ON TV in March

https://www.youtube.com/watch?v=A3uHLFPYNNg

On Mint 12th March 2020: Crude oil etc.

https://www.youtube.com/watch?v=5ITqDOs2Vw0

On mirror now on Shutdown panel discussion 

Book Review: ‘Too Small to Fail’ by R James Breiding: Financial Express 19th April 2020

The world economy has traditionally been driven quite decisively by the USA, Japan, UK, Germany and probably France. In the last decade, the emerging markets, which have been clubbed as BRICS, have joined the league. These big countries have the numbers, and their success or failure can drive the global prospects quite decisively. Somewhere in this game are the small countries like Finland, Sweden, Norway, Singapore, etc, which are opposite in size but so dominate almost all the global indices in terms of performance that they form the contours of the storyline of the book ‘Too Small to Fail’ by James Breiding.

The author starts off by arguing that large countries are difficult to govern because of several factors. As countries become big, it is difficult to address issues of inequality, employment, quality of life, delivery of services, etc. The smaller countries, in contrast, are more coherent in all these respects and governments are able to perform more efficiently. The crux is in creating an egalitarian society, which can be done if governments equalise the ‘prerequisites’ that are required for creating and maintaining such societies. This is done by delivering the same education to all children, as is the case in Finland where everyone goes to schools run by the government and where teachers are paid well. Therefore, everyone starts off at the same level and has the same opportunity. This is unlike countries like India, where an education in government schools permanently damages the prospects of children compared to the affluent, who exacerbate inequality by having access to global curricula and certificates.

Similarly, Singapore is the epitome of health services where the entire structure is standardised with a pay-as-you-go model, which differentiates only the comfort and not quality. In fact, from a complex system that exists everywhere when doctors, insurance companies and hospitals have a perverse incentive to overcharge and under-deliver, the government streamlined the system so that everyone has access. It has set a model for others to emulate, though, admittedly, it is easier in a country of the size of Singapore where the population is low.

The author then talks of Denmark which addressed the issue of environment by decongesting Copenhagen, which now has the largest number of cycles on the road. The incentive to own and drive cars, which exists everywhere as people become richer and like to buy even bigger and more expensive cars, was addressed by converting roads to lanes for only cycles, which gradually brought about this transformation. This has helped people stay fit and also helped to conserve the environment as pollution levels have come down considerably.

Breiding then takes us through Israel, which given its rather vulnerable structure and political relations with neighbours, has used startups as the route to growth by combining incentives and environment to ensure that individuals took up innovation out of habit, which helped to create a strong economy.

Countries like Australia and New Zealand more recently have followed a unique path to reduce crime. Given that shooting has been responsible for deaths of several people, the governments have announced schemes of buyback of weapons, which has worked as people get paid for returning their guns, which are then destroyed. This is a unique way to reduce the incidence of crime where rather than banning the ownership of guns, which leads to a black market and premium, a buyback actually rewards people for giving up such possessions.

In fact, curiously, two interesting patterns followed by these small countries are that they have looked at manufacturing as a means to grow and, second, have or used principles of open economy and trade and have hence reaped the benefits of competition and specialisation. Hence while larger countries constantly get into the dialogue on protection of domestic markets, the smaller ones perforce follow free trade and allow the economic principles of comparative advantage to work their way through. They have created templates that can be followed where countries with limited access to raw materials can leverage trade to expand their economies and wealth.

The author also points out that by following these rudimentary principles, these countries have managed to foster egalitarian societies where individual wealth is not overtly visible as the corporate owners can barely be distinguished from a common man. With the state virtually looking after education at an early age and health when it matters to most, which is old age, there is less incentive to accumulate extraordinary volumes of wealth as seen in other countries, which, in a way, maintains a semblance of modesty.

This book will make policy-makers think hard about how to adapt these principles for larger countries. The idea of decentralisation is a step in this direction, but regional authorities need to foster these rules within their domain to make them work. Countries like India will never be able to close the bridge given that there is stark inequality, especially in education and health, which just exacerbates the future where the lesser privileged can never dream of getting out of their existing lifestyle.

In fact, governance and democracy are also important factors that the author talks of, as there are several such smaller countries in Asia and Africa which do worse than even countries like India on social parameters due to highly corrupt regimes. Hence one would get a feeling that Breiding’s exposition are models for only a set of countries that have the will to improve and deliver, which, in turn, requires very high governance standards and focused attention.

From low GDP to ...., 10 economic damages .. after normalcy resumes: Free Press Journal 16th April

The lockdown in force across the country could be virtually for a period of 6 weeks. It could get longer, but even if it does end on 3rd May, practically speaking it would take at least 3-6 months for any semblance of normalcy to return. We may look at ten major economic damages that would be witnessed on this score.

First, the overall GDP growth would be a new low. The IMF has put it at 1.9%, while some private forecasts are not ruling out a negative growth rate, too. Any which way a low growth rate will prevail as loss of output for around 33 days in this financial year means that GDP of over a month is lost. Given that we clock in around Rs 18 lakh crore every month, assuming that only ¾ is operational (government, agriculture, pharma, FMCG and finance), at least Rs 13-14 lakh cr of nominal GDP would be lost.

Second, the major collateral damage has been in terms of labour. For the last three years, the economy has been impacted by low demand due to limited job creation. Now the fear of job losses is even more palpable with several companies invoking salary cuts, reduction in headcount, skipping of wage payment and layoffs when it comes to casual workers. This is probably the biggest blow because getting labour back will be slow and can cause a lot of pain.

Third, bringing back labour has to go with restoration of the transport system, which probably is the most vulnerable piece in the cake. Once normalcy sets in, the challenge is to get this system working which involves people getting close to one another. Social distancing pursued so far has mitigated such possibilities but the fear of travel will be there going ahead.

Fourth, industries like tourism, entertainment, aviation, hotels, restaurants, etc. would be the ones most affected in terms of output as it is unlikely that there can be compensation of use of such services once normalcy is restored. A car purchase can be deferred for later, but a holiday given up will be lost forever.

Fifth, the SMEs face the wrath of this backlash as a shutdown involving closing down of production activity will necessarily mean non-payment to vendors which has already been witnessed in the last three weeks. The auto components industry for example has been affected sharply by such non-payments which affects their viability in future. Employment is another casualty here and this would be the third successive blow following demonetisation, GST and now the virus.

Sixth, a lockdown for this month also means that the government GST collections would be affected sharply. The thumb rule of Rs 1 lakh cr a month will not be achieved as only a part of this amount would come under essential commodities. At best not more than 20-30% of the target would be achieved for this month, and would also only increase gradually once the lockdown is rolled back gradually. Services in particular would provide virtually nil GST.

Seventh, the government has already announced a fiscal package of Rs 1.7 lakh crore which would have to be accommodated this year. This means that the fiscal deficit targets will be breached further. Low revenue from GST, corporate and income tax, customs and inability to get through the disinvestment programme can mean the deficit overshooting by 2-2.5%. The same holds for states.

Eight, India Inc faces a challenge of getting under the weight of debt this year as non-production means that income is not earned and hence while there is a moratorium given, at the end of the day, money has to be repaid and this can be a big challenge for the companies.

Nine, the banking system which had just been getting out of the mess of NPAs, would have to face this new challenge of reconciling all these debtors once the moratorium ends even after an extension. NPAs will increase at all levels and even retail will not be insulated as job losses and salary cuts has hit individuals quite hard.

Last foreign trade would be a laggard as the pace of growth is dependent on how soon other countries are able to get out of this struggle. Presently it looks like that countries which witnessed this pandemic before India have still not shown any sign of the spread abating which means that exports in particular would be bearing the brunt of this pandemic and all the industries like gems, textiles, electronics, engineering, etc. will have to be more dependent on domestic recovery as trade will be a barrier this year.

Therefore, the shutdown impact will be severe and show more once the shutdown is withdrawn. Today the concern is on the spread of the virus, but after it is behind us, the challenges will be immense.

RBI has made life a bit easier for NBFCs, MFIs amid Covid-19 pandemic: Business Standard 17th April

The Reserve Bank of India (RBI) has proactively made two sets of relevant announcements as a follow-up of what were made in the credit policy recently. The first is to focus on provision of liquidity and the second to sharpen the solvency issue related to companies.

The TLTRO is now being increased by Rs 50,000 crore with the caveat that 50 per cent has to go to the small and medium size non-bank finance companies (NBFCs), which in a way, is sectoral targeting starting with this segment. This is a positive move as NBFCs, including micro finance institutions (MFIs), are an integral part of the financial system and require support in the form of liquidity. The RBI has said that this amount can be increased; and while it has not mentioned other specified targeting, it looks like that it cannot be ruled out. Along with this amount, there is another Rs 50,000 crore being given to Nabard, Sidbi and National Housing Board (NHB) to enable refinance, which is an indirect way of supporting agriculture, small industry and housing companies. As the funds will be given at 4.4 per cent, the refinance rate would also be reasonable.

The State ways and means advances (WMA) limits have been increased by another 30 per cent to 60 per cent now over the March 31 level. This is important to address the liquidity concerns of States, which are now in a tough spot. The lockdown has ensured that revenue is reduced to a minimum, which when combined with higher expenditure, will require support from the RBI to make ends meet.

Credit flow

The other aspect which has been plugged by the RBI is the flow of credit. Today, actually there is no shortage of liquidity as seen in the net surplus liquidity of over Rs 4 trillion per day. It is just that banks do not want to take a chance in lending. Therefore, the RBI has now brought down the reverse repo rate to 3.75 per cent so that it becomes unattractive to invest in such overnight auctions and instead lend to the commercial sector. A suggestion here is that the RBI could instead use a cap on the auction limit, so that instead of the present level of Rs 4 trillion flowing in, only Rs 1-2 trillion would be accepted. That can be more effective under these circumstances.

The other set of regulatory measures are also quite pertinent. As the moratorium has been given for three months, the RBI has now removed this period as a part of the 90 days non-payment classification and there would be a case of reckoning the date from when the moratorium is provided as being the standstill time point. This, in effect, means that the 90-day classification would kick-in only after the moratorium ends for the purpose of classification. This is allowed by Basel, and hence, is in accordance with the best practices. However, from a prudential point of view, the RBI has asked banks to make an additional 10 per cent provision on these standstill accounts, which in turn, could be adjusted against the true non-performing assets (NPAs) later. This makes sense as the RBI has to think from the regulatory standpoint in the future as well.

As short-term measures the liquidity coverage ratio (LCR) has been lowered to 80 per cent for the time being and banks have been told not to pay any further dividend until an assessment is made. This is reasonable as we cannot be having a situation where banks are getting funding from RBI at a low cost and they are paying off larger dividend. This is not good for the market but makes strong economic sense.

The RBI has indicated that it expects inflation to come down by September, which means that more rate cuts are in the offing. This may not be good news for deposit holders, but industry can look forward to easier times.

Covid-19: What govt's partial lifting of restrictions...: Business Standard 15th April 2020

The much-expected guidelines for the partial lifting of limited economic activity announced by the government are pragmatic and would be in force post April 20. It is good that the government has opened the doors towards working on an exit route and has included the most essential activity, agriculture to operate freely. With the Rabi harvest to reach its peak this month, allowing the free flow of labour and transport to enable sale of produce is a big step that has been taken. 

While agriculture can be justified, allowing other activity like construction in rural areas or IT related activity along with certain conditions being imposed can be interpreted as an experiment to see how it plays out. The spread of the virus is still quite prodigious in our country and one can still not be sure if the number of new cases has peaked out or whether it is going to be higher. This being the case, any relaxation has to be calibrated, which is the approach taken. Given the data on the spread of the pandemic it does appear that the higher cases have emanated in states and districts where there have been more testing which can also mean that regions with nil cases could be because of the absence of testing. Therefore, it needs to be seen how this works out.

But the message for India Inc is clear. Companies need to be prepared for the lockdown to end and should have their internal strategies in place. The services such as aviation, hotels, malls, etc. would have to wait for a much longer time as they involve direct interaction of people which will be the last set of activities to be relaxed. All these come under public spaces which will be the lowest priority in any phased withdrawal plan of the government. The others need to plan on how to go about their business as the new normal comes in maybe after a gap of three months. The pressing issues will be to plan their production levels which will determine the requirement of labour. This will necessarily mean that those industries which are B2B would have to evaluate how other businesses are placed to come up with their strategies. Next, the challenge is to re-assemble the workforce especially if it includes causal labour which had moved back to their home towns. This will have issues relating to restoration of transport especially buses and trains as it would be difficult otherwise for any reverse migration to take place. 

At the macro level, this may not amount to significant increase in production as the present space provided is restricted more to non-urban areas which have not been infected. This should be seen more as a case of easing of supply chains which was a major impediment in the first phase of the lockdown. Farmers will be better off for sure though would still face challenges at state border levels as regional rules vary across territories. While SEZs have been afforded some more freedom, given that other countries, which are our trading partners, have their set of embargoes on flow of goods, there may not be much advantage for the concerned units. The positive however is that by allowing free movement of all goods irrespective of them being essential or not, a major stumbling block has been removed which should hopefully ensure that supplies of raw materials in particular are smooth.

On the whole a calibrated approach is the best option, and the government has quite rightly started it off with a few baby steps which will serve more as an experiment before opening up in a bigger way. The present relaxation actually loosens some strings while still keeping the reins tightly clasped. 

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Challenges for the financial system: Financial Express 9th April 2020

In these uncertain times, the banking sector needs careful tracking. Seemingly, banks are virtually exempt from the lockdown, and are operational as customers continue to make banking transactions. Almost all policies implemented to aid relief operations involve banks, making them the nucleus of the welfare package. Yet, this onus makes them more vulnerable than any other entity.

The issue of moratorium on loan repayments is crucial. While the idea is to make it easier for firms to service debts during the shutdown, and to enable individuals to still make repayments despite layoffs or salary cuts, banks will face a problem of choosing which accounts to consider for the moratorium. Since the clause allows deferment, and not waiving, of payments, it is important to think carefully before opting for the moratorium. Borrowers may have an incentive to deliberately delay payments, which can increase the bandwidth of banks once the moratorium lifts.

Relatedly, there can be extensions of the moratorium if the shutdown gets extended. Further, even after the moratorium ends, the probability of borrowers defaulting will be high—a major worry for banks. Post the NPA crisis, banks have focused more on extending loans to the retail segment as well as to SMEs, with strong nudging by the government. These two segments are expected to witness significant increase in NPAs in the current crisis, as larger companies are better insulated against the ongoing economic slowdown.

Also, the first package the government announced increased the threshold for default by companies under IBC from Rs 1 lakh to Rs 1 crore to prevent the triggering of insolvency proceedings against MSMEs. For banks, this means greater monitoring work, reworking the asset classification and provisioning norms, as well as capital adequacy.

These measures definitely favour borrowers. But, banks run the risk of disruption to their books as they rework all their policies and numbers for the first three months, and take reverse action post the extension, which will throw up a fresh set of numbers. Thus, there is reason to believe that NPAs may increase once again after this exercise, and the March numbers, based on the new recognition norms, might understate the situation. RBI’s latest FSR has highlighted that incremental NPAs have actually come down, and most of the stock was due to recognition of past assets, not new ones. This matrix will change.

Banks are tasked with enhancing flow of credit to the commercial sector, and lowering interest rates. RBI has created an enabling environment for this, and will expect banks to match the repo rate cut with lower MCLR. The small savings rates have been cut quite drastically, nudging banks to lower deposit rates too. This may be expected to follow, with banks lowering their lending rates, though not to the extent of the reduction in small savings rate, and will also be short of the repo rate change.

There is, however, a possibility of deposits being impacted by multiple factors. First, household incomes would be lower due to layoffs and pay cuts by several companies. Certain state governments have also announced pay cuts for their employees, which will reduce overall consumption, and ability to save. With food inflation already showing signs of increasing, the incremental flow of deposits could be impacted.

Second, lowering of deposits rates will incentivise households to venture into the capital market, which has attractive valuations given the decline by over 30% in the last fortnight or so. While the more suave might go for equity, mutual funds look relatively more attractive, and safe, under these conditions.

It must be pointed out that the government, too, is likely to opt-in for a large borrowing programme, which might go beyond Rs 7.8 lakh crore. This is for three reasons. First, the welfare package of Rs 1.7 lakh crore will be equivalent to 0.75% of GDP. Second, it is certain that tax collections will be lower this year due to the shutdown, and the slowdown that will follow. GST collections will be lower due to consumption being affected, while corporate distress will manifest in low or negative profits and, therefore, tax payments. Third, the government has drastically cut the small savings rate, which logically makes them less attractive. Now, the NSSF has been an important source of funding for the government, and in FY20 and FY21, have been placed at Rs 2.4 lakh crore. In case this reservoir dips, which will happen when incremental inflows slow down, the government, per force, will have to borrow from the market, and the gross borrowing programme will be exceeded.

This is where the conundrum arises. Banks and FIs are large subscribers to government bonds, and for an enlarged programme to be successful, sufficient funds will be needed. Today, liquidity is high due to low offtake in credit. In FY21, there will be opposing forces. Bank credit will be growing at a faster rate as banks rework the working capital limits of borrowers. Also, those in distress will require funding, making the growth rate much higher than that in FY20. The government will be borrowing more for the reasons stated above. And, finally, growth in deposits would slow down. In this eventuality, it will be like FY19 again, where there has to be substantial RBI intervention. RBI has already opened its armoury through LTROs at a time when there was surplus liquidity to quell interest rates. This time, it will have to support government borrowing (states, too, will probably borrow more in the market). All this means that there will be too much money spent, leading to higher inflation in the medium term.

This will have a bearing on future monetary policy decisions as the comfort of low CPI inflation will be a thing of the past. This happened post the financial crisis in 2008, and will be repeated with greater momentum this time. This will be one of the biggest costs of the pandemic to India, which may not get reflected in the GDP growth number (UN believes India and China will be the outliers). And, the banking sector will have to be prepared for an NPA replay.

Covid-19 impact: Missing disinvestment targets will have consequences: Business Standard 9th April 2020

The economic travails this year will be challenging, and from the economist’s perspective, economic growth and fiscal deficit are the two main challenges. The government had embarked on a very ambitious disinvestment programme for the year of Rs 2.1 trillion. It sounded optimistic as we have never delivered such an amount before. The highest was Rs 1 trillion in FY18. The present programme includes the sale of Air India, Life Insurance Corporation of India (LIC) and Bharat Petroleum Corporation Limited (BPCL), which made this very aggressive target look possible.

For disinvestment to take place, there need to be a good number of buyers as well as valuation. Else, like in the past, divestment becomes an exercise of one public sector undertaking (PSU) buying into another. The challenge today is that the conditions do not look congenial and the market is just too volatile. The stock market has touched a new low post the announcement of a shutdown. There seems to be no sign of the shutdown ending or even a plan as to what should be done once this ends. Realistically speaking, FY21 will be a washout. The market is unlikely to reach the January levels anytime soon and unless it is moving in the upward direction continuously for three months, can one be assured that the valuation will be fair?

The other factor is the kind of disinvestment we are looking at. BPCL no longer looks as attractive with the price of oil below $30/barrel and the future of the sector being uncertain. A global recession is for sure, which means that oil prices will be depressed and the sale of such an enterprise will remain unattractive. Next, Air India has been on the block for some time now, and there is no clear plan about how to go about it given the overhang of debt which is around Rs 60,000 crore. To top it all, the future of the aviation industry is in jeopardy following the breakout of the pandemic as movement across countries will remain barred for at least six months after normalcy returns.

The domestic segment, too, looks static and it is doubtful if people will be willing to fly except under extreme conditions post the epidemic. In fact, with business getting used to conducting meetings through webinars, the cost saving involved in not travelling will make sense when India Inc is not expected to do well. Therefore, potential buyers would certainly not get in given the low prospects.

Lastly, LIC was to get in almost half of the targeted amount, which was always going to be a challenge when the Budget announced that the 80C section was going to be optional for taxpayers who could opt for the scheme where one could give up exemptions to join a system of lower tax rates. One can logically interpret this to mean that at some stage all the exemptions would go and insurance would be the last thing on a saver’s mind given that the returns are even lower than bank deposits and small savings.

Not meeting the target has severe challenges for the government and this is where growth comes in. An extended shutdown and lower growth means lower GST (the monthly target cannot be attained). That apart, it will lead to lower corporate, customs (ban on trade), and income (job loss) tax collections.

Overall tax revenue, including those to be transferred, was estimated at Rs 24 trillion and a now a 10 per cent fall cannot be ruled out. Add to this the low level of disinvestment and we can be looking at a shortfall of around Rs 2.5 trillion or so. The fiscal stimulus announced of Rs 1.7 trillion will add to the fiscal deficit further and the fiscal deficit ratio could be at 5.5 per cent.

The problem really is that any slippage in disinvestment combined with other revenue shortfall will mean that the government would have to rework some expenditure numbers, which could mean rolling over some of them. Minor cuts in salaries or MPLAD being withdrawn can contribute a little, but at the end of the day, borrowing will go up. This is probably the reason as to why the market is still skeptical despite the surplus liquidity in the system. The government would necessarily have to borrow more in the market, which will pressurize liquidity over time.

Sharp cut in small savings rates was ill-timed:Business Line 3rd April 2020

While the effort is to improve monetary transmission, the deep cuts will hurt ordinary people at a time when retail inflation is on the rise

The decision to cut the small savings rate by 70-140 bps is not well-timed and would affect people in the lower income segments, especially in the semi-urban and rural areas. This deep cut in rates is probably the first of its kind as the approach so far has been to have a calibrated reduction in rates. The last time they were cut was in July 2019, by 10 bps.

There are probably two motivating factors here. First, the RBI has gone in for a sharp cut in the repo rate by 75 bps and second, the small savings rates have not been tinkered with significantly for some time. While there could be a strong economic rationale for the same, the timing is quite odd.

The argument is that the RBI has addressed the pandemic by lowering the repo rate, which will work if deposit rates are lowered, leading to lower lending rates. Deposit rates can come down if small savings rates are lowered. This overemphasis of transmission comes at a time when inflation is high and above the 6 per cent mark. Also, the shutdown has led to the supply of food products being affected by paucity of labour and transport facilities. Prices have gone up, and so will headline inflation. Presently, with inflation at 6 per cent and repo at 4.4 per cent, the real return is negative. One-year term deposit gives a return of 5.9-6.5 per cent, which gives negative to 0.5 per cent real return.

Small percentage

Small savings are around ₹10 lakh crore, of which around 68 per cent are in deposits. This compares with ₹133 lakh crore of bank deposits, and hence the former is just 5 per cent of the latter. Quite clearly, the argument that is normally given for banks not being in a position to lower deposit rates because of small savings rates being higher is not really strong, as just 5 per cent volume of deposits cannot be driving total deposits in the system.

The reason for low participation in small savings is that they are normally catering to people in the rural and semi-urban areas, where post offices are contact points and provide these facilities. The senior citizens’ scheme is also popular due to the higher rates offered — which has come down from 8.6 per cent to 7.4 per cent — but the outstanding volume is just ₹0.68 lakh crore.

Therefore, while theoretically the two could be competing, in practice, they have different target segments and interest rates do not really influence customers. It has been seen that deposits are always sticky and do not move from one bank to another even when there is variation in interest rates. Hence, to think that customers would en masse all go to post offices on account of higher rates being offered is quite far-fetched.

Impact on deposits

The logical fallout is that banks will lower the deposit rates for sure, and the quantum would probably be 50-100 bps on new deposits. While the immediate impact will be that the formula-based MCLR will come down, there is a possibility that growth in bank deposits will slow down. This was witnessed in FY19, when the banking system was in a state of scarcity with the RBI going in for a record OMO purchase of ₹3 lakh crore mainly due to the slowdown in growth in deposits, as households moved to mutual funds and stocks.

This time, there will be added pressure on deposits, because of the higher inflation and lower income growth due to depressed performance of companies. The fall in interest rates will affect those who depend on savings for sustenance, which can be around 20-25 per cent of the population.

Curiously, small savings are critical for the government for financing the deficit. In the last four years, the recourse sought has increased from ₹0.67 lakh crore in FY17 to ₹2.4 lakh crore in FY20, which will be retained in FY21. Hence, the size of support is 30 per cent of gross market borrowings which are to be ₹7.8 lakh crore this year. Intuitively, it can be seen that if these savings were not available, the market borrowings would have been higher at ₹10.2 lakh crore. Hence, if there is a decline in the growth in small savings, the government will be most affected as it will have to borrow more from the market which in turn will push up yields.

The rate cuts on small savings should have been calibrated and of a smaller magnitude, to eschew the shock effect of a single large cut.

Coronavirus outbreak: Lessons from COVID-19 shutdown: Financial Express April 1 2020

This is not difficult as the government has a list of all registered and unregistered factories, and based on industry classification it can segregate those units that are exempt from those that are not.

The world is always in awe of how the Kumbh Mela, which involves millions of people and is organised in a non-metro city, moves seamlessly without a hitch, and rarely do we come across mishaps. However, when it comes to economic announcements, the approach is more of what is called ‘jugaad’, where we decide to go ahead with a certain dictum and then hope things get ironed out. It happened a little over three years ago, when we went in for demonetisation, where the public was assured cash would be available in 48 hours, but it took over two months to come close to 50% normal. The same holds for the shutdown, which has rightly been announced. It had to be done to ensure we mitigate the damage that could be caused by not having such a diktat. But considering it was known at the beginning of the month that it was only a matter of time before we could be forced to take such a measure, a contingency plan could have been in place. While it is true that it is easier to be wise post the event, there are lessons to be learnt that can form a template for future actions.

A major hurdle has been communication and the fact that we have a federal structure means that what is announced by the PM takes time to get absorbed, as the process of osmosis is slow. States and local bodies have their own interpretation of what has been said at the top, and hence while the common man hears the PM and feels assured that essential commodities will be available, the reality is shops are shut, goods don’t move, and transporters are stopped and even thrashed by the cops. This is because the communication is not clear and, ideally, such statements should be simultaneously sent to all states, which, in turn, should pass it on immediately to local authorities, of which the police force is the most important.

The police is rarely empathetic because when the business is dealing with wrongs in society and not ‘rights’, the thinking capacity is constricted. A curfew means that anyone on the road needs to be thrashed, and unless told clearly of what is exempt, would deal with the situation as they would when such an imposition takes place, which, historically, is a riot. Therefore, for five days post the PM making the announcement of which essential services are exempt, at the ground level ambiguity remains. The lesson is, post an announcement at the national level, all other authorities have to assemble and use internal channels to pass on such information so that life remains normal, with the only ban being on movement.

The second part of the story is that there is always the need to plan in advance as to how a shutdown is to take place. This is not difficult as the government has a list of all registered and unregistered factories, and based on industry classification it can segregate those units that are exempt from those that are not. The problem is that with all production units closing down, while delivery is gradually being taken care of, new output is not coming in, including products like vegetable oils, spices, soap, toothpaste, packaged foods, etc. Factories have been closed and even if they are open, due to varied interpretation, employees are unable to reach their place of work. With Mumbai and Delhi having challenges of including neighbouring territories as part of the metropolis, stoppage of vehicles creates more confusion as there are restrictions on crossing over districts that adjoin major cities. At the police check post it is easy to convince the authority that you are working at a bank than in an FMCG company (which have been allowed to work with limited staff).

Therefore, such lists along with requisite passes should have been ready and distributed to the concerned units that are allowed to function to eschew disruptions. A shutdown is aimed at forcing people to stay away from one another, and not to create scarcity in the market. An example is that while the emphasis is on e-commerce being used widely, the business is not just about delivering goods in a truck, but also packaging material including labels, courier service (if not having own link), hiring vehicles, etc. This should also be coming in the list of exempt industries, or else there would be major supply disruptions due to absence of production and distribution once the existing stock gets exhausted. Such scarcities are self-reinforcing and lead to high level of hoarding.

One can hope that these issues are sorted out over the next couple of days because the journey is long. While the shutdown is for 21 days, there would be extensions depending on how the virus has spread. It is too early to take an informed guess, just like it is hard to say how the economy would be impacted. Therefore, if such a sketch is not in place, it should be prepared and disseminated widely given that the country is well-linked through technology and messaging is easy.

Different countries have interpreted lockdowns according to their judgements. Ours is an extreme case like in some European countries where people are not to step outside except for buying essentials. Production is bound to be impacted as virtually 80% of the goods produced in the country cannot be considered as essential. But the balance has to be kept flowing in, in normal quantities, to eschew unnecessary hoarding. Also, as all food products have their origins with farmers, any embargo impacts their sales and income, which has to be protected for sure.

Book Review: Wonked! India in Search of an Economic Ideology : Financial Express 29th March 2020

Vivan Sharan starts off his book Wonked with the view that ever since we went in for reforms, we have not quite changed the way we approach policy; and while every party talks about doing things differently, at the end of the day, it is the same package in front of us. In a way the author is right because when we read the political manifestoes of parties before elections, they read the same, with only the language and numbers being different. This, according to Sharan, is the problem with making policies that fail to leverage our advantages.

The view presented is quite pessimistic, as it is critical of things not being done. Hence, while we make much ado about being part of various groups of nations, like say BRICS, we have not taken any advantage of the same and get caught up in clichés. His suggestion is to leverage global supply chains and ensure that the country moves up the ladder. In fact, he goes a step further and says we need to work closely with other developing nations and become a lighthouse for them on how policies like direct benefit transfer can work or how productivity in the dairy industry can be improved.

Curiously, he points out that one reason why we falter, and here one can probably look at the current context, is that we do not encourage debate. He gives the example of how Amartya Sen was ridiculed for his views on demonetisation, which shows that this intolerance has led to policies from the top that don’t work because they have not been debated. In fact, he goes ahead to say that we need to change the way in which we carry out administration and that there is need to have lateral recruits in public service—something which is not acceptable either at the government level or even within the bureaucracy. This shows his distinct leaning towards the right, which may find support in the corporate world.

He dissects various sectors in the book, devoting separate chapters for them. For agriculture he recommends that we go in for a second green revolution which is required to enhance productivity, given that there is a large population employed here. Further, his argument, where there could be detractors, is that all our policies are centered around the consumer rather than the farmer. This has to change and the MSP has to be used more effectively (which he feels is better than loan waivers in terms of cost to the exchequer). He is all for getting more of the market than government and the need to get the APMC laws out of the way.

His take on manufacturing is interesting, because while he agrees that small is beautiful, we need to help these SMEs scale up and become self-sustaining rather than keeping them small forever. Besides finance, there is need to change the management structures too, as there exists a perverse incentive to remain small to draw the benefits provided from the top without getting competitive. He is also critical of the fact that despite the Make in India and digital campaign, we have actually gotten the government to be easy on imports, especially from China, which has come in the way of indigenous development. Further, we do not really give incentives for big innovation and while we are very good in frugal innovation, which comes under the term jugaad in common lexicon, there is no real support to scale them up and become leaders in the world. Hence, what works in a village is not picked up and extended across the country so that it can be sold in other nations too.

The author shows his proclivity towards less regulation as he argues for lighter regulation rather than stringent regulation. This is the only way in which innovation will pick up and the concept now being spoken of as ‘regulatory sandbox’ fits in. He has pointed out that our approach to regulation has turned out to be stringent because at this level there is nothing much to be done as most of the prospective activity is prohibited. On the other hand having lighter regulation means closer monitoring and becomes onerous for regulators. Here the view can be countered, especially on the financial side where the regulators have certainly opened the doors wide for players, and hence his contention may hold in specific cases and cannot be generalised.

On infrastructure, he believes we have messed up, especially in power where we produce more than we can use, have an unnecessary government presence in telecom and not sure on how much of PPP should we go in for given financial constraints. This has led to the rather weak structures that we have created. He believes we should be getting more funds from overseas markets given the limitations of the government to spend and our financial system to provide such support.

At another level, he is critical of the governments, past and present, which have tended to be protectionist at various stages, ensuring that we have not really gained from globalisation. It is true that we have always tended to be inward looking and various issues relating to nationalistic spirit are raised which has come in the way of leveraging benefits of globalisation. He gives the example of e-commerce, which he believes can bring about a lot of integration within the supply chains. But we are unwilling to be open about it and quite clearly there are political motivations.

This is what the author has not discussed—politics. Most of the recommendations made have been debated in the media and several commentators have supported such action. But it is the compulsion of politics that finally makes all parties move towards the same agenda and approach, as any drastic change in policy can mean loss of votes. Therefore, our policies are in a way ‘wonked’, where we don’t think beyond the prism we hold which makes actions repetitive.

RBI's rate cut provides the much-needed balm to revive the economy: Business Standard 27th March 2020

A rate cut by the Reserve Bank of India (RBI) was much expected this time and the Governor did not disappoint. The aggressive cut of 75 basis points (bps) in the repo rate is commendable, as it provides the balm required to revive the economy. This is evidently meant to counter the negative impact of the coronavirus (Covid-19) pandemic. Governor Shaktikanta Das was very prudent in not giving a forecast for growth or inflation because, as he rightly stated, with things changing so fast, it is not certain how long the threat will last and how its spread and depth will impact the economy. Therefore, the policy is directed towards the immediate problem of mitigating the damage caused by the virus.
 
The RBI has decided to use a novel way to influence interest rates. The repo rate has come down to 4.4 per cent, while the reverse repo rate is now 4 per cent with a difference of 40 bps. The idea is to ensure that banks do not deposit surpluses in the reverse repo auctions, which is averaging Rs 3 trillion on a daily basis. Now, they will be forced to invest their surpluses in credit rather than giving it to the RBI. This is probably the first time that the central bank has changed this corridor size to 65 bps from 40 bps. It will be interesting to see how banks respond, as they would need to be more responsive to the need of the hour and change their mindset to ensure they lend more to companies.
 
The move to expand liquidity in the system is again very noteworthy. The twist this time is that the long-term refinance option (LTRO) of Rs 1-trillion will have to be invested in corporate bonds, commercial papers (CPs) or debentures, which in a way will be beneficial for the markets and is, hence, novel. While the LTRO was so far targeted at providing funds for direct lending, this time it is more for direct subscription of paper, which also means it cannot be hoarded or invested in government paper. Second, the cash reserve ratio (CRR) cut provides another 1 per cent of NDTL to banks for lending purposes with a lower minimum daily balance to be maintained.
 
The MSF increase of 1 per cent, along with the above two measures, would infuse another Rs 3.74 trillion into the system – that is a big jump in liquidity. Combine this with the open-market operations (OMO) and LTRO of the past, and the monetary stimulus provided is 3.2 per cent of GDP, which is quite substantial from the point of view of the RBI, which has supplemented the efforts of the government in alleviating the pain caused by Covid-19.
 
The regulatory measures are also important because this is something that the market players were looking forward to. The three-month moratorium on all term loans is quite the need of the hour, which will make it easier for companies as the cut in supply chains and the lockdown have meant a severe blow to most companies in terms of their ability to service debt. For banks, a deferment of maintenance of the last tranche of the capital conservation buffer would provide relief as they also readjust their balance sheets to meet regulatory compliances.
 
On the whole, the announcements are very good and the RBI has done this well in time so that from the monetary end all impediments are addressed to a large extent. The assurance that Indian banks are very safe is timely, as there had been some scepticism building up early this month.

FM's proposals aimed at protecting loss of livelihood; delivery will be key: Business Standard 26th March 2020

The Finance Minister’s package announced on Thursday must be viewed as the second in the series of measures to be announced by the government to address the negative impact of the Covid-19 virus. The first announced was in the area of compliances regarding time lines, which were relaxed by three months to June. The same is being done now for the poor in what can be called the second package, which is again looking at a three-month horizon.

The outlay is to be Rs 1.7 trillion - around 0.75% of gross domestic product (GDP) and can be taken to be a fiscal stimulus. The variety of stimulus is, however, different as it is not for reinvigorating the economy but sustaining human life, which is the important goal given the disruption caused by the 21-day shutdown where several people have been displaced.

The package looks at cash transfers as well as delivery of goods, which is good for the poor. What has not been mentioned is whether this will be part of the Budget allocations, or beyond the same. If it is additional spending, it can trigger a slippage in fiscal deficit under constant conditions. The 5 kg scheme of food grains per month for three months is to be given free to every poor individual. This will impact 800 million people and would involve around 12 million tonnes of food grain (15 kgs for 800 million over three months), which is not a challenge given the stocks with FCI. Also, 1 kg per family would involve around 480,000 tonnes (3kgs for 160 million families). Pulses distribution, however, will be a challenge as there is no machinery present to collect them unlike rice and wheat which is procured by the FCI.

The challenge will be in delivery of the same which is always a challenge as the last mile connectivity tends to be weak. Further, the package has spoken of increasing the NREGA wage by Rs 20 from Rs 182 to Rs 202, which on the basis of 100 days of labour can give workers Rs 2,000 more. Here, too, the government has to strive to create projects and get people to work as experience shows that the average utilisation of the scheme has been around 50 days. But to the extent that the provision is there, agricultural workers would have to be sensitised to the same and ensure they make use of the scheme. The states have to pitch in with appropriate projects.

The package also includes insurance of Rs 50 lakh for all the healthcare workers who are involved in combating the disease which is very useful given the uncertainty of the disease and its impact. There are other announcements concerning reaching out to women, elderly, destitute etc, which will work to alleviate their suffering. The “Kisan” scheme in the Budget that gave Rs 6,000 per annum to farmers would be released with the first tranche of Rs 2000, is not an additional allocation but a frontloading of an already existing scheme.

The FM has not committed on whether there will be more schemes being announced by the government for corporate India that face a series of challenges. The present announcements have been directed to the people affected the most in terms of loss of livelihood, and hence, has taken front stage. Business, too, would be expecting something from the FM given that across the governments across the world have been announcing stimulus packages that go beyond 10 per cent of GDP to resuscitate their economies. There would be expectations of something more to be announced probably this weekend or early next week before the start of the new financial year.

FM Sitharaman's relief package: All about convenient extensions of schemes? Business Standard 24th March 2020

The news of the announcement of a package from the Finance Minister did raise a lot of expectations given the threat of a very negative impact of coronavirus on the economy. A quick gauge of the reaction is the stock market, where the S&P BSE Sensex declined by around 500 points by the time the announcements were made. This is not surprising as the FM had clearly stated in her prologue that the announcements to be made would be more in the procedural and administrative areas, which seek to address the convenience of individuals and units in the light of the shutdown. She has, however, assured that there would be a special economic revival package soon.

So what does this package talk of?  It essentially looks at eight areas - income tax, customs, goods and services tax (GST), company affairs (MCA), IBC, banking, fisheries and commerce. In short, there has been an extension in timelines for filing of various statutory returns/compliances from March to June 2020. In the light of the present lockdown, this will benefit everyone involved.

Three things, however, stand out. The first pertains to the IBC where the FM has raised the threshold of default from Rs 1 lakh to Rs 1 core, with a further topping that if conditions in the economy stay grim or worsen during the next month, there would be a six month extension where small and medium enterprises (SMEs) will not be taken to the IBC. This is a big positive as these units have already bore the brunt of the shutdown just as was the case with demonetisation and GST. As the shutdown will impact their incomes and hence debt servicing ability, the present set of announcements would come as a major relief for the SMEs.

This is also a signal for banks, too, which will have to evaluate their portfolio as well as the possible loss of revenue from these enterprises which will not service their debt. This can be a potential stress point for banks as they would also be simultaneously watchful of home loans where the delinquency rates could tend to increase.

The second pertain to banking where the FM has announced certain waivers of charges on use of debit cards in any automated teller machines (ATM) or the maintenance of minimum balance for a period of three months. This will be helpful for households where people have been confined to homes and would need access to cash to make payments given the precaution taken on using cards given the human touch required on machines.

Third, from the point of view of adherence to MCA rules, the announcement involving flexibility in holding of Board meetings for another 60 days as well as the one regarding independent directors will help companies escape the penalties that go with these clauses given that Directors are not in a position to travel and holding meetings has become impossible under the current conditions of a shutdown.

Hence on the whole the announcements have extended all deadlines from March or April end to June end without quite changing the guidelines of any scheme. This is significant because the government is not really going back on any rule laid down giving more time to comply under the present circumstances.

Going ahead, the markets will look for more substantial announcements in the next package that can provide more support to an economy likely to be hit hard by the virus in terms of employment, loss of production, supply dislocations and uncertainty.

Rate cut a palliative measure; cannot counter coronavirus pandemic impact: Business Standard 17th March

The Reserve Bank of India’s (RBI’s) decision not to lower the repo rate was in a way expected; and it would be interesting to see how the market reacts. Post the US Federal Reserve (US Fed) lowering rates, it was widely debated whether the RBI would lower rates before the next policy or wait for the formal occasion. It may be pointed out that the decision of the US Fed to lower rates in the first phase did not quite move the markets. The latest move to bring the rate down to 0 – 0.25 per cent with a quantitative easing (QE) attached would also be watched carefully. The cut by Bank of England (BOE) or the European Central Bank’s (ECB’s) assurance of quantitative easing (QE), too, have not quite lifted sentiment. The question is whether a rate cut will work in times like these? There are two ways of looking at this. The first is from the macro perspective where rate cuts are to spur investment, and hence growth. The earlier cuts of 135 basis points (bps) have not quite delivered since the problem in India is on the demand side. Hence, this rate cut, even if transmitted adequately will not change the course of the economy. Also, it cannot counter the effects of the virus or the spread of the same. This has been accepted in the global context, too. The other view is from the point of view of being a palliative at the time when the economy could be moving towards a faster slowdown due to this epidemic. We have seen that several industries have been affected directly like tourism, hospitality, aviation. Those like pharma, auto, electronics where the supply chains have been impacted are also likely to confront challenges as the China problem has become a global one. Some firms in these industries could be impacted negatively in terms of sales coming down and their working capital cost-servicing being a burden. In such a case, the lower interest rate scenario will help to alleviate their travails. This could ease the pressure on banks in a way as the probability of potential non-performing assets (NPAs) come down. The latter looks more likely the impact of this rate cut provided there is efficient transmission. The signal sent clearly is that the RBI is willing to do everything to lessen the pain of the virus attack to the extent that it is possible. It may be recollected that the RBI had actually used novel measures in the earlier policy to lower rates like the long-term refinance option (LTRO) and cash reserve ratio (CRR) exemption on certain loans (SMR and retail). That has worked to an extent to help the concerned segments though not really brought in a large amount of fresh lending. The same will be the case here where the benefits will flow and pain alleviated. Lowering rates at this time also carry the risk of affecting deposits, as banks will have to rework their deposit rates considering that the lending rates have already been affected where they have been linked to benchmarks like the T-bills yields, which have been going down. To maintain profitability through steady net interest margins, banks will have to lower deposit rates, too, which can come in the way of savers. This is a conundrum that banks will face. Rate cut, in my view, cannot stop the virus from playing out its course and have an impact on the global financial markets and economy.