maggubhai op-ed

OP-ED VOLUME 3 ( FOR RBI/SEBI/IBPS 2020)

April 27, 2020

NBFCs will play a pivot for growth revival. Let more liquidity flow

1. Several decisions have been taken to ensure the survival of the NBFC sector. The RBI slashed the repo rate, introduced a 3-month loan moratorium to provide relief to borrowers and announced measures like LTRO for lending to NBFCs (with 50 per cent reserved for smaller NBFCs). But these measures aren’t enough to ensure that the NBFCs will receive it in sufficient quantity as credit outlook.

2. As a large proportion of borrowers opt for the moratorium, cash inflows for NBFCs may be limited, making them dependent on their liquid assets and refinancing to service their upcoming debt maturities.

3. NBFCs also borrow from the capital market and no forbearance is given on capital market instruments. These will have to be retired as and when the liability is due for repayment.

4. To resolve these issues all the regulators need to come forward and clarify pending issues of the moratorium on debt instruments of NBFCs like NCDs (non-convertible debentures), PTCs (pass-through certificates) and NBFCs’ bank borrowings.

5. In 2008, during the Great Depression, the US Fed Reserve created ‘Emergency Credit Facilities’ for the non-bank financial system which covered not only the banking system but also overall financial system. The RBI can also do the same.

6. Robustness is needed in the application of Ind-AS (Indian Accounting Standards), a version of IFRS 9 (International Financial Reporting Standard), as it will be tough for NBFCs to make forward-looking judgements in their financial statements in the current environment of heightened uncertainty.

Tank up strategic oil reserves fast

1. As there is a crisis in demand for crude oil due to the Covid-19 as well as massive output, It is the right time to fill up India’s storage and strategic petroleum reserves (SPRs).

2. The world’s onshore storage capacities are running out, and supertanker ships being used to store oil on the seas are also filling up fast. But the price of oil will not be staying down forever.

3. Reports say that until early this month, India’s SPRs were just about half full. The country currently has an SPR capacity of 5.33 million tonnes in giant underground caverns in Vishakhapatnam, Mangaluru and Padur.

India’s opportunity for sustainable growth

As India looks to shore up its economy it is worth reflecting on the systemic actions that are needed to shift towards a more sustainable and resilient economy. Here are some suggestions:

1. Sustainable infrastructure investments are an effective way to boost the economy and to create jobs. Renewable energy, scaling up the electrification and adoption of public transport, investment in cold storage facilities and supply chains can be proven as promising sustainable infrastructure investments.

2. About 90% of India’s workforce is vulnerable to economic shocks and needs greater access to formal credit and social safety nets. Employments, guarantees, insurance and pension schemes, universal basic income, better access to clean water, clean air, and primary healthcare can be the measures to build better sustainable growth.

3. Fiscal mechanisms which can help support recovery and resilience efforts, while promoting low-carbon development can be used. To do so the government can infuse capital for the MSME sector, support to recover the aviation and automobiles industry, increase taxes on luxury sectors with high environmental impact etc.

4. The long term and effective changes in behaviour like electricity consumption, purchasing of non-essential materials, conservation of energy, promoting reuse, recycling, and repair models for consumption, supporting the continuation of work-from-home policies to reduce vehicle pollution can be taken as prominent steps.

RIL’s ‘phygital’ commerce may give Zuckerberg the desired foothold in India

1. The phrase, “phygital” commerce—the combination of physical and digital retail which the JIO Platforms Ltd. projects might be the biggest appeal by which the firm won a $5.7 billion investment from Facebook Inc.

2. Four years ago, Facebook Inc. was keen to dish out free internet service to India. Zuckerberg thought he was being charitable by offering a low-bandwidth entry to those who were yet to get basic internet service but the critics and the Indian government saw it differently.

3. Zuckerberg’s naive view was that India wouldn’t be able to compete with the internet-centered economy of China if it was hamstrung by high data costs. But Ambani has made it accessible by forcing down data charges and offering cheap handsets. By investing in the JIO Zuckerberg has possibly fulfilled his past agenda.

3. Besides these the social media giant also needs expansion to keep growing which may contribute a large part of their revenue in future.  

Why the Federal Reserve should take interest rates below zero for first time ever next week

1. In the US, the unemployment rate is expected to reach double digits by June, inflation will likely fall to 1% or even lower by the end of the year. In such a serious situation it is preferable to cut interest rates to stimulate growth and job creation.

2. This stimulates consumer demand in the usual ways: by incentivizing banks to make loans at lower interest rates, to bid up the prices of financial assets, and to charge higher fees for deposits.

Rethink design of SC and ST reservations

1. The current reservation policy for SCs and STs has no exclusion criterion, such as an income threshold that defines a creamy layer that is excluded from the benefit of reservations in the case of Other Socially and Economically Backward Classes.

2. Such layering is needed to restrain those who have already gained from this reservation system for one generation or more and made themselves advanced socially and economically.

3. The policy designing must be in such a way that it wears away the perceptions of inferiority. Limiting reservation benefits to two generations of a family and giving weightage to handicaps such as gender and regional and income backwardness should be considered.

Innovate for low-cost return to work

1. As Covide-19 has hit the economy, the industries need to think and redesign themselves in a bid to minimise costs, damages.

2. Instead of reporting one hour before flight departure, flyers can report three hours before departure, undergo an RNA test for the virus, and only those testing negative qualifying for a boarding pass.

3. Factories can work without social distancing if all workers stay at a factory-controlled dormitory and interact only with others, all of whom have tested negative for the virus.

4. Workers would need to be paid a premium for the hardship and the additional cost of the accommodation has to be borne. As there is a fear of bringing the virus with them a separate accommodation can help in this case. The industry needs to innovate such ideas more to revive the economy.

Printing money is valid response to coronavirus crisis

1. In times of emergency, particularly war, central banks have often handed freshly printed banknotes to governments.

2. But financing itself by creating freshly notes can result in inflation. But this is manageable; as the past statistics show that the measure has not lifted inflation above the main central banks’ 2 per cent targets.

3. This may be termed as quantitative easing, which is temporary i.e. the newly-created money will one day be removed from the economy.