maggubhai op-ed

OP-ED VOLUME 2 ( FOR RBI/SEBI/IBPS 2020)

Op-Ed is the collection of important editorials published in last few days (19th April,2020). It helps you in saving time as well as you can build your knowledge base.

A reality check for India’s monetary policy

In this article, the writer discusses about the slip-ups of the monetary policy.

1. In its recent Monetary Policy Report, the RBI changed the MPC’s stance of the past. The MPC projected a growth rate of 5.3 per cent and 6.1 per cent for Q2FY20 and Q3FY20 respectively but in this latest report, they admitted the actual growth is 5.1 per cent and 4.7 per cent which undershoots its projection.

2. To assess its projections the RBI heavily depends on forward-looking analytics such as – surveys of households on inflationary expectations, industries on output, professional forecasters on growth.

3. But the above reports capture the existing market sentiment neglecting the fundamentals and prone to be changed in short notice.

4. The above reports also extensively rely on past data but today’s market leaders want a futuristic view for scenario-building.

Why India needs a formal economy

1. Informal sector consists of small and medium enterprises which are also characteristic of a fast-growing economy but they are not an important engine of economic growth. The informal sector doesn’t offer stable employment, non0wage benefits, greater quality and quantity of employment.

2. Policy circles of labour laws regarding layoffs, retrenchment, taxation rules promote informality as well as poor job growth. Thus informality is a choice in relation to regulation by the state and financial development affects the decision to operate formally.

3. To operate firms in formal financial system that makes possible a considerable value addition that exists unwanted costs and losses from being in a tax net.

4. How policymaker can handle the economic shock due to Covid-19 is a matter to see and here formalisation can help as it provides for good risk-sharing institutions.

An FDI barrier that could be leapt over

1. On Saturday, the government tightened foreign direct investment (FDI) rules, requiring specific approval for inward investments by entities based in countries that share a land border with India. The so-called automatic route, under which the central bank simply had to be informed after money was invested, has been blocked in such cases.

2. Recently Chinese central bank’s purchase of about a 1% stake in HDFC Ltd appears to have stirred the fear of getting acquired of major of Indian firms.

3. It is true that businesses in India should ideally be under Indian control but on a broader perspective filtering foreign investment may go against the post-1991 policy approach.

4. In a globalized world, country-wise restrictions can also be gotten around by channelling a disguised investment through a transit country.

An unhealthy call by President Trump

1. Recently US president Mr. Trump took a decision to suspend US’s contribution to the WHO(World Health Organization) at a time when it needs to function at its optimum.

2. However Trump’s complaints about the WHO isn’t absolutely wrong however, casting aspersions in the midst of the worst-ever public health crisis is not helpful.

3. The WHO must be strengthened, and reforms are necessary. The multilateral public health body must have institutional access to and assess information from sources other than national governments, which should be part of the post-Covid agenda.

Funds can be raised for covid control and an economic stimulus

Arvind Subramanian and Devesh Kapur suggested that the government needs to spend an additional ₹10 trillion to fight the post-covid economic meltdown, both for disease control and for a stimulus package to support India’s economy. Here the discussion is on how the fund can be raised.

1. A big part of the Union Budget is deemed non-discretionary, i.e. cannot be reviewed, and these include interest payment, defence, subsidies (on food ₹1.15 trillion, fertilizer ₹71,000 crore and petroleum products ₹41,000 crores) and pensions. Each of these could share a burden of the pain.

2. Interest payments can be rescheduled with a one- or two-year moratorium, allowing interest on this sum as well.

3. Last but not the least, counter-intuitive as it may seem, this is the time for speedy privatization. The candidates for privatization could be the top three loss-making units with the top three profit-making units: Air India, BSNL, MTNL, ONGC, IOC and NTPC.

Are Lockdown Bonds a balm for the virus-hit businesses?

As the economy is suffering from an unprecedented crisis a huge amount of fund is needed. This is an extraordinary crisis needing extraordinary solution. Among many possible ways, one innovative method could be through Lockdown Bonds.

1. Either a separate bank is established for this purpose or an existing PSB (public sector bank) is given the responsibility to manage issuance, servicing and distribution of these bonds.

2. The first step will be to estimate cash losses suffered by businesses. Only cash losses on account of wages, interest, rent and the like will qualify for such support.

3. All those businesses opting for such support will be allowed to capitalise these losses and create Lockdown Assets. These Lockdown Assets will be financed by a Lockdown Bank or a designated bank.

4. The Lockdown Bank will raise resources by issuing Lockdown Bonds. The bonds could be issued in a variety of ways. In case these bonds are interest free, these will be issued to the government only. These bonds could also be issued with interest as guaranteed by the Centre.

5. Given that interest rates are low, this risk-free avenue may attract lots of investment. Since the issuance to investors can be long, the entire issue, to begin with, can be subscribed by the government and then listed and sold to all interested buyers.

Reduce cost of state borrowing

States need extra funds to tackle the Covid-19 pandemic but their borrowing costs have risen steeply. It need to be reduced.

1. One, the Centre should pay, by borrowing more, if need be, compensation arrears to states for revenue lost while transiting to goods and services tax.

2. Two, the Centre should exercise its ability to raise funds cheaply and lend them on to the states.

3. RBI has increased the ways and means advances (WMA) limit, a temporary liquidity arrangement, to states by 30% till September this year. An increase in the overdraft facility to 21 working days from 14 working days will give them more flexibility to time their borrowings.

4. The FRBM Act allows RBI to subscribe to the primary issues of central government securities under emergencies. The facility should be made available for approved state borrowing, too, amending the law suitably.