Monday, April 13, 2020

The Curious Case of Corona | Indian Economy and Beyond


Let us understand India’s GDP from the spending pattern:
Private consumption accounts for about 58% of the GDP (expected to be about $1.7 trillion even after the unexpected deceleration of the economy in Q4FY20). Hence, the government’s economic war-room participants have to give considerable attention to ensure that various components of India’s private consumption are protected from a demand deceleration to the best feasible extent. There are a few interesting aspects of India’s private consumption. Merchandise accounts for about 48% (around $825 billion at the end of FY20), and the remaining goes to services. In the merchandise component of private spending, food & grocery accounts for nearly 67% ($550 billion). The next four big sub-segments, though much smaller compared to food & grocery, are textiles & apparel (about $65 billion), jewelry (about $65 billion), consumer durables and electronics, including phones (about $50 billion), home & living (about $35 billion). Besides, consumer spending on automobiles (2W and 4W) in FY20 is estimated to be about $50-55 billion (with another $15-20 billion revenues from the commercial vehicles segment). The 52% component of private spending (about $875 billion) is on services, of which the largest components include education & coaching (about $125 billion), and healthcare (about $80 billion). Other components include spending on housing, telecom services, financial services and savings, food services, travel & leisure, and entertainment, etc.

If we quote the report published by Tejal Kanitkar and MS Swaminathan, the loss of GDP ranges from ₹ 17 lakh crore (7% of GDP) in the most conservative scenario, where the average number of output days lost is only 13, to ₹ 73 lakh crore (33% of GDP) in the most impactful scenario, where the number of days of lost output averages 67. In intermediate scenarios of 27 and 47 days of lost output, the GDP decline is ₹ 29 lakh crore (13% of GDP) and ₹ 51 lakh crore (23% of GDP), respectively.

Average number of working days lost
Loss Of GDP
Loss of GDP (%)

The average loss of GDP is somewhat 30 percent. 

Will the RBI step in?

Recently RBI surprised the market as the key rate was moderated to 4.4% which is close to zero, given that the inflation target of 4%. RBI has ingeniously widened the monetary policy rate corridor to 65 bps from the earlier 50 bps. This is expected to nudge banks to lend more, as parking of funds becomes less attractive. A moratorium on term loans and working capital loans for 3 months will provide relief to the borrowers. Also, deferment of implementation of NSFR and last tranche of capital conservation buffer is expected to provide some relief.

FYI: The NSFR is defined as the amount of available stable funding relative to the amount of required stable funding. “Available stable funding” (ASF) is defined as the portion of capital and liabilities expected to be reliable over the time horizon considered by the NSFR, which extends to one year. The amount of stable funding required ("Required stable funding") (RSF) of a specific institution is a function of the liquidity characteristics and residual maturities of the various assets held by that institution as well as those of its off-balance sheet (OBS) exposures.

The above ratio should be equal to at least 100% on an ongoing basis. NSFR guidelines were to be brought into effect from April 1, 2020. This stands deferred as of now.

But that’s not all. The real question is will the RBI finance India’s deficit? From where GOI is going to raise money for the packages that have been announced or will be announced?

The government has announced a package of 22.59 Billion dollars as of now ( 1.7 Lakh cr) Available in the state disaster relief fund is 60000 cr, comprising 30k outstanding balance and the central govt’s allocation of a similar amount for FY21. Hence GOI needs an additional 1.1 Lakh cr i.e. 65 percent of the rescue package outlay.

The rupee has lost 6.5 % so far in 2020 and hence is the 3rd worst-performing currency in Asia after Indonesian Rupiah and Thai Baht. FPIs have pulled out 17 Billion dollars from the Indian Capital market since the beginning of March. Obviously, investors are looking for safe haven and are likely investing in US Dollars. India is holding vast reserves close to $ 474 B despite having used some in the past month to stabilize the rupee as FPIs pulled over $15B from Indian Markets. RBI also has (almost) reached an agreement with the US Fed on dollar swap facility. In these conditions, RBI is most unlikely to affect its balance sheet by monetizing India’s deficit.

But there are counter-arguments as well:

There is this growing body of opinion arguing the bond market will not have the appetite for monumental borrowings; far better the central bank directly buys from government debt instead. This can be done using the ‘escape clause’ in the amended FRBM 2018 that allows the RBI to buy primary issues of government securities in a national calamity; this also provides for converting G-secs held by it to ‘other’ securities by mutual agreement. The essence is that skipping the bond market will prevent yields from hardening; else, higher interest rates could undermine the economic recovery.

Just for clarity and understanding, I will try to explain the concept of yield again.
The rate of return or yield required by investors for loaning their money to the government is determined by supply and demand. When the Govt Bond yield increases, interest rates in the economy also increase since the government must pay higher interest rates to attract more buyers in future auctions.

At an auction of SDL ( State Development Loan ), 19 states managed to raise only 325.6 Billion rupees against Rs 375 Billion planned. Yield surged across the board with the Kerala Govt agreeing to pay 8.96 percent on its 15-year paper. The yield on 10 year Government Bond has surged 50 basis points to around 6.44 percent. Also, the 75 basis point policy cut-rate achieved barely 12 basis points lowering of the long bond yield. On the bank side the transmission is broken; bypassing the bond market is not going to fix it. So the bond market is something that is again pitched. Though RBI has claimed that the transmission has improved in the last quarter.

But the forced economic shutdown may end up creating internal jobs and financial crises which if not addressed, may relegate the economy to a prolonged slump. Lower tax revenues, disinvestment receipts will cause a drop in the growth of the nation. Though the lower oil prices will provide a windfall gain of 1-1.5% of GDP depending on the price fluctuation of the same. But the job losses are going to be unprecedented. 40-60 million workers are estimated to have lost jobs in this lockdown. The package needs to be announced as soon as they may be.

In the continuation of the same, allow me to quote Mr. Yashwant Sinha, the former finance minister.

“Where will the government of India get the resources? We need an expert committee to work this out. But broadly speaking it will come partly through market borrowing and partly from the RBI. Manmohan Singh had decided in 1994 that in future the GOI would not monetize its deficit; in other words, it would not borrow from the RBI but go to the money market and borrow from there. In these unprecedented times, we may take leave from that very sound principle, which all governments have followed religiously since then, and borrow from the RBI. This means printing more currency notes with all its attendant problems including inflation. I am making this suggestion with the fullest sense of responsibility. After all, I am guilty of imposing FRBM. I am today publicly declaring that I shall have no problem if the GOI runs a huge deficit to tackle the present crisis and asks the RBI to monetize a part of it.”

The former finance minister has proposed of monetizing India’s deficit by RBI.

Though other sources of money currently for the government are as follow:

1.     If we talk about the 15 largest non-financial central PSEs (CPSE), their non-core assets is something that can be monetized by the government They may encourage the government to form a HoldCo,  along the lines of Singapore’s Temasek Holdings and Malaysia’s Khazanah Nasional Berhad to enable PSEs to monetize their non-core assets at remunerative prices, maximize their enterprise value and focus on their core businesses. Their outstanding cash and bank deposits stood at Rs 64,252 cr which is above the requirements. And they have also accumulated Rs 93000 cr financial investment comprising listed or unlisted debts.
2.     The Asian Development Bank on Friday announced 2.2 Billion assistance for India to fight the COVID 19 outbreak and pledged greater support if required.
3.     The World Bank has already signaled additional financial support of $ 1B. This could be doubled. India has not tapped the IMF since the 1991 crisis. Its quota at the IMF- roughly $5.8B could be tapped. The fund allows any country 145% of its quota on request. So India could get $8B from this source.
4.     The ministries have been asked to reduce their expenditure by up to 40 percent. Nevertheless, key ministries like health, agriculture, food, consumer affairs, rural development, railways, textiles have been spared from such limitations

As of now, what we understand is that there is a different opinion about RBI’s role in helping the government raise funds. Also, other sources of money have been mentioned. The time would ultimately let us know as if how much we had predicted on the correct line.

Stressed Sectors:

There is hardly any sector that had not been affected by the ongoing crisis. Directly or indirectly, each sector has got its own story. But as of now, we will be focussing on Power Sector and NBFCs in particular to discuss their present cases.

Just for a brief, I will introduce you to the Indian Power Sector first before delving into the Discoms. The Indian power sector value chain can be broadly segmented into the generation, transmission, and distribution sectors. Generation happens through the thermal power plants and renewable sources, meaning hydroelectricity plant. The national electric grid in India has an installed capacity of 368.79 GW as of 31 December 2019. Renewable power plants, which also include large hydroelectric plants, constitute 34.86% of India's total installed capacity. In the transmission sector, India’s regional grids (Northern, Eastern, Western, North-Eastern, and Southern) are currently integrated into one national grid. The distribution sector consists of Power Distribution Companies (Discoms) responsible for the supply and distribution of energy to the consumers (industry, commercial, agriculture, domestic, etc.). This sector is the weakest link in terms of financial and operational sustainability. In these unprecedented times, the Discoms have been hit very hard, given that they were already struggling before as well.

Power distribution companies (Discoms) earlier known as state electricity board (SEBs) are the ones that fulfill the electricity requirement of the households and all. They source power from independent power producers (IPPs), public sector undertakings (PSUs) viz NTPC apart from their stations. The Discoms have legally binding contracts especially with big companies, which draw electricity in large quantities, with provisions for the latter to pay when they don’t draw power. But in the current scenario discoms maybe not in a position to enforce as these big organizations are not able to draw power because of reasons that are not in their hand. You may say that they may invoke ‘force majeure’

FYI: Force majeure, meaning "superior force", is a common clause in contracts that essentially frees both parties from liability or obligation when an extraordinary event or circumstance beyond the control of the parties, such as a war, strike, riot, crime, epidemic or an event described by the legal term act of God (hurricane, flood, earthquake, volcanic eruption, etc.), prevents one or both parties from fulfilling their obligations under the contract.

Overdue-payment default of 60 days or more from discom to power producers were already at Rs 80,387 cr at February end. The Union power ministry is deliberating on a plan to infuse liquidity in stressed through center run PFC- REC. Now many of you already know about the largest NBFC of the nation. But still, if you have missed a bit about the same, I would love to let you go through the wiki snippet once again.

“Power Finance Corporation Ltd is an Indian financial institution. Established in 1986, it is the financial backbone of the Indian Power Sector. PFC's Net worth as of 30 September 2018 is INR 383 billion.PFC is the 8th highest profit-making CPSE as per the Department of Public Enterprises Survey for FY 2017-18. PFC is India's largest NBFC and also India's largest Infrastructure Finance Company.

REC Limited, formerly Rural Electrification Corporation Limited, is a public Infrastructure Finance Company in India’s power sector. The company is a Public Sector Undertaking and finances and promotes rural electrification projects across India. The company provides loans to Central/ State Sector Power Utilities in the country, State Electricity Boards, Rural Electric Cooperatives, NGOs and Private Power Developers.

On 7 December 2018, the Cabinet Committee of Economic Affairs gave its in-principle approval for the sale of 52.63% REC to the state-owned Power Finance Corporation (PFC).  On 20 March 2019, PFC signed the agreement to acquire a 52.63% controlling stake in REC for ₹14,500 crores (US$2.0 billion).[5] On 28 March, PFC announced that it had completed making the payment for the acquisition and intended to merge REC with itself in 2020”

And that’s how PFC-REC has come into the picture.

The government has tried very often to limit the losses of the sector. The debt waiver of 2015 helped reduce their losses from 52000 cr during 2015-16 to Rs 32000 cr during 2016-17 and further to Rs 17000 cr during 2017-18. But the reversal was short-lived even as loss increased to 27000 cr during 2018-19. If the sources are true, currently, discoms don’t even have the money to pay for the power they buy for catering to essential services such as health care. In this case, it has been very important for the arms of the government to step in for the rescue. Again.

PFC and REC are likely to seek state government guarantee against the additional loans that would be given to state-run power distribution companies (discoms) to help them cope with the current COVID- 19 induced crisis. Discoms are also finding difficulty in continuing meter reading exercises and collect payments from consumers amid the crisis.

The Reserve Bank of India (RBI) had asked banks, co-operative banks and NBFCs to offer a three-month moratorium on loan repayments by their customers in the wake of the COVID-19 pandemic and the nationwide lockdown. While NBFCs — hit hard by the IL&FS and DHFL crises — have taken up the moratorium issue with banks, the RBI and the Finance Ministry, they have not received any favorable decision so far.

The message that has been relayed seems that the central bank is not in a favor of allowing financial intermediaries such as microfinance institutions or MFIs or non-banking finance companies or NBFCs (there are many MFIs that are NBFCs) into the moratorium.
They cannot reclaim repayment from their borrowers because of the moratorium but they need to pay back the loans taken from the banks (which they have used to lend to their borrowers). When they cannot lend fresh (and earn interest) because of the nationwide lockdown and claim repayment following the moratorium, how will they service bank loans?
The RBI probably wants them to borrow short term money from banks. It has opened a targeted long term repo (TLTRO) window for up to Rs 1 trillion from which banks can borrow to invest in corporate bonds, commercial paper and non-convertible debentures of NBFCs and mutual funds. However, only half of that is earmarked for primary issuances. Moreover, an expected scramble for funds means corporates and government-owned financiers will also be interested in this window. Still, many small NBFCs will not be able to raise fresh funds and there would be causalities. Thus they have put significant pressure on liquidity profiles of many such companies.

The total bank loan outstanding to the NBFC sector — which was already facing liquidity problem — was Rs 7,37,198 crore as of January 31, showing a rise of 32.2 percent on a year-on-year basis. While collections are falling steeply in the wake of the lockdown, closure of units and job losses, an estimated Rs 1.75 lakh crore debt obligation of NBFCs will mature by June.

According to a Crisil report, with collections minimal and the moratorium only for their borrowers, raising fresh funds is critical, especially because NBFCs, unlike banks, do not have access to systemic sources of liquidity and depend significantly on wholesale funding.
The rating agency said that liquidity pressure will increase for nearly a quarter of NBFCs if collections do not pick up by June. These NBFCs have Rs 1.75 lakh crore of debt obligations maturing by then, it added. In a report, Acuité Ratings & Research said, “While we can presume that most banks will provide back to back moratorium, there is no indication that it will be applicable for the non-bank lenders or investors unless there are specific bilateral arrangements.” This implies that the bondholders, commercial paper investors and also fixed deposit holders (applicable for deposit-taking NBFCs) in all likelihood, will insist on maintaining the existing repayment schedule, the agency said. Almost 60 percent of NBFC borrowings are from non-bank sources and require continuity in debt servicing. With minimal collections, NBFCs can only depend on their cash reserves and any backup credit
lines from banks, if available for servicing such debt.

Also, these are points or events that took place in the last few weeks along with the suggestions/remedial measures:

  1. The construction sector has a large multiplier effect and labor-intensive. The automobile sector also has a large multiplier effect and has been experiencing a downturn. The 2008 package included grants for the purchase of about 2000 buses for use in city bus services. Something similar could also be considered.
  2. This is the time when the NIP could be taken off and it has become more urgent than ever.
  3. The need is to create demand in the market. In the wake of the 2008 crisis, for example, China announced a massive $586 B stimulus package for its economy to be implemented over a period of 2 years. This amount was 16 percent of China’s pre-crisis GDP. And while the size and scale of China’s stimulus did cause problems later — a massive debt pile for local governments across that country — it ensured that China recovered much faster than many other countries. In contrast, the European Union, with its tight fiscal rules, saw years of weak growth and persistent crises in some countries, well into the last decade. Given this context, the NIP isn’t in fact, wildly ambitious — it amounts to about 7-10 percent of GDP annually. Further, around 42 per cent of the total amount of ~102 trillion covers projects already under implementation. In fact, it is fair to say that the government could scale up the NIP’s ambitions even further, given the potential size of the impact on the economy from the current crisis.
  4. Recapitalization instead of debt: As liquidity reaches companies through loans, it increases their leverage through greater debt and therefore default risk, leaving them with little room to invest and grow. Hence, recapitalization with government funding will be substantial and important.
  5. The suspension of MPLADs:  The immediate benefit now is the freeing up of about 7900 cr over a 2 year period so that it can be spent on boosting the health infrastructure needed to combat the pandemic. Second Administrative Reforms Commission too had recommended its abrogation altogether, highlighting the problems of the legislator stepping into the shoes of the executive. Though if you go through the arguments of Dr. Shashi Tharoor and Manish Tewari, you may feel the case to be different. Manish Tewari says that MPLADS was challenged in the supreme court as being violative of Articles 275, 282, the 73rd and 74th amendment, and the constitutional design itself. In 2010, a five bench of SC held the scheme to be intra vires of the constitution and declared “Indian Constitution does not recognize the strict separation of power”
  6. Inflation Data: The govt. statistical officers have used simulation and imputation to compute the March inflation rate based on the Consumer Price Index (Combined), details of which be made available on the day of the data release of Monday. Imputation is a statistical process of replacing missing data with substituted values, which in this case are like to be priced from the previous month. Data collection stopped from March 18.  However, The consumer price index (CPI)¬based inflation, which had stayed elevated in the last few months, is expected to soften during the course of the financial year, the Reserve Bank of India (RBI) said in its monetary policy report (MPR).  “CPI inflation is tentatively projected to ease from 4.8% in Q1 of 2020¬21 to 4.4% in Q2, 2.7% in Q3 and 2.4% in Q4, with the caveat that in the prevailing high uncertainty, aggregate demand may weaken further than currently anticipated and ease core inflation further, while supply bottlenecks could exacerbate pressures more than expected,” the RBI said. The central bank said, looking ahead, the balance of inflation risks is slanted even further towards the downside.
  7. Jairam Ramesh even mentioned that a second Budget may be required to deal with COVID-19 aftermath’
  8. Prof Sharma of IIM Rohtak made an interesting point in this scenario. He mentioned that India is one of the few economies that will still grow with positive growth for sure aftermath of the crisis. India should go for pumping more money in the economy without thinking much about the deficit. The counter-argument made was that doing so would bring the credit ratings below BBB-, which is the junk category and hence heavily impacting the prospects. On the same he responded by saying that Rating agencies wouldn’t do that as doing so would mean talking things in isolation, India would still be growing much faster than the rest of the world, even perhaps escaping the fear of recession which advanced nations may face. Hence they, in the most likely scenario shouldn’t do so. [FYI: Bonds with a rating of BBB- (on the Standard & Poor's and Fitch scale) or Baa3 (on Moody's) or better are considered "investment-grade." Bonds with lower ratings are considered "speculative" and often referred to as "high-yield" or "junk" bonds.]
  9. Demand led recovery is the need of the hour: On Friday, Energy ministers of G20 batted for consumption-led demand recovery for an early economic revival. In the same meeting, India also decided to buy oil worth around 5000 cr to fill up three strategic reserves with a capacity of 5.33 million tonnes.
j.   Developers are sitting on 3.7 Lakh cr in unsold inventory. Unsold inventory increased from 442228units in the last quarter of 2019 to 455351 units in the first quarter of 2020, according to a report by JLL.  The expected time to liquidate this stock has increased marginally from 3.2 years in the last Q of 2019 to 3.3 years in Q1 2020.
k.     Food Saga of India: Romania has become the first country to cut off grain exports. The government passed a decree banning the sale of grain to countries outside the European Union during the state of emergency, which is expected to last until at least mid- May. To understand the food stock situation in India, you need to understand the Food Subsidy accounting. Even though the fact is that India had one of the largest buffer stocks, we have not been so generous enough to distribute the same among the needy ones. Let's look over at the stats. India’s foodgrain output is projected to be about 292 MMT in 2019¬20. On March 1, 2020, the total stock of wheat and rice with the Food Corporation of India (FCI) was 77.5 MT. The buffer norms for food grain stocks — i.e., operational stock plus strategic reserves — is 21.04 MT. Similarly, for pulses, India had a stock of 2.25 MT in mid- March 2020. In both cases, the rabi harvest is slated to arrive in April 2020, and the situation is expected to ease further. The bottom line is that we have almost 3x the buffer stock norms and the rabi harvest will make things much better. But if we try to follow the argument of Jean Drèze, then you could understand the accounting better. The food subsidy essentially pays for the losses FCI makes when it buys at minimum support prices and sell at much lower PDS prices, and also the money spent on transportation and storage. As it happens, however, the food subsidy does not enter the central govt accounts until the stocks are released. That is why the Finance minister had to budget Rs 40000 cr in her relief package simply to release some excess food stocks into the PDS. In economic terms, releasing excess stocks is costless, even saves money, But in accounting terms, it is expensive. This anomaly makes it harder to release food stock; Credit rating agencies watch the fiscal deficit, not the food economy

Positive Outlook:

1.       Bank loans grew by a whopping ₹ 2.31 lakh crore in the fortnight ended March 27, indicating robust loan demand just when a nationwide lockdown was imposed to contain the spread of COVID¬19, according to the RBI. This was probably the highest fortnightly loan growth recorded in the financial year 2019¬20. The lockdown, that paralyzed the economic activity, came into effect on March 25. Soumya Kanti Ghosh, group chief economic adviser, SBI, had said in a report that the banks have witnessed a healthy credit demand in the last seven days of the financial year 2019¬20. “The good thing is that banks have witnessed good traction in credit (term and working capital requirements) in the last 7 days of the year ending March 31, 2020. It seems that companies are preparing themselves for a surge in demand after the lockdown period.


The pandemic has erased years of progress. But can the government save every firm/every industry during this time? Can every industry be awarded a heavy restructuring package? This seems pretty impossible. There are going to be firms that will be badly hit and may not even survive the coming quarters. How should the government proceed in that scenario?

Let me quote Ajay Shah, a professor at the National Institute of Public Finance and Policy, New Delhi who has some interesting views on this matter and financing.

“Finance does the triage: of allocating the capital to the places where it will have the highest marginal product. Some firms are not going to make it, and putting capital there is like putting good money after bad. Some firms need more capital, but not badly enough to pay a higher rate of return. It is the middle zone – the firms where survival and success are likely to come about, but only if new external capital in brought in- that a capable financial system should devote itself to. The best corporate finance deals are available to financiers when they are putting capital in a sound firm, where this capital will make a difference of life or death”


6.     Articles by Renu Kohli, Tamal Bandyopadhyay
7.     Report published by Tejal Kanitkar and MS Swaminathan


  1. Thanks a lot Dinesh. Really appreciate the same :)
    Meanwhile, Stay safe and stay healthy.


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