INSUBCONTINENT EXCLUSIVE:
By Somnath MukherjeeAfter several days, the Reserve Bank of India delivered big on monetary intervention in response to Covid-19
It wasn’t the nuclear option (some big weapons like monetization of fiscal deficit were not touched), but it certainly is a big Daisy
Cutter (perhaps the largest non-nuclear, conventional bomb used in combat).
As a disaster policy construct, it is near perfect
It opens several liquidity taps – CRR (lowest ever level), MSF (expanded by 1%) – that significantly enhance the liquidity available to
It reduces policy rates significantly, and also skews the angle between the two (75 bps cut in Repo and 90 bps for Reverse-repo) to
disincentivize lazy banking (of banks simply laying off extra deposits with RBI).
Together, enhanced liquidity and angular skew in the Repo
corridor spread should also ensure better transmission of policy rates
The Targeted Long-Term Repo Operation (TLTRO) opens up the frozen corporate bond market and enables at least the highly-rated issuers (and
mutual funds) access cheaper funding and liquidity
Forbearance guidance on bank loans prevents a wave of NPAs from swamping bank balance sheets
In a nutshell, RBI delivers on its main premise of maintaining the stability of the financial system.
It is important to realise though what
RBI’s intervention is not about
It is not an economic booster with nearly enough ammunition to balance out the impact of an induced slowdown
No amount of incremental liquidity in the banking system can create new credit when enterprises are in lock-down mode
Even the most efficient transmission of policy rates will not goad the private corporate sector to undertake fresh capex when demand is
uncertain and many (if not most) projects cannot be started due to the lockdown in place
Neither will (even well-off) consumers be able to spend on credit – not when automobile showrooms and malls are shut, and job/salary
Add to it the negative wealth effect of a crashing stock market, which dampens sentiment even in the tiny topsegment of the consumer base
Above all, a large number of bottom-of-the-pyramid consumers, who will drastically cut back on consumption as livelihoods get disrupted
In a nutshell, no amount of easy money or low rates can induce consumption or investment during periods of extreme uncertainty.
It is too
early, and the data (and outlook) are too uncertain to calculate the cost of the lockdowninduced slowdown with any level of accuracy
Estimates in the US range from a 10% to a 24% decline in GDP for the first quarter.
For India, estimates are somewhat more sanguine, but the
predominant risks are all for further downward revisions
It is no surprise therefore that globally, governments have rolled out large fiscal plans
In comparison, the Indian fiscal intervention plan rolled out is lacking in scale
A safety-net programme with a headline outlay of 1.7 trillion has been rolled out
For starters, the headline is extremely modest in its scale – less than 1% of GDP
Further, closer scrutiny reveals that a lot of the headline outlay is upfronting of expenditure already budgeted for
The net incremental is an even more modest 40-50,000 crore
When entire swathes of the economy have been taken out of action, these quantums don’t move the dial nearly enough.
There are some
suggestions that India cannot “afford” a large fiscal intervention as the fisc is already stretched and existing financial savings
won’t be enough to fund large incremental government borrowings.
They miss the point by a mile and a half – empirically
US federal fiscal deficit is 50% higher than India’s (in % of GDP terms)
Financial savings in several European economies (and in the US) are lower than India
In a crisis, a large fiscal outlay is merely a function of the society borrowing more from its future to fund its present
There are several windows of financing a much-expanded fisc in India.
To start with, demand from the private corporate sector on domestic
savings is going to be invariably lower this year
The fiscal financing maths in India works out in the following broad-brush: 3-4% (of GDP) is the central fiscal deficit, another 3% is the
state fiscal deficit – both adding up to 6-7% as demand from the savings pool
On the supply side, financial savings (households and private corporate) is in the 10-11% range – which leaves about 3-4% for consumer and
corporate credit (bolstered by corporate sector access to foreign savings via ECB, FDI and FII)
In a weak consumer (and corporate) demand scenario, a large chunk of the savings demand from them would be available for higher public
borrowings.
Second, the crash in oil prices by $30/barrel are an immediate revenue soak – every $1 decline in oil is a $1-1.5 billion
This would still leave $15-20 billion of incremental resources that the government can mop up.
Last but not least, there are the
“nuclear” options of RBI buying out government debt directly
In colloquial terms, print money to buy government debt
Ordinarily, it’s a practice that is avoidable, but in extreme situations, merits outweigh the downsides.
The author is the managing
partner at ASK Wealth Advisors
The views expressed in this article are personal.