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ETNow India Development Debate 10th June 2020


https://www.youtube.com/watch?v=Y4YaHDnBlTk

ETNow 29th June 2020


https://www.youtube.com/watch?v=56QSbH6N5-k

CNBC 21st May 2020

Unravelling the surge in India’s forex reserves: Business Line 16th June 2020

One of the biggest positives for our economy has been on the external front, where forex reserves have risen quite consistently in FY20 and continues to rise even today, with the number expected to cross the $500 billion mark. This comes as a major source of comfort, considering that there were times when there was talk on raising sovereign bonds to shore up the forex reserves.

The increase in reserves from $412 billion as of end-March 2019 to $476 billion in March 2020 and further to $493 billion is a display of strength of the external account. It is probably this reassuring trend that has prompted S&P to acknowledge India’s external position in its report. Forex reserves are the final indicator of the strength of a country’s economic fundamentals, as they are the result of inflows and outflows on balance of payments during any time period. In India’s case, an increase of $80 billion over 14 months is more than impressive.

Current, capital accounts

This increase has been brought about by a combination of both the current and capital accounts. However, the reasons for the same are quite different.

The lower growth in GDP, for example, has led to a sharp decline in imports and for a country with a perennial trade deficit there was bound to be improvement. The fall in crude oil prices has helped the cause in FY20 and the shutdown has virtually lowered the demand for imports to bare minimum, resulting in a lower trade deficit. While exports of goods have also fallen and invisible receipts affected by the global lockdown, the CAD (current account deficit) is still expected to improve sharply in Q1 of this year and could turn into a surplus at the extreme.

The area of interest is, however, the capital account where flows have been steady, lending strength to the external story. FDI has been the scoring point and there have been equity flows of $50 billion in FY20 and a total of $73 billion, including reinvested earnings and other capital. This is a testimony of two things. First, India remains an attractive destination for FDI, and it has been so for the last 5-6 years, with only FY19 showing a marginal dip.

Second, the government needs to be credited for both easing the rules and widening the scope of FDI as also improving the ease of doing business environment. Quite clearly, with the resolve to further improve the latter, FDI flows should increase even more in the coming years. FY21, however, will be a testing period, as the supply of funds may be limited given the recessionary trends in most countries.

The other factor responsible for forex flows has been ECBs (external commercial borrowings). The relaxation of ECB norms by the RBI and the favourable environment overseas, where interest rates are likely to remain at very low levels for the next couple of years, really means that companies can continue to access this market.

ECBs touched an all-time high of $53 billion in FY20 — from less than $30 billion till FY19. Companies which were not able to borrow at favourable rates in domestic markets, especially in the BFSI space, did reach out for these markets and that has led to the surge. Hence, higher FDI and ECBs were able to counter the negative FPI flows, resulting in accretion to the country’s forex reserves.

Rupee value

The picture changes when this is seen against the currency movement. Under normal circumstances, strong fundamentals lead to appreciation of a currency. However, over the last 14 months there has been a distinct fall in the exchange rate of the rupee from ₹69.17/$ as of end- March 2019 to ₹75.64/$ as of end-May. This fall, by nearly 9.5 per cent, goes with forex reserves increasing by around 19.5 per cent. A part of the reason for the rupee not strengthening can be attributed to the RBI, which purchased around $45 billion in FY20 to ensure that the rupee did not appreciate too much.

However, the external factor of the dollar strengthening in international markets was primarily responsible for the rupee declining, which, in a way, worked to our advantage in providing a fillip to exports. However, the fact that all competing currencies also depreciated meant that this advantage got eroded. The currencies of Brazil, Russia, Turkey and South Africa fell by over 10 per cent while those of Indonesia and Korea were by comparable to the rupee’s. Hence, the benefits of the mounting forex reserves did not quite lead to appreciation in currency, and the resulting depreciation did not deliver the export advantage.

Looking ahead

Going ahead, the current situation on the reserves front can be expected to continue, though the pace of increase will depend a lot on how foreign investors behave. Indian companies will continue to use the ECB route. While this is good for the borrowers, the RBI will be more watchful because a situation where the currency ceases to be linked with fundamentals can add to the risk attached to forex borrowings which have to be serviced at a higher currency rate.

Currently, the forward rate is around 3.8 per cent for one year and may not necessarily have been taken by companies borrowing for longer periods of time. The problem will arise only when there are exposed positions and the rupee continues to decline. Normally, a 3-4 per cent annual depreciation cannot be ruled out and hence hedging is a necessity.

Given this anomaly between fundamentals and currency movements, FY21 may be expected to see some degree of volatility in the latter depending on when countries move out of the lockdown and normalcy is restored.

Why RBI’s new draft frameworks are path-breaking for banking sector: Financial Express 16th June 2020

Two important draft frameworks put out by RBI, on securitisation of standard assets and on sale of loans, are quite path-breaking as they move the system towards the market. In a way, financial intermediation moves towards the market. Anything in the market tends to be more transparent, and hence, is an improvement as it feeds back into the system of sanctioning loans.

So far, securitisation has functioned in a limited perimeter, with stressed assets and retail loans going under such packaging. Now, with the framework being laid down for all standardised assets, there will be better pricing also in the market, which will be a collateral benefit. The same holds for sale of loans, where it will now be possible for one bank to originally give the loan and then sell to another within the guidelines set for the players.

The major advantage here is that the buying and selling of the security in the bond market is replicated in a different form here. At a mature stage, the loan market can mimic the bond market where there are continuous trades taking place. The advantage for the selling bank is that it can tune its balance sheet to the overall changing risk appetite and maturity preference. Hence, relatively riskier assets can be sold off at a discount to stabilise the balance sheet, and just like how there is continuous ALM in banks, the same can hold for the loan portfolio. The buyer of the loan or security would also be matching the asset to the available risk appetite and tenure.

Second, based on how the market evolves, banks would have to be probably more careful when lending because taking on risk which cannot be passed on will ensure that good behaviour prevails. Hence, as seen in the latest episode in the BFSI space, taking on undue risk will not make sense as it will not be able to pass it on to other institutions. Or even if there is appetite for the same, the discount at which it will go will be quite deep, which affects the P&L.

Third, following from the above, such a market will lay the foundation of the development of a junk bond market. Currently, in India, such a market does not exist, and hence it will be a case of the bank loan market leading to its development. As buyers of high-risk assets (which will go at a substantial premium) increase in number, it would be possible for a parallel market to develop in the bond market, which will be useful for the system as this has been one of the objectives to create markets for lower-rated securities with high yields. Therefore, the fructification of securitisation of standard assets and sale of loans can be a useful precursor for the junk bond market to evolve.

Fourth, an active market for sale of loans will lead to finer pricing. Right now, there are internal risk models used by banks to price loans. As banking is often a relationship business, there is considerable negotiation involved in pricing of the loan. While this has worked well in the past, things will change once there is a secondary market where the price is determined by the interplay of banks rather than being unilaterally fixed. This will, interestingly, address the issue of transmission of interest rates in the system, which, it is believed, is quite sticky. In a way, the central bank policy rate transmission will be tested by the market; the suasion being used today to make it more efficient may not work. The market will decide.

Fifth, the credit rating agencies (CRAs) will be a critical piece here, for the buyer of any loan or security would like to have an independent assessment of the concerned financial instrument. While securitisation does involve such a rating, even for sale of loans there should be a rating provided on the residual maturity, besides the initial rating provided at the time of evaluation. This fresh rating would need to be separately tracked by CRAs till maturity. But this is very essential for the final pricing in the market where it assumes the role of a critical input. In fact, unlike the primary loan disbursed where the price is based on a rating (internal), in this case the secondary market pricing will vary according to the rating reviews of an external CRA.

Sixth, the sale of loans is a modified version of take-out finance, which was the solution mooted for the infra sector where a bank that gives a loan for a 20-year project moves out after a fixed time period by selling the same to another bank, which could be on pre-specified terms. This way, the ALM gets balanced for all the concerned parties. The sale of bank loans may be looked as a market solution to the problem of rolling over of loans. It is very progressive for the system.

It would also be interesting to see if these instruments would lead to an increase in lending. This can be a big plus for the system as the risk-taking ability could also increase where banks would lend knowing that they can exit after some point of time. While the line between prudent and aggressive risk will have to be sorted out in the guidelines that are finalised, typically in the initial stages there would be caution exercised for sure. It is only when the market develops fast that this problem can arise. This was the case with the sub-prime crisis where the concept of securitisation involving CDOs, MBS, CDS, etc, inspired higher risk-taking by financial institutions.

Finally, a well-developed market for these two assets can also trigger some action on the CDS front. The CDS is fairly moribund in India for a variety of reasons. With these markets for bank loans evolving, the logical corollary would be to have some protection being offered on loans in the form of insurance. This is where one can see potential for the CDS market where such an opportunity would arise and can be taken as a trigger. On the whole, there are exciting times ahead for the Indian banking system.

By retaining India's rating S&P has taken a balanced view of the economy: Business Standard 10th June

A lot of uncertainty over India’s sovereign rating has been cleared by S&P which has retained the BBB– grade with stable outlook. After Moody’s had lowered India’s rating to a similar level earlier with negative outlook there was debate on how the other agencies would react.

The view taken by S&P appears to be more balanced as it has factored in the challenges and opportunities that the country faces but takes a different view that the economy will regain poise in FY22 and grow by 8.5 per cent after falling by 5 per cent this year. It is certainly more sanguine about the prospects given the strong fundamentals which can help to withstand the Covid-19 impact.

Lets us see the positives that have been highlighted by the rating agency. Three things stand out. First growth prospects appear to be above average post Covid-19 which is realistic. Second, the external situation is very good. Contrary to expectations in FY20 and the shutdown, the forex reserves have been moving upwards towards the $500 billion mark. Quite clearly this has been enabled by both the CAD coming down and an increase in capital inflows especially through the FDI and ECB routes. This has strengthened the balance of payments and made India fundamentally strong on the external account. Third the CRA has been appreciative of the evolving monetary situation where the RBI has been more than proactive ever since the shutdown has been announced to smoothen the flow of funds across sectors and create a meaningful time table.

However, three factors remain in the concern zone. The first is the state of the financial sector.

This probably holds for all countries which have been providing room for borrowers through moratorium as well as extension of credit lines. There is concern that this can mount at some point of time if the economy does not perform. While FY21 will not enter the picture, it should be realised that if the economy does not bounce back in FY22 the NPA issue will resurface for sure which has been highlighted by the agency.

The second is the labour market. Here there has been a conundrum posed with the migrant issue not yet being resolved as jobs have been lost that are required. Further non-commencement of business also means that there can be a further fall in employment which can be a tricky issue during the recovery phase. Some states have allowed for layoffs which though good for business can have other social implications for the government.

S&P has also highlighted the fiscal stress that lies ahead which is important because in the times of Covid-19 all governments have been more flexible with their targets. The challenge for India really is that while the government has been quite tight fisted in the area of expenditure, it has little control over revenue generation. The economic package is more through the financial system which is a positive for the fiscal numbers. The budget has taken on only relief work and not gone overboard in spending. However, expected sharp fall in revenue will keep the fiscal deficit of the combined government in the double digit zone. The challenge is to get it back on course in FY22.

The message really is that growth in FY22 will be critical for any further rating action and this in turn will guide the health of the financial sector as well as fiscal balances. The government for sure is aware of these issues and would be tackling them appropriately.

Why Moody's downgrade is not a bolt from the blue but still not justified: Business Standard 1st June 2020

The lowering of India’s credit ratings by Moody’s from Baa2 to Baa3 with a negative outlook does not come as a shock considering that downgrading of all countries due to the pandemic was quite likely given the way things have turned out. However, it was logical to assume that no such judgment call would be taken at this point of time. Let’s see the basis for the same.

The first point made is about lower GDP growth in the present conditions. This holds for probably all economies and though the IMF spoke of positive growth and the UN called India one of the shining stars for 2020, the RBI has talked about a negative growth rate this year. However, what is important from Moody’s standpoint is that the agency believes that the plethora of policies announced by the government even before the pandemic set in have not worked. This is debatable given the time lags involved in policies working out. Admittedly there have been more of supply side impulses provided by the government rather than the demand side and this has skewed the CRA’s decision as there has not been much of stimulus on the demand side and has been confined to relief. This is something that can be looked at more closely by the government.

The second point is the fiscal situation which is certainly grim. The FY20 numbers have shown a much higher fiscal deficit ratio which will get exacerbated this year with fall in revenue and higher relief expenditure. Here the CRA is concerned on the high debt level which has gone up from 72% in 2019 to 84% of GDP in 2020. This is again expected given the higher borrowing programme announced by the government this year which goes up by Rs 4.2 trillion. The handicap is both higher absolute debt level as well as lower growth in GDP which could be barely positive given the extent of decline in real GDP.

The third concern flagged by Moody’s is that the stress in the financial system would increase and it is a legitimate concern given that the moratorium announced on loans would have to be serviced at some time. This can potentially be a stress point for the financial system at a later date.

Should India be concerned? The sovereign does not borrow overseas and hence this should not make a difference. However, Indian companies borrowing from outside will have challenges when factoring in the cost. There is also a possibility of other ratings agencies like S & P and Fitch following suit which has to be observed.

Is this justified? Probably not as this is the kind of situation to be witnessed for almost all countries where governments have been more aggressive with spending under these pressing times. It would be interesting to see if similar action is taken against other nations too as low growth, higher debt and financial sector stress go along with almost all countries which have had a shutdown where activity has come to a standstill. Ideally one could have waited for another year before taking such a call as the true picture of any economy would emerge only after this black swan event is behind us. From the point of view of the government it would be instructive to examine on merit the concerns of the rating agency and address them if they so need to be tackled.

We need to plan for the next round of NPAs: Business Line 29th May 2020

A lesson learnt from the shutdown is that we need to have in place a plan for every policy that is announced, especially so if it is temporary in nature. The idea of giving a moratorium was felt necessary in March. With all the extensions of the shutdown, enterprises have stopped operating for two months and would take at least another three months to commence operations while addressing the issues of labour and supply chains. The RBI has offered to extend the moratorium for all borrowers, which is necessary. But have we thought of what would happen when the rescue package comes to an end?

The TLTROs have had a limited impact, as banks have matched borrowings to risk. However, now that the FM programme gives a guarantee to loans for SMEs as well as NBFCs, the total lending here could go up to ₹3.75 lakh crore, with ₹45,000 crore having a partial credit enhancement.

The present level of NPAs could be in the region of around 9-10 per cent for March 2020. With the present crisis bringing growth down to a negative region, the level of NPAs will increase sharply. It may be hard to guess the number, as the course of moratorium is not known. It is possible that by March 2021, the borrowers will be asked to pay on schedule and banks recognise their asset quality. This would mean that there would be a sharp increase in NPAs, as negative GDP growth for the year would definitely mean that companies will not be able to honour their servicing obligations. On a conservative basis there can be 40-50 per cent increase in NPAs, which would push up the level to close to ₹14-15 lkh crore of outstanding credit of ₹107-110 lakh crore.

Asset performance

There would be multiple issues here. First is the provisioning, which has to be made by the banks. Here, the RBI could make some extensions, besides modifications in the way in which NPAs have to be dealt with, as the existing rule cannot hold given that banks will be handicapped with low growth in income (the accounting standards will face major disruption on how accrued income is treated, given that it may never come in). But at the end of the day, money lent and not returned has to be paid for by the system through provisions and write-offs.

Second, the NPA spread would be across all segments — probably barring agriculture. Services have been impacted quite sharply, especially trade, transport, hospitality, entertainment, and to an extent the smaller NBFCs. These industries are bound to face challenges. For the NBFCs, their ability to service will depend on how their clients perform, and this is where the problem will get blown up at the retail end. The high level of job losses and salary cuts means that individuals will have a problem in servicing their loans, which is serious as it can bring back memories of the 2008 Lehman crisis which germinated in the mortgage sector. This also has ramifications for the real estate sector, and while banks have less of exposure here, it is significant for NBFCs.

SME loans

Third, the FM programme on providing guarantees to SME loans is noteworthy. Of the ₹3 lakh crore that has been spoken of assuming the NPA ratio is 20 per cent, which will be conservative as this segment is more impacted than others, there could be an amount of ₹60,000 crore that will not be serviced on principal, and maybe another ₹30,000-40,000 crore on interest. The sum of ₹1 lakh crore would have to be borne by the government as and when the accounting practices return to normal.

Fourth, the NBFC guarantee of lower rated bonds/loans would carry a lower quantum of risk, and hence the propensity to turn NPA would be lower than that of SMEs. This too would have to be considered by the government.

We need to be prepared for this. The RBI should draw up guidelines on rolling back of these rules on moratorium and NPA classification in advance and inform banks. It should not come to them as a surprise after, say, two years when like the AQR episode, the rules of the game change.

The government, on its part, should start making these provisions in the Budget and make the payments to banks, so that the latter are not held in suspension over the debt servicing of the guaranteed loans. By making these payments on time, it would serve the purpose better.

Rs 20 lakh crore Covid-19 relief package: Missing demand: Financial Express 28th May 2020

What is one to make of the Rs 20 lakh crore economic package? First, it is not a package that exclusively tackles the immediate fallout of the Covid-19 pandemic. Second, it addresses the larger issue of reforms in various areas—agriculture, mining, FDI, the power sector, and so on. Third, it does not provide any demand-side stimulus, which was expected given that the announcement of the package had mentioned everyone being included. Fourth, it depends heavily on financial institutions (FIs) to deliver the goods, and is, hence, follows more of a supply-side approach. Fifth, there is something for the really poor, but with limits, as the relief is time-bound and not for the full year. Therefore, for the population that is being provided with money and employment through MGNREGA, a lot will depend on when the economy will recover—the 100 days’ wages address the need of only three months, whereas many had virtually permanent jobs, earning anywhere between Rs 10,000-30,000 per month against the Rs 6,000 receiveable under the scheme.

From the standpoint of corporate India, it would be a disappointment as several sectors—especially, aviation, tourism, etc, for whom recovery is improbable this year—were expecting tax breaks, loan guarantees, and funds for resuscitation. The government has taken a macro view, addressing needs from below, including those of SMEs, but not the onus of alleviating the pain of industry, which is the key driver of the economy.

The package has a large role for RBI, with 40% of the amount mentioned being provided as liquidity by the central bank. This is an indirect way of supporting the economy: RBI can infuse liquidity in banks and nudge them to lend at a lower cost by altering the repo rate, but the final call is to be taken by banks after evaluating risk, which is going at a premium today given the inability of the majority of sectors to operate during the shutdown. The government has often used this formula—of allowing for more liquidity through RBI and restructuring debt to ensure production can proceed—to revive the economy. The advantage this time is the government’s assertion that Rs 3 lakh crore of SME loans will be guaranteed by the sovereign—this should enable banks to lend, though the fine print on this is yet to be revealed. The time-frame goes up to October, meaning that borrowers must have an appetite for such loans. The challenge really is that SMEs, which have been impacted the most, would need to start production to feel confident of taking loans. This means there needs to be demand, which is lacking today. Therefore, an externality has to be solved for this to happen.

The announcement of the components of the package in tranches, across five days, did have a touch of drama. There was, however, a method to this rather elaborate unveiling. As one moved from the first to the last component, the focus changed to medium- and long-term reforms, instead of immediate relief or stimulus against the pandemic.

Strengthening agriculture has always been a goal, and the allocation of Rs 1.5 lakh crore under different schemes is spread over two to three years. The issues of mining and minerals, as well as airspace, are far-reaching in terms of reform, but presently, individual companies may not be too eager to get into such projects when the challenge is of survival. The same holds for the privatisation of discoms in Union Territories. Improvements in the business environment are always welcome, and less onerous laws under the Companies Act are suited to this.

Hence, only the first two tranches are to have an impact on the current situation. There has been some funding for street vendors and migrant labourers, but this will, at best, be in the form of sustenance. Central and states governments have to urgently take up rehabilitation of migrant labour. A plan has to be drawn up to bring them back as they cannot live on MGNREGA or agriculture, from which they had moved away to begin with. This is one of the two gaps to be filled for the economy to resume as labour shortage will be a hurdle going ahead, especially for construction, factories, retail malls, etc.

The other issue to be taken on jointly is that of logistics. Even today, states do not want their migrant population back for fear of spreading the virus—this is also the issue with supply chains. Presently, even manufacturers of essential goods have to deal with panchayats, municipal organisations, and state governments (based on their stance on opening up the economy) forcing them to close. This is serious, and needs be resolved lest the lifting of the lockdown becomes more haphazard—just as the detention of migrant labourers for 45 days before being allowed to go back has only caused large-scale trauma.

Banks and the capital market would play a vital role in the road to recovery as most of the schemes involving funds that have been spoken of are to come from FIs, banks, and the market. Some, like NBFCs, have guarantees attached while the PSUs have to borrow in a big way to address the issue of financing of receivables of discoms. The conundrum for banks is that while a lot of push has been given to supplying funds, with guarantees being thrown in along the way, there are no measures to stimulate demand. The package is not Keynesian in nature, but more a set of survival measures. Banks will be reading the fine print all through since they have to be assured that the guarantee given by the government for SMEs is for the entire time period. They already have to deal with the moratorium given to borrowers, which has to be extended for at least another two quarters as it is unlikely that those who were unable to pay by March will be able to do so by even September. The spectre of NPAs increasing will surely dominate their vision all through the year.

Lockdown 4.0: Here's a proposed map for the state government to reopen Mumbai: FPJ 27th May 2020

Extension 4.0 for Maharashtra in general and Mumbai in particular presents a conundrum. Maharashtra is the most important state from the point of view of economic growth being the epicentre of business. It is also the state which has the highest number of infected people with Mumbai topping the list. Clearly there does not appear to be any light at the end of the tunnel. Economic activity has come to a virtual standstill and several jobs have been lost and those units which are still hanging on to paying salaries have to relent at some point of time if business does not resume. Some states have opened up, which is progressive, and the idea is that we have to learn to live with the virus. The state has just not been able to provide sustenance to the people who have lost jobs and the chaos surrounding the migrants issue has been discouraging.

The only logical conclusion that can be drawn is that we have to learn to live with the virus and standard operating practices have to be followed by all entities. Risk of infection remains and its spread cannot be contained but one has to learn to live in a new environment. It is necessary for the government to have a firm plan for the lockdown to end this time so that there is a roadmap which takes business to normal over a period of three months starting June 1st. The following protocol is proposed so that all businesses can get back to work.

First, just like how social distancing and use of soap and handwashes has become a habit, so should the act of disinfection be followed assiduously for every activity undertaken. This will mean having such chemical sprays ready in adequate quantities which can be used across the city so that a basic cleansing is done for every activity that is reopened. If such capacity does not exist, the manufacture of the same should begin in a big way in this interim period of Lockdown 4.0.

Second, to begin with for the first phase, only private vehicles should be permitted on the roads where people are able to commute to work and back. This will open up some room for offices to start working while the basic rules of working from home for the majority still holds with a proportion of 33% being put to begin with especially for factories. Non-compliance should be met with warnings rather than punitive action to ensure that there is no untoward harassment by the authorities.

Third, at the next stage only BEST buses and private buses should be brought in with a capacity restriction so that there can be a check on the number of people travelling. This will have to be planned in advance to make them mostly point to point to avoid needless waiting at bus stops.

Fourth, the hotels and restaurants business should be allowed to reopen with specific norms of how seating can take place and the absence of table service so that human contact is reduced. The standard procedure of disinfection after every customer leaves will be the norm. The timings can be regulated with restaurants going in for reservations to avoid waiting outside.

Fifth, for cinema theatres which are standalone, the seating arrangement can be stated in advance to ensure that there is adequate distance between groups of patrons with the disinfection norms being adhered to across every show. The theatre management can decide on the ticket prices depending on the viability of having limited capacity.

Sixth for malls, entry to shops should follow the waiting line as happens in supermarkets in the west, where people stand in line to enter the outlet. Typically for garments, trials should not be allowed and patrons have to take the chance on the size and fit to begin with. The food courts should follow the same rules as a restaurant and ensure that there is distance between tables which are disinfected before being used. Separate entrances and staircases should be reserved for theatres where only online bookings with tickets on WhatsApp being the norm to begin with. Needless to say there will be no human contact between staff and patrons.

Seventh, all retail standalone shops should be allowed to open irrespective of dealing with essential goods. The idea is that these small service SMEs should have scope to do business and the BMC can draw up a plan to have shops open which can be alternate or with a gap of two shops in a row on specified days. The number of days when they can be open can be twice a week which can be increased gradually depending on how things play out.

Eight, taxis and autos have to carry with them the disinfection sprays for their vehicles that have to be mandatorily used as patrons enter the vehicle. This will involve a cost, but the alternative is not to be allowed to ply. This can be brought in along with the buses so that last mile connectivity is possible.

The use of temperature checks at every point of opening should be a habit and hence every person stepping out for work or recreation has to time oneself to ensure that this is buffered. Spraying of every vehicle or chair or table in offices, buses, autos, theatres etc. would be mandatory before any service is allowed. Depending on the use of such chemicals, washing hands and spraying of persons can be considered after taking advice from medical experts.

All this will require elaborate planning and cost, and while the feasibility can be evaluated by the government, there is need to plan from today so that as and when the city is prepared with these prerequisites, business can be opened up gradually in a calibrated manner. There is a cost for everything and the viability is what the business has to consider. But a start has to be made at some time, and as the consequences of two months of shutdown have been crippling for the economy, we need to think differently.

The only logical conclusion that can be drawn is that we have to learn to live with the virus and standard operating practices have to be followed by all entities. Risk of infection remains and its spread cannot be contained but one has to learn to live in a new environment. It is necessary for the government to have a firm plan for the lockdown to end this time so that there is a roadmap which takes business to normal over a period of three months starting June 1st. The following protocol is proposed so that all businesses can get back to work.

First, just like how social distancing and use of soap and handwashes has become a habit, so should the act of disinfection be followed assiduously for every activity undertaken. This will mean having such chemical sprays ready in adequate quantities which can be used across the city so that a basic cleansing is done for every activity that is reopened. If such capacity does not exist, the manufacture of the same should begin in a big way in this interim period of Lockdown 4.0.

Second, to begin with for the first phase, only private vehicles should be permitted on the roads where people are able to commute to work and back. This will open up some room for offices to start working while the basic rules of working from home for the majority still holds with a proportion of 33% being put to begin with especially for factories. Non-compliance should be met with warnings rather than punitive action to ensure that there is no untoward harassment by the authorities.

Third, at the next stage only BEST buses and private buses should be brought in with a capacity restriction so that there can be a check on the number of people travelling. This will have to be planned in advance to make them mostly point to point to avoid needless waiting at bus stops.

Fourth, the hotels and restaurants business should be allowed to reopen with specific norms of how seating can take place and the absence of table service so that human contact is reduced. The standard procedure of disinfection after every customer leaves will be the norm. The timings can be regulated with restaurants going in for reservations to avoid waiting outside.

Fifth, for cinema theatres which are standalone, the seating arrangement can be stated in advance to ensure that there is adequate distance between groups of patrons with the disinfection norms being adhered to across every show. The theatre management can decide on the ticket prices depending on the viability of having limited capacity.

Sixth for malls, entry to shops should follow the waiting line as happens in supermarkets in the west, where people stand in line to enter the outlet. Typically for garments, trials should not be allowed and patrons have to take the chance on the size and fit to begin with. The food courts should follow the same rules as a restaurant and ensure that there is distance between tables which are disinfected before being used. Separate entrances and staircases should be reserved for theatres where only online bookings with tickets on WhatsApp being the norm to begin with. Needless to say there will be no human contact between staff and patrons.

Seventh, all retail standalone shops should be allowed to open irrespective of dealing with essential goods. The idea is that these small service SMEs should have scope to do business and the BMC can draw up a plan to have shops open which can be alternate or with a gap of two shops in a row on specified days. The number of days when they can be open can be twice a week which can be increased gradually depending on how things play out.

Eight, taxis and autos have to carry with them the disinfection sprays for their vehicles that have to be mandatorily used as patrons enter the vehicle. This will involve a cost, but the alternative is not to be allowed to ply. This can be brought in along with the buses so that last mile connectivity is possible.

The use of temperature checks at every point of opening should be a habit and hence every person stepping out for work or recreation has to time oneself to ensure that this is buffered. Spraying of every vehicle or chair or table in offices, buses, autos, theatres etc. would be mandatory before any service is allowed. Depending on the use of such chemicals, washing hands and spraying of persons can be considered after taking advice from medical experts.

All this will require elaborate planning and cost, and while the feasibility can be evaluated by the government, there is need to plan from today so that as and when the city is prepared with these prerequisites, business can be opened up gradually in a calibrated manner. There is a cost for everything and the viability is what the business has to consider. But a start has to be made at some time, and as the consequences of two months of shutdown have been crippling for the economy, we need to think differently

RBI buttresses earlier position forcefully; economic forecasts conservative: Business Standard 22 May 2020

For the second time, the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) has met before schedule and taken a decision to lower the repo rate. This time it is by 40 basis points (bps) and the signal is quite strong that it will do anything to restore growth; hence, one may expect more of such cuts going ahead. The reverse repo rate also comes down to 3.35 per cent, which is significant as it becomes even less attractive for banks to put surplus funds here.

It will be interesting to see how banks react. These have been challenging times for banks. Lending more to firms which are non-functional has higher credit risk. As a result, banks have been shying away so far despite the continuous nudging from the RBI. Also, given that the expected borrowing by the centre and state governments will be higher, there could still be incentive to wait for these securities to invest.

This becomes pertinent because all the norms of relaxation of payments in the form of moratorium on term loans and extension of working capital limits and margins would mean that will have to rework their business models. Therefore, the banking sector will witness substantial disruption in flow of funds as borrowers may defer their debt service payments and convert accrued interest to term loans.

The RBI has been quite conservative on the macro economic forecasts. For gross domestic product (GDP) growth, the central bank has acknowledged it will be in the negative, but has not put a number to it yet. The signal given here is that the second half looks better poised for growth to take-off in a limited manner with the farm sector showing the way. Yet, demand would be retarded due to the lockdown. But, two months of lockdown and a possible gradual opening up means that growth has moved into the negative territory for sure. This is different from the International Monetary Fund (IMF), which had put a positive number for India earlier in April.

ALSO READ: RBI says India GDP will contract in FY21, cuts repo rate by 40 bps to 4%

On inflation, the RBI appears to be cautious though more optimistic. For the first half, it admits that inflation will be high due food prices going up quite sharply, with core inflation being measured. It has, however, pointed out that while demand side factors have been negligible, supply distortions have affected the movement of goods and hence there has been an upward pressure on prices. From the second half of the year, RBI expects that inflation will move down and sees the headline number being close to the target of 4 per cent during this period. Therefore, the first half would be one of caution as supply distortions in particular will skew prices.

Quite clearly, the RBI has taken the stance of doing everything to keep the economy going and has rolled over all the regulatory decisions taken in March and April, which was expected as the lockdown had a very negative impact on enterprise. The central bank has not opted for any new route of liquidity provision through targeted long-term refinance options (TLTROs) for sectors, which was expected post the FM’s announcements last week. That would have helped sectors like aviation, hotels, tourism, entertainment, auto etc. that have seen a set back sharply due to the shutdown. Banks will have more time to plan their books given these extensions and figure out how their asset quality would look like by March 2021.