CBS projects Nepal's GDP to grow at 2.3% in FY2020

On 29 April, Central Bureau of Statistics (CBS) estimated that Nepal’s economy (at basic prices) will likely grow at 2.3% in FY2020, down from 6.7% revised estimate for FY2019. The projected growth rate is lower than the government’s 8.5% target. The growth estimates by CBS is based on the assumption that the COVID-19 affected economic activities will start to pick up pack from mid-May (last quarter) except for tourism activities (hotels & restaurants, and international travel). 

In FY2020, the growth is largely driven by electricity, gas and water output. This might be based on the expectation that the government will be able to bring online Upper Tamakoshi and few other hydropower projects by mid-July as a few large infrastructure projects are not severely affected by COVID-19 pandemic related disruption to labor, supplies and capital.

Overall, agricultural, industrial and services sectors are projected to grow by 2.6%, 3.2% and 2%, respectively. Agricultural sector contributed 0.8 percentage points, industrial sector 0.5 percentage points and services sector 1.07 percentage points to the overall projected GDP growth of 2.3%. These projections are based on eight to nine months data and the assumption that economic activities will gradually pick up from mid-May (expect for international tourism). 

Specifically, electricity, gas and water sub-sector is projected to grow at the fastest rate (28.7%, up from 9.1% in FY2019), followed by fishing (7.2%, up from 5.6% in FY2019), health and social work (7.1%, up from 6.8% in FY2019), and public administration and defense  (6.9, up from 5.5% in FY2019). All other economic activities are expected to grow at a rate lower than in FY2019. Construction; mining & quarrying; manufacturing; transport, storage & communications; and hotels and restaurants activities are expected to contract in FY2020. 

Industrial output would have contracted if it were not for the high growth projection for electricity and water sub-sector's output. Delayed monsoon, slow capital spending and lack of business confidence amidst the lower-than-expectation performance of the government had already created an environment where GDP growth was projected to be lower than in FY2019. The strict lockdowns and social distancing rules to contain the spread of COVID-19 exacerbated the slump in economic activities. 

Agricultural output is projected to grow at 2.6%, down from 5.1% in FY2019, largely due to a delayed monsoon, shortage of fertilizers, use of substandard seeds and an armyworm invasion. The labor, harvest and supplies disruptions due to COVID-19 exacerbated the situation. The CBS expects wheat and vegetables output to grow despite the effect of COVID-19 on agricultural market and supply chains. 

Industrial output is projected to grow at 3.2%, down from 7.7% in FY2019. Within industrial sector, electricity, gas and water subsector is expected to grow at the fastest rate: 28.7%, up from 9.1% in FY2019. The CBS expects a substantial addition of hydroelectricity to the national grid by mid-July. All other industrial sector activities are expected to contract. Mining and quarrying activities are projected to grow by -0.7%, down from 8.9% in FY2019, as mining and quarrying of stones, sand, soil and concrete is affected by the lockdowns and social distancing rules. Similarly, Construction activities are projected to contract by 0.3%, down from 8.1% growth in FY2019 as a combination of slow capital spending and the strict lockdowns affected output.  Manufacturing activities are projected to contract by 2.3%, down from 6.8% growth in FY2019. In addition to the COVID-19 related lockdowns and containment measures, manufacturing sector has been suffering from a lack of private sector investment as well as loss of both domestic and external markets due to eroding cost and quality competitiveness. Stable supply of electricity and improved industrial relations were not sufficient to drastically boost manufacturing output as expected. 

Services output is projected to grow at 2%, sharply down from 7.3% in FY2019, making it the most affected sector due to the lockdowns and supplies disruptions. Within service sector, wholesale and retail trade activities are expected to grow by 2.1%, down from 11.1% in FY2019. This reflects a drastic drop in import demand (as remittance-financed imported goods are traded in the domestic market) and sale of agricultural and industrial goods. Since travel and tourism activities were severely affected by COVID-19 pandemic, hotels and restaurants sub-sector is expected to contract by 16.3% and transport, storage and communications by 2.4%. The growth rates in FY2019 were 7.3% and 5.9%, respectively.  Financial intermediation is projected to grow by 5.1%, lower than 6.2% in FY2019, reflecting reduced income of NRB, BFIs, insurance board and companies, securities board, EPF and CIF. Real estate activities are expected to slowdown to 3.3% from 6.1% in FY2019. Education sector is expected to slowdown to 3.0% from 5.1% in FY2019. Public administration and defense is expected to grow at 6.9%, up from 5.5% in FY2019. Similarly, health and social work is expected to growth at 7.1% from 5.7% in FY2019. 

On the expenditure side, GDP (at market prices) is expected to grow at 2.3%, drastically down from 7% in FY2019. Consumption is expected grow at 3.2%, down from 5% in FY2019. However, public and private gross fixed investment and inventory (change in stock) are expected to contract. Net exports is expected to growth at 5.5% (compared to a negative growth rate last fiscal) thanks to a higher rate of decrease in imports compared to exports. 

Here are quick takeaways from the latest GDP projection.

First, the strict lockdowns, supplies and travel disruptions, and social distancing norms have severely affected almost all sectors. Particularly hit are industrial and services sector activities. Overall, consumption slowed down but investment (both public and private) contracted.

Second, GDP growth was projected to be lower than in FY2019 even before COVID-19 pandemic affected Nepal. Delayed monsoon and shortage of inputs had dented prospects for higher agricultural output. Slower than expected capital spending during the first half of FY2020 had affected construction, and mining and quarrying. Industrial sector was in stress due to low capital utilization. Slowdown in remittance inflows had affected services sector activities (particularly, import dependent wholesale and retail trading). The COVID-19 onslaught exacerbated the economic outlook. 

Third, the CBS’s projection might be a bit more optimistic. A majority of the economic activities happen in the second half of fiscal year. This is also the period when COVID-19 hit Nepal and the government resorted to necessary containment measures like strict lockdowns and social distancing. The CBS expects lockdowns to loosen by mid-May and economic activities to gradually normalize. However, this may be challenging because of the disruption to labor and supplies markets and subdued consumer demand. For instance, the dispersal of labor (internal and external migrant workers) is hard to reverse quickly. Contagion conscious businesses may find it hard to fully open shops and activities. Same with casual workers and informal sector workers. It will be challenging to ramp up construction activities for the rest of the year because contract award and work commencement usually happened in the second half. Additionally, if hydroelectricity generation (addition to the national grid) is less than expected by mid-July, then it will affect the growth projections too. 

Fourth, fiscal stress will be heightened as revenue dwindle but expenditure needs shoot up. Employment demand under prime minister employment fund will increase as jobless people resort to making use of social protection schemes (think of it as automatic stabilizer in employment market). Similarly, there will be increased pressure for direct cash transfer to the newly jobless workers and vulnerable groups.

Fifth, with adverse external environment (weak export demand, slowdown in Indian economy, likely fall in remittances and FDI, etc), and weakened internal production, GDP growth in FY2021 might still be muted. Private sector investment may remain subdued given the large uncertainties and additional cost to businesses due to the lockdowns. Worse, some might simply go out of business and default on loan payments. In times like this the public sector really has to ramp up consumption (direct cash and in-kind transfers, support to MSMEs) and investment (high capital spending exploiting the low hanging fruits) to stabilize falling aggregate demand. 

Fiscal deficit in India and rebooting the economy

Govt needs clear 'entry and exit plan' on fiscal expansion: Shaktikanta Das

From Business Standard: The coronavirus pandemic will expand the government’s fiscal deficit beyond 3.5 per cent of India’s gross domestic product (GDP), said Reserve Bank of India (RBI) governor Shaktikanta Das as he called for a "well calibrated roadmap” to manage finances. “The 3.5 per cent fiscal deficit target for this year will be very challenging to meet,” Das told news agency Cogencis in an interview. "It has to be a judicious and balanced call keeping in mind the need to support the economy on one hand and the sustainable level of fiscal deficit that is consistent with macroeconomic and financial stability.” “There has to be a very well calibrated and well thought out roadmap for entry and exit.” The RBI has not yet taken a view on monetising the government deficit.

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Rebooting the economy: India needs a stimulus package of at least 5% of GDP

Ashok Gulati writes in Financial Express: My humble assessment is that this may not take us far enough as the real problem is collapse in demand. And, that demand may not pick up easily as the virus is likely to stay with us for quite some time, and we may again have lockdowns as and when the viral infection surges. This will surely limit our travels and shopping for non-essentials. However, there is one demand that can easily revive, and that is food. The NSSO survey of consumption expenditures for 2011-12 revealed that in an average Indian household, about 45% of the expenditure is on food, and almost 60% of the expenditure of the poor is on food. We do not have information about consumption patterns in 2020, but my guess is that an average Indian will still be spending about 35-40% of their expenditure on food; for the poor, this expenditure would be about 50%. And, herein lies the scope to reboot the economy.

[...]But, eastern Uttar Pradesh, Bihar, Jharkhand, West Bengal, and Odisha, from where much of the migrant labour goes to other parts of India, will face a double challenge. In these states, agriculture, with tiny farm holdings, was already saddled with large labour force, engaging almost 45 to 55% of their total labour force. Non-farm income from wages and salaries, through migrant labour, was one important source of their income. This is now severely hit. In all probability, these staes’ overall per capita incomes in rural areas may shrink, at least in the short run, raising issues of swelling poverty, hunger, and malnutrition. In such a situation, how does one reboot the economy and also take care of a worsening situation on the hunger and malnutrition front?

A special investment package, a la USA’s Marshall Plan in 1948, for the eastern belt of India to build better infrastructure, agri-markets and godowns, rural housing and primary health centres, schooling, skilling will go a long way to revive the economy, and augment incomes of returned migrant labourers in these states. Rising incomes will generate more demand for food as well as manufactured products, giving a fillip to growth engines of agriculture as well as the MSME sector. Building better supply chains for food, directly from farm to fork, led by the private sector will not only augment export competitiveness of agriculture but also ensure a higher share of farmers in consumers’ rupee. This broad-based development in the hitherto laggard region of India will lay down the foundation for the long-term, demand-driven growth of industry in India.

Remittances to South Asia projected to decline by 22.1% in 2020

The latest Migration and Development Brief from the World Bank projects that global remittances will decline by 19.9% in 2020 due to the economic crisis induced by the COVID-19 pandemic and shutdown. Remittances to low and middle-income countries (LMICs) are projected to fall by 19.7% to $445 billion. The fall in FDI is expected to be much larger. 

South Asia is projected to see 22.1% decline in remittances. It is expected to see mild recovery in 2021 but medium-term downside risks persist. The deceleration of remittance inflows is due to COVID-19 outbreak and oil price decline. 

• In India, remittances are projected to fall by about 23% in 2020, to $64 billion, from a 5.5% growth and receipts of $83 billion seen in 2019.
• Remittances to Nepal are expected to decline by 14%, dropping to about US$7 billion in 2020.
• Remittances to Sri Lanka are expected to decline by 19%, dropping to about US$5.5 billion. 
• In Bangladesh, remittances are projected at $14 billion for 2020, a likely fall of about 22%.
• In Pakistan, the projected decline is also about 23%, totaling about $17 billion, compared with a total of $22.5 billion in 2019, when remittances grew by 6.2%.

The COVID-19 presents particular challenges:

1. Economic crisis could be longer, deeper and more pervasive than the recent growth estimates. The decline in fuel prices and lockdowns have affected sectors that depend on migrant workers in host countries. Migrant workers are more vulnerable to employment and wages losses in host countries.
2. It has disproportionately affected food and hospitality, retail and wholesale, tourism and transport, and manufacturing. 
3. Developed countries that depend on migrant workers in agriculture sector will face labor shortages when farming season begins. 
4. Cross-sectoral mobility of workers is affected. It is hard for low-skilled migrant workers to move to other sectors. During the global financial crisis in 2009, many migrant workers moved from construction to agriculture and retail. Now, health and information technology require high and specific skills, which is missing among many migrant workers.
5. Internal migrants without access to housing, basic water and sanitation, health facilities, or social safety nets are more vulnerable to the crisis, especially lockdowns, travel bans, and social distancing measures.

Economic contraction and increase in NPAs

Economy headed for contraction, less fiscal space for big stimulus

From The Indian Express: “It is quite difficult to assess how the economy will react when the lights, which were turned off March 24 midnight, and remain so for 40 days (almost six weeks), are switched on again,” a senior official said. There are many variables: consumer behaviour post lockdown, fear of infection, persistence of social distancing, risk aversion at firm and individual level, the pandemic curve itself, and finally the depth and breadth of government intervention through fiscal measures, and RBI support on the monetary and credit front.

It is this huge uncertainty and “hysteresis” (the unknowns going forward on how the pandemic will play out), which render the exercise of making projections irrelevant. “In the middle of a storm, it is hard to make any assessment, because the task at hand is to ride the storm. Any kind of accuracy will be misleading,” the official told The Indian Express, without wishing to be named.

[...]The impact of an almost six-week lockdown until May 3, with the persistence of social distancing thereafter, and the knock-on effect of these two, will most likely see the Indian economy decelerate in 2020-21, said another analyst with a leading global financial services group. “After the lockdown is lifted, it will definitely not be business-as-usual. A sudden stop in cash flows has put small enterprises under tremendous pressure, with many on the verge of bankruptcy,” the analyst said.

“Salary cuts and job losses in the organized sector will adversely impact discretionary spending by individuals. Consumption, which is almost 60 per cent of GDP, will be severely hit. At the consumer level, discretionary purchases, shopping in malls, eating out, movie halls, travel, and home purchases, may not be forthcoming,” said another economist with a leading investment bank.

At the firm level, proprietorships, micro, mini and small enterprises, will first want to recoup their losses (having had to endure 12 months of costs on 10 months of revenues), and build a nest egg to ensure they are not adversely hit again. This is one big income shock, the economist said.

[...]But a government official said that India, unfortunately, cannot spend like developed economies. “With a BBB- sovereign rating, we still are investment grade. And unlike 2008 when the government’s fiscal was in order and it could manage to give a massive stimulus, it doesn’t have the cushion now. One notch below BBB-, and India will slip into ‘speculative’ grade rating,” he said.

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India’s Path Out of Pandemic Slump Hobbled by Shadow Bank Crisis

From Bloomberg: For India’s financial sector, the coronavirus freeze is just the latest headwind in a multi-year storm that’s dragged down consumption and seen the nation lose its crown as the world’s fastest-growing major economy. Now, if bad loans rise as many including the central bank expect, banks and shadow lenders are set to become ever more cautious just when credit is most needed to keep the economy going.

[...]“India’s financial system has had a rocky few years,” said Pranjul Bhandari, chief India economist at HSBC Securities and Capital Markets Pvt Ltd. in Mumbai. “The recognition and provisioning for high loads of bad debt at banks took a toll over 2015-2018, ending with a fallout at the shadow banks.” The seeds of stress were sown even earlier, in a debt-fueled economic boom between 2007 and 2012 when banks increased loans by 400%. When the economy began slowing, many companies struggled to repay debts, making banks reluctant to lend as bad loans piled up.

Some of the slack was then picked up by shadow banks -- lenders that don’t rely on deposits and are typically less regulated. But a default by one of the most prominent of those -- Infrastructure Leasing & Financial Services Ltd. -- in 2018 saw that lending dry up too.

The collapse triggered a credit crunch, forcing the Reserve Bank of India to step in to take control of another shadow lender, Dewan Housing Finance Corp., to contain the fallout. A smaller lender also failed in 2019 after allegedly duping investors about its exposure to a property developer. Then, in March this year, the central bank seized private-sector Yes Bank Ltd. in India’s biggest bank rescue.

[...]“Companies relying on either type of lender for funding, many of which have weak financials, will have difficulty in maintaining liquidity, which can result in defaults on loans from banks and shadow banks,” she said. “As loan losses at shadow banks increase and threaten their solvency, banks’ direct exposures to them can be at risk.” Desperate to avoid such a chain of events, the RBI has injected $6.5 billion into banks to promote lending to shadow banks and small borrowers, further relaxed bad-loan rules and barred lenders from paying dividends in the current fiscal year through March 31 so that they can preserve capital.

Impact of COVID-19 on migration and remittances

Excepts from Peter Gill's article in The Diplomat:

Nepali deaths and illnesses abroad portend long-term trouble for the Nepali economy at home. In the past, international labor migration has been an essential lifeline for Nepali families coping with domestic crises, from a civil war that raged from 1996-2006 to an earthquake that brought homes crashing to the ground in 2015. But the current crisis is unlikely to afford Nepalis this opportunity. Nations worldwide have erected barriers to human movement, and job opportunities from New York to Mumbai to Seoul will likely plummet in the aftermath. COVID-19’s long-term consequences could be devastating for Nepal. A recent World Bank report predicted a severe drop in GDP growth over the next three fiscal years, stating that “the risk of falling into poverty is high, and it will increase into 2020.”

It is difficult to overstate the importance of migration and remittances to millions of Nepali families.  Nepalis have long depended on seasonal agricultural and military work in India, and after 1990, increased access to passports opened up new types of work in destinations from the Middle East to Southeast Asia and beyond. Constructing high-rises in Dubai, guarding private homes in Kuwait, or working on assembly-lines in Penang often paid more than anything available in Nepal.

[...]Migration insinuated itself deep into the Nepali macroeconomy, becoming a keystone on which other sectors depended. “Remittances have been crucial to support growth, particularly by sustaining a high consumption level, which comprises over 85 percent of GDP,” says Chandan Sapkota, an economist at the Nepal Economic Forum. “Remittances have also been crucial in meeting a high revenue growth, as over 45 percent of government revenue is based on duties imposed on import of goods financed by remittance income. Remittances have been the major source of deposits in banks and liquidity.”

The COVID crisis has already put many Nepali migrants out of work. As fears of a pandemic spread in February and early March, a few hundred thousand workers returned to their hometowns and villages in Nepal. But most migrants were prevented from returning after the Nepali government announced a nationwide lockdown on March 24. Some were able to maintain their jobs abroad, but many others were fired or took unpaid leave and are living off meager savings. Reports have emerged of workers being forced into unsafe, crowded conditions in Malaysia and Qatar. In the United Arab Emirates, some Nepalis have been evicted from their homes. Meanwhile, hundreds of Nepalis remain stuck at the Indian border, having walked for hundreds of miles through the Indian lockdown only to be denied entry by the Nepali police. The government maintains that quarantine facilities are inadequate to cope with returnees from abroad.

Falling remittances could have knock-on effects in multiple areas of the domestic economy, harming government revenue and reducing liquidity in the banking industry, says Sapkota, the economist. Along with tourism — another sector sledgehammered by the crisis — remittances are a key source of foreign currency, crucial in an import-dependent country like Nepal. The national bank holds enough foreign exchange reserves to cover more than eight months’ worth of imports – a comfortable cushion in normal times, but then these are not normal times.

Import substitution in India and crowding out of corporate bonds due to high state borrowing

Indian government to chart plan for higher investments

From The Times of India: The government is beginning to reach out to domestic and global investors to work out a strategy for higher investments and reduced reliance on imports in the post-Covid-19 world. During the lockdown, the commerce and industry ministry has had detailed discussions with a group of CEOs on boosting local production of several items, which are currently imported in large quantities, with work on an initial blueprint having begun. Sources told TOI that segments such as mobiles, air-conditioners, auto parts, specialised steel and aluminum products, power equipment, wooden furniture, along with food processing (with potato and orange in focus) are on the table.

Separately, Invest India, the government’s investment promotion agency, had identified over 1,000 global companies across sectors, whom it was reaching out to as part of the “China+1” strategy. “Globally, companies are realising that there is a need to diversify their production bases and India is being pitched as a possible destination. Our plan had slowed down due to Covid-19 but we are in talks with some of them,” a senior government officer told TOI.

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State Govt borrowers are crowding out cash-strapped firms in raising funds

From The Hindu Business Line: Indian companies struggling against the coronavirus pandemic and a domestic credit crunch are facing another obstacle: competition from state governments to sell debt. States are planning to crank up bond sales by 18.2% this quarter from a year earlier to make up for a decline in tax revenue due to an economic slowdown. They usually have lower credit risks than companies, and are offering higher yields than before, which could entice investors. The corporate bond market was already suffering, prompting the RBI on Friday to again inject more money into it. The demand for longer tenor corporate bonds from insurers and pension funds is expected to fall as they shift allocations to state bonds after the recent surge in yields, said Manoj Jaju, chief investment officer at Bharti AXA General Insurance Co. “We too will have a bias toward state bonds over corporate debt now.

[...] But recent cases show how state debt may be more appealing than company securities, even with the extra policy support. Maharashtra state is a case in point. It auctioned 10-year debt on April 7 with an annualized yield of 7.98%, the highest for that tenor since January last year. The latest rate was 44 basis points more than the yield on similar maturity AAA corporate notes. On the same day, REC Ltd., a state-owned financial firm, scrapped plans to sell notes because market participants demanded higher yields.

State bonds are also attractive because they have better trading liquidity in the secondary market compared with corporate securities, said Jaju at Bharti AXA. The State notes are accepted as collateral at the central bank’s repurchase auctions, unlike corporate bonds, providing an added incentive for investors, he said.

Fiscal stimulus equivalent to 5% of GDP needed in India

Triple trouble: coronavirus, hunger, and the economy

Sudipto Mundle writes in Mint: A package to restart the economy was announced on 15 April, with some graded easing after 20 April. These supply-side measures are welcome. But we also need to stimulate demand to get the economy going. My initial back-of-the-envelope calculations suggest that without a massive stimulus, the shutdown with a phased reopening could reduce GDP by around 10%in 2020-21.

Providing 2% of GDP extra expenditure for medical equipment and for temporary low-skill health workers, 2% of GDP for income support, and another 1% for extra food allocations would add up to a 5% of GDP fiscal stimulus. West Bengal Chief Minister Mamata Banerjee has recommended a 6%-of-GDP package. The multiplier effect of this 5-6% of GDP stimulus would reduce the recessionary impact of the lockdown significantly.

If GDP declines, it will reduce government revenue even if the existing tax exemptions and concessions are pared. The reduction of non-merit subsidies, totalling 5% of GDP, would at best offset the revenue decline. Hence, a 5-6%-of-GDP fiscal stimulus would have to be financed mainly through extra borrowing. To enable this, the current Fiscal Responsibility and Budget Management limits on Central and state government borrowing will have to be suspended. Under present global conditions, extra borrowings will mainly have to be financed from domestic sources. Such risk-less sovereign debt should be attractive for institutional investors, and its impact on domestic bond yields muted, since private sector demand for funds remains weak. Only in the unlikely event of commercial banks, including public sector banks, declining these bonds should the Reserve Bank of India step beyond its remit and monetize the deficit by directly acquiring them.

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COVID-19 crisis: Stimulus of 5% of GDP needed, says NITI Aayog

From Financial Express: Estimating the economic cost of the Covid-19 epidemic to be huge, the NITI Aayog has proposed a massive fiscal stimulus of over Rs 10 lakh crore or 5% of the gross domestic product (GDP) to address the situation. The package envisaged by the think tank includes income support to the poor, equity support to corporate India, absorption of a portion of NPAs in MSME sector and additional investments in healthcare. While the potential decrease in GDP size itself will raise the Centre’s fiscal deficit expressed as fraction of it to 4% in FY21 from the budgeted 3.5%, the proposed fiscal stimulus could widen it to an unheard-of 10.5% of GDP.

Given that the Centre’s fiscal resources are constrained, the Reserve Bank of India (RBI) may need to finance a portion of this incremental government stimulus, the government think-tank said. The special spending could be ring-fenced within a special Covid-19 budget, rather than as part of the general budget, it added. “Not implementing a concerted stabilisation package in a timely fashion may lead to a far greater damage to livelihoods, the economy and the financial sector, with far worse macro-economic consequences… debt-to-GDP could still rise to 95-100% due to reduced GDP,” the think tank’s CEO Amitabh Kant said in a presentation to the CII.

[...]Niti Aayog cautioned that unemployment risk and social unrest could rise materially with possible displacement of over 3 crore workers. It also warned that solvency risk to the financial system is high if the economic impact is not mitigated in the next 2-3 months. With incremental NPA across banks and NBFCs to be Rs 8.1 lakh crore or 7.3% (of advances) if lockdown continues till mid-May (the government has already extended it till May 3), the NITI Aayog said the core Tier 1 capital of banks will be around 12% or only slightly more than net unprovided NPAs of 10.9%.

[...]The Niti Aayog suggested income support programme of Rs 3.1 lakh crore to 6 crore permanent and contractual workers in the corporate sector and 13.5 crore informal workers and contractors. It also estimated Rs 70,000 crore additional expenditure in healthcare. Among other big fiscal sops, it suggested Rs 2.3 lakh crore capital support (preferably equity) to large corporates in a troubled asset relief programme (TARP) and Rs 1.7 lakh crore credit guarantee fund to absorb likely NPA slippage and credit costs. Certain proposals with no fiscal impact suggested include Rs 2.5 lakh crore RBI forbearance to reduce capital constraints (by rolling back capital conservation buffers) and Rs 1 lakh crore equity support to banks, housing finance companies and NBFCs via a TARP.

Besides the fiscal stimulus, shortfall of Rs 2 lakh crore in tax revenues, Rs 1.1 lakh crore in disinvestment receipts and additional stimulus in the form of payment of governments’ unpaid dues, will push the Centre’s fiscal deficit to Rs 21.1 lakh crore in FY21, the Niti Aayog said. With states’ projected fiscal deficit at 2.6% (to rise significantly as they will spend more and revenues will falter), the combined fiscal deficit of the Centre and states would be 13.1% in FY21, it added. The combined deficit should have been less than 6% in business-as-usual scenario.

RBI announces further measures to boost liquidity

Since February 2020, the RBI has rolled out plans to inject liquidity equivalent to 3.2% of GDP. The RBI has also undertaken targeted long term repo operations (TLTRO), which allows banks to borrow one to three year funds from RBI at the repo rate by providing government securities with similar or higher maturity as collateral.

Here are the additional measures taken by the RBI on 17 April 2020 to maintain adequate liquidity, facilitate and incentivize bank credit flows, ease financial stress, and enable normal functioning of markets. 

Liquidity management

• TLTRO 2.0: INR 50,000 crore of TLTRO in tranches of appropriate sizes. The funds availed by banks under TLTRO 2.0 should be invested in investment grade bonds, commercial paper, and non-convertible debentures of NBFCs, with at least 50 per cent of the total amount availed going to small and mid-sized NBFCs and MFIs. Investments made by banks under this facility will be classified as held to maturity (HTM) even in excess of 25 per cent of total investment permitted to be included in the HTM portfolio.
• Refinancing facilities for All India Financial Institutions (AIFIs): Special refinance facilities for a total amount of INR 50,000 crore to National Bank for Agriculture and Rural Development (NABARD), Small Industries Development Bank of India (SIDBI), and  National Housing Bank (NHB) to enable them to meet sectoral credit needs. Specifically, INR 25,000 crore to NABARD for refinancing regional rural banks (RBBs), cooprative banks and micro finance institutions. INR 15,000 crore to SIDBI for on-lending/refinancing. INR 10,000 crore to NHB for supporting housing finance companies. Charges set at RBI's policy repo rate. 
• Liquidity adjustment facility: Fixed rate reverse repo rate: Reduce fixed rate repo rate under LAF by 25 basis point from 4% to 3.75%, which will encourage banks to use surplus funds in investments and loans in productive sectors. Due to various liquidity enhancement measures taken by RBI, banks now have surplus liquidity. On April 15, it absorbed INR 6.9 lack crore through reverse repo operations. No change in policy repo rate (4.4%), and MSF and bank rate (both at 4.65%).
• Ways and means advances for states: WMA limit of states increased by 60% over and above the level as on 21 March 2020. On April 2, the RBI set it at 30%. This will be available till September end. 

Regulatory measures

• Asset classification: Institutions granting moratorium or deferment of loans can exclude the moratorium period from the 90-day NPA norm, i.e. there would be an asset classification standstill for all such accounts from March 1 to May 31, 2020. NBFCs can provide such relief to their borrowers too. However, to reduce building up of risk in banks' balance sheets, they they will have to maintain higher provision of 10% on all such accounts under the standstill, spread over two quarters, i.e., March, 2020 and June, 2020. These provisions can be adjusted later on against the provisioning requirements for actual slippages in such accounts.
• Resolution timeline extension: The period for resolution of stressed assets extended by 90 days. Currently, all banks, AIFIs, and NBFCs are required to hold an additional 20% if a resolution plan has not been implemented within 210 days form the date of default.
• Dividend distribution: Scheduled commercial banks and cooperative banks are not allowed to make any further dividend payouts from profits pertaining to the financial year ended March 31, 2020 until further instructions. This is done to maintain enough capital to absorb losses amidst heightened uncertainty.
• Liquidity coverage ratio: LCR requirement for Scheduled Commercial Banks is being brought down from 100 per cent to 80 per cent with immediate effect. The requirement shall be gradually restored back in two phases – 90 per cent by October 1, 2020 and 100 per cent by April 1, 2021. 
• Relief for NBFCs on real estate sector loans: Date of commencement of commercial operations can be extended by one year over and above teh one-year extension permitted during normal times without treating them as restructuring. This facility was earlier available to banks only.

On 26 March, the government announced $23 billion Pradhan Mantri Garib Kalyan Yojana to targeting the vulnerable groups.

Spend on the poor now and do not worry much about fiscal cost

Amartya Sen, Raghuram Rajan, Abhijit Banerjee write in The Indian Express that a combination of loss of livelihoods and interruptions in standard delivery mechanisms will push a huge number of people into dire poverty. The core message is that the government should expand social protection measures (food subsidy, cash transfers) and not worry about cost right now. Perhaps, as Paul Samuelson said "every good cause is worth some inefficiency". 

Here is excerpt from their article:

[...]As it becomes clear that the lockdown will go on for quite a while, in a total or a more localized version, the biggest worry right now, by far, is that a huge number of people will be pushed into dire poverty or even starvation by the combination of the loss of their livelihoods and interruptions in the standard delivery mechanisms. That is a tragedy in itself and, moreover, opens up the risk that we see large-scale defiance of lockdown orders — starving people, after all, have little to lose. We need to do what it takes to reassure people that the society does care and that their minimum well-being should be secure.

We have the resources to do this; the stocks of food at the Food Corporation of India stood at 77 million tons in March 2020 — higher than ever at that time of the year, and more than three times the “buffer stock norms”. This is likely to grow over the next weeks as the Rabi crop comes in. The government, recognizing the disruptions to the agricultural markets from the lockdown, is more than usually active in buying the stocks that the farmers need to get rid of. Giving away some of the existing stock, at a time of national emergency, makes perfect sense; any sensible public accounting system should not portray it as inordinately costly.

[...]More importantly, a substantial fraction of the poor are excluded from the PDS rolls, for one reason or another (such as identification barriers to get a ration card that turn out to be hard to overcome), and this supplementary provision only applies to those who are already on it. For example, even in the small state of Jharkhand, there are, we are told, 7 lakh pending applications for ration cards. There is also evidence that there are a lot of bona fide applications (for example of old-age pensioners) held up in the verification process, partly because the responsible local authorities try to avoid letting anybody in by mistake to avoid any appearance of malfeasance. Such punctiliousness has its merits, but not in the middle of a crisis. The correct response is to issue temporary ration cards — perhaps for six months — with minimal checks to everyone who wants one and is willing to stand in line to collect their card and their monthly allocations. The cost of missing many of those who are in dire need vastly exceeds the social cost of letting in some who could perhaps do without it.

[...]Starvation is just one of the worries; the unexpected loss of income and savings can have serious consequences, even if the meals are secured for now: farmers need money to buy seeds and fertilizer for the next planting season; shopkeepers need to decide how they will fill their shelves again; many others have to worry how they would repay the loan that is already due. There is no reason why, as a society, we should ignore these concerns.

[...] as a part of the commitment to not miss the needy, there has to be funding available that state and local governments can use to find effective ways to reach those who suffer from extreme deprivation.

MSMEs in India, microfinance institutions in trouble and more

India: Bring in the MSME relief package

From The Economic Times: The MSME sector accounts for about 40% of exports and almost a third of national output, and it is critical to address loss of revenue so as to purposefully avoid closure of units and damage to livelihoods. An estimated 6.3 crore MSME units employ 11 crore persons across the country, and it is only fitting that the sector is provided credit guarantees and interest subventions to survive the lockdown. True, the Small Industries Development Bank of India (Sidbi) has announced emergency loans at a concessional interest of 5%, but these are only meant for MSMEs manufacturing products or delivering services to fight the coronavirus pandemic. A far more comprehensive coverage is surely warranted. It has also been reported that public sector banks are extending emergency lines of credit to MSME borrowers, of up to 10% of their working capital limits. But much larger loans are required to tide over the present crisis in earnings capacity.

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Moratorium on loans critical for microfinance institutions: Icra

From Mint: Microfinance institutions (MFIs) could be heading for troubled times. If they don’t get a moratorium on their loans, their debt-servicing obligations could be severely impacted, according to a note released by credit rating agency Icra. The credit rating agency analyzed a sample of 29 MFIs, which makes up for 70% of the industry portfolio.

Collectively, these institutions have operation expenditures and repayment obligations of ₹8,000 crore in the first quarter of the financial year 2021. However, their on-balance sheet liquidity buffer stood at ₹5,400 crore. These institutions are facing a shortfall of ₹2,600 crore in the absence of any external funding support. “As the collections from borrowers could remain muted for some time post the lockdown is eased, the industry stares at a cash shortfall of ₹2,600 crore, according to our estimates," the Icra note said.

[...]The strain on borrowers’ cash flows will lead to a build-up of arrears, dilution of credit discipline, migration of borrowers owing to loss of livelihoods and the possibility of local, or political issues.

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Fiscal and monetary policy: It takes two to tango

Sajjid Z. Chinoy writes in Mint: Fiscal-monetary coordination is often misconstrued to simply mean a monetization of the deficit. In India, any monetization remains an academic debate for now. Amid unprecedented uncertainty, without knowing the size of the economic shock, how automatic stabilizers on the budget will react, and what the absorptive capacity of the market will be, it’s virtually impossible to assess any funding gap. But that’s not to say fiscal and monetary don’t have other opportunities to co-ordinate in the interim. There are a plethora of opportunities and synergies.

The first task should be to enable the Centre and states to borrow from markets in a non-disruptive manner. Here, there’s some disquieting news. Three weeks after the Reserve Bank of India (RBI) unleashed its bazooka, monetary conditions have begun to tighten again. The glut of interbank liquidity (almost ₹7 trillion) has pushed interbank overnight rates to just 2-3%. Yet, the 10-year GSec recently hardened to a 2-month high of 6.5%. This is now the steepest yield curve in a decade. Meanwhile state yields have firmed to the 7.7-8% range—twice the typical spread over GSec yields.

Given the abundant system liquidity and weak credit growth, what explains this? It’s because in recent years, banks have revealed a growing aversion to long-dated government bonds (“duration risk"). This is because banks’ holding of bonds is much above statutory limits (the corollary of soft credit growth in recent years), exposing them to interest rate risk. The longer the duration, the greater the “mark-to-market" risk—losses which impinge upon (often scarce) banking capital. It’s this disinclination to buy “duration", a behaviour exacerbated by increased market volatility, that underpins the hardening of yields.

What can policy do? 

• First, given the unprecedented uncertainty, policymakers could consider granting temporary forbearance to banks on their “mark-to-market" accounting (e.g. temporarily increase “hold-to-maturity" on which there is no interest rate risk).
• Second, the “ways and means" advances for states could temporarily be increased further so that states’ near-term market borrowing temporarily reduces. 
• Third, RBI often needs to buy government bonds to create base money just to support activity in the normal course of events.As households begin to hoard cash, we expect “currency-in-circulation" to rise by 1% of GDP this year. So RBI will have potentially meaningful space to buy government bonds 
• Expenditure will therefore have to be ruthlessly prioritized, akin to a “war-time" effort, and must focus squarely on boosting healthcare capacity, support for the needy (in cash and kind), funding automatic stabilizers like the Mahatma Gandhi Rural Employment Guarantee Act scheme, and back-stopping the financial sector (credit guarantee and re-capitalization funds). 

Normal monsoon forecast, risk aversion in bond market, and debt relief for poor countries

India to get normal monsoon, says IMD as country battles coronavirus

From Business Standard: India is likely to have a normal monsoon this year, the country’s weather department said on Wednesday giving the country’s coronavirus-battered economy some good news. Monsoon rains are expected to be 100 per cent of a long-term average, M. Rajeevan, secretary at the Ministry of Earth Sciences told a news conference, according to news agency Reuters.

The India Meteorological Department (IMD) defines average, or normal, rainfall as between 96 per cent and 104 per cent of a 50-year average of 88 centimetres for the entire four-month season beginning June. Monsoon enters Kerala coast on June 1, covers much of central and western India between June 5 and 15, and enters North India from July 1. It is crucial to rice, wheat, sugarcane and oilseeds cultivation in the country, where farming accounts for about 15 per cent of the economy and employs over half of its people.

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Risk aversion: Bond sell-off brings down FPI utilisation of G-sec limits to 52%

From Financial Express: With continuous selling in central government securities by foreign portfolio investors (FPIs) due to persistent risk aversion in the wake of the Covid-19 crisis, general category FPI utilisation of investment limits in G-secs have fallen to 52.31% as on April 13 compared to the peaks of over 75% at the beginning of 2020. In the last 18 consecutive sessions, FPIs have sold Indian bonds – including both G-secs and corporate bonds  – worth $8.8 billion, Bloomberg data show. Following the continuous selling by foreign investors, general category FPI investments in G-secs currently stand at just over $17 billion against the total available investment limits worth over $32 billion, CCIL data show.

Manish Wadhawan, managing partner at Serenity Macro Partners, said that markets are a bit wary of the potential spike in fiscal deficit this year. “We saw FPI selling in equities halting a bit in recent times but the selling has continued in debt. I believe FPI fund flows will depend a lot on the fiscal and currency views. Even when foreign investors decide to make a comeback to emerging markets, they will have options to invest in the debt of other countries like Korea and China. The only turning point India can see would be if the RBI decides to conduct open market operations (OMOs) or decides to buy bonds directly in the primary central and state government auctions,” Wadhawan said.

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G20 agrees debt freeze for world's poorest countries

From Reuters: Finance officials from the Group of 20 major economies agreed on Wednesday to suspend debt service payments for the world’s poorest countries from May 1 until the end of the year, as a group of private creditors also backed offering debt relief. The moves to freeze both principal repayments and interest payments will free up more than $20 billion for the countries to spend on their health systems and help tackle the coronavirus pandemic, Saudi Finance Minister Mohammed al-Jadaan said.

[...]German Finance Minister Olaf Scholz called the move “an act of international solidarity with a historical dimension,” adding it would let the countries invest in healthcare “immediately and without time-consuming case-by-case examination”. A source familiar with the agreement said it would cover $12-$14 billion in bilateral debt service payments.

The G20 also called on private creditors to participate in the initiative on comparable terms. The Institute of International Finance, which represents 450 banks, hedge funds and other global financial firms, said it would recommend that private sector creditors voluntarily grant similar debt relief to the poorest countries, if they requested it. A French finance ministry official on Tuesday said private creditors had agreed voluntarily to roll over or refinance $8 billion of the debt of the poorest countries, on top of $12 billion in debt payments to be suspended by countries.

COVID-19 induced recession worst since the Great Depression

In the latest World Economic Outlook (April 2020), the IMF projected global growth to contract sharply to -3% in 2020. The cumulative loss to global GDP over 2020 and 2021 from the pandemic crisis could be around 9 trillion dollars, greater than the economies of Japan and Germany, combined. For the first time since the Great Depression both advanced economies and emerging market and developing economies are in recession. It argues that many countries face a multi-layered crisis comprising a health shock, domestic economic disruptions, plummeting external demand, capital flow reversals, and a collapse in commodity prices.

Under the assumption that the pandemic and required containment peaks in the second quarter for most countries in the world, and recedes in the second half of this year, in the April World Economic Outlook the IMF projects global growth in 2020 to fall to -3 percent. This is a downgrade of 6.3 percentage points from January 2020. This makes the Great Lockdown the worst recession since the Great Depression, and far worse than the Global Financial Crisis.

Assuming the pandemic fades in the second half of 2020 and that policy actions taken around the world are effective in preventing widespread firm bankruptcies, extended job losses, and system-wide financial strains, the IMF projects global growth in 2021 to rebound to 5.8 percent.

In an adverse scenario, the pandemic may not recede in the second half of this year, leading to longer durations of containment, worsening financial conditions, and further breakdowns of global supply chains. This could mean even greater fall in global GDP: an additional 3 percent in 2020 (below the baseline in 2002) if the pandemic is more protracted this year, while, if the pandemic continues into 2021, it may fall next year by an additional 8 percent compared to our baseline scenario.

The IMF recommends that countries continue to spend generously on their health systems, perform widespread testing, and refrain from trade restrictions on medical supplies. It also recommends continued support to households and businesses throughout the containment period: credit guarantees, liquidity facilities, loan forbearance, expanded unemployment insurance, enhanced benefits, and tax relief. During the recovery phase, policies should shift to supporting demand, incentivizing firm hiring, and repairing balance sheets in private and public sector. It recommends moratoria on debt repayments and debt restructuring to be continued during the recovery phase too. 

Substantial targeted fiscal, monetary, and financial measures to maintain the economic ties between workers and firms and lenders and borrowers is required to keep intact the economic and financial infrastructure of society. Meanwhile, broad-based stimulus and liquidity facilities to reduce systemic stress in the financial system can lift confidence and prevent an even deeper contraction in demand by limiting the amplification of the shock through the financial system and bolstering expectations for the eventual economic recovery.

INDIA: 

• The IMF has projected India’s economy to grow at 4.2% in 2019/20, 1.9% in 2020/21 and then quickly recover to 7.4% in 2021/22. 
• Inflation is projected to remain low at 3.3% in 2020/21 and 3.6% in 2021/22. 
• Current account balance is projected to narrow to -0.6% of GDP in 2020/21 and then increase to -1.4% of GDP in 2021/22.

NEPAL:

• The IMF has projected Nepal's economy to grow at 2.5% in 2019/20 and 5% in 2020/21. 
• Inflation is projected to remain at 6.7% in FY2020 and FY2021. 
• Current account balance is projected to be -6.5% in FY2020 and -6.2% in FY2021.

Policy measures for the immediate-term:

• Sizable, specific, temporary, and targeted fiscal measures to cushion the impact on the most affected households and businesses, and to preserve economic relationships (by reducing firm closures). Digital payments may improve the delivery of targeted transfers to the informally employed.
• Central banks can provide ample liquidity to banks and nonbank finance companies, and credit guarantee on loans to SMEs. It could also encourage banks to renegotiate loan terms for distressed borrowers without lowering loan classification and provisioning standards. Beyond conventional interest rate cuts, expanded asset purchase programs may be helpful. 
• Broad-based fiscal stimulus such as public infrastructure investment or across-the-board tax cuts can help to boost confidence, stimulate aggregate demand, reduce bankruptcies and avert an even-deeper downturn. 
• Flexible exchange rates should be allowed to adjust as needed. Temporary capital flow measures on outflows could be useful.

Policy measures for the recovery phase:

• Secure swift recovery as even after the containment phase, uncertainty about contagion could subdue consumer demand. Firms will hire staff and utilize capacity gradually. Hiring subsidies may be required and worker retraining programs may alleviate labor market friction. Scaling back targeted, temporary measures may be warranted. 
• Balance sheet repair and debt restructuring may be required. Banks and regulators should encourage early and proactive recognition of nonperforming loans. Steps to strengthen the insolvency and debt enforcement framework, and measures to facilitate the development of a distressed debt market could be helpful.
• Strong multilateral cooperation is a must, especially on international trade and multilateral assistance.

GDP growth to decline 2.8% in FY2020 in Nepal and in FY2021 in India

In its latest South Asia Economic Focus (April 2020), the World Bank projects a sharp economic slump in South Asia, caused by halting economic activity, collapsing trade, and greater stress in the financial and banking sectors. The WB estimates that regional growth will fall to a range between 1.8 and 2.8 percent in 2020, down from 6.3 percent projected six months ago. Prolonged and broad national lockdowns will push growth in the negative territory. In 2021, growth is projected to hover between 3.1 and 4.0 percent, down from the previous 6.7 percent estimate. 

The WB notes that “the impact of the pandemic will hit hard low-income people, especially informal workers in the hospitality, retail trade, and transport sectors who have limited or no access to healthcare or social safety nets.” It recommends stablishing temporary work programs for unemployed migrant workers, enacting debt relief measures for businesses and individuals, and easing inter-regional customs clearance to speed up import and export of essential goods during the short-term. Over the medium-term, it recommends expansionary fiscal policies combined with monetary stimulus to keep credit flowing in their economies. 

Because of the drying up of tourism, disruption of supply chains, collapsing demand for garments, deteriorating consumer and investor sentiment, withdrawal of international capital, and decreasing remittance inflows, the effect of COVID-19 on South Asian economies is particularly severe. The report argues that the crisis has increased inequality in South Asia because the poor people have a higher likelihood of losing work, and domestic migrant workers are being pushed back to rural areas from where they moved to cities to escape poverty. Food security risks have increased. 

Here is an update on GDP forecast for FY2020:

For Afghanistan a deep recession is expected this year, with a contraction between 3.8 and 5.9 percent. With population growth of 2.3 percent, this implies a dramatic drop in per capita income.

In Bangladesh, with a population growth of 1 percent per year, a limited increase in per-capita GDP is projected for two years. That would be an abrupt change from high growth rates in recent years. Given the variation within the country, it means that significant parts of the population would lose income during these two years. GDP is expected to growth at 2.0% to 3.0%.

In Bhutan, growth is still expected, but the downward revision from Fall forecast is large in both years.

In India, GDP growth in FY2021 is expected to range between 1.5 and 2.8 percent, implying per-capita GDP growth of between 0.5 and 1.8 percent. In FY2020, GDP is expected to grow at 4.8% to 5%.

Most affected is the Maldives, where tourism directly and indirectly contributes two-thirds of GDP, 80 percent of exports and 40 percent of revenues. A contraction of the economy between 8.5 and 13.0 percent is expected in 2020. With population growth of 1.8 percent in 2019, the per-capita income loss will be significant.

Nepal, with population growth of 1.1 percent per year, would experience low per-capita growth for two years in a row. GDP is expected to grow at 1.5% to 2.8% in FY2020. In FY2021, GDP is expected to grow at 2.7% to 3.6%.

For Sri Lanka a recession is anticipated, with annual growth estimated between -3.0 and -0.5 percent.

Pakistan, which has already experienced low growth rates in recent years, could well fall into a recession. With 1.8 percent population growth, that would imply a painful decline in per-capita income.

Economic impact of COVID-19, policy measures required and how to finance deficit in India

Adapted from McKinsey & Company's latest brief on Getting ahead of coronavirus: Saving lives and livelihoods in India

In scenario 1, the economy could contract by about 10 percent in the first quarter of fiscal year 2021, with GDP growth of 1 to 2 percent in fiscal year 2021. In this scenario, the lockdown would be relaxed after April 15, 2020 (when the 21-day deadline is due to expire), with appropriate protocols put in place for the movement of goods and people after that. Our economic modeling suggests that even in this scenario of relatively quick rebound, the livelihoods of eight million workers, including many who are in the informal workforce, could be affected. In other words, eight million people could have their ability to subsist and afford basic necessities, such as food, housing, and clothing, put at severe risk. And with corporate and micro-, small-, and medium-size-enterprise (MSME) failure, nonperforming loans (NPLs) in the financial system could rise by three to four percentage points of loans. The amount of government spending required to protect and revive households, companies, and lenders could therefore be in the region of 6 lakh crore Indian rupees (around $79 billion), or 3 percent of GDP.

In scenario 2, the economy could contract sharply by around 20 percent in the first quarter of fiscal year 2021, with –2 to –3 percent growth for fiscal year 2021. Here, the lockdown would continue in roughly its current form until mid-May 2020, followed by a very gradual restarting of supply chains. This could put 32 million livelihoods at risk and swell NPLs by seven percentage points. The cost of stabilizing and protecting households, companies, and lenders could exceed 10 lakh crore Indian rupees (exceeding $130 billion), or more than 5 percent of GDP.

Scenario 3 could mean an even deeper economic contraction of around 8 to 10 percent for fiscal year 2021. This could occur if the virus flares up a few times over the rest of the year, necessitating more lockdowns, causing even greater reluctance among migrants to resume work, and ensuring a much slower rate of recovery.

What policy measures are required?

[...]Several measures have already been announced to provide liquidity, limit the immediate NPL impact, and ease personal distress for needy households in India. These amount to around 0.8 percent of GDP. Additional measures could be considered to the tune of 10 lakh crore Indian rupees, or more than 5 percent of GDP in fiscal year 2021. All the estimated requirements may not necessarily be reflected in the fiscal deficit of the current year—for example, some support may be structured as contingent liabilities that only get reflected when they devolve. However, a package of this order of magnitude may be essential in supporting those dealing with the possible steep declines in aggregate demand and in protecting the financial system from the possible solvency and liquidity risks arising from stressed companies if scenario 2 or scenario 3 plays out.

[...]Consideration could be given to an income-support program in which the government both pays for a share of the payroll for the 60 million informal contractual and permanent workers linked to companies and provides direct income support for the 135 million informal workers who are not on any form of company payroll. India’s foundational digital-identity infrastructure, Aadhaar, enables effective mechanisms for direct support, including through the Pradhan Mantri Jan-Dhan Yojana (PMJDY) and Pradhan Mantri Kisan Samman Nidhi (PM-KISAN) programs and to landless Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) beneficiaries. Concessions for home buyers, such as tax rebates for a time-bound period, could stimulate the housing market and unlock the job multiplier.

For bankruptcy protection and liquidity support, MSMEs could receive liquidity lines from their banks, refinanced by the Reserve Bank of India and a loan program for first-time borrowers could be administered through SIDBI.3 Substantial credit backstops from the government could be instituted for likely new NPLs Timely payments to MSMEs by large companies and governments could be encouraged by promoting bill discounting on existing platforms.

For large corporations, banks could be allowed to restructure the debt on their balance sheets, and procedural requirements for raising capital could be made less onerous. The Indian government could consider infusing capital through a temporary Troubled Asset Relief (TARP)-type program (such as through preferred equity) in a few distressed sectors (such as travel, logistics, auto, textiles, construction, and power), with appropriate conditions to safeguard workers and MSMEs in their value chains. Banks and nonbanks may also require similar measures to help strengthen their capital, along with measures to step up their liquidity and the liquidity in corporate-bond and government-securities markets.

How to finance?

Given that India’s fiscal resources are constrained, the Reserve Bank of India may need to finance a portion of such incremental government spending. The spending could be tracked as a COVID-19 portion of the budget to boost transparency. The inflationary effects may be low, as lockdowns severely constrict demand and the fiscal support provided would be a substitute for expenditure rather than additional stimulus. Price increases could, however, occur in some sectors, such as food, so appropriate steps would be needed to maintain harvests and keep the food supply chain operating smoothly.

Overall, devising a credible, systemwide, stabilization package would benefit from being executed in a timely fashion so it can influence the pace of recovery and help avoid severe damage to livelihoods, the economy, the financial sector, and society.

Following the first wave of stabilization measures, attention could shift to implementing the structural reforms needed to increase investment and productivity, create jobs quickly, and improve fiscal health. This could mean introducing further reforms in infrastructure and construction and accelerating investments in health, affordable housing, and other urban infrastructure. States could accelerate spending, and institutions such as NIIF4 could deploy domestic and long-term foreign capital faster. Such reforms could also enable Make in India sectors to become globally competitive and boost exports (such as electronics, textiles, electric vehicles, and food processing), strengthen the financial sector, deepen household financial savings and capital markets, and accelerate asset monetization and privatization to raise resources.