Thursday, April 16, 2020

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


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.


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.

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).