Vijay Kumar Gaba

The three day periodic review meeting of the Monetary Policy Committee of RBI started yesterday. The Committee may review the monetary policy of RBI, in light of (i) the prevalent macroeconomic conditions-  especially inflation, fiscal balance, growth outlook; (ii) working of the financial system, e.g., liquidity situation, financial stress, credit off take, etc.; (iii) the global economic developments; and (iv) the assessment of economic shock in the aftermath of the pandemic.

The market participants are mostly focused on the monetary stimulus, which the MPC may propose, especially cut in the policy repo rate. Besides, the market will be watching out for the RBI stance on further extension of the debt moratorium; targeted credit for weaker sections; relaxation to the bank and non bank lenders from provisioning norms; inflation outlook and growth outlook.

In my view—

1.    Any cut in policy repo rate at this stage will be mostly meaningless, having only a symbolic value. The credit demand and the willingness to lend are abysmally low presently. Despite multiple rate cuts, incentives and assurances the credit growth has failed to pick up. The latest data shows that the in the second fortnight of July 2020, the overall credit demand slipped to 5.8%, which is close to the lowest level in a decade.

2.    The RBI has been maintaining surplus liquidity in the Indian banking system for past many quarters now. The liquidity has been boosted materially by (i) Forex accumulation by RBI in current account surplus situation; (ii) rate management actions of RBI through LTRO, etc. and (iii) other measures like CRR cut etc.

The excess liquidity is helping the government in funding the enlarged fiscal gap while maintaining the borrowing cost at lower level. However, the side effect of this has been total crowding out of private capex. The risk wary bankers are too happy to buy government securities which are available in abundance. Scheduled commercial banks’ investment in central and state government securities had increased by over 19% as on July 3 compared to last year, led by weak credit growth and surplus liquidity. 

In this situation, any liquidity enhancement measure may not yield any positive outcome.

3.    Insofar as extension of moratorium on certain debts is concerned, the situation is rather tricky. The disclosed amount of debt under moratorium varies widely across lenders and category of borrowers. The latest commentary of bank management indicates that the number of people and entities availing moratorium facility has come down materially in July. If this is the correct position, there should be no need to extend the moratorium deadline further. Even if it is extended, the number of beneficiaries would be supposedly much lower.

However, there is a section of analysts who believe that many lenders may not be presenting the true picture of the accounts under moratorium and expected recovery from such accounts. In their view, the lenders may be pushing RBI for extension of moratorium to March 31, 2021 so that they could make adequate provisions for the anticipated losses on this account.

The analysts at brokerage firm, Edelweiss Securities believe that the NPAs of banks may only peak by end of FY22, assuming material rise in FY21.

4.    The monsoon progress appear to have stalled and large parts of India are staring at deficient rains. If the monsoon fails to gather steam in August, as forecasted by IMD, the food inflation may spike further. MPC may be mindful of this event in taking rate cut decision.

5.    Last but not the least, in my view, motivating bankers to begin taking risk would be more productive than rate cut etc. For example, widening the policy corridor dramatically by cutting reverse repo rate by 50bps may encourage lending to some extent.

In June 2020, the finance ministry directed all ministries and departments to suspend implementation of all new schemes till March 2021. The directions read that “In the wake of COVID-19 pandemic, there is unprecedented demand on the public financial resources and a need to use resources prudently in accordance with emerging and changing priorities”.

In pursuance of these directives, many ministries have issued instructions to their respective departments not to initiate any new project or scheme, and suspend the spending on existing projects where no significant progress has been made so far. For example, the Ministry of Railways, issued directions to all the general managers of Indian Railways that- 

(i) New works proposed in the budget for FY21 (Pink Book)shall be kept in abeyance; except for the works which impact the safe running of trains and are considered essential and inescapable may be considered for sanction.

(ii) Works which have been approved till 2019-20 but have made insignificant physical progress shall be kept frozen till further orders except those which are essentially required for safe running of trains. 

(iii) Unutilized provision of Umbrella Works of 2018-19 and 2019-20, if any, may be suspended.

(iv) GMs of Zonal Railways/Pus may review the works already approved by them for possible suspension.

(v) Exemption for sanction of works which are considered essential and inescapable will have to be obtained from the Ministry of Finance. Given that the center has already expressed its inability to pay GST compensation to states, most states will also be under pressure to implement material cuts in their expenditure plans. It is common knowledge that a large number of small contractors and sub contractors completely depend on the business awarded by the governments. Most of them have been already struggling with inordinate delays in the payments due to them for the goods and services already delivered in FY19 and FY20. Now the flow of new orders shall also stop, rendering large capacities idle. This shall reflect on the financial stress and unemployment conditions in general; and may also lead to increased litigation as the change in scope of work; extension of timelines; delays in payment etc give rise to a multitude of disputes.

Another aspect that needs to be noted carefully is the tendency of the central government to impose licensing requirements and trade restrictions on increasing number of goods and services. This is gradually threatening to reverse the process of liberalization started in 1991, leading us back to the era of Mrs. Indira Gandhi which was underlined by centralization of powers; variety of controls; rationing of consumption; excessive taxation; and focus on import substitution.

Just like 1970's when Mrs. Gandhi swayed the common public with the perception of threats from external forces and internal traitors; the present regime also appears to be using the crisis created by Pandemic and evil designs of China to centralize the authority in the country. The whole campaign of 'self reliance" and "make in India' lacks credibility given that just few months ago the top leadership of India and China were sipping coconuts in Mahabalipuram discussing how to increase trade between two fastest growing large economies. 

This whole anti China sentiment therefore cannot be accepted as part of a long term policy of self reliance and localization. And if this campaign is just about nationalist shenanigans, and government seeks to reverse it anytime in next 5-10yrs, the cost to the economy would be tremendous. My fear come from the fact that historically Indian policy makers have taken many midway diversions at the expense of economy and society.