https://www.indiatoday.in/coronavirus-outbreak/story/time-for-a-national-lockdown-to-bend-covid-curve-here-s-what-experts-have-to-say-1795261-2021-04-26
ON India Today TV
n 2020, when the Covid-19 pandemic appeared to be coming under control, the vaccine story was developing. The government had assured the citizens that the entire cost of vaccination would be borne by the states and hence the 140 crore population would be protected. As vaccines came up for trials, pharmaceutical companies pledged their support to the country and said that profit would not be the motivating factor and the focus would be on producing vaccines.
Beginning 2021, as vaccines started getting administered, the story line took a new course. Both the government and industry started talking of the cost. Industry said that the first set of the stock was given to the government at a breakeven cost, if not loss, and they should be permitted to sell to others at market rates. The government changed track and brought in the concept of private centres charging Rs 250 for a single shot and government centres providing the same free of cost.
Late March things changed again, when infections started mounting, and it was realised that lockdowns would not help, especially so as there were large social gatherings encouraged by the State in various regions for different purposes. There was a vaccine shortage, and this is wPharmaceutical companies have spoken of aid from the government to produce vaccines as capacities are limited. This was the course adopted in the West, especially the US, where the government gave funds even before the research started. The government now has made it more universal in India in terms of age groups, but has devised a formula that will have some free vaccines, some at Rs 250, and the others at market prices which the states and the private sector can purchase based on quotas. There is ambiguity about whether the pharmaceutical industry is breaking even or not, as the Rs 150 per dose which was earlier considered to be profit-making has changed to Rs 600 today. The government and the industry can work this out.
Pharmaceutical companies have spoken of aid from the government to produce vaccines as capacities are limited. This was the course adopted in the West, especially the US, where the government gave funds even before the research started. The government now has made it more universal in India in terms of age groups, but has devised a formula that will have some free vaccines, some at Rs 250, and the others at market prices which the states and the private sector can purchase based on quotas. There is ambiguity about whether the pharmaceutical industry is breaking even or not, as the Rs 150 per dose which was earlier considered to be profit-making has changed to Rs 600 today. The government and the industry can work this out.
Two issues stand out here. First, the government is looking at the fiscal numbers when changing the stance of ‘free vaccine for all’ to ‘free vaccine for some’. Second, pharmaceutical companies cannot be doing philanthropy at this scale as they have to make a nominal profit and it is the job of the State to ensure subsidisation of the product.
The big question, however, is how do we price the vaccine to the final user, which is the citizen? At one level, if 140 crore of the population were to get two shots (if 18 years is the cut-off, then 40% of the population would be excluded) at a manufacturing cost of, say, Rs 500 at the upper limit, then the cost would be Rs 1.4 lakh crore, which is 0.7 % of nominal GDP. As this would, broadly speaking, be a two-year exercise, Rs 70,000 crore per year is a cost that is doable for the government. In fact, the split between the Centre and the states will make it not more than 0.35% of GDP, and is insignificant when calculating the fiscal deficit. The Centre has provisioned for Rs 35,000 crore for this year, and if this amount is not going in administrative costs, it will actually cover the share for FY22. A simple solution is to just allow the states 0.35% of flexibility on fiscal deficit based on population to be vaccinated, and the basic cost of the vaccine can be absorbed without much ado.
The other route is to have differential pricing for the population based on the ability to pay. Several corporates have evinced interest in vaccinating their employees and families at their cost, which is a positive development. As this population is quite large, with the top 2,000 companies having a headcount of 4-5 million (around 50 million EPFO registered staff are there in the country), around 20-25 million can be charged a market price and the government can offer the sop of these funds coming from the CSR commitment. This is a win-win solution. Corporates, however, have to figure out how this can be administered and have to work through hospitals, but can pay a higher cost for the same.
There is another class of people who have the ability to pay a higher price, but avoid the inconvenience of rushing from centre to centre to get vaccination shots. Here, even a price of Rs 1,000 or Rs 2,000 per shot is not a concern, and while it may sound ‘siding with the rich’, a certain section can be made to pay and enable cross-subsidisation. This way, everyone gains: the private hospital finds it worthwhile (currently the Rs 100 taken of the Rs 250 does not cover overheads as it involves space and diversion of staff), the pharmaceutical company charges more here to subsidise the sale to the government, and the individuals don’t really mind the cost. There can be strict quota here where a pre-registration is required.
For the larger section of the population that have the ration card to denote being below poverty line or those who find the cost of Rs 250 or Rs 600 onerous, the government facility should be open where there is zero cost and where the allocation is the highest. Here, rather than have the Centre and the states divide the quota, there should be one bucket that is distributed to the states based on a criterion. This can be population of the state or population in the most infected districts, which the NITI Aayog can draw up so that there is a transparent system in place.
The progress of the infection cases looks scary as there is only hope of the number plateauing before coming down. Economic lockdowns, as had been witnessed last year, were not really effective which made the trade-off of lives and livelihoods extremely rigid. The only hope is to vaccinate people as fast as possible which is possible provided the doses are available.
For manufacturing the same, the pharmaceutical industry has to be incentivised as it requires money. Companies cannot make a loss to subsidise the government. Governments actually have no constraints except self-imposed ones on widening their deficits by making these provisions. The amount is not really much. For states that honour leaders by constructing statues costing Rs 3,000 crore or more per head, spending on vaccinations cannot be questioned. The clue is to get all the stakeholders involved and create a pricing structure that is a win-win solution, which is possible. More importantly, there should be consensus here and no further delays.
Needless panic
The absurd rule of e-commerce not being allowed to sell non-essentials looks out of place because if rice and biscuits can be delivered, why not mobile sets and clothes? Evidently, this has been done to placate the non-essential establishments, which thought it was unfair that their businesses would be shut while e-commerce flourished. The local police have their way and the new sticker policy, subsequently scrapped, created unnecessary panic.
As the rule was that one could be on the road for a specific permitted activity, stickers for vehicles was not required especially so because one could still be going out to the airport or railway station or to visit an elderly relative and not be in the medical, grocery or essential service categories. Such anomalies are widespread in the circulars issued, which give cross references to policies of the past that are hard to trace and figure out.
What does this indicate? It is evident that the administration in the country is not prepared for this second wave of the virus and the response has been knee-jerk. Last year, it was understandable that the sudden national lockdown had several inconsistencies in communication and the public were confused about the restrictions. It could have been done in a better way this time, but it does appear that there was no plan drawn up before the announcements were made. This can be a pain factor for businesses across the country, as the infection cases rise and more states go in for lockdowns.
On their own
The reactions in Delhi, Bengaluru, Ahmedabad etc. have followed the Maharashtra playbook so far. First, services are closed down and hence malls, theatres, restaurants get affected. Next, the curfews start in the night and then move to the weekend. In the last stage there are total lockdowns, bringing everything to a halt. The businesses that are affected are left to fend for themselves.
The Maharashtra government has been extremely progressive here, by announcing a package to help out the vulnerable sections. But today, there is no way to look after itinerant labour, which is the migrant population. Last year, there were relief camps set up for them so that they could stay and be looked after. Presently, the states are grappling with the lack of hospital beds, doctors, oxygen, medicines and have no bandwidth to stop migrants from fleeing. Therefore, it is a repetition of what happened last year.
Uniform guidelines
Business cannot function with uncertainty and as the pandemic is characterised by this factor, the state needs to provide comfort. With the Centre advocating ‘no lockdowns’, the responsibility for containing the virus is on the states, which will lead to asymmetric responses. This affects movement of goods and services, which create problems for business. It becomes difficult to plan production if clothes can be shipped to Telangana but not to Maharashtra. There have to be symmetric rules in the country. Travel has been in a quagmire as different states have their own rules of Covid testing passengers from other states.
Also, there are no timelines which can be given by states, as no one knows when the infection numbers will come down. Presently, they are going up and there is no sign of abatement. This leads to disruption in business plans, as differential lockdowns and guidelines across states multiples uncertainty at a time when business appeared to be picking up. This is not good news for labour, which will once again bear the brunt, as well as consumption that will be in jeopardy.
There is need for all states to agree on a set of uniform guidelines and timelines for the lockdowns. This can happen if there is a collective will. Otherwise, business will keep slipping in different pockets, causing large-scale disruptions in corporate activity. The SMEs will once again be on the radar, with no further assistance being provided. This should be avoided.
The names of Billy Fisher and Teresa Hodge will not mean much to the reader when this book Alien Thinking is picked up, but will constantly be referred to as some kind of role models that the authors have presented when explaining the concept of alien thinking. In short, the authors show that there are no limits to imagination, and we can achieve a lot if we want to. For this we need to think differently. This holds for entrepreneurs, scientists, doctors or artists and hence even companies.
Alien Thinking by Bouquet, Barsoux and Wade is a very interesting book that is meant more for individuals, which when applied at the macro level will translate to affirmative action in companies. As the word ALIEN suggests, it has something to do with out-of-the-box thinking. This works better if you are not directly in the business but are able to conceptualise, take your chances and deliver the final product or service. If one is already immersed in doing any specific work, it is less likely that such thinking will come naturally as we get into a routine way of thinking and hence some effort has to be put in. This is easier said and done because otWhile ALIEN does mean something from outside and not part of our system, the authors use this acronym to denote the five characteristics that go into alien thinking. These are attention, levitation, imagination, experimentation and navigation. These words are quite self-explanatory. Let us put these thoughts together. We need to be attentive and see the problem as an outsider and then decide on action. Looking at things afresh is important and can also be done by us in our routine work if we really want to. While deciding on the solution we should be prepared to go forward and backward, to understand the situation and see what works. This is levitation and here they give the example of Bertrand Piccard who had to swing his thoughts in all directions to create a hot-air balloon which could fly around the globe without using any fuel and came up with the idea of solar impulse which was a solar powered craft capable of perpetual flight.
Third, one needs to be imaginative which does not come very easily because it depends on the situation and the response will be varied. Next we need to be willing to experiment with new ways of doing things and last we have to navigate the system to ensure you do what you have to. This is dealing with the external environment and adjusting to the forces that can make or break the solution.
Let us look at Billy Fisher who is a doctor sent by WHO to Guinea to attend to Ebola patients who were just dying by the day with little hope of survival. Patients did not want to go the hospital because they knew that death was beckoning them. The hospital had no air conditioning, limited equipment and doctors who were clothed in protective garments could talk only on phone which did not work. The conventional course of medication did not help. Dr Fisher keeps observing what happens to patients as they move towards death and then drew a pattern. Most of them had severe diarrhoea which led to dehydration combined with high temperatures and finally death. Put in a simplistic way, he thought differently and put the patients on saline with antibiotic and the mortality rate came down sharply and patients revived. It was quick thinking and experimentation which worked. There was no time to consult with the authorities and he had to do the best that he could and hence imagination and experimentation had to be invoked.
Teresa Hodge was jailed for an offence and when she came out decided to do something for prisoners who were released but did not know what to do. Not really a techie, she embarked on creating a model which she presented to bankers on evaluation of such people who now sought loans. The R3 Score which is a risk assessment tool was engineered by her and is used widely today.
The point being driven by the authors is that we need to be innovative in thinking and have the courage to go ahead with our thoughts to the implementation stage. This is the only way in which changes can be brought in. It holds for individuals and also for enterprise. The example of Narayana Peesapaty is given where he gives up his job as a researcher and blends his thoughts concerning India’s problem of water for farming. People grow more rice which uses more water which is given cheap due to government policy and hence lowers the water table level. A solution is to encourage new crops. This includes growing more millets which use less water. He has his eureka moment on a plane when he is eating his meal in disposable plates where the idea of using edible cutlery strikes him and he is able to develop edible spoons etc made of millets.
A mechanic Jorge Odon visualises and finally brings in an alternative to forceps used by obstetricians to extract babies with zero risk and harm. He invented a device that was similar to a cork remover that could free a baby stuck in the mother’s birth canal. These examples are quite amazing and show that people can achieve a lot when they stop to think.
The basic message of the authors is that this is something all of us can do if we are willing to put in effort to start thinking differently. We do have the capability of alien thinking but have to search for the same and use it to becoming creative.
Alien Thinking: How to Bring Your Breakthrough Ideas to Life
Cyril Bouquet, Jean-Louis Barsoux & Michael Wade
Penguin Random House
Pp 292, Rs 699herwise all companies and individuals would be successes.
The demise of M Narasimham does strike a chord of melancholy, given his contribution to reforms in the financial sector. What we see in the banking system today in terms of the struggle to bring about change, had its genesis documented in Narasimham’s epochal reports (there were two of these). His reports were seminal because they brought in all the global wisdom at a time when the internet was non-existent in India, and were based on real hard work put in by the committee members. One can expect him to have had considerable satisfaction over the progress made in the last three decades. It would be interesting to see how the banking system took in these recommendations.
The first was bringing in prudential concepts as propounded by the Bank for International Settlements (BIS) regarding income recognition, capital adequacy, quality of assets, provisioning, etc. These concepts took time to digest, and the Reserve Bank of India (RBI) played a stellar role in bringing them in a calibrated manner so that the system was not disrupted. Basel II and Basel III were extensions of the same course. It may be recollected that RBI took time to bring the 90-day concept for recognising non-performing assets (NPAs) so that the system was able to absorb this rule.
Second, he had propagated the concept of having more private banks, which was very timely as the system was typified by public sector banks (PSBs), given the shadow of nationalisation. Getting in new private banks has brought about a technology revolution in the banking sector, which has now permeated all banks, making the system globally comparable. Along with this suggestion was the extended frame provided to foreign banks to operate in India, besides a firm signal that there would be no further nationalisation.
Third, interest rates on deposits and loans were to be freed, and this was significant because until that point of time all decisions came from ‘above’. Here, RBI had gradually moved towards giving banks the freedom to fix their rates on the deposits side, though the lending side is once again back to the fold of partial regulation, with the central bank asking them to follow a formula.
Fourth, the committee argued for sharp reductions in the CRR (Cash Reserve Ratio) and the SLR (Statutory Liquidity Ratio) of banks. Interestingly, while banks argue against having a CRR, the system had a rate of 15% in 1989 and again in 1994, after which it has been brought down to 4%. The SLR at its peak was at 38.5% in 1990! Therefore, the move to lower these pre-emption reserves owes a lot to the committee.
Fifth, the concept of marking-to-market the portfolio of government securities was again a takeaway from this report. This was a way of making them market-oriented and also ensuring that the real value of bonds was accounted for by banks.
Sixth, Narasimham had spoken about creating a four-tiered structure of banks, which is what we are seeing three decades down the line. The idea of having large banks that can be globally competitive, regional banks that serve specific purposes, niche banks that cater to communities, and finally new small banks and payments banks owes its genesis to this report. This was further buttressed subsequently by a RBI committee where differentiated banks were spoken of.
Seventh, exposing the concept of evergreening is something that was brought to the table by the committee. Here, attempts have been made, but as has been seen there is a fine line dividing evergreening and restructuring—the latter being legitimate even today. It was dodging this rule and classifying NPAs as restructured assets which brought the system to an embarrassing situation when the asset quality review was undertaken in 2015.
Eighth, the identification of weak banks and putting conditions was again a concept from this book and hence the PCA (Prompt Corrective Action) policy of RBI has drawn from this chapter. The ways to tackle such banks and get them out of the mess with narrow banking being an intermediate route was an idea that came from this report.
Ninth, the committee recommended introduction of transparency in bank accounts. Today, all annual reports include all disclosures and follow fixed formats, and it is possible for one to analyse any aspect pertaining to all banks in a uniform manner. This was not the case earlier, and hence RBI should be credited with this reform.
Tenth, the concept of mergers across the financial sector was envisioned in terms of synergies being created and the committee also spoke of mergers between PSBs, which is now a reality. The earlier mergers were more due to expediency, while the ones that were taken by the FM a couple of years ago were a planned move keeping in mind all these tenets.
There are, however, certain recommendations that are still to be fulfilled, even though there has been some urgency shown for a few of these.
—The first relates to privatisation of PSBs. This is something that the government is looking at seriously, as per the Union Budget of 2021-22.
Second, banks are being targeted for full disinvestment. Given that PSBs that have been merged are out of this loop, it does look like that the candidates would be smaller ones, which may not have the best financials, though are bestowed with strong infrastructure and processes.
—Two, the remuneration factor was something that Narasimham had spoken of for PSBs as recruitment was to be made independent as per this playbook. There has been no attempt here on the pay structure, which is still a bargaining process where the Indian Banks’ Association (IBA) plays a vital role. However, in a rather feeble manner, one can say that lateral hiring with market-related salaries for specialised posts has come in from the backdoor, with now even some of the large PSBs having a lateral recruit as a CFO.
—Three, the committee had spoken of reducing the amount of lending that had to go to the priority sector from 40% to 10%. This has been a disappointment as there has been no change and it looks unlikely that this issue will ever be discussed. Given the political economy, it looks expedient for governments to retain this limit to show that they are pro-poor. While there can be arguments on the legitimacy of such lending, the fact is that if 40% of lendable resources are to be directed at pre-decided sectors, there is less flexibility for banks when it comes to lending.
—Four, the committee had also recommended differentiated deposit insurance premium for banks. This is really interesting because based on the CAMELS (capital adequacy, asset quality, management quality, earnings, liquidity, and sensitivity to market risk) score of RBI, banks carrying a higher risk on their lending portfolio would be made to pay a higher premium for cover on their deposits. This will be quite appropriate to ensure that banks pay more attention to the quality of assets, which will mean honing skills in credit appraisal.
Therefore, on the whole, Narasimham would have been satisfied with the progress made, given the socio-economic conditions in the economy where it is not easy to change systems easily. Where it was urgent, like prudential norms, the change came with alacrity. However, structural changes take time, and three decades down the road a lot had changed, albeit gradually.
https://www.htsmartcast.com/single-episode/news/will-covid-second-wave-have-limited-economic-impact_16f0c200-6cf6-4c43-9848-600c818a1f3b/
The economic scene today has been so disturbed by the Covid-19-induced lockdowns—leading to a lot of theorising on what could happen—that a lot of us have missed the demise of Nobel laureate Robert Mundell. His name would trigger instant recall amongst students of international economics, particularly those who studied at the Delhi School of Economics where Mundell always was in the frame of discussion and debate.
Mundell, along with Marcus Fleming, came up with the ‘impossible trinity’ that is brought to the fore every time there is upheaval in the forex markets and the rupee goes up or down. Central banks virtually have Mundell at the back of their minds when viewing exchange rates, because the unwritten rule is that when in doubt go back to theory—in this, Mundell cannot be missed.
The impossible trinity is about having control over three variables: free capital flows, currency and monetary policy. It is an old rule that befuddles all central bankers. If we have floating exchange rates and there are free capital flows, then the rupee will keep appreciating or depreciating as the FPI comes in and central banks face loss of freedom on monetary policy as they have to perforce sterilise inflows or change interest rates to maintain stability. To use an analogy from the tennis court, the central bank is always left thinking of the ‘return’ and can never ‘serve’.
Accordingly, fiscal policy has to adjust, else there will be issues of inflation. At the same time, if there are fixed exchange rates and the central bank controls monetary policy, then capital flows cannot be open, else, there will be chaos in the markets. The central bank has to recalibrate interest rates all the time.
Often, we have heard Governors of RBI talking of the impossible trinity, and this is what Mundell had introduced decades ago. Given that, even today, the rupee has rarely been fully floating—as there are several instances of RBI buying or selling dollars to manage the currency—there is actually very little freedom for the central bank. Most countries allow free flow of capital; this thus becomes exogenous to the system. The challenge then is balancing currency changes with monetary tools, knowing well that interest rates cannot be looked at as only affecting currency as there are domestic liquidity implications.
While the trilemma is well-known, Mundell was also a proponent of the famous ‘supply-side economics’, which was invented by Arthur Laffer. The basic principle was that if one lowered tax rates, especially for the rich, then the tax revenue will increase for the government. This thought is far-reaching, because, even today, the main reason for cutting the corporate tax rate in India is not just to make companies pay less taxes and reward the shareholders and hence the stock market, but to incentivise investment.
As companies have more disposable profits, they would tend to invest more by also borrowing a multiple of ‘own funds’, thus leading to a thrust for the credit markets. This was a theory of the 1970s which found favour in England and the US. In fact, the concept of Reaganomics was a modified version of supply-side economics which added expenditure cuts to tax cuts. This, however, was not used in India as the theory has stopped at the stage of lowering of corporate tax rates only. Governments have rarely managed to really cut expenditure given the expediency of addressing issues of the social sector.
Another lesser publicised fact about Mundell was that he was a votary of the euro, and while he cannot be called the father of the concept, a lot of work was done on the concept of a common currency for the region. The foresight of having a common currency that goes beyond a common market was epochal. This is something that has worked to a large extent, even though the Greek crisis which spread to the PIGS due to reckless governance did question this concept.
Essentially, what Mundell spoke of is the free movement of labour and capital across markets being an efficient solution. This was the idea of the euro zone, which was an improvement over the European Union that maintained individual currencies but allowed free movement of factors of production. Now, with the Brexit being a reality, one can question whether such concepts are sustainable, but the single market concept is surely something that works well in good times for sure.
The problem really is when things go awry and countries do not follow the rules of the game, and this is where Mundell’s theory runs into a problem. The euro concept worked as long as the so-called great moderation was enveloping the developed world. But once the fissures came out, there was a lot of disagreement, especially between countries like Germany, Austria and the Netherlands, and the PIGS group, as the former had been conservative and followed the rules of controlling deficits, which was an unwritten though accepted rule. That is why this led to ruptures. The same holds for the EU where the majority in Britain felt that, on balance, a united market did not serve their purpose.
Interestingly, Mundell had also mulled on the idea of a single currency called the DEY (dollar, euro and yen). But it may be assumed that this will go down more as a concept than a reality, which is the case with several economic ideas. If the euro did not work, there is little reason for any other basket to be effective. Interestingly, the earlier talks of a BRICS group and probably single market now are no longer being spoken of.
Mundell was definitely not as famous as John Maynard Keynes or Milton Friedman, but surely has an important place in the pantheon of economists, and the ‘impossible trinity’ will be something which will never move out from the discussion rooms of central banks. That’s because there never can be a practical answer!
The end of March was a time to be cheerful as far as the economy was concerned—the GST collections had swelled and it looked like that the debate on the revival was sealed in favour of the economy. However, the disturbing rise in the number of virus infections has brought in a sense of déjà vu as governments have reacted in the same way in which they did in 2020. Announce lockdowns. It does appear that the lessons have not been learnt. In 2020, it could be said that the event was a shock to the world and hence we did what everyone else did. But this time it shows lack of preparedness, which is not surprising because as the infection cases fell to less than 10,000 per day by February, every authority took credit for the same and we assumed that herd immunity had set in and that the second wave was an affliction of the West. It was typical Indian hubris speaking.
The lockdown is virtually ‘complete’ in Maharashtra, while major cities like Bangalore, Delhi, Jaipur, Ahmedabad, etc, have announced night curfews and have restricted movement of people. It is ironical that while various states had been warning the public of dire action and lockdowns, political expediency took over when it came to elections in the five states and Union territories where none of the rules of social distancing were maintained. Therefore, ambivalence in approach has caused the citizens to doubt the seriousness of such lockdowns. Hence, while in 2020, despite the hardships, there was no criticism against the act of ‘lockdown’, this time scepticism clouds the air.
Economic growth depends on consumption, and if people cannot consume, there is no need to produce. Using this thought, one can say that if Maharashtra, which accounts for 15% of GDP, decides to close down with caveats, there is a major risk of household spending coming down. This means that there is a chain reaction through backward linkages which feeds into production lines that have not been banned. But with people not allowed to buy, say, clothing in the state either through online or offline routes, the incentive to produce comes down. Therefore, it is not just a case of services being affected, but also manufacturing of non-essentials. Hence, the list starts from hotels, travel, entertainment, retail, malls, to industries like textiles, electronics, automobiles, etc. There are some anomalies in Maharashtra where garages can run, though shops selling spare parts cannot be opened!
From the business standpoint, the uncertainty is very disturbing. For business to be conducted, certainty in the rules of the game is necessary. This is a fundamental factor that defines the ‘doing business’ climate. It has been seen in Maharashtra, for example, that taxes had to be paid by the hospitality industry for the new financial year by March-end, and then in a couple of days they were told to close down. Rental lease contracts were negotiated for the year based on the premise that these enterprises could operate. The services industry will be left wondering how long this lockdown lasts, as experience shows that even last year no one knew. The initial 21 days drew a lot of appreciation as it made sense, but soon it was realised that such lockdowns had to be extended endlessly as the infection rates increased. What looks good on paper does not quite work the way it is planned.
The problem today is that while lockdowns and night curfews have been announced for a specified period of time, no one is sure about what would be the situation in the city or state or the nation on April 30. Once the elections end and the Kumbh Mela culminates, the number of infections will rise exponentially provided people are tested, and the number of 1.8 lakh new cases per day that was registered recently will seem very modest. The issue really is what do governments do then? Announce more lockdowns with more stringent measures?
Last year it was seen that while a lot of largesse was announced to look after the deprived class including migrants, the enthusiasm was lost along the way. While announcements were made on cash transfers, there were complaints that this never happened and hence even the Budget for the central government did not show all these numbers. Sure, administrative issues were there on the delivery side as several states were involved, but by November even the announcements stopped. Currently, the Centre is not involved in announcing lockdowns, but states have taken on the role of bringing in the restrictions. Maharashtra has announced a package of around Rs 5,500 crore, which is encouraging. But the critical question is whether this can be delivered to the targeted group in the next 15-20 days? Does such a list of beneficiaries exist or is this an empty announcement? This is important because once the lockdown is in place, those who are out of work will require aid immediately.
For a country that is still struggling to deliver vaccines to the public, distributing this amount will be a big challenge as beneficiaries have to be identified. Hence, this may be another loan waiver scheme where states announce large numbers but finally do not disburse more than 20-50% of the amount over a period of time.
India’s GDP for FY22 would be around Rs 145-150 lakh crore as per projections made by different agencies. This would mean approximately Rs 12-12.5 lakh crore a month. The lockdown will affect this monthly GDP quantum for sure, and even a 10% cut-back would mean a loss of Rs 1.2-1.25 lakh crore a month. GST collections are normally supposed to be 8-9% of this amount, though these had scaled up to 10% in March. A one-month semi-lockdown would also mean a loss of Rs 12,500 crore based on the 10% rule. A concern for the banking sector would once again be the asset quality because closure of business, especially for SMEs, will mean loss of income and diminishing ability to service debt. While there are still hopes that on account of the lockdown there could be another moratorium announced by RBI, one cannot be too sure. The receivables cycle of all concerned companies will take a hit once again on this score. The other issue is with employment. There are signs of migrants once again returning home as there is fear that, like last year, lockdowns could get elongated and will affect their jobs and incomes.
Therefore, the economic impact of this series of lockdowns will be significant, though not as sharp as that of last year because of the scale. Even state budgets will get affected with fall in consumption and hence we will be rewinding the clock once more, albeit not knowing when to let it run in the right direction.
Times Now: 15th April 2021
https://www.timesnownews.com/videos/times-now/india/amid-lockdown-curfews-what-relief-measures-can-be-taken-for-sectors/94885
‘When sorrows come, they come not single spies, but in battalions’ (Claudius is Hamlet).
This is the feeling one gets today as the stock market is plummeted, COVID is spreading, vaccination stocks are under a cloud and the rupee went down to Rs 75/$. What's happening, and is there a light at the end of the proverbial tunnel?
It all started with the credit policy where the Reserve Bank of India (RBI) announced a barrage of liquidity measures to pre-empt the possible shortage on account of the large government borrowing programme. It did seem innocuous at first, but the market got spooked. Too much liquidity which is exacerbated by Government Securities Acquisition Programme (G-SAPs) only means that bond yields will go down further. That was enough to spur a rally in the downward direction for the rupee, which started falling. In March, we were worried about the rupee appreciating and now in April the currency is falling and after 75 the expectation is whether 76 will be breached.
Probably not. That's because the currency is being driven by sentiment, which is seldom long lasting. The present conditions do warrant concern, as low interest rates means that investors will not find India attractive. Given that the rates are going up in other western countries on the back of a perceived revival in the economy, they appear more attractive investment destinations. It could also mean that we are missing the boat on this side of the channel.
The fundamentals, too, look less strong today. Growth will slow down, thanks to the lockdowns. Exports may not rise as imports will. Therefore, the current account deficit (CAD) will widen and could reach 1-1.5 per cent of gross domestic product (GDP). Foreign portfolio investors (FPIs) may no longer provide succour and while foreign direct investment (FDI) will continue; external commercial borrowings (ECBs) will not until such time the investment cycle turns around.
So, the rupee will be in suspended animation for some time. While a value of Rs 74-74.5/$ looks fair, one can never tell. The RBI may have to intervene if the rupee crosses the 75 mark and edges upwards. But this can be taken to be more transient than a permanent shock.
How about bonds?
With the surge in liquidity which is being topped at the brim with GSAPs, yields will remain low as bond prices inch upwards. This seems to be the unintended consequences of trying to stabilise yields which has led to bond prices going up.
The 10-year bond, which was expected to cross 6.5 per cent under unchanged liquidity conditions during the course of the year, has actually come to the 6 per cent level on Monday - almost 12-14 basis points (bps) lower than at the time of the policy announcement. After the first GSAP transaction, there could be a further dip to less than 6 per cent. The market is finding it difficult to digest all these changes, but the government comes out as a winner as the borrowings will be at a low cost.
A worry will be inflation, which will continue to be in the 5-6 per cent range, as food prices have gone up and global prices firmed up. The assurance given by the RBI that while inflation is being targeted, the monetary arm movement will be towards being accommodative until such time growth looks sustainable is a signal of unchanged repo rate. This is good for bonds, though not so for the currency.
This is an unusual position to be with as normally a falling currency should go with higher interest rates. But this time it is not so, which is why we can expect more volatility in currency for another week or so even while the bond yields remain stable in downward direction.
FY21 was a dismal year from the economic standpoint, and while the right noises are being made about the so-called recovery, none of these are convincing. A full year had gone by and the state response to virus infection has been the same: Announce a lockdown. It gives a sense of doing something as it stops everything from happening. But there has been one blazing factor in this year of gloom and doom, and that is the stock market.
The new highs that have been reached can be hard to explain, but it is there for everyone to see and from a level of 29,468 in March 2020, a gain of 70% has been achieved. Hence, as the economy collapsed and the virus spread, if one sat back and invested in the Sensex in March, the gains would have been amazing. And what is surprising is that there have been justifications for the same by the market movers, which include India Inc and the stock market experts who talk to us on a daily basis.
Arguably, the March 2020 level was low on account of the announcement of the lockdown at the national level. But the Sensex recovered and reached the 32,400 level by May, which was when the lockdown was severe, and the migrant issue was at the fore. Once the unlock was announced even as the infection cases rose, the market was impervious to these numbers and marched past 38,000 in August, as the seven-day moving average of infections were as high as 74,000 that month. There was a nervous kind of stagnation in September when cases peaked at above 80,000. Since then, the number of cases came down and the Sensex averaged 50,000 in March as the moving average in the last week came back to a new peak of more than 60,000.
Quite clearly, the number of infections had little to do with the stock market movements. The coefficient of correlation between the two variables was +0.24, and while the level was low, the positive sign is what upsets rationality. It is clear that the market does not really bother about the level of infections, and while there are a couple of sessions that witness a decline in the Sensex, it is back to business; it is forward-looking.
When the lockdown was announced and the market went down, one never knew how things would shape up. The quick indicator that was available before corporate results came out and the GDP estimates came in related to tax collections, which were abysmal as no activity meant no income for the government. Corporate results came out by August and these pointed towards the downward direction. Yet the markets were positive. The sharp fall in GDP also did not lead to any correction, and while September was more or less unchanged, the spirits were still undaunted. Since then, there has been an upward move culminating in the 50,000 level in March.
If one were to try and rationalise these movements, it has to be put in the context of forward-looking perspectives. This is where the language spoken by India Inc during the announcement of their results and the relentless advice given in the media on various sectors and stocks make a difference. In fact, the experts in the markets are really market-makers as they keep the spirits up and are always positive. This is rationalised by the earnings growth which is compared with the price and the gap provides scope for the increase in prices. This is not just an Indian phenomenon, but also a global one, as all stock markets have worked the same way. A lot of drivel involving the shape of the recovery is discussed the stock markets move on comfortably, and by the end of the day the two reinforce one another. Just as there is the explanation that the K-shaped or V-shaped recovery is driving the market, the experts on the other side use market movements to justify the view that the recovery is imminent.
In India, at least a part of the rise in the indices could be attributed to the infection cases going down. But in the US the markets did well notwithstanding the infection levels going up, as two other factors played a role. The first was the outcome of the US elections, and the second was the growth prospects of the economy that were revised upwards. This was contemporaneous with the creation of the vaccine, which brought a lot of hope and gains in the market, and this thought still is driving markets everywhere. The second wave in Europe was quite severe with the responses being similar with lockdowns being announced. But the markets moved on.
Where will the market go? The Q1 results of corporates were downbeat with sales and profits falling. Q2 saw sales fall but profits rise, as companies cut on costs, especially labour costs. Q3 saw a marginal growth in sales but profits continued to zoom, which gave a sense of sharp recovery. Q4 will probably be a repetition of Q4 with a better sales growth due to the low base effect of Q4FY20. The announcements of localised lockdowns shake the market but do not really change direction for more than a few sessions. The market is driven more by the vaccination numbers and the high frequency indicators such as GST collections, PMI, e-way bills, etc. Therefore, it looks unlikely that the Sensex will slip too much for a prolonged period of time.
In fact, corporate results will be more than positive in the first two quarters of FY22, which is good news for the market. There would be sectoral imbalances as the services segments will continue to be hit adversely. But the Sensex is dominated by the blue-chip stocks in the manufacturing and IT sectors.
Interestingly, all through the year, the markets were not too much enthused by the government policies as the series of announcements made under Atmanirbhar Bharat campaign drew an indifferent response. The same was with the Union Budget. Therefore, there seems to be more faith put in the private sector and animal spirits than the policies of the government, which is a surprise. But then the history this year of the stock market has been one of surprises for sure!
On CNBC
https://www.cnbctv18.com/videos/economy/experts-discuss-economic-impact-of-new-covid-restrictions-in-maharashtra-8830611.htm
https://www.thehindubusinessline.com/opinion/tweak-the-formula-for-small-savings-rates/article34255379.ece
The Monetary Policy Committee (MPC) decision on rates was quite expected and hence the status quo was not a surprise for the market. The same holds for the accommodative stance, which means that growth will remain the main objective, as the MPC has stated that this stance will hold until growth prospects stabilise.
The focus was to be more on the language of the RBI on growth and inflation. Here, the RBI has been pragmatic on growth with a forecast of 10.5 per cent for fiscal 2021-22 (FY22), which is quite timely. The International Monetary Fund (IMF) had just spoken of 12.5 per cent growth, which looks less likely given the recent developments taking place. However, the RBI has spoken very positively on the growth situation based on the high frequency indicators available, which is open to debate given the series of lockdowns we have had in various states. The RBI has a lot of confidence that the measures invoked by the government last year will bear fruit this year, which is encouraging.
On inflation, the central bank has talked of CPI being above 5 per cent till September and the rationale is assuring. The kharif crop and movement of international commodity prices will have a bearing on the progress of prices. The RBI has again suggested that the government does something on fuel taxes, as this has potential to lower not just the primary effect, but also the secondary impact on inflation of other goods that got affected due to transport costs going up.
Admittedly, these inflation numbers are getting support from the base effects as last year it was high for the first three quarters. Therefore, numbers of 5.2 per cent in Q1 and Q2 should be interpreted against this background. The expectation is inflation will come down to 4.4 per cent in Q3 presumably on the back of a good crop. The assumption is that there will be no onion or tomato-price shock this time!
The RBI has done a mammoth operation of managing liquidity last year, not just for government borrowing, but also the corporate bond market through the targeted long-term refinance options (TLTROs) and other facilities. This will continue in FY22 too.
There are however, two interesting new measures to be taken at managing liquidity. The first is drawing down liquidity in the system, which cannot be put to use through the variable rate reverse repo (V3R) for different maturities. Depending on the quantum and persistence of surplus liquidity in the system, these reverse repo operations would be undertaken. To speak clearly to the market, the RBI has said that this measure is no way a signal for tightening policy as was interpreted last time. Such blunt talk is helpful.
The other is the GSAP – Government security secondary market acquisition programme. This will be a planned open market operation (OMO) kind of action, where the first has been announced for Rs 25,000 crore for April 15. Clearly, the RBI is ring fencing the liquidity issue on both sides - being either surplus or deficit - given the large borrowing of the government. It has been stated that this will keep the yield curve stable and free from volatility. Therefore, two objectives will be met at one stroke.
The RBI has set the tone for the year and we can expect more of these GSAP measures and maybe even TLTROs when the need arises. So, it will be again liquidity management while keeping an eye on inflation and growth all the time.
With the credit policy coming up next week and the cash reserve ratio (CRR) increase already in force by 50 basis points (bps), it may be time to reconsider the value of having a CRR in place. This also rhymes with what the late Deputy Governor of RBI, KC Chakrabarty, argued for—doing away with the CRR. Today, the net demand and time liability (NDTL) for the banking system is around Rs 160 lakh crore, and 4% CRR means around Rs 6.4 lakh crore is impounded by the Reserve Bank of India (RBI) under this stipulation on which no interest is earned. Further, the markets were quite sensitive to the RBI announcement in the last policy of increasing the CRR in two steps. G-Sec yields were nudged up as it was assumed that the signal was one of tightening rates even though it was pointed out by the central bank that this was not the case. There is compelling reason to revisit this issue.
A CRR has been defined by most central banks because it is meant for solvency of the banking system. If a bank goes bust and there are issues in liquidity, the central bank can use the cash that has been impounded to make the necessary payments to begin with, before using other measures to save the deposit holders. In the Indian case, this has never been used and all bank failures have been caught early by the central bank and action taken. Where the central bank has been caught off guard, the CRR money has not been deployed to pay the deposit holders. In fact, there have been restrictions put on withdrawals and the CRR was never used for this purpose. The deposit insurance scheme is already there to address issues of safety of bank deposits. Therefore, the solvency explanation is not too strong.
The other justification for the CRR is that it is part of monetary policy toolkit, and by increasing or decreasing this ratio, RBI can manage liquidity. Hence, unlike repo rate where changes can only nudge the banks to follow suit, a CRR change deals with the supply of liquidity directly, which, in turn, affects interest rates. Intuitively, if the CRR is increased, the supply of lendable funds falls and rates would go up. Unlike repos/reverse repos which are of a short tenure or OMOs which are of smaller quantities, the CRR is a permanent deal with liquidity. Therefore, the impact is sharper here. Quantitative measures like the CRR have an advantage of being large and direct, and hence effective. However, it is a one-time shot. And once the CRR change is absorbed by the system, a reversion to earlier equilibrium is possible. OMOs, on the other hand, are smaller doses which can be used periodically to steer the market.
Globally, the CRR exists and is as high as 17% in Brazil, 11% in China and 8% in Russia. These rates are much higher than in India (which will soon be 4%). It is nil in the US, 1% in the UK and 2.5% in South Africa. Therefore, there are different ratios in countries depending on local conditions. But the concept is not alien.
Now, bankers would always argue that the CRR should not be there. The idea of collecting deposits is to lend the money to the productive sectors. By impounding funds through the CRR, there is loss of liquidity. Here it can be counter-argued that banks anyway are never lending all their funds and are investing in government securities far in excess of what is required, either out of regulatory pressures of Basel III or preference for the same. Therefore, even if they had these funds, it would not have been necessarily used for credit deployment. In fact, in FY21, RBI had lowered the CRR by 100 bps, which would be roughly Rs 1.5 lakh crore, which could be matched with large reverse repo deployments through the year (of the order of above Rs 5 lakh crore on a daily basis). Hence, the original objective of lending to industry was never achieved as the money went back to RBI and earned 3.35% interest. But the market was happy that more funds were permanently made available to the system.
Then there is the question of interest payment on the CRR. Earlier there was an interest paid on CRR balances till 2007. This made sense when the CRR was in the double-digit range. Now, while demanding an interest payment on CRR payment is legitimate, it should be realised that banks actually have around 9-10% of their deposits that are rolled over continuously as demand deposits. No interest is paid on these deposits, but the funds are deployed for lending as there is stability in these deposits, just like savings deposits which are around 25% and cost not more than 3%. It can be argued, therefore, that as money is fungible, the 9% demand deposits that come free of cost have a part withdrawn through the CRR by RBI which is interest free. Hence, banks are not really losers given the inherent structure of banking in India.
On balance, it can be argued that the CRR should remain, and RBI has been fair to banks as the cost of the CRR is permitted to be included in the calculation of the base rate and the MCLR (Marginal Cost of Funds Based Landing Rate). Therefore, the cost is loaded finally to the borrower and not really borne by the bank exclusively.
The purpose so far has mainly been to use the CRR as a monetary policy tool rather than a final recourse for failing banks. In this situation, a pertinent question to ask is, can these funds be used for some productive purpose? It is important because even forex reserves which are accumulated by the central bank are deployed in federal bonds or other investments. Here, the existing balance of, say, Rs 6 lakh crore is idle, and it is possible for these funds to be deployed by RBI. These funds can be partly used for zero-cost emergency lending to the government for short-term periods including WMA (ways and means advances) which have the advantage of not leading to creation of new reserve money. Probably RBI can decide on what part of the CRR can be used for these purposes while the base CRR money which can be defined as being 50% is used for monetary policy purposes. How about lending to the new development finance institution (DFI)? It cannot be for the long-term and has to be for the short-term only because otherwise the conduct of CRR tool for monetary policy will be impeded. A discussion needs to start on this subject for sure.
