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Reform 4.0 package promises a better tomorrow for the sectors in focus: Business Standard: 16th May 2020

Just like the series of lockdowns, going from 1.0 to 3.0, with a 4.0 not being ruled out, so have been the government’s stimulus packages that are now in the fourth stage. This time, the finance minister has taken on the issue of reforms in eight sectors and is hence quite divorced directly from the pandemic crisis. However, will contribute to a better tomorrow for these sectors. While there are no relief packages as such, there is facilitation of more investment.

The steps taken in coal and minerals are quite positive for the country, as permitting coal mining by auctioning 50 blocks is progressive and will plug a major gap in the ecosystem. This will bring down imports and encourage investment with the government contributing to Rs 50,000 crore for evacuation. Supply of coal will increase, while prices will be more market oriented. Hence, private investment will increase from the present captive producers. For mining, allowing a seamless package of exploration, mining and production of minerals will remove uncertainty in the minds of the concerned companies as they will no longer have to be dependent on the value chain where they do not operate. We can expect higher investment in the mining sector in the next couple of years.

Increasing the foreign direct investment (FDI) limit in defence to 74 per cent is a big reform, which should get in some interest going ahead. The import of some equipment is being banned where domestic competence exists. Hence, foreign participation will now have to be through FDI, which will also help shore up the balance of payments (BoP). This is a big positive for the defence sector that gets a boost for production with the possibility of higher FDI inflows.

The government continues to focus on privatisation of airports and six of them will be made open to public private partnership (PPP) – although under the present conditions of Covid-19 and uncertainty on the future of air travel, there could be some concerns to begin with. While there are expectations of an investment of Rs 13,000 crore to flow in with Airports Authority, the response would tend to be muted for the first couple of years. However, when it comes to creation of maintenance, repairs and overhaul (MRO) hubs, higher investment may be expected. Presently, there is a tendency to use nearby Asian markets for such a support.

The other significant announcement from the point of view of industry is the privatisation of discoms in Union Territories (UTs). This is clearly the first step being taken by the government to see how viable such measures are before it can also be tried out in States. The state of discoms is still quite weak and the government has tried its best to bring about reforms, which have not worked fully. By privatising them, it is hoped that the sector as a whole can be made more robust. It needs to be observed how these reforms work out as it will set the blueprint for the future.

There is an allocation of Rs 8,100 crore for funding of hospitals, which is progressive with a 30 per cent clause being brought in for viability gap funding – meaning thereby potentially there can be a total of Rs 27,000 crore of investment going into this sector. However, this will happen over a period of time.

Overall, the measures announced under the Reform 4.0 package should be viewed as beneficial over the medium-term, where they seek to bring in more private investment in mining, coal, airports, social infra and power by removing the constraints that exist today. These investments may not come in immediately, as most companies are still grappling with the moratorium with banks and would hence flow post normalcy being restored in the country. The policies will bring in a delta to growth in future, but should not be interpreted as being support for Covid-19 relief.

FM has leveraged banks and PSUs to deliver the goods: Business Standard 13th May 2020

The Prime Minister boosted market confidence by announcing on Tuesday a Rs 20 trillion package. The composition of the same was always going to be a point of interest. The economic relief package was expected to be in some tranches, and hence, the Finance Minister (FM) will have something for the market players in the next couple of days. The FM has spoken of 15 odd measures in Round 1 with focus on micro, small and medium enterprises (MSMEs), non-bank finance companies (NBFCs) and power sector, which is significant. This is in keeping in mind both the importance of the tenet of ‘Make in India’ and going local.

The credit angle is interesting for them as the Rs 3 trillion to be disbursed by banks would go as collateral free debt for four years with a 12-month moratorium. This will help them to access funds to meet requirements for payment of salaries and raw materials. For the units under stress, Rs 20,000 crore support is to be provided as subordinate debt. The ones which are viable, Rs 50,000 crore of equity infusion is to be created from a fund of funds, or Rs 10,000 crore, so as to enable them to grow and get listed on SME exchanges. Hence, the flow of funds will improve for the SMEs. It would, however, need to be seen whether banks would go beyond the priority sector stipulation over here, as there are loans being given even today to the SMEs under MUDRA, and hence the delta involved would be interesting to watch.

The alteration of the definition of MSMEs is definitely good for them. So far, there was an incentive to remain small due to the benefits to be drawn by being so classified. However, now they could grow to higher levels as specified, which will help to build scale. On-time payments will help them to get their dues from government agencies.

The other big announcement pertains to the NBFCs, which do not have a good rating. For this, there are two measures. The first is guaranteeing Rs 30,000 crore of debt and giving 20 per cent first loss guarantee of Rs 45,000 crore. These, as can be seen, would be contingent liabilities for the government and hence not really add to the fiscal deficit until invoked.

The third big measure is for Discoms for Rs 90,000 crore, which will be funded by Power Finance Corporation (PFC) and the Rural Electrification Corporation (REC) against receivables of these distribution companies. This move will ensure that the Discoms can make payments to their suppliers, which would be the generators and transmission companies. Hence, this is good move for the power ecosystem.

With Rs 20-trn package, govt determined to deliver relief to the needy: Business Standard: 12th May

The Prime Minister’s speech on Tuesday has been quite inspiring, as there is a clear number provided for an economic relief package of 10 per cent of gross domestic product (GDP), which is around Rs 20 trillion. It has also been stated that this will cover all people including migrants, farmers, small and medium enterprises (SMEs), middle class, and one assumes some industrial sectors also. The details will be keenly awaited.

There are two points of interest in this package. The first is the form which it will take, and hence, how it will be distributed over different constituents that are targeted. The second is the implementation. That’s because the first package announced in March for the poor has had a serious limitation of unsatisfactory delivery and the plight of the migrant population stands as testimony to the Centre-States communication and coordination.

The PM has mentioned that the package will have contribution of all arms, which includes also the Reserve Bank of India (RBI). The central bank has already highlighted that the monetary stimulus has been significant, which takes into account the long term refinance options (LTROs) and a cut in cash reserve ratio (CRR) to 3.2 per cent.

The first question is whether the package amount announced on Tuesday will start from Wednesday also includes what has been done in April, which also had the Finance Minister’s (FM’s) package of Rs 1.7 trillion for the needy.

Second is the sharing of this with the RBI. Any measure from the RBI will technically not be money being spent, but high powered money created which can be used for lending. Here, it is expected that the RBI will have an aggressive lending programme through the LTRO route that can be sector-specific so that there is a flow of funds to companies. This monetary impetus can also be defined as lending targets for agriculture and SMEs with scope for further restructuring of loans to them. Even the Union Budget does normally talk of targets for farm loans, which can be a part of this programme.

Third is the role to be played by the government in terms of taxation and spending. On taxation front, lowering of tax rates for individuals is something which will be expected, given that people have lost jobs or salaries for an undefined period of time. That apart, corporates would expect some more rebates to alleviate their tax payments this year.

On the expenditure side, the government would be expected to do several things. The first is to rollover the Rs 1.7 trillion package, as those who are distressed would require continued support. This assumes significance as these people are unlikely to return to their place of work this year. The government could also opt for some farm loan waivers to be shared with states. The PM did mention the farming community in some detail, and such a move would be beneficial. It is expected quite widely that there would be loan guarantee coming from the government, which can be for a high amount of around Rs 5 trillion.

In this set-up, the pertinent question is what could be the quantum of additional fiscal deficit that can be taken on by the government. The large revenue slippages this year have already translated into additional government borrowing of Rs 4.2 lakh crore and the fiscal deficit ratio can reach around 5.50-6 per cent in the normal course. Assuming there is a 10 per cent fiscal deficit number which is being targeted, it would tantamount to around Rs 10 lakh crore of fresh spending and also borrowing. Can the market take in this amount?

Presently with surplus liquidity of Rs 5-7 trillion, the additional Rs 4.2 trillion of borrowing could be met even in case there is a pick-up in commercial credit in second half. Now if even Rs 5 trillion of extra borrowing has to come into the market, it will be hard to match and there would be need for more RBI intervention with LTROs and OMOs to provide liquidity to banks to subscribe to government paper. The option of direct financing by RBI, though not permitted, can be enabled and used as the last option.

Hence, we can expect RBI to play in tandem with the government in implementing this package. But hopefully, the government is determined to deliver relief to the needy. The state of migrants even today is a sad reflection of our limited ability to handle such a crisis.

Job cuts, zero production activity due to lockdown: What the Centre must do now: Financial Express 9th May 2020

There is a lot of uncertainty with regards to the course of the lockdown. Hence, there is a call from all quarters to come up with a stimulus. Examples of relief measures from other countries are being cited. While the Indian government has already announced a relief programme of Rs 1.7 lakh crore for the first quarter, and RBI has followed up with a monetary stimulus of 3.2% of GDP since February, there are expectations of more.

Let us first assay what measures other nations have instituted. The US has a $2.2 trillion fiscal stimulus, which includes, giving as much as $3,000 to millions of families. EU’s total fiscal response to the epidemic is €3.2 trillion, of which, €100 billion will go towards subsidising wages so that firms can cut working hours and not jobs. The European Investment Bank will utilise €200 billion to lend to companies. Germany has a €750 billion package, with €100 billion for an economic stability fund that can take direct equity in companies, and another €100 billion of credit to KfW for loans to struggling businesses. It also has a stability fund of €400 billion in loan guarantees. France has made provisions for €45 billion for companies and workers, and €300 billion for guarantees of corporate loans. Spain is guaranteeing loans of corporates and individuals. The UK has put £330 billion for loan guarantees to businesses and has offered to pay 80% of wage bills for staff sent on leave, up to a maximum of £2,500 a month. Japan’s package totals ¥108 trillion ($993 billion). It includes cash payouts worth more than ¥6 trillion to households and small and midsize firms.So, what could be the options for the Indian government? The first would be an extension of the Rs 1.7-lakh-crore, or 0.75% of GDP, stimulus for another quarter, which will effectively target the neediest. The government has already aggressively delivered this part of the story to the lower-income groups. And, with the lockdown expected to extend further, in different forms across the country, a second-round extension may happen.

The second possibility is setting up a fresh coronavirus fund for various industries that have been impacted adversely. If industries like automobiles, textiles, aviation, hospitality, etc, are affected most acutely, the fund can be used to provide support. This would necessarily be targeted at the registered units where industry associations will play a role in the identification of firms. The fund can support either through direct lending or guarantees given for bank loans. Direct lending is not the job of the government (though nothing stops this from being done), and hence, the latter looks more feasible.

The third is in the area of taxation. Following the example of Western governments that have talked about giving a fixed sum of cash to everyone, the relief programme outlined above can be supplemented with a cash payment to all taxpayers. This can be of a fixed amount, say Rs 10,000 per taxpayer. It is easy to identify and implement. There are around 5.5 crore taxpayers, as per FY19 records, and giving this sum could cost Rs 55,000 crore. This can be further segmented by the government to exclude those in the higher income groups.

Fourth, the government can work on giving further concessions to the corporate sector. While cutting the tax rates for a loss-making company may not help, concessions on depreciation can be made, which will help companies. But, this will mean a drop in revenue for the government.

Fifth, the government can also consider halving the GST rates to lower the prices of goods and boost demand. This can be time-bound for this year and can be rolled back to normal in FY22. It should be remembered that on account of the loss of jobs and sharp salary cuts, the ability of people to spend will get restricted. By lowering prices, real purchasing power can be increased, which in turn will help to create demand, and this may gradually help revive growth.

Sixth, the government has to definitely roll back the cuts in DA and pensions that have been invoked for central government employees as it affects the income and livelihood of people. The decision not to pay these amounts is antithetical to the advice given to private companies to continue to pay their staff and desist from layoffs.

Seventh, PSBs can be provided with additional capital by the government to be used specifically for lending to the affected sectors. Here, there is no revenue loss, but a capital cost, which will make banks stronger by keeping them better capitalised.

Quite clearly, all this requires a substantial amount of spending and cuts in revenue. There is a high cost that has to be borne but is essential. So far, the targeting has been limited to weaker sections. The amount involved is quite reasonable at the macro-level, but very low at the micro-level given the number of people involved. The central government has to take a stance on the amount of fiscal deficit that it is willing to bear. Doubling of the fiscal deficit from Rs 8 lakh crore to Rs 16 lakh crore may not be out of place here.

In the last five years or so, the government’s response to challenges, faced by sectors, has been more in terms of policy changes related to procedures or removal of administrative impediments. While this is useful, they do not directly contribute to demand, which is the requirement today. RBI has stepped in quite proactively to ensure the flow of credit to specific sectors, with SMEs, NBFCs and real estate, in particular, being the beneficiaries.

The approach to be taken this time has to be fully Keynesian in nature, and there is little choice. People are losing jobs, and production activity has come to a standstill due to the lockdowns. There is enough evidence to show that all countries are aggressively doing the same. Paying attention to FRBM norms does not make much sense at this time as survival and sustenance are importance. More important, these steps should be invoked immediately, before it becomes late as lives of several are involved.

Book Review: Stop Reading the News – A Manifesto for a Happier, Calmer and Wiser Life: Financial Express 10th May 2020

Today the whole world is obsessed with the coronavirus and all of us are busy tuning into various sources of news to find out the latest ‘score’ and feel more depressed because there does not seem to be any light at the end of the proverbial tunnel. Yet our instinct makes us monitor this virus for hours together and all discussions are on what various news reports say, which, when combined, creates a mountain of depression.

This is where Rolf Dobelli’s book, Stop Reading the News, makes a lot of sense. If you actually ask yourself, what exactly are we gaining from the deluge of news, the answer is ‘nothing really’. We may end up feeling knowledgeable, but feel down in spirit. Dobelli wrote this book before the virus came in, but his insights are quite amazing and after reading his views, the reader will actually spend time in a better manner being surrounded with positive feelings by reading a book or watching a movie or listening to music.

The author grew up picking up as much news as possible, and the thirst was so immense that with change in technology, he was able to gather even more free news that came through online mediums and the RSS feeds. Then one fine day he asked himself a personal question. By knowing so much of clutter do you understand the world better, and second, does it help you make better decisions? When the answers were not in the affirmative, he gave up reading news and instead spent time on what he liked doing.

His view is that selecting one or two credible sources of news is enough to know what has happened in the world of politics and business. It is better to read long articles than short ones and books and academic papers are knowledge-enriching. By doing so one’s attention span increases and one can concentrate better reading a long essay rather than a short piece, which is really not relevant for your life. Earthquakes somewhere in the world, divorces of celebrities, missile launch in Korea or ECB warning of recession are not really important in your life and one can do without such clutter that abounds the Internet particularly. He supports news sources that are not commercial and provide unbiased news which does not seek to influence your thinking and is more factual. He feels the Internet can be a labyrinth that confuses the reader or follower.

One can ask if news is really that bad? The author thinks it works up our mind over things we can do nothing about. For instance, if we do not like a PM or president, we get agitated when we can do nothing about it and hence a lot of negativity is created. If we are not interested in what happens on Mars, why should an earthquake or volcano in a distant land worry us? He strongly advocates what Warren Buffet called our ‘circle of competence’. Basically, we all have a fixed amount of absorption capacity in our mind and if it is filled with junk, and there is less space to retain other things important in life.

Now there are some interesting maxims that he puts forward where the reader cannot have any quarrel. Let us look at some of them. First news gets risk assessment wrong. Our system reacts disproportionately to scandalous and sensational news, which the creators of news exploit. Too much news can make us lose long-time focus. More importance to negative news can be toxic for us. News can also produce fake fame. We read so much on celebrities who do not matter, but know little about people who made a difference to world health, like Donald Henderson who wiped out small pox.

It is a book to be read in these times of Covid-19, as the sheer amount of information and theories going around, many of them inaccurate from unreliable sources, leaves us confused and misguided.

Living with the virus: Not just liquor, open non-essential stores to generate revenue: Free Press Journal 12th May

The 7-week lockdown to flatten the curve has been a conjecture at best. Equipped with a dwindling revenue to spend on relief, State governments were desperate enough to open liquor shops. It is time to learn to live with the virus and allow other retail non-essential stores to open.

There is irony attached to the opening up of liquor shops is several states. Given that there is a very strict enforcement of curfews in almost all so-called hotspots, allowing official liquor sales looks interesting. The answer is not hard to guess as alcohol contributes to 10-15% of own tax revenue of states. As has been the case with any major disruption, the state is less sympathetic to the plight of people – migrants and those who have been laid off due to the shutdown, but gets into action when it faces the backlash of such action. Public suffering is treated as being the cost to be paid to save the country from a larger disaster. But now when it is realised that a lockdown means that the government ceases to receive revenue, it shows in such actions.

A shutdown so far has been looked at from the point of view of individuals being displaced and companies forced to shut shop. But once production has come down, which the PMI numbers show as being disastrous, it also means that the revenues stop flowing to the government. GST was to clock in Rs 1 lakh crore a month and with both April and May to be virtual minimal activity, not more than 15-20% would be realised. Companies shutting shop will mean that corporate tax collections will suffer as they will be making only losses. Foreign trade has virtually stopped which means customs collections have been impacted and with several layoffs, income tax collections would also get affected. Therefore, the Rs 24 lakh tax collection of the centre will fall short in the first two months for sure.

This is the reason why the governments have targeted petroleum products and liquor. Petrol product taxes have been raised and while the consumer price has not changed significantly, the surpluses which went to the OMCs when Brent came down by 50% has now gotten transferred to the government. This is unfortunate that consumers never benefit when crude oil price comes down as it goes to the OMCs or government. Even this may not help the government as with few vehicles on the road the demand for petrol and diesel has diminished sharply.

Liquor is considered to be a sinful product and it is ironic how the governments have opened up these shops with alacrity and slapped higher duties knowing that the demand would ensure that revenue will increase. Instead of allowing other retail non-essential outlets to open where the owners are impoverished, the decision to open liquor is a sign of desperation.

From the government’s standpoint getting revenue is important. The central government has not enhanced their fiscal deficit limits which is constrained at 3%. Neither has the centre decided to borrow from the RBI directly large amounts so that the needs of states are met. The states received almost Rs 15 lakh crore from the centre as transfers and grants in FY20. With the centre unable to collect revenue, the transfers have come down. At the same time the states have to pay salaries to their own staff, MLAs/MLCs, doctors, teachers etc. With own revenue trickling down, there is a case of states not being able to spend on relief or even routine expenditure. This is why the decision has been taken to open liquor business and tax the same at a higher rate as pent up demand is immune to price.

The shutdown needs to be rolled back as the 7 week lockdown till 17th May has not really had any clear impact in terms of halting the spread of the virus. The numbers are increasing and the comfort is that the mortality rate is just at 3.5% with associated comorbidity. While a post mortem on the decision makes no sense as it was imposed at a time when the entire world went for such measures, the realisation today is that we need to learn to live with the virus rather than close down the country. The state has definitely not proved capable of handling the shutdown as it has not been able to deliver essential goods and services to the people and several of them have lost their jobs. Such collateral damage has been high even in USA where unemployment has gone past the 10% mark. The medical staff has been stretched and have risked their lives being forced to attend to duty. As we do not quite know what we are looking for as the concept of the flattening curve is conjectural with no basis, economic activity needs to be restored with all the safeguards put in so that the nation can move to normalcy. At least we would know where we are headed.

Dining with the dragon: Economic Times 6th may 2020

India’s concern is real because China has been involved in dumping of steel in the past and the same allegation has been made by other countries when it comes to automobiles and electronics. Given China’s superior economic position today amidst good valuations from an investors’ standpoint, leveraging the same makes business sense.

The recent decision taken by the government to allow FDI from countries adjoining our borders through the prior approval route rather than the automatic route needs to be seen against a perspective. First, the rule does not bar such investment but only says that such proposals should be approved by the government which really means that they will be studied closely before being permitted. This is against the normal practice of having automatic approval where the transaction has to be reported to the RBI once finalized. The second is that this is a concern everywhere in the world because these are unusual times. FDI in India is classified under three lists: banned, prior approval, and automatic routes. The limits are very liberal for most sectors where over 51% is allowed, and even in case of prior approval it is only ensured that there is an orderly way in which investment is undertaken with commitment to remain in the country. More often than not it is a formality. The new rule which becomes country specific is definitely novel as it brings in proposals from a fixed set of nations and the allusion is clearly to China as the other nations like Pakistan, Afghanistan, Nepal, Bhutan and Bangladesh have limited exposures in India. China is clearly the nation which has deep pockets and would be seeking to expand on its investments globally at a time when other investors may be restricted by domestic recessionary tendencies. China is also the country which has officially recovered from the pandemic where it originated and would be in a better position to leverage the situation when other nations are in a state of lockdown. While India has taken a region-specific approach, it does not bar such investment but only makes it mandatory to be examined in detail before taking a decision and hence it would be incorrect to conclude that there is a ban on such investment. It must be realized that the pandemic has brought down the markets across the globe with share valuation falling sharply which makes them attractive for potential investors. This is one reason why several European nations have already invoked policies of taking a closer look at the FDI flows as there is a real threat of takeover of companies by foreigners. While from an investor perspective this would be a good opportunity it may be interpreted as being opportunistic by the host nation as such takeovers could be considered to be hostile. India’s concern is real because China has been involved in dumping of steel in the past and the same allegation has been made by other countries when it comes to automobiles and electronics. Given China’s superior economic position today amidst good valuations from an investors’ standpoint, leveraging the same makes business sense. However, precedents of dumping in the past would militate against such activity as almost all countries are wary of this possibility. From a company perspective this would also be a vulnerable situation where business has been affected due to the shutdown leading to lower valuation which makes it susceptible to takeovers. As economic conditions are not normal, having certain checks on flow of FDI is always advisable. The problem with China and investments from the country is that it is hard to distinguish between private and government investment given the close relationship that is there between the two. The government of India is definitely playing safe by asking for greater scrutiny before such investment is permitted, which is logical especially in this period where a substantial proportion of equity can be taken over by investors. This will actually hold for certain critical sectors like banking, telecom, non-financial services etc. There is no reason to believe that all or most investment proposals will be rejected. Insisting on prior approval is just a check that has been put in to ensure that the process is in order. While this may be accused of being discriminatory by the pure WTO standards, countries need to ensure that critical segments are not taken over by what could be called hostile or opportunistic investors in these unusual times. It would be interesting to see if this new rule would be withdrawn or diluted over time. More likely it should be restored to normal once the pandemic is behind us and the markets back to realistic levels.

Challenges that will be brought by the end of the lockdown: Business Line 6th May 2020

From ensuring health measures to providing financial support and reviving the economy, the future will throw up many roadblocks to opening up the country again

Unwinding from the nationwide shutdown would be quite challenging, and unless the pieces have been put in place, the cost of doing the same would get exacerbated. It is now recognised that at some point we will have to learn to live with the virus, and staying at home is not a solution. It appeared to be the only thing to do in March, as every country was doing it.

But now it is certain that when livelihood cannot be ensured by the state (unlike in the West, where there have been cash transfers), there is a need to open up and ensure that the rules of social distancing are adhered to. The ignition key has to be turned on soon.

Social challenges

There are several challenges that lie on the road to opening up. First, the government has just started allowing migrants to go home which will be the big challenge when the shutdown is reversed as labour is unlikely to return after going through the travails. Without labour being available, the activities of SMEs, construction, retail services, transportation etc, will be short-staffed for a long time. The fear of the virus and the rather indifferent treatment meted out to them was traumatic. Hence, working in the villages would make a lot more sense even if income is lower.

Second, the crux of going back to normalcy would be the restoration of public transport, which includes trains and buses. This is probably the biggest challenge as it is very difficult to maintain social distance, especially when it comes to local trains and metro systems, and hence getting to work would be a logistical challenge across the country. All authorities starting from the Centre (Railways) to the States and corporations, need to start working on this from now to ensure that there is a plan in place. The sanitising and security arrangements have to be in place well before these services can be resumed.

Monetary relief

Third, the Centre had allocated ₹1.7 lakh crore as relief to the needy in March for three months. Quite clearly, the government would have to renew this pledge and have at least two more such quarterly installments rolled out, or else the targeted groups will be in a position of disadvantage. It is still to be seen if the government would be coming out with any additional stimulus package which is required to support an economy which has literally crash landed.

Fourth, the banking system would be the nucleus of monetary action, as the problem loan recovery as of March 31 had been deferred by three months. This pertains to the moratorium, which has to be extended further as companies which have opted for the same and have not been in operation for at least two months (April and May), will not be able to service their debt in July. This means that the RBI will have to roll this over for another quarter.

But the conundrum for the banking system is that a moral hazard has been created, where everyone has opted for this deferral. This means that at some time, the money has to be repaid; and the absence of any growth in the economy will mean a build-up of NPAs. This is a major concern, as the likely restructuring exercises which will be invoked, will elongate the NPA road.

Corporate changes

Fifth, several businesses need to do major introspection and work on the premise that their models have to change significantly as the earlier ones will not work. Industries like aviation, hotels, entertainment, tourism, real estate, taxis etc. will have to reinvent themselves. With the pandemic to last for an undefined time and its shadow being cast over a larger canvas, these industries will never be the same as the customers keep away.

Sixth, the government would be in the act of augmenting revenue, and increasing tax rates cannot be ruled out. This will be a major blow for taxpayers who have already gone through the travails of cuts in salary or layoffs. A Covid surcharge can be combined with higher GST rates. Some States have already increased taxes on petrol and diesel which will be another concern of households.

And for sure, all these measures that have been invoked by the RBI and the government will ultimately be inflationary. Any stimulus of this magnitude will lead to demand pull inflation, which will become apparent with a lag. So, the days of low interest rates will be replaced by tighter regimes.

Will RBI’s liquidity-enhancing measures help? Business Line 28th April 2020

In the current context, firms’ demand for funds for expansion and growth would be limited, and banks will be doubly cautious about lending following the turmoil caused by the NPA crisis

The liquidity situation in the market is quite fascinating. The situation is quite diverse. Growth in bank deposits is higher than change in credit (which was negative in first fortnight of the month). This means that credit is not growing relative to deposits. Next, the RBI has cut the CRR by 1 per cent which releases around ₹1.45 lakh crore in the system. There have been a series of LTROs and TLTROs of over ₹2 lakh crore over the last two months or so. It is not surprising that banks have been putting around ₹7 lakh crore in the reverse repo auctions of the RBI.

The basic question raised is why are we releasing so much money into the system at a time when demand is low? The RBI has brought in a moratorium of loans for three months, which most likely is to be rolled over selectively for some sectors. Any which way when a company is not in a position to repay old loans, it is very unlikely that it would be seeking fresh loans for productive purposes. It is more likely that it could be using cheaper finance to repay old loans. While some companies will be going in for expansion, it is unlikely to be in the first quarter when there is a lockdown. Therefore, demand for funds for expansion and growth would be limited.

The RBI has also asked banks to enhance the working capital limits by 10 per cent which is good for firms which are stretched. The question is whether or not all companies will opt for it as even today the ratio of outstanding credit to sanctioned credit limits for the industry as a whole is around 70 per cent. But increasing the limit provides a lot of comfort.

Abundance of liquidity

As far as banks are concerned, liquidity has been in abundance. Money from TLTRO can be used for subscriptions in the bond market, but it makes sense for them to go for the better-rated instruments which would tend to be the blue-chip companies in the private sector and public sector units. The money from the regular LTRO has been churned through the LAF window and while the RBI has made it commercially non-viable to invest money lent at 4.4 per cent in reverse repo of 3.75 per cent, it is still preferable given the banks’ reluctance to lend right now and the limited demand for funds. Such rollovers can be used when the economy recovers and deployed at the MCLR of 7.1-7.75 per cent. Quite clearly banks are waiting for the better performing companies to come in for borrowing.

The last TLTRO auction on April 23 meant for NBFCs did not quite get the enthusiastic response as in the earlier auctions with only a little over 50 per cent being bid for. It does appear that the earlier TLTRO funds have already gone into the blue-chip NBFCs and with banks cherry-picking their investments there is less interest in the lower-rated companies.

Banks will be cautious

One takeaway from this entire exercise of the RBI is that banks are going to be doubly cautious about lending as the last NPA episode has caused substantial turmoil in all banks with several controversies being ignited. The moratorium has to be extended logically because all borrowers who have opted for the same have been out of production or income (the retail part) for one month for sure and probably a longer period given the certainty of further extensions of lockdown in different forms. Hence those who have not been able to service debt in March cannot do so in July and have to be given an extension.

Also banks are cognisant of the fiscal deficit target being breached for certain. This will mean a larger amount of government paper coming into the market and the non-TLTRO funds can be used to get a return of around 6 per cent or higher from these auctions. There is talk of the RBI lending directly to the government (which is not allowed post 1997 when there were the 4.6 per cent ad-hoc T-Bills).

How can banks be nudged to lend? First, if the RBI announces that it will directly lend to the government by changing all the Acts due to extreme conditions, banks may perforce have to use their funds for lending. Second, the RBI can put curbs on the amount that will be absorbed under reverse repo auctions just like the rule on repo earlier which was restricted to 1 per cent of NDTL. This may just help the cause.

What the COVID-19 numbers tell us: Financial Express 22nd April 2020

The COVID-19 pandemic has given rise to a lot of speculation on how it spreads and can be cured, with various theories being espoused, which has led to a virtual lockdown of the entire world. While the implementation will vary across regions, in general, it can be said that most people are at home and that countries are progressively testing more people for the virus. The carriers could be primary or secondary and so on, and it is logical that the primary set consisted of people who had a travel history and came in touch with those who carried the virus. There would be many who got away and then spread it to others, which is something no one is sure of.

What is attempted here is to look at data as on April 20, and see if there are any trends that emerge on how this virus has affected countries. India is past the ‘we are monitoring closely’ phase. The accompanying graphic shows the total number of cases that exist as on April 20, and looks at three ratios. The first is the number of cases as a proportion of the number of tests carried out. This tells us how many patients were detected by the tests. The second is the mortality rate as the number of deaths as per cases detected. The last is the recovery rate of patients who have been deemed to be out of this disease. These numbers can throw some light on how one can interpret India’s position statistically, which is not backed by any medical thought, but purely as a result of data interpretation. should be interpreted with caution as different countries are at different stages of being affected by the pandemic, and testing operations have begun in a staggered manner. The US, Germany and Russia have tested as many as 3.9 million, 1.7 million and 2.1 million people, respectively, while India has tested around 400,000, which is the highest amongst developing countries. India’s efforts need to be lauded.

Now, based on the cases detected to the numbers tested, India does well at 4.4%, compared with all the countries that have higher number of cases. India ranks 14th in the top-24 list in terms of number of cases, but this ratio signifies that out of those tested, the infected rate is very low, which is heartening. As mentioned earlier, this can be because we have tested more of the primary carriers and not the secondary ones, which can happen only as local authorities intensify testing. As our numbers have been increasing quite sharply by the day with tests being carried out, this proportion can increase, especially so, as these cases are being detected in areas of high population density. But, the pace of testing has increased in the last 10 days and has more than doubled.

The mortality rate is low in India as of now, at 3.2%, which is again heartening and compares well with Germany, Portugal and Austria. It is lower for Turkey and Russia. This ratio is again low compared with double-digit rates in the UK, Italy, France, Spain, Belgium and the Netherlands. As on date, the number is not alarming, and can also be partly attributed to better immunity in our country. In fact, all the countries with higher infected people tend to be from the developed world, with only Turkey and Iran being developing nations. But, climatic conditions are closer to the west than the east.

South Korea, Germany, Austria, Iran, Peru, Spain, Brazil and Switzerland have impressive recovery rates of above 40%, with South Korea, Austria and Iran going past the 70% mark. Again, as our numbers have been increasing of late, the result will be known only in the future, and is currently low at 16%.

Hence, even globally, the progress of patients is quite unsteady, and it is grim in the sense that recoveries are still low, even though some of them have been through a full month’s cycle of the pandemic affliction. China has the most impressive results, with recoveries of over 90% and death rate of just 4%.

The above data gives an idea of how countries have fared as they keep testing more people and taking action of quarantine or hospitalisation. But, the question on everyone’s minds is: When will all this stop? Is there anything that data can tell us about the course of the virus affliction? There is really no way in which data on afflictions, which is based on progressive testing, can be extrapolated for future scenarios, like done with economic data. Yet, there are some interesting trends that can be seen in the movement of new cases being detected in different countries.

The accompanying graphic looks at the last seven days’ data on new cases being reported, and then checks if this trend (if at all) is above what was the peak earlier. If there was no peak earlier, then it means one must wait and watch as the current trend may or may not be the peak level. Some countries do show that the worst could be over as the incremental cases are much lower than the peak established over a period of seven days earlier.

Therefore, the next seven days for India will be crucial, and it is absolutely necessary to keep testing more people who show symptoms—for only then can we know whether it has spread or is under control. The current range of 1,200-2,000 has been due to more testing being done, and as it is still in the initial phases, the mortality and recovery rates are not as firm as those of European countries that have been through a whole month of spread. The US looks convincing, given the large numbers that have been tested.

The clue is to identify and isolate the cases so as to treat the patients and ensure that the virus does not spread. The proactive steps of the government have helped a lot in controlling the spread in India, but the next seven days will be crucial as it will set a new trend.