Editorial Notes

Editorial Notes 8th November 2016

Bt cotton; Major flaws in Bt cotton use in India; Non-performing asset and Inflation.
By IT's Editorial Notes Team
November 08, 2016


GS (M) Paper-3: “Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.”


NPA clean-up suggests higher inflation



  • RBI Governor recently says that the bad loans problem should be handled with firmness, creativity and pragmatism.
  • Chairman of Banks Board Bureau says, 2 large PSBs can be merged once the clean-up of bad loans have run its course.
  • The deadline for creative and pragmatic clean-up seems to be the next 6 months of this fiscal.
  • Therefore, one can conclude that the idea of clean-up is something else from what is commonly understood.
  • Their idea is that clean-up is over once the bad loans are partitioned into sustainable and unsustainable portions (as per the S4A scheme).
  • Where the unsustainable portion is to be designated as banks’ equity investment in the borrower companies.

Operating aspects:

  • But the common idea of clean-up is that whether it is classified as a loan or equity investment — the asset should generate returns for its holder.
  • This means the debtor (borrower) should be able to service his capital fully with his operational earnings.
  • In a sample of some 3,000 companies, Credit Suisse in a recent update says that 40% have interest coverage (IC) of less than 1 (interest coverage ratio is the ratio of earnings before taxes and interest as a proportion of interest payouts). It is only slightly higher than 1 for the rest. (An IC of 2.5 is considered acceptable). Therefore, for the bulk of the sample, only piecemeal debt servicing is being done while for the NPAs, there is no debt servicing.
  • It is only when non-earning assets turn into earning assets we can say that a clean-up has been achieved which can likely happen only over the next two to three years.
  • Also the equity stakes that banks may be forced to take in borrower companies can potentially become unsaleable if too much of the current debt pile is re-designated as equity, still companies find it difficult to achieve IC of more than 1.
  • Unsustainable turns to supposedly sustainable but again becomes unsustainable!

Higher prices are key:

  • The companies should first service is their capital — equity or debt.
  • This can be done only if their operating revenues exceed expenditures.
  • An IC of less than 1 shows a gaping mismatch between operating expenditures and revenues.
  • This mismatch can be eliminated only if there is much higher inflation in the goods (and services) that the debt-laden companies are selling.
  • These companies should go for stronger pricing power than the current prices so as to inflate the value of their sales.
  • The inflation in revenues should be higher than the inflation in expenditures to have an IC more than 1.

Solution- Inflating away debt:

  • A neat solution to the bad debt crisis is to generate much higher inflation in the overall economy.
  • This is an age-old solution to a debt crises.
  • The prime example is India’s fiscal history itself — the overall public debt as a fraction of GDP has fallen from 85% in the early 2000s to the 65% levels now — mainly because of the sharp increase in the prices component of nominal GDP.
  • Another recent example is provided by the sharp fall in delinquency rates on US residential mortgages in the past few years — from their highs following the housing crash of 2008-09.
  • Hence, there are only two ways to reduce debt burdens: default on outright; lower its real value through high inflation.
  • It finally depends on the RBI whether it strengthens or weakens the inflation.
[Ref: Business Line]


GS (M) Paper-3: “Food security”
GS (M) Paper-3: “indigenization of technology and developing new technology.”


Flaws in application Bt Cotton in India


What is Bt cotton?

  • Bt cotton, is a transgenic plant which produces an insect controlling protein Cry1A(c).
  • The gene has been derived from the naturally occurring bacterium, Bacillus thuringiensis.
  • The cotton hybrids containing Bt gene produces its own toxin. The toxin is effective in killing bollworms, which are the most potent pest affecting cotton plants.
  • Thus they significantly reduce chemical insecticide use and provide benefit to cotton growers and the environment.

Its usage in India:

  • Official approval of Bt Cotton was granted in March 2002, thus Bt Cotton became the first GM crop approved in India.
  • Introduction of Bt cotton revolutionized the production of cotton in India since 2002. But since 2008, yield increase has been stagnating.

Major flaws in Bt cotton use in India:

  • Undue haste in releasing Bt hybrids: Bt Cotton is available in two forms viz. Bt Hybrids and Bt straight (non-hybrid). The hybrids were introduced at the rate of almost 200 a year between 2007 and 2014. Such a huge number of Bt hybrids having varied growing durations, flowering periods and pest susceptibilities caused utter confusion among farmers as well as agronomists and pest management specialists. Thus, the first mistake India did was to allow the Bt Hybrids rather than limited Bt Straight varieties.
  • The presence of cotton flowers in fields over longer durations helped bollworms to get accustomed to Bt toxins and acquire resistance against them much sooner than was anticipated.
  • Laxity in forcing the farmers to grow non-Bt cotton on the periphery of Bt cotton fields as “refugia” to serve as alternative hosts for pests has also been a costly mistake. This could have delayed the emergence of resistance among pests.
  • Overlooking emergence of resistance among pests.
  • Distancing public institutions from Bt cotton research: Public-funded research centres should have been encouraged to evolve Bt cotton varieties and hybrids by using genes licensed from companies like Monsanto or discovered by them on their own. They can insert these genes in their own elite varieties or hybrids having superior fibre qualities, yield and adaptability to drought, pests and diseases.

All these mistakes have led to decrease in efficiency of Bt cotton. Mistakes must serve as a lesson for future ventures into introducing genetically modified crops.

[Ref: Business Standard]


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