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.