Proportional Representation

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Why in the News?

Recently, more people in India, including citizens and political parties, have agreed that the current First-Past-The-Post (FPTP) voting system should be replaced with a Proportional Representation (PR) system.

What is the First-Past-The-Post (FPTP) Electoral System?

About:

The First-Past-The-Post (FPTP) electoral system is one where voters select a single candidate, and the candidate with the most votes wins. This is also known as the simple majority or plurality system. It is one of the oldest and simplest electoral systems, used in countries like the UK, the US, Canada, and India.

Features:

• Voters choose from a list of candidates from various political parties or independents.
• Voters mark their choice on a ballot paper or electronic voting machine.
• The candidate with the most votes in a constituency wins.
• The winner only needs the most votes, not necessarily more than 50%.
• This system can lead to disproportionate representation in assemblies, such as parliaments, as parties may not get seats matching their overall vote percentage.

Advantages:

1. Simplicity: Easy for voters to understand and for officials to manage, making it cost-effective and efficient.

2. Clear and Decisive Winners: Provides definitive results, contributing to stability and credibility.

3. Accountability: Candidates directly represent their constituents, enhancing accountability compared to Proportional Representation (PR) systems.

4. Candidate Selection: Voters choose specific candidates, unlike PR systems where votes are for parties and representatives are selected from party lists.

5. Coalition-Building: Encourages social groups to unite locally, promoting unity and preventing fragmentation into many community-based parties.

What are Proportional Representation (PR) Systems?

About:

Proportional Representation (PR) is an electoral system where political parties receive seats in the legislature in proportion to the share of votes they receive in elections.

Features:

• Fair representation for political parties based on their vote share.
• Ensures every vote counts towards allocating seats in Parliament or other elected bodies.

Types:

1. Single Transferable Vote (STV):

• Voters rank candidates in order of preference, casting only one vote.
• Allows voters to choose their most preferred candidate, including independents.
• The President of India is elected through this system by an electoral college using a secret ballot.

2. Party-List PR:

• Voters vote for a party, not individual candidates.
• Parties receive seats based on their vote share, with a minimum threshold of 3-5% to be eligible for seats.

3. Mixed-Member Proportional Representation (MMP):

   Combines FPTP and PR systems.

• Voters elect one candidate per constituency via FPTP, and additional seats are allocated based on overall party vote share.
• Used in countries like New Zealand, South Korea, and Germany for balanced and diverse representation.

Advantages:

1. Ensures Every Vote Counts:

• Each vote contributes to seat allocation, enhancing voter participation in democracy.

2. Diverse and Representative Government:

• Smaller parties and minority groups gain representation, bringing more perspectives and ideas to Parliament.

3. Reduces Gerrymandering:

• Seat distribution is based on vote proportion, reducing the impact of manipulating district boundaries.

Disadvantages:

1. Unstable Governments:

• Increased representation for smaller parties can make forming stable coalitions challenging.

2. More Complex:

• PR systems are more complicated than FPTP, harder for voters to understand, and for governments to implement.

3. Expensive:

• Running PR elections requires significant resources and funds.

4. Neglect of Local Needs:

• Leaders may prioritize party agendas over local issues, with shared constituency representation diluting accountability.

Why there is a Need to Shift From the FPTP System to the PR System?

Disadvantages of FPTP:

1. Over or Under Representation:

• The FPTP system can lead to political parties being overrepresented or underrepresented in terms of seats compared to their vote share.
• Example: In the first three elections after independence, the Congress party won about 75% of seats in the Lok Sabha with just 45-47% of the vote share.
• In the 2019 Lok Sabha Elections, the BJP received 37.36% of the vote but won 55% of the seats.

2. Lack of Representation for Minority Groups:

• In a two-party FPTP system, smaller parties with a significant vote share may not win any seats, leaving a large portion of the population unrepresented.

3. Strategic Voting:

• Voters might vote for a candidate they don't fully support to prevent a less preferred candidate from winning, which can result in voters not truly expressing their preferences.

4. Disadvantage for Smaller Parties:

• Smaller parties often struggle to win in FPTP systems and may need to align with larger national parties, which can undermine local self-government and federalism.

5. Country Examples:

• The UK and Canada also use FPTP, but their Members of Parliament (MPs) have more accountability to their local constituencies.

Way Forward

Law Commission Recommendation:

Mixed Member Proportional Representation (MMPR):**

• The Law Commission's 170th report (1999) recommended experimenting with the MMPR system.
• Suggested filling 25% of Lok Sabha seats through a PR system by increasing the Lok Sabha's strength.
• Proposed considering the entire nation as one unit for PR based on vote share or at the state/UT level, given India's federal structure.

Upcoming Delimitation Exercise:

Challenges:

• Redrawing constituencies based on population shifts may disadvantage states with slower population growth.
• This could violate federal principles and lead to resentment in states losing representation.

Need for Fair Representation:

• Ensure fair representation for all states, regardless of population growth.
• Consider current representation levels to create a fairer balance.
• Investigate alternative systems like MMPR for better representation.

Recommendation for MMPR System:

Equitable Distribution of Power:

• Implement the MMPR system for additional seats or at least a quarter of the existing seats in each state/UT.
• Empower southern, northeastern, and smaller northern states by giving them a stronger voice in Parliament, even with an increase in total seats.

Conclusion

As India progresses as a democracy, exploring electoral reforms such as proportional representation and mixed member proportional representation could result in a more balanced and fair system.

Implementing these changes carefully, taking into account India’s unique federal structure and diverse population, could improve the democratic process and ensure that every vote truly matters.

 

Aspirational Goals of RBI

Why in the News?

Recently, the Reserve Bank of India (RBI) has set several aspirational goals to prepare for India's rapidly growing economy, aiming to be "future-ready" by its centenary year, RBI@100.

What are the Aspirational Goals of RBI?

Capital Account Liberalisation and INR Internationalisation:

Capital Account Convertibility: Proposing full convertibility of the capital account, allowing free conversion between the rupee and foreign currencies for capital transactions.

Internationalization of the Rupee: Allowing non-residents to use the rupee for cross-border transactions and improving rupee account accessibility for people outside India.

Calibrated Interest-Bearing Non-Resident Deposits: Taking a cautious approach towards interest-bearing deposits for non-residents.

Promotion of Indian MNCs and Global Brands: Supporting overseas investments by Indian multinational corporations.

Digital Payment System Universalisation:

• Domestic and Global Expansion: Expanding the use of India's digital payment systems (like UPI, RTGS, NEFT) within India and internationally, and integrating payment systems with other countries.
• Central Bank Digital Currency (e-Rupee): Phasing in the implementation of the e-Rupee.

Globalisation of India’s Financial Sector:

• Domestic Banking Expansion: Growing the banking sector in line with national economic growth.
• Top Global Banks: Aiming to position 3-5 Indian banks among the top 100 globally and establishing the Reserve Bank as a model central bank in the global south.
• Support for GIFT City: Assisting the International Financial Services Centres Authority (IFSCA) to make GIFT City a leading international financial hub.

Monetary Policy Framework Review:

• Balancing Act: Maintaining a balance between price stability and economic growth from an Emerging Market Economy perspective.
• Policy Communication: Improving communication about monetary policy and addressing spillovers from debt overhang in key economies.

Climate Change Initiatives:

• Guiding stress testing asset portfolios against climate risks and strengthening payment systems against climate risks.
• Proposing disclosure norms and a government taxonomy for climate risks.

Short and Medium-Term Measures:

• Trade Arrangements: Standardizing approaches for trade invoicing, settlement, and payment in rupee and local currencies.
• Financial Market Strengthening: Developing a global rupee market and adjusting the foreign portfolio investor regime.
• Rupee Masala Bonds: Reviewing taxes on rupee masala bonds.
• Global Bond Indices: Including Indian Government Bonds in global bond indices.

What are the Challenges in Achieving the Aspirational Goals of RBI?

Triffin Dilemma:

• Description: Conflict between domestic monetary policy goals and the role as an international reserve currency issuer.
• Manifestation: Conflict between maintaining stability in India's domestic economy and meeting global demand for the Rupee.

Exchange Rate Volatility:

• Concern: Opening the currency to international markets can increase exchange rate volatility, especially initially.
• Impact: Fluctuations can affect trade and investments, potentially impacting economic stability.

Impact on Export:

• Effect: Internationalisation of the Rupee may increase its demand globally, making Indian exports relatively costly.
• Challenge: Increasing Indian products' share in the competitive global market despite limited international demand for the Rupee.

Convertibility Concern:

• Issue: The absence of full convertibility of INR for capital transactions may restrict its use in international trade and finance.

Cybersecurity Threats:

• Risk: Digital payment systems are vulnerable to cyberattacks, leading to fraud and financial losses.
• Necessity: Building trust requires robust security measures to protect user data and ensure transaction safety.

High Non-Performing Assets (NPAs):

• Concern: Indian banks, especially public sector ones, struggle with high non-performing assets.
• Impact: This makes them less resilient to absorb shocks during a global financial crisis.

What are the Challenges in Achieving the Aspirational Goals of RBI?

Triffin Dilemma:

• Description: Conflict between a country's domestic monetary policy goals and its role as an international reserve currency issuer.
• Manifestation: Conflict between maintaining stability in India's domestic economy and meeting global demand for the Rupee.

Exchange Rate Volatility:

• Concern: Opening the currency to international markets can increase exchange rate volatility, especially initially.
• Impact: Fluctuations can affect trade and investments, potentially destabilizing the economy.

Impact on Export:

• Effect: Internationalisation of the Rupee may increase its demand globally, potentially raising costs for Indian exports.
• Challenge: Despite limited international demand for the Rupee, increasing Indian products' share in the competitive global market is crucial.

Limited International Demand:

Challenge: The Rupee's share in the global forex market is low (~1.6%), while India's global goods trade share is higher (~2%), indicating the need to increase the demand for Indian products.

Convertibility Concern:

• Issue: Limited convertibility of INR for capital transactions may restrict its use in international trade and finance.

Cybersecurity Threats:

• Risk: Digital payment systems are susceptible to cyberattacks, leading to fraud and financial losses.
• Need: Strengthening security measures to protect user data and ensure transaction safety is essential.

High Non-Performing Assets (NPAs):

• Concern: Indian banks, especially public sector ones, struggle with a high percentage of non-performing assets.
• Impact: This reduces their ability to absorb shocks during a global financial crisis.

What are the Steps Needed to Reach the Aspirational Goals?

Convertibility of Rupee:

• Goal: Aim for full convertibility by 2060, allowing free movement of financial investments between India and abroad.
• Benefits: Easy buying and selling of the rupee for foreign investors, enhancing liquidity and attractiveness. Tobin Tax can be used to safeguard against currency speculation.

Reforms Suggested by Tarapore Committee:

Preconditions for Capital Account Liberalisation:

• Fiscal consolidation, inflation control, low non-performing assets, low current account deficit, and strengthening financial markets.

Strong Fiscal Management:

• Reduce fiscal deficits to less than 3.5%, maintain inflation rate at 3%-5%, and decrease banking non-performing assets to less than 5%.

Liberalised Scheme for Personal Remittance:

• Introduce a more liberal scheme for personal remittances to facilitate easier foreign exchange transactions for individuals.

Pursue a Deeper Bond Market:

• Enable more investment options in rupees for foreign investors and Indian trade partners, while developing the corporate bond market in India.

Increase Rupee in International Trade:

• Optimize trade settlement formalities for rupee import/export transactions, such as rupee swap agreements and payment of Russian oil in Indian rupee.

Globalisation of India’s Financial Sector:

• Encourage domestic banking expansion and support Indian banks in enhancing their global presence through licensing reforms, branch network expansion, and strategic partnerships.

Monetary Policy Framework Review:

• Conduct a comprehensive review of the monetary policy framework to ensure alignment with price stability and economic growth goals.
• Enhance transparency and clarity in monetary policy communication, for example, by releasing meeting minutes.

Climate Change Initiatives:

• Issue guidelines for stress testing of asset portfolios to assess climate change risks and develop resilience measures against climate-related risks in payment systems.
• Propose disclosure norms for climate risk reporting and contribute to the development of a standardized government taxonomy.

 

UN Report on Global Debt Crisis

Why in the News?

Recently, a report by the UN Trade and Development (UNCTAD) titled "A World of Debt 2024: A Growing Burden to Global Prosperity" has uncovered an unprecedented global debt crisis.

The report highlights that around 3.3 billion people currently live in countries where paying interest on debts exceeds spending on either education or health.

What are the Key Highlights of the Report?

Rapid Increase in Public Debt:

• The Institute of International Finance estimates that global debt, including households, businesses, and governments, will reach USD 315 trillion in 2024, which is three times the global GDP.
• Global public debt is growing rapidly due to recent crises like COVID-19, rising food and energy prices, and climate change, along with a slow global economy and increasing bank interest rates.
• Net interest payments on public debt in developing countries reached USD 847 billion in 2023, a 26% increase compared to 2021.

Regional Disparity in Debt Growth:

• Public debt in developing countries is increasing at twice the rate of developed countries, reaching USD 29 trillion in 2023 (30% of the global total), up from 16% in 2010.
• Africa's debt burden is growing faster than its economy, with the number of African countries having debt-to-GDP ratios above 60% increasing from 6 to 27 between 2013 and 2023.

Higher Debt Servicing Share of Income & Impact on Climate Initiatives:

• Roughly 50% of developing countries now allocate at least 8% of their government revenues to debt servicing, doubling in the last ten years.
• Developing nations are spending more of their GDP on interest payments (2.4%) than on climate efforts (2.1%), constraining their ability to address climate change.

3 Shifts in Official Development Assistance (ODA):

• ODA, aimed at promoting economic development in developing countries, has decreased for two consecutive years, dropping to USD 164 billion in 2022.

• More aid is given as loans instead of grants, increasing from 28% in 2012 to 34% in 2022, adding to debt burdens.
• Funds for dealing with debt relief and restructuring have significantly decreased from USD 4.1 billion in 2012 to USD 300 million in 2022, making it harder for countries to manage current borrowing and access future loans.

What are the Initiatives Related to Solving the Debt Crisis?

Heavily Indebted Poor Countries (HIPC) Initiative:

• The IMF and World Bank's initiative addresses debt crises in the world's poorest countries, recognizing their struggle to repay debts while maintaining crucial investments.
• By offering debt relief, the program frees up resources for these nations to invest in healthcare, education, and poverty reduction, fostering long-term economic growth and social progress.

Debt Management and Financial Analysis System (DMFAS) Programme:

• UNCTAD's DMFAS program helps developing countries manage debt responsibly by providing training and technical support.
• It improves borrowing practices, including tools for recording debt, assessing risks, and negotiating effectively, promoting sustainable debt management to avoid future crises.

Global Sovereign Debt Roundtable (GSDR):

• Co-chaired by the IMF, World Bank, and G20 presidency, the roundtable aims to comprehensively address debt challenges.
• It brings together debtor countries and creditors to foster a common understanding of issues related to debt sustainability, debt restructuring challenges, and potential solutions.

What Measures should be taken to Address the Global Debt Crisis?

Inclusive Governance, Transparency, and Accountability:

• The World Bank's 2022 International Debt Statistics report highlights a worrying increase in public debt, especially for low-income countries, emphasizing the need for increased participation of these nations in decision-making processes.
• Financial transparency and accountability are crucial, as emphasized by the UN Office for Sustainable Development, to prevent debt crises.

Contingency Financing:

• The IMF plays a vital role in providing emergency financial support.
• Measures proposed in a 2019 IMF Report titled "Three Steps to Avert a Debt Crisis" include increased access to Special Drawing Rights (SDRs) to strengthen developing countries' reserves during emergencies.

Managing Unsustainable Debt (Managing Debt Challenges):

• Existing frameworks for debt restructuring, like the G20 Common Framework for Debt Treatment, need improvement.
• Including automatic provisions for suspending debt payments for countries facing crises would provide essential flexibility to stabilize their economies.

Scaling up Sustainable Financing:

• Multilateral Development Banks (MDBs) need to play a bigger role in long-term financing for Sustainable Development Goals (SDGs).

Attracting private investment towards sustainable projects, such as clean energy, is crucial. Fulfilling existing commitments for aid and climate finance, particularly for developing countries, is essential for facilitating this transition.