Question

3. To mitigate the economic effects of the COVD-19 pandemic,
what is the orientation of the budgetary and monetary policies implemented?
Justify your answer

Answer 1

Orientation of the budgetary and monetary policies implemented are as-

FISCAL

• Finance Minister Sitharaman on March 26 announced a stimulus package valued at approximately 0.8 percent of GDP. The key elements of the package are: in-kind (food; cooking gas) and cash transfers to lower-income households; insurance coverage for workers in the healthcare sector; and wage support to low-wage workers (in some cases for those still working, and in other cases by easing the criteria for receiving benefits in the event of job loss). These measures are in addition to a previous commitment by Prime Minister Modi that an additional 150 billion rupees (about 0.1 percent of GDP) will be devoted to health infrastructure, including for testing facilities for COVID-19, personal protective equipment, isolation beds, ICU beds and ventilators. Several measures to ease the tax compliance burden across a range of sectors have also been announced, including postponing some tax-filing and other compliance deadlines. Numerous state governments have also announced measures to support the health and wellbeing of lower-income households, primarily in the form of direct transfers (free food rations and cash transfers)—the magnitude of these measures varies by state, but on aggregate measures thus far amount to approximately 0.2 percent of India’s GDP.

  On May 13 and 14, the Finance Minister announced new measures targeting businesses (about 2.7 percent of GDP) and expanding support for poor households, especially migrants and farmers (about 1.1 percent of GDP). Key elements of the business-support package are various financial sector measures for micro, small, and medium-sized enterprises and non-bank financial companies; liquidity injection for electricity distribution companies; and a reduction in up-front tax deductions for workers. Additional support to migrants and farmers will mainly be in the form of providing concessional credit to farmers, as well as a credit facility for street vendors and an expansion of food provision for non-ration card holders (mainly migrants).

MONETARY AND MACRO-FINANCIAL

• On March 27, the Reserve Bank of India (RBI) reduced the repo and reverse repo rates by 75 and 90 basis points (bps) to 4.4 and 4.0 percent, respectively, and announced liquidity measures to the tune of 3.7 trillion Rupees (1.8 percent of GDP) across three measures comprising Long Term Repo Operations (LTROs), a cash reserve ratio (CRR) cut of 100 bps, and an increase in marginal standing facility (MSF) to 3 percent of the Statutory Liquidity Ratio (SLR). Earlier in February, the CRR was exempted for all retail loans to ease funding costs. The RBI has provided relief to both borrowers and lenders, allowing companies a three-month moratorium on loan repayments and the Securities and Exchange Board of India temporarily relaxed the norms related to debt default on rated instruments. At the same time, the implementation of the net stable funding ratio and the last stage of the phased-in implementation of the capital conservation buffers were delayed by six months.

  On April 1, the RBI created a facility to help with state government's short-term liquidity needs, and relaxed export repatriation limits. On April 3, the RBI revised trading hours for various markets to optimize thin resources and ensure safety of personnel. Earlier, the RBI introduced regulatory measures to promote credit flows to the retail sector and micro, small, and medium enterprises (MSMEs) and provided regulatory forbearance on asset classification of loans to MSMEs and real estate developers. CRR maintenance for all additional retail loans has been exempted, and the priority sector classification for bank loans to NBFCs has been extended for on-lending for FY 2020/21.

  During April 17-20, the RBI reduced the reverse repo by 25 bps to 3.75 percent, announced: (a) a TLTRO-2.0 for an initial amount of around 0.2 percent of GDP, in extension of the initial TLTRO program of around 0.4 percent of GDP (funds to be invested in investment grade bonds, commercial paper, and non-convertible debentures of NBFCs); (b) special refinance facilities of around 0.2 percent of GDP for rural banks, housing finance companies, and small and medium-sized enterprises; (c) a temporary reduction of the Liquidity Coverage Ratio (LCR) from 100 to 80 percent and restriction on banks from making dividend payouts to conserve capital; (d) a standstill on asset classifications during the three-month loan moratorium period with 10 percent provisioning requirement, and an extension of the time period for resolution timeline of large accounts under default by 90 days.

  Furthermore, state’s Ways and Means Advance (WMA) limits have been increased by 60 percent (compared with 30 percent earlier) and the limit for the central government’s WMA for the remaining part of first half of the FY 2020/21 has been revised up from Rs1.2 to 2.0 trillion. The guideline to banks on loans to delayed commercial real estate projects was extended to NBFCs. On April 20, the Securities and Exchange Board of India (SEBI) reduced the required average market capitalization of public shareholding and minimum period of listing. The RBI asked financial institutions to assess the impact on their asset quality, liquidity, and other parameters due to spread of COVID-19 and take immediate contingency measures, including BCPs, to manage the risks following the impact assessment.

  On April 27, the RBI announced a special liquidity facility for mutual funds (SLF-MF) of Rs500 billion and a fixed-rate 90-day repo operation for banks exclusively for meeting the liquidity requirements of mutual funds, along with regulatory easing for liquidity support availed under the facility; and the SEBI reduced broker turnover fees and filing fees on offer documents for public issue, rights issue and buyback of shares by 50 percent. On April 30, the RBI extended the regulatory benefits under the SLF-MF scheme to all banks, irrespective of whether they avail funding from the RBI or deploy their own resources under the scheme.

  On May 13, the government announced measures targeting businesses: (i) a collateral-free lending program with 100 percent guarantee, (ii) subordinate debt for stressed MSMEs with partial guarantee, and (iii) partial credit guarantee scheme for public sector banks on borrowings of non-bank financial companies, housing finance companies, and micro finance institutions. The government also announced (i) a Fund of Funds for equity infusion in MSMEs, and (ii) a special liquidity scheme of the RBI for non-bank financial companies, housing finance companies and micro finance institutions, fully guaranteed by the government. The RBI’s policy measures since February 8 represent liquidity injection of around 4 percent of GDP.

EXCHANGE RATE AND BALANCE OF PAYMENTS

• On March 16, RBI announced a second FX swap ($2 billion dollars, 6 months, auction-based) in addition to the previous one with equal volume and tenor. The limit for FPI investment in corporate bonds has been increased to 15 percent of outstanding stock for FY 2020/21. Restriction on non-resident investment in specified securities issued by the Central Government has been removed. Foreign direct investment policy has been adjusted requiring that an entity of a country that shares a land border with India can invest only after receiving the government approval.