Modi Govt -- Bazooka 2.0

Since the commencement of the lockdown in India,32.32 crore beneficiaries, till date, have directly received monies in their bank accounts, amounting to an overall sum of Rs 29,352 crore, via the direct benefit transfer (DBT) scheme. Rs 9,930 crore has been disbursed to 19.86 crore women, "Jan Dhan" account holders. 97.8 lakh free cylinders have been given to beneficiaries under the "Pradhan Mantri Ujjwala Yojana" while 5.29 crore poor people have already received free ration under the "Pradhan Mantri Garib Kalyan Ann Yojana". Rs 1400 crore has been disbursed to 2.82 crore disabled, widows and old age persons while 2.17 crore building and construction workers have already received financial support to the tune of Rs 3071 crore. Rs 14946 crore has been disbursed to 7.47 crore farmers, under the PM-KISAN scheme during the lockdown. 2.1 lakh EPFO members have already availed online withdrawal of a sum of Rs 510 crore so far.

Needless to add, measures to provide free rations to 80 crore people, direct cash transfers to farmers, financially empowering 63 lakh self-help groups (SHGs) and, free health insurance of Rs 50 lakh each, to over 20 lakh health workers, are steps being implemented on a war footing by Prime minister Narendra Modi who has been virtually burning the midnight oil, so that a nation of 1.37 billion people, can breathe easy, as the worst global pandemic in a 100 years, brings the world to a grinding halt.

On 27th March 2020, India's central bank, the RBI, stepped in with a Rs 3.74 lakh crore monetary stimulus package, amounting to 1.87% of GDP, that included cuts in the benchmark REPO rate from 5.15%, to 4.4%, moratorium for three months on EMIs of all term loans including credit card dues, home loans and personal loans, cut in the cash reserve ratio (CRR) for banks from 4% to 3% and, bond buybacks of Rs 1 lakh crore via, targeted long term repo operations (TLTROs). On 17th April 2020, the RBI Governor announced new measures, in continuation of steps announced on 27th March 2020, to maintain adequate liquidity in the system, facilitate bank credit flow and ease financial stress. 

The RBI on 17th April 2020, announced Rs 50000 crore worth of Targeted Long Tern Repo Operations (TLTROs) and a cut in reverse repo rate from 4% to 3.75%. This will further activate credit growth, motivate banks to pass on rate cuts to end-users, help the MSME sector and microfinance institutions (MFIs) and, prevent the banking sector from getting gridlocked. TLTROs will reduce bond yields and will bring down the overall cost of borrowing for bond market players, including the government of India, which is looking to borrow Rs 4.88 lakh crore from the bond markets in the first half of the financial year 2020-21 (FY21).

Rs 50000 crore of TLTROs will be done specifically to invest in investment-grade bonds and commercial papers of NBFCs, which will be a very big boost to repair the health of ailing NBFCs, who are big lenders to MSMEs, as this is one space where banks have traditionally played a less aggressive role as lending institutions.

Also, this will create a virtuous economic cycle between NBFCs, MFIs, credit flow and financial stability, in the larger sense. While central banks in Australia, the UK, the USA and New Zealand have embarked on massive bond purchases, capping borrowing costs, the Narendra Modi led government has largely refrained from these big bang measures and opted for a more studied and calibrated approach, which is precisely what the Indian financial system needs right now. 

With the plethora of measures announced, India’s benchmark 10-year bond yield which had climbed 30 basis points so far in April, to 6.39%, its biggest monthly rise in two years, is slated to inch downwards. Today's measures by RBI will help bring down the overall cost of funds for banks and NBFCs, will reduce the transmission cost and also lower the overall cost of the government's aggressive borrowing programme.

Cut in the reverse REPO to 3.75%, has been done specifically to prevent banks from indulging in lazy banking. Most banks were not lending to corporates, but simply lending money to RBI at 4% and making money via reverse REPO operations. Excess liquidity or surplus money floating in reverse REPO window has been to the tune of a whopping Rs 7 lakh crore daily. By now cutting reverse REPO rate to just 3.75%, RBI has disincentivised banks to engage in idle or lazy banking.

Indian Banks' Association (IBA) Chief, Sunil Mehta, said that once accounts don’t slip into NPAs, bankers will be more willing to lend to such accounts that are currently stressed and threatening to turn into bad assets. By reclassifying NPA norms for banks and those lenders who have undertaken a 3-month moratorium on EMIs and by giving these lenders an additional 90-day window, before an account where interest is overdue, is termed an NPA, the RBI has infused dollops of confidence into the banking system.

Effectively speaking, instead of 90 days, an account where interest was due as on 29th February/1st March 2020, will now be termed as NPA only after 180 days, instead of the mandatory 90 days. This will induce bankers to lend to separately managed accounts (SMA). However, banks will have to make additional provisions for such accounts and this relaxation in asset/NPA classification is only temporary. Original NPA classification norms will be applied at a convenient date after COVID-19 related economic slump is under control.

Loans given by NBFCs to real estate companies will get similar benefit/treatment as loans given by scheduled commercial banks (SCBs), to the realty sector. This parity in treatment will is a big relief for NBFCs, real estate players/property developers and home loan borrowers, who have borrowed from NBFCs and not necessarily, banks. Liquidity coverage ratio (LCR) has also been reduced from 100% to 80%, to ease banking-related stress in India's financial system. The liquidity coverage ratio requires banks to hold enough high-quality liquid assets (HQLA), such as short term government debt – it is a debt which can be sold to fund banks during a 30-day stress scenario as designed by Indian regulators. Original LCR norms of 100%, will be gradually restored from next year onwards.

Special refinance facility of Rs 50000 crore has been additionally provided, to help ease stress in SMEs and other related areas. Rs 25,000 crore has been earmarked for NABARD, Rs 15000 crore for SIDBI and Rs 10000 crore for National Housing Bank (NHB).WMA limit to States and Union Territories has been revised upwards by 60%. WMA (Ways and Means advances) hike, will help states to plan their borrowing and cash flow better, in the COVID-19 aftermath. This WMA limit will be available till September 30th 2020 and, applicable from 1st April 2020. The government had earlier decided to enhance the WMA- a temporary facility to meet revenue mismatches, by 30%. That 30% has been further now raised to 60%, which once again proves, the Narendra Modi-led government truly believes in the spirit of co-operative federalism and does not have the "Big Brother" attitude. 

Reserve Bank had constituted an Advisory Committee under Sudhir Shrivastava to review the Ways and Means limits for State Governments and Union Territories and seems to be generously adhering to takeaways from that which is the right thing to do.

Since the start of the lockdown in March 2020, the Modi government has been completely seized of the economic repercussions of the Wuhan virus or Coronavirus as it is widely known and, has been firing on all cylinders. The extension of the realisation period of export proceeds is one such instance. Presently, the value of the goods or software exports made by the exporters is required to be realized fully and repatriated to the country within 9 months from the date of exports. In view of the disruption caused by the COVID-19 pandemic, the time period for realization and repatriation of export proceeds for exports made up to or on July 31, 2020, has been extended to 15 months from the date of export. This measure will enable the exporters to realise their receipts, especially from COVID-19 affected countries, within the extended period and also provide greater flexibility to the exporters to negotiate future export contracts with buyers abroad.

Again, the framework on the countercyclical capital buffer (CCyB) was put in place by the Reserve Bank in terms of guidelines issued on February 5, 2015 wherein it was advised that the CCyB would be activated as and when the circumstances warranted, and that the decision would normally be pre-announced. The framework envisages the credit-to-GDP gap as the main indicator, which is used in conjunction with other supplementary indicators. Based on the review and empirical analysis of CCyB indicators, it has been now decided that it is not necessary to activate CCyB for a period of one year or earlier, as the case may be.

The IMF recently came out with GDP projections for the calendar year 2020, wherein the global GDP growth is slated to be minus 3%.USA will have negative growth of 5.9% and the Euro area, a negative growth of 7.5%. India is slated to grow by 1.9% and China by 1.2%. Asia's economy is likely to suffer zero growth this year for the first time in 60 years, the IMF said in a report on the Asia-Pacific region released on Thursday. While Asia is set to fare better than other regions suffering economic contractions, the projection is still worse than the 4.7% average growth rates seen throughout the global financial crisis triggered by the Lehman meltdown in 2008 and, the marginal 1.3% increase witnessed during the Asian financial crisis in the late 1990s.

"Today we are confronted with a crisis like no other. In fact, we anticipate the worst economic fallout since the Great Depression. Just three months ago, we expected positive per capita income growth in over 160 of our member countries in 2020. Today, that number has been turned on its head: we now project that over 170 countries will experience negative per capita income growth this year. The bleak outlook applies to advanced and developing economies alike. This crisis knows no boundaries.”, said the IMF a few days back while drastically downgrading GDP growth forecasts for its members.

That India still stands head and shoulders above everybody else and will have positive growth, is a testimony to the many things that are being done right both at a macro and micro level, under the extraordinary leadership of Prime minister, Narendra Modi. Yes, these are challenging times but, India is holding up a lot better than most peers and a large part of this resilience can be attributed to the reforms that have slowly but surely shaped India's financial landscape in the last six years.

The IMF estimates the total loss to global GDP over 2020 and 2021 at $9 trillion. The estimated cumulative loss to global GDP is expected to be greater than the economies of Japan and Germany combined. The World Trade Organisation (WTO) expects global merchandise trade contracting by as much as 13-32% cent in 2020. India is set to have one of the sharpest rebounds in 2021-22, with GDP growth estimated at pre-COVID-19 levels of 7.4%, by the IMF. And, that is no mean achievement for a nation of 1.37 billion people, which has often been criticized for its size. Well, size and scalability can often walk together--something "Modinomics" has repeatedly showcased, in more ways than one.

Ms Sanju Verma is an Economist, Chief Spokesperson for BJP Mumbai and Author of the Bestselling, "Truth & Dare--The Modi Dynamic".