A Wall Street View of Rural India: A book ...Financial Express 2nd August 2020

 When you pick up a book called A Wall Street View of Rural India, the first thought that occurs to you is that it will have something about how rural-focused companies can score over others in the market. This is a misnomer, as Sujit Sahgal, a career banker who has worked outside India, narrates his view of rural India based on his experiences. It is, hence, not a macro view of the rural economy, but a summation of micro interviews and discussions had with rural folk. It is, hence, different.

What Sahgal tells in his book is really interesting. He covers seven-eight states across the country and talks to hundreds of rural folk to grasp the ground-level reality over a decade. We are fed with a lot of information at the policy level and official documents about achievements in rural India and, as the author tells us, this is important, as it fetches votes. But the real story is different and this is what makes the reader turn the pages. The truth is somewhere in between.

Let us look at some of the good things that are silently happening. This is more in the social domain, where education is high-priority and, contrary to what we believe, rural folk want to give their children better education. Also, this holds for both boys and girls, which is a comfort. His observation is that, in government schools, there are more girls than boys and this is so because some of them are working on land with their parents, while others go to private schools. The revelation here is that villages, which are within a radius of a certain distance from cities, tend to have better performance. Schools are not as bad as we are normally told, as they do function and have teachers, and the infrastructure is satisfactory with computers also making their presence felt.

The reader feels nice when he talks of women empowerment in rural India, and the proliferation of news and media in general has brought about this change. Self-help groups work well and gone are the days when they remained in a state of disadvantage throughout their lives. Another important takeaway from his treatise is that a lot of development has happened on the social front in terms of having electricity connections, toilets and so on, which has improved lives in rural India, notwithstanding the limited coverage.

The book also provides a reality check on the economic story and this is where Sahgal actually opens the cans. The rural growth story should not be overstated and this is a message for all corporates in the B2C area who must read this book. The rural spending story developed due to both the income and wealth effects—not something which has been captured in macro analysis of this economy. High MSPs during the Congress regime, coupled with investments made by corporates and the government which entailed buying land from farmers, led to this increase in wealth, which led to spending. This was not sustainable, according to the author, as the chain had to break, which it did with the BJP coming to power. The halt in investment due to the scams, issues in selling land and lower increase in MSPs led to income coming down, which has made this story untenable.

Another revelation by Sahgal pertains to the extended leverage of this sector and the loan waivers, which are politically motivated. Interestingly, while the government talks about rural credit and the success of Kisan credit cards, given the structure of such credit, it has been used mostly for consumption rather than production, which is a problem. In fact, smart cards, which are becoming the norm, encourage such indiscretion. Also, thanks to loan waivers, it has entered the psyche of farmers not to repay their loans. On the other side, he also shows that it is not easy to qualify for the same, as the conditions put are quite stringent. So, there are two sides to this issue.

Sahgal also dwells on the flip side of the initiative taken by the government to make all benefit transfers online. This has actually led to lower employment because before the new system came about, there were people from the village employed to carry out these chores. With everything happening from above, these jobs became unnecessary. Similarly, post 2014, the NREGA programme did not have too many projects that were available for work to be made available to the farmers. Hence ironically, some reforms which were brought on to cut leakages were at the cost of job creation!

Sahgal does see problems going ahead in agriculture, as children of farmers do not want to do farming. While urban folk do have a penchant for reverse migration, it may not be sustainable. There will be more technology at play and the shared economy will dominate even in, say, the tractor business. People are getting savvier and can get progressively integrated in the technology web, where the eNAM will help.

Sahgal’s book is very readable as it takes us to the roots with his stories and conclusions. His approach is real as it is based on what has been experienced by him over the years in villages. Everything in this large economy is dualistic and there are surprises everywhere as myths are exposed (in economic domain) and pessimism moderated (in social area). It is definitely not based on secondary sources of data which normally commentators use sitting in their air-conditioned chambers. This is why it stands out.

Government and RBI should revisit all bank charges on deposits: Free Press Journal 1st August 2020

 Recently the author received a message from AXIS Bank that henceforth the bank would be charging Rs 15 a month for SMS messages. Quite predictably the savings bank account was debited for the same. There was no choice provided to the customer and the bank went ahead without the consent. As is normally the case with all bank charges it is possible that your bank might have had this in fine print in the account opening form which would have been exempted from a fee to begin with. Hence there was nothing amiss about such a charge being imposed after a decade. Should the RBI be worried about such developments?

In the Indian banking system, there are around 165 crore savings bank accounts in the country and if this charge of Rs 180 per month were to be applied to all, the system would be earning up to Rs 30,000 crore. If even 25% of these accounts are charged, the income would be Rs 7500 crore. Practically speaking, savings bank holders are normally salaried class which does not need such messages which are ‘pushed’ on them and then charged. The same bank earlier started charging Rs 300 per annum for debit cards issued which is mandatory for every customer. All those in the exempted category, like salary accounts, were also charged this fee. This is a personal experience with the bank. This practice has become universal now as a check across these banks show that all are charging customers for basic services. And the curious part is that the RBI has actually given freedom to banks on these accounts and the interest earned could be as low as 2.5% now for some banks.

The Financial Resolution and Deposit Insurance Bill, 2017 had also proposed deposit holders to partly bail out banks, meaning thereby that if NPAs increased and banks went bust, the deposit holders should bear part of the cost. The RBI has also approved all the charges which banks charge to customers—number of ATM withdrawals, cash deposits, entry into banks, and so on. Therefore, banks are merely working within the rules laid down by the regulator.

The broader questions are the following. First, deposits keep banking business going and hence the savers cannot be charged for basic banking services. Banks keep messing up on what they are supposed to do i.e. lending, and try and make up these losses by burdening the customer with these charges. As banks operate as an oligopoly, everyone does the same and hence deposit holders have no choice. Second, when a charge is imposed the deposit holder’s consent has to be mandatory and an ‘opt in’ facility has to be there. If a person does not want a debit card the choice should be given with the provision that the person has to go to the bank branch and make a transaction. While the charge may not be high, but with 165 crore accounts involved, the potential cost to the savers will be around Rs 50,000 crore. When the smart card concept came in, the idea was that customers did not crowd the branch and were given this facility. Once used to it, banks have started charging for the card. Often on security grounds there is a time stamp which means that new cards are issued and the customer can be made to pay for this issuance too. Third, the very idea of FRDI of making deposit holders also taking the burden of NPAs is abhorrent. Banks make money on the deposit holders’ money and hence the latter cannot be made responsible for something which the former is supposed to have the expertise.

There is definitely need for the RBI to revisit all these charges that are levied by banks and question the logic of each one of them. Basic bank services have to be free of cost and where there are charges the customer should be given the choice. In fact, even minimum balance rule, which is a good way for banks to earn money makes no sense as there are actually no costs in having an account which does not have this threshold. Banks continue to use these funds for their business and earn an income and hence the argument that this is a cost for the bank is fallacious.

There is also need for an association to be formed for deposit holders which works towards protecting their interests. Curiously all policies are biased heavily towards the borrowers and rarely talk of the interests of deposit holders. Hence the savers’ perspective is never looked at. As there is a large population that lives on a fixed income the anomaly is that while the government talks of the interests of this class, the same does not get reflected in policies.

The government also should look into this issue as on one hand it is trying to drive people away from cash holdings and forcing savers to put money in a bank where these practices can be interpreted as being exploitative.

Takeaways from RBI’s financial stability report on moratorium: Financial Express 28th July 2020

 

Takeaways from RBI’s financial stability report on moratorium

By: Madan Sabnavis | 

Published: July 28, 2020 7:15 AM

The moratorium has been extended by another three months and, hence, a clear picture, on whether these accounts will remain standard or not, will emerge only towards the end of the year

The moratorium, extended to all bank customers, as per RBI’s March announcement, had raised some issues; these have been answered, to an extent, in the latest Financial Stability Report (FSR). There was no firm data concerning how many loan-account-holders availed of the moratorium and the overall value of outstanding credit reserved for this. There was ambiguity regarding whether or not this was automatic or whether one had to opt for it. There was strong messaging from the government that it had to be automatically offered to all customers, while the borrowers often complained that they had to ask their bankers.

The data provided in the FSR is interesting. The accompanying table shows that around half of the outstanding loans were under the moratorium, which also covered 55% of customer accounts. Given that outstanding credit in the system was Rs  104 lakh crore (includes farm loans too) as of March 2020, a sum of up to Rs 45 lakh crore, or around 22% of India’s GDP, is, thus, under the moratorium. (this was offered to all standard assets as of March 1, which was above 90% as of March-end). This shows the effect of lockdown on the economy, with half the borrowers preferring to opt for this facility. Indeed, even the borderline companies that could have serviced their loans went for the moratorium owing to the uncertainty of future cash-flows, but this shows that such loans can be considered vulnerable to differing degrees.

The highest share of o/s loans is, quite expectedly, with the SMEs, and this should be a cause of worry. SMEs were adversely affected by demonetisation and GST, now lockdown has added to woes. Even after this scheme ends, the government will have to announce a restructuring scheme for this segment.

The other revelation is that, in all segments, the share of outstanding loans that have sought moratorium is higher than the share of accounts, which means that it is the relatively larger ticket-size borrowers that are under stress.
Only in the case of individuals is the differential low as the ticket-sizes tend to be normally homogenous across the board. Banks, hence, need to take a closer look at the bigger tickets in the corporate segment as they could potentially be trending towards becoming NPAs. And, as some segments like hospitality, airlines, media, tourism, construction, and real estate are still to recommence activity—some may even take another six months—a rigorous monitoring policy should be in place.

The retail loans would also be a concern as PSBs, in particular, had moved more aggressively into the mortgage segment with the pressure of affordable housing being an overriding factor. Now, anyone taking a moratorium here would be in an extremely challenging position compared to say a corporate. Job-loss or a salary-cut would typically increase the probability of not being able to service the loans. Here, the situation will not change during the year. In case of corporate loans, with the unlock phase being in force, it may be possible for companies to recover. In the case of personal loans, this may not be the case.

For FY20, RBI has pointed to an NPA ratio of 2%, which can rise sharply in the coming year once the classification norms are normalised. The affordable segment will be the most vulnerable section as the loss of jobs has already affected or will impact the lowest-income group. In fact, a section of the migrant labourers who have gone back to their hometowns in rural India would also be covered here.

The other interesting bit revealed by the data is the residency of these loans across the different categories of banks.
The overall picture on loans under moratorium has been skewed by the PSBs, as shown in the accompanying graphic. Two-thirds of their accounts and loan-value are now covered under the moratorium. This is much lower for the private and foreign banks. Several conclusions can be drawn from this.

First, the government may have nudged the PSBs to be more aggressive in getting customers to opt for the moratorium. Affordable housing, too, has been high on the agenda of the government. Second, PSB accounts are clearly more stressed than others, something that gets revealed in the NPA numbers as well. With a high impaired-assets ratio, it is but natural that the more vulnerable accounts would be in their portfolio relative to other banks. Third, for foreign and private banks, the difference between the percentage of accounts and outstanding loans is quite stark, with the share of customer accounts being higher than those held by debt. This means that typically the smaller tickets have gone for the extension and the bigger accounts have not.

Hence, the number of accounts seeking moratorium is higher than that by value. Fourth, a corollary, the non-PSBs have better quality of customers, which is buttressed by the fact that their NPA levels are much lower. Therefore, their customers tend to be financially stronger, and thus have not opted for this facility. They have been choosier when picking their customers.

Interestingly, for the small finance banks, 85% of the accounts covering 63% of the o/s are under moratorium. Here, it is the smaller tickets that are under pressure. For urban cooperative banks, it is the reverse with 57% of accounts and 65% of the value being under moratorium. The same is seen for NBFCs, where 29% of the accounts and 49% of outstanding have opted for this facility.

The moratorium has been extended by another three months and, hence, a clear picture on whether these accounts will remain standard or not will emerge only towards the end of the year. This is a global problem and can lead to an increase in the set of impaired assets at a later date. The clue is to restart the economy as soon as possible so that the enterprise can get back to work and start earning revenue. For individuals who are working with pay-cuts or are out of work, the situation is unsatisfactory, which will finally show on the books of banks. Will the government be forced to announce waivers in future?

Book Review — Sway: Unravelling Unconscious Bias: Financial Express 26th July 2020

 ‘Sway’ by Pragya Agarwal is quite a delightful book that gets into our subconscious and reveals the unconscious bias that exists in our mind that manifest in terms of behaviour or reactions even before we are aware of them. Agarwal is a behavioural and data scientist and while she is an Indian by origin, is a citizen of the UK. But her appearance and that of her children make her stand out for differential treatment even in her homeland.

Such biases are quite strong and also manifest in terms of conscious bias against a race or community and become all-pervasive. The ban on, say headgear for women, appears to be a conscious bias but is driven by the unconscious, which makes people generalise and come to certain conclusions.

The author takes us through various biases that exist when we deal with people. Gender bias has been spoken of, as it is very evident and almost all working women can testify to this disadvantage where there are certain preconceived notions when hiring people for certain jobs. The bias comes out further quite interestingly when we see the design of something like passenger cars where intrinsically the seats and positioning of the pedals are tuned to men rather than women. This means that women have to make the adjustments rather than men who have the vehicle tailormade for their physical stature.

She also gives an example of Microsoft’s gaming device that was to pick up commands from signalling of hands or voice. It was geared to men in a certain age group, and women and children got left out. The bias, hence, also enters AI, which, when running algorithms with data, would always reinforce the best selection as being men rather than women. This means that even technology is not free from such biases, probably because it is designed by people who reinforce the same in their work.

Race is another disadvantage in society and this holds true in all countries, especially where the mixed-race country is dominated by the local gene. There is typecasting of race everywhere and we can see it in India too where coming from a particular region makes one get bucketed under certain preconceived notions, which can either help one in a job interview or even work against the person by virtue of this unconscious bias.

Agarwal talks of other biases that come from something as rudimentary as looks. The so-called good-looking people stand a better chance at getting jobs and even credits in universities. Studies were conducted which showed how essays were marked when the person was not seen by the evaluator and when the face was shown. The better-looking ones performed better when the evaluator saw their faces. This is another bias which comes at the time of recruitment where looks matter. This can also be carried further to heads of states where often a less good-looking person could be at a disadvantage. The author again says that this is ‘unconscious’ because even experiments involving babies show that they tend to spend more time looking at what are considered to be good-looking things, including people, and could also offer smiles as a reward!

Another area where there can generally be a disadvantage is ageism, where older people are looked down upon. This is surprising because there was a time when age went with experience and people looked up to them with respect. But today when it comes to hiring people, age is a drawback as it is assumed that people slow down with age and several jobs require quick thinking and movement which does not go with age. Hence often even when jobs are advertised with an age range, the lower limit would be more attractive for potential employers compared with the elderly.

Agarwal gives several examples of experiments that have proved such biases which exist and hence this leads to stereotyping or type-casting. It affects all areas of our lives when we look for admission or a job or compete, as the other person is always typecasting us as being of a certain bucket, which may or may not be right. It can lead to prejudices and as seen in the western world, race and religion are often associated with certain negative qualities leading to discrimination and ostracisation. In fact, the concept of ghettoisation is a result of such prejudices that come for minorities in countries where they tend to live in clusters and for all purposes are looked upon as being ‘others’ even though they are citizens of the same country. Hence, the entire concept becomes self-fulfilling.

The challenge, according to the author, is to break these stereotypes, which is difficult because these are not conscious to begin with. Also, at times, this stereotyping is perpetuated by the persons concerned where women may not trust women directors, with the author giving the example of Anne Hathaway. Hence, every bucket of people who are typecast also follow this instinct, thus reinforcing the theories that have been informally set in the mind.

Pragya Agarwal does make everyone aware of these biases and leaves it to us as individuals to bring about changes. Some have been carried down the ages and have become conscious bias. Ideally a multicultural setting with no preconceived biases, whether it comes to subjects or games, where equal opportunities are provided, are a starting point. But exposure to culture outside the book like the company one keeps and the movies one watches and the news that one reads will make this task very difficult.

The author does not say so but one can conclude that maybe such things have to be finally taught in the classroom so that the future generations are consciously told not to develop such unconscious biases!

RBI rate cut: The outlook on inflation makes a strong case for a pause by MPC: Financial Express 23rd July 2020

 The outcome of the MPC meeting is always of interest to the market, as there is guesswork guesswork  The outcome of the MPC meeting is always of interest to the market, as there is guessworkgoing on all the time on what the committee may decide on interest rates. If the economic conditions now are compared with those in May, when a call was taken on interest rates, there is considerable uncertainty on the ‘unlock’ process the government has talked. This is so because, while most manufacturing activity and some services have been allowed to recommence operations, periodic lockdowns at the state- or district-level leaves companies wondering about the future. Basic problems, such as of labour and logistics, remain, while liquidity has been more than addressed by the central bank.

The first question in the current context is whether RBI will lower the repo rate again this time. It is at 4%, and there is room for further cuts. But, inflation is above 6% and will remain at elevated levels for some more time until the kharif harvest sets in. This basic indicator is justification for a pause on the accommodative stance this time. However, this is a judgment call to be taken. Looking ahead, the inflation dynamics are going to shift, with non-food inflation being the variable to look at. The services segment, which dominates the core inflation part, has shown signs of moving up; and as services open up, this will become all-encompassing. Airline rates are up, as are those for healthcare as providers of such services make up lost ground. Hence, notwithstanding a good kharif crop, price pressures will remain, and an average CPI inflation of 5% for the rest of the year looks likely.

In the last few meetings, the MPC held growth as the overriding objective, and, now, there is more clarity on negative growth expected. RBI will probably have its growth outlook number this time, as evolving conditions have gotten clearer. The first quarter has been a disaster of mammoth proportions for the economy, and, while conditions will get only better, the question is whether the interest rate cut is important now.

RBI has aggressively induced liquidity in the system, which, ironically, is getting reinvested in the reverse repo auctions at around Rs 6 lakh crore a day. This signals that RBI may pitch to lower this rate further, from 3.35% to 3% or 3.1% to dissuade banks. The positive development is, as stated by the FM, the flow of funds to the SMEs has increased sharply till mid-July, and data for the fortnight ending July 3 reveals around Rs 48,000 crore of incremental credit. Thus, it is logical to conclude that the economic package announced by FM, which includes guarantee of credit to SMEs, has taken off.

The interesting thing is that this increase in credit to SMEs comes at a time when they are still finding it hard to get back on their feet, and economic activity is just about recovering. Therefore, it does look like that the first round of credit flow would be more for sustenance rather than growth as this segment has been impacted by cessation of activity and a high level of receivables from the linked production. The second round of credit would probably be more for growth, and, hopefully, should be before the guarantee scheme ends in October 2020.

In terms of lending rates, the MCLR has moved down to 6.65-7.3%. At this juncture, it should be kept in mind that a large set of borrowers have used the moratorium allowed by RBI; this is primarily to tide over times when there is less revenue due to the lockdown. Lowering rates further would help, albeit again as relief. But, large-scale borrowing at such low rates could lead to mis-pricing in the market and result in higher leverage at a time when economic activity has not yet picked up. Therefore, there is a counter-argument for keeping rates unchanged for the time being and wait for the revival to take place. Theoretically, lowering rates when the economy is on the upward slope is more risk-compliant than when conditions are really downbeat.

A related issue that will definitely be deliberated in the context of banking is the moratorium, as the concept came as part of the policy in March, and again in May. At present, the moratorium is for 6 months, and at some stage, it will have to be rolled back. As has been seen even in the case of ‘unlocking’ over the last two months, there has been volatility with ground-level disturbances. Therefore, the central bank needs to have a plan in place as to how the system can be moved away from the moratorium and be brought back to normal. The definition of NPAs, too, would have to go back to normal as these two concepts run in parallel.

This is where RBI needs to have a roadmap defined for banks. Some of the scenarios that can be conjectured here are the following. First, the moratorium may have to be extended; we are in the second quarter of the financial year, and most firms are still operating at low capacity utilisation levels while some in services are barely operational. Therefore, an extension by another quarter or even a month or two can be considered. Second, there is a possibility that, based on the advice of the government, there can be a restructuring of certain loans. While those for SMEs are almost a given for inclusion if this happens, other categories, too, may be considered over time. Hence, a roadmap for the same is something that maybe expected in the policy statement.

As the economy is progressing in the right direction, even though the pace may be equivalent to a crawl, the market expectation is that there should be sectoral TLTROs. This will be of use to sectors that require funding for both survival and growth. Real estate, auto, hospitality, aviation, etc, are segments which would be looking for some support through the monetary system. The upcoming credit policy will be the first official policy since the economic relief package was announced in the last week of May. There has been time to take stock of earlier measures like liquidity, lower repo and reverse repo rates and TLTROs. Such a wish-list is hence not out of place.

There will be a lot of expectation from the credit policy this time, not restricted to just the repo rate. The policy measures beyond the development measures, which are normally put on the table, will be important.

Tackling China: Emotional rhetoric gaining in decibel: Financial Express 17th July

However, for India substituting goods worth $65 bn with equivalents could mean ending up with a higher import bill, which translates to higher prices.

There is a consensus that India needs to take stern action against China, at least on the economic front. The first action can be to sever diplomatic ties. However, this is more theoretical, and not feasible as this is not yet a war-like situation.

The second option is to have an Iran-like situation, where we, like the US, get the world to impose sanctions. But the India-China skirmish today is localised, and, hence, cannot be taken to that level. Besides, India does not have such sway over the rest of the world.

The third is to directly ban goods from China or impose a prohibitive tariff on imports. We will have to contend with the WTO, but then the organisation does not have the clout to act. China can do the same for our exports, but given that we imported around $65 bn and exported around $16-17 bn on an annual basis in FY20, this may not matter in net terms. Such a decision would have to be taken at the political level and, at present, does not look to be under active consideration. We did have anti-dumping duties some time back on steel imports from China; these, however, were based on an economic and not political rationale.

Fourth is all Indian importers boycotting Chinese goods. Of the $ 65bn or so that we import, around $21bn are electronics, $20bn engineering goods and $12bn chemicals. The reason for importing from China is price and quality. These can be sourced from elsewhere, but the cost factor could militate against such a decision.

The fifth is a modification of the fourth, where every citizen in the country desists from buying any good which has an element of Chinese inputs. This is probably a theoretical response as a product can be made using different supply chains and networks. Besides, for a consumer, cost and quality considerations trump everything else.

The nationalistic tone set by Make in India and the Atmanirbhar campaign is quite appropriate for such action. The question is whether we are willing to do this. There have been relentless moves against the use of plastics, where some sections have moved away. There are campaigns against using environment-unfriendly products, which have not quite picked up. The war against colas has not been heard. In such a situation, class action from the masses is unlikely. It has to be done at the level of business, where one is prepared to import from other countries and probably pay a higher cost. There have been some action on this from dispatch agents who have refused to pick up Chinese goods from the ports. But such responses have to become more macro to be effective. It leads to a classical strategy in the realm of ‘game theory’ where no one knows what the other will do and, hence, boycotting Chinese goods could end up with others going ahead and increasing market share in sales of, say, mobile phones. Therefore, it is hard to have strategies here.

In this age of globalisation, Chinese goods can be routed through any other jurisdiction like Hong Kong, Taiwan, Korea, and so on, which will be hard to track. Chinese manufacturers are everywhere, and the import label could say Europe, with a Chinese company being the manufacturer. Boycotting Chinese goods may not be feasible.

In the medium- to long-term, taking such action against any country may not be prudent as skirmishes on the border do not last forever. Withdrawing economic relations may not be the best practice as it sets precedents. Reviving relations after breaking them is even more difficult. That’s why even globally such actions do not happen too often, and the case of Iran is quite singular. Therefore, letting emotions control policy action is not usually the response of the government and diplomatic channels come into play. It can be assumed that the call for a ban on Chinese goods is more a public outcry than a measure that the government could be considering, as we are nowhere close to the tipping point.

Assuming this extreme, how significant will it be for China? In 2019, out of $2.5 trillion (worldstopexports.com) global trade, India was seventh with around $75 bn. The US topped ($419 bn) followed by Hong Kong ($280bn), Japan ($143 bn) and South Korea ($111bn). India’s share is just 3%.

However, for India substituting goods worth $65 bn with equivalents could mean ending up with a higher import bill, which translates to higher prices. While at the macro level, the impact may not be very sharp, it would impact product segments such as laptops, mobile phones, drugs and pharma, TVs, plastics, dairy machinery etc.

Interestingly, out of the $680 bn of FDI cumulative inflows, China has a share of just 0.5%, and, hence, is not a major player. However, routing through tax havens like Mauritius and Singapore cannot be ruled out which have a share of 50% in total.

To conclude, while emotional rhetoric has gained in decibel level, practically speaking, as long as diplomatic relations are open between India and China, taking stringent action is not feasible. Those in favour of a ban argue that we are already less dependent on China for imports. While it may be tempting to conclude that there is a silent withdrawal taking place, overall imports have fallen. The jury is still out on this. 

Unlocking economy in phases poses a major conundrum for government: Indian Express 15th July

Today, it is hard for one to say whether it is more challenging to opt for “unlocking” the economy as compared to “locking” the country. In a way, the former option looks more difficult because when the country opted for the lockdown, there seemed to be little choice. It was based on the assumption that lives were more important than livelihoods. But as the decision sank in, and its impact played out, it was realised that the lockdown led to the impoverishment of enterprise and that the epidemic was spreading. The decision to unlock the economy in phases poses a major conundrum for the government. Unlocking also means getting back to a state of normalcy at some time, which will be problematic.

First, the steps involved in unlocking the economy. Opening up of non-essential production has been allowed, though it’s fraught with ambivalence at the state level. But, this will be ironed out in the typical “jugaad” manner over time. But what about services? This is probably the most crucial element of unlocking the economy at a time when the number of infected has crossed 25,000 a day and is moving north. How does the government agree to allow public transport to function? And when will the railways and airlines’ operations be restored to normalcy? The truncated services have complex “standard operating procedures”, which deter travel. But once opened up, the SOPs will lead to chaos as there would be millions of people on the move every day. Therefore, the door has to remain closed for a longer period.

Second, after three months of the first economic package that offered free foodgrains to the poor elapsed, the Prime Minister announced its extension for another three months, which would cost the exchequer Rs 90,000 crore. But what happens after three months? Can one really withdraw the scheme, given that most sectors in the economy would, at best, be getting back on their feet rather than walking? Withdrawing any scheme for the poor is tough, though retaining the same will add another Rs 90,000 crore or 0.45 per cent of GDP every three months, adding pressure on the fiscal deficit.

Third is the moratorium provided by the RBI to borrowers for six months beginning in March. The lingering question is: What happens after the six-month period ends? The first-quarter corporate results are abysmal, with negative growth in sales and a sharp drop in profits. This will get reflected in their ability to service their debt commitments. The Purchasing Managers Index for June also indicates that activity is sluggish and it looks unlikely that there will be a turnaround in July. With output growth being stifled in this period, it is improbable that those who took the moratorium can actually start servicing their debt. Additionally, the retail portfolio is filled with mortgages of borrowers with “no jobs or lesser salary” (NJLS). These individuals have been affected for at least a year. The question is: How long will one extend this facility and, more importantly, what happens when it ends?

Opinion | In locking down and opening up, state needs to choose its words carefully

Fourth, the RBI has tweaked the NPA classification norms in conjunction with the moratorium, which is logical. But, at some time, money has to be repaid to the banks, and if not, the loans have to be classified as NPAs. There is already talk of restructuring loans but which part of the asset portfolio would qualify for the same? Should it be only the SMEs, which are on the radar all the time, and also sectors that have been deeply impacted, especially in the services sector such as tourism, hospitality, airlines, and entertainment? While restructuring is a short-term measure, banks will be keen on knowing how the RBI will be looking at these assets because when forbearance becomes a bad word there can be a ballooning of NPAs. This is problematic for the system and the government because it would mean the provision of more capital to support public sector banks.

Fifth, and related to the previous point, is the outcome of lending based on guarantees given by the government for SMEs and NBFCs. This was a useful step announced by the Finance Minister — in line with what several governments in the West have announced to support their economies. While it would be too pessimistic to say that a large part of the debt could go bad, defaults in the region of 10-20 per cent cannot be ruled out. Hence, an SME package of Rs 3 lakh crore of guarantees may have to be forgiven (waived off) and paid through the budget.

Sixth, the curse on all central banks this year has been the provision of liquidity to the system. Central banks in the West have opted for quantitative easing in different forms while the RBI has used long-term repo operations and measures like facilities for NABARD, SIDBI, targeted long-term repo operations and open market operations to ensure that there is a lot of money in the system. But with subdued production (supply) even in 2021-22, the generation of excess demand across the world leading to higher inflation cannot be ruled out. The puzzle is what will happen to the loans that have been taken today at a variable rate, which will become more expensive in future. This can affect the economic viability of units in the second round.

Clichéd arguments of there being no free lunches are a fact in the present context. Someone has to pay for this package and while the government will find itself fiscally strained, it could collect revenue through more taxes — the dividend distribution tax, surcharges on higher incomes or a COVID cess — but this will be intrusive. The RBI will have to move away from the accommodative stance and rein in inflation.

The scenario painted here is not without a sense of déjà vu as the post-Lehman drama played out, which though was of a smaller scale than the current pandemic, was not without repercussions. We need to be ready with answers now.