INDIA RESPONDS TO POLICIES
POST BY: Sarvesh
Background:
India has 106,737 active COVID-19 cases
as of June 4, with 6,075 deaths attributed to the disease. Prime Minister Modi
announced on March 24 that the entire country will go under lockdown, now
extended for the third time to May 31. Prior to this announcement, numerous
containment measures had already been imposed, varying in intensity across the
country, including travel restrictions (complete restriction of incoming
international commercial passenger aircraft and some restrictions on domestic
travel including cancellation of domestic passenger air traffic); closing
educational establishments, gyms, museums, and theaters; bans on mass
gatherings; and encouraging firms to promote remote work.
Reopening of the economy:
On April 15, with a view to supporting
economic activities, the government announced several relaxation measures in
geographical areas designated as non-hotspot, with effect from April 20, 2020.
On April 29, the government permitted inter-state movement of stranded people,
including migrant workers, managed by the nodal authorities who are designated
by the states. Some graded relaxations in economic activities have been allowed
in geographic areas designated as orange and red zones on May 4 and domestic air
travel restarted on May 25. On May 12, the PM announced a relief package of
around 10 percent of GDP, including previously announced monetary and fiscal
measures. On May 30, the central government issued ‘Unlock 1’ guidelines paving
the way for a phased re-opening of most activities across the country and
limiting the lockdown only to containment zones for a month until June 30.
However, states have been empowered to prohibit certain activities if they deem
it necessary.
Key Policy Responses as of June 4, 2020
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 well-being 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.
During May 13-17, the Finance Minister announced new measures targeting
businesses (about 2.7 percent of GDP), expanding support for poor households,
especially migrants and farmers (about 1.5 percent of GDP), targeted support
for the agricultural sector (about 0.7 percent of GDP), and some expansion of
existing programs providing work opportunities to low-wage laborers (about 0.2
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 expansion of food provision for non-ration cardholders (mainly
migrants). The main measure for the agricultural sector is support for infrastructure
development.
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 the 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 the 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 regulatorily
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 the 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 the 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 were 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 financially
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) subordinated 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 (HFCs), and micro
finance institutions. The government also announced (i) a Fund of Funds for
equity infusion in MSMEs, and (ii) a special purpose vehicle (SPV) to purchase a short-term debt of the eligible non-bank financial companies and housing
finance companies, fully guaranteed by the government and managed by a public
sector bank. The RBI’s policy measures since February 8 represent liquidity
injection of around 4 percent of GDP.
On May 22, the RBI eased policy rates by 40
basis points (repo to 4.0 percent and reverse repo to 3.35 percent),
accompanied by further regulatory easing, which includes the extension of the
loan moratorium and support for working capital financing by another three
months (through end-August), the increase in the large exposure limit from 25
percent to 30 percent of bank capital, relaxation of some of the norms for
state government financing, credit support to the exporters and importers and
extension of the tenor of the small business refinancing facilities
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 government approval.
https://carnegieindia.org/2020/05/15/coronavirus-and-future-of-indian-foreign-policy-event-7327https://www.imf.org/en/Topics/imf-and-covid19
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