020 has created significant challenges for Indian companies, particularly start-ups and smaller enterprises.
• This amendment requires prior government approval for investments from entities located in countries sharing land borders with India, or where the beneficial owner is from these countries.
• The intent was to prevent opportunistic takeovers during the COVID-19 pandemic, but it has caused uncertainty due to the undefined term ‘beneficial owner’.

Ambiguity and Regulatory Scrutiny

• Initially, the industry adopted a lenient interpretation of beneficial ownership based on other laws. However, the Reserve Bank of India (RBI) has since taken a stricter stance.
• This stricter interpretation led to issues for Foreign Owned or Controlled Companies (FOCCs) regarding their downstream investments.
• The lack of clear guidance has caused investors and law firms to re-evaluate their positions, leading to increased caution.

Challenges with Government Approval

• The prior government approval process is time-consuming and has a high rejection rate.
• Unofficial reports indicate that proposals worth ₹50,000 crore from neighbouring countries are either pending, withdrawn, or rejected.
• The burden of compliance falls on Indian companies, with severe penalties for non-compliance, including fines up to three times the investment amount.

Impact on Start-ups

• Start-ups, which often receive investments exceeding their revenue or assets, could face insolvency due to hefty fines.
• Non-compliance could lead to prolonged legal battles, exacerbating India’s backlog of court cases.

Issues and Potential Solutions

Defining Beneficial Owners:

• There is a need for a comprehensive definition of ‘beneficial owners,’ including ownership thresholds and control tests.
• Ownership thresholds could range from 10% (as per Indian company law) to 25% (as recommended by the Financial Action Task Force).
• Different sectors might require different thresholds based on their sensitivity, such as higher scrutiny for telecom and defense sectors compared to manufacturing and construction.

Control-Conferring Rights:

• The definition should include specific control-conferring rights beyond ownership thresholds, capturing entities with significant influence.
• Rights related to operational control, such as board meeting quorums or veto powers over capital expenditure, should be included.
• Investor value protection rights, like veto powers over mergers, should be excluded as they do not constitute control.

Consultation Mechanism:

• A consultation mechanism similar to Indian competition law could be introduced to resolve ambiguities regarding control-conferring rights.
• This mechanism would provide time-bound consultations with regulatory authorities to determine if specific clauses confer control.

Conclusion

• The article highlights the challenges posed by the amendment to the FEMA rules for foreign investments in Indian companies.
• It underscores the need for clear definitions and streamlined approval processes to facilitate foreign investments while safeguarding national interests.
• Addressing these issues through precise regulations and consultation mechanisms can help balance attracting foreign investments and ensuring national security and economic stability.

PYQ: Examine critically the recent changes in the rules governing foreign funding of NGOs under the Foreign Contribution (Regulation) Act (FCRA), 1976. (200 words/12.5m) (UPSC CSE (M) GS-2 2015)

Practice Question:  Discuss the challenges posed by the amendment to the Indian Foreign Exchange Management (Non-debt Instruments) Rules, 2019, on attracting foreign investments and suggest measures to address these challenges. (250 Words /15 marks)