The HINDU Notes – 26th March 2020 - VISION

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Thursday, March 26, 2020

The HINDU Notes – 26th March 2020

πŸ“° Saudi King to chair G20 virtual summit

For Modi, this will be the second leadership summit after SAARC video meet

•Leaders of the G20 (Group of Twenty) nations will hold a video conference on Thursday. The virtual summit will be led by King Salman bin Abdulaziz al Saud of Saudi Arabia, which is the current president of the economic grouping.

•“G20 members will be joined by leaders from invited countries, Spain, Jordan, Singapore, and Switzerland as well as international organisations the United Nations, the World Bank Group, the World Health Organisation and the World Trade Organisation, the Food and Agriculture Organisation, the International Monetary Fund, the Organisation for Economic Cooperation and Development,” said a statement issued by the Saudi authorities.

•Apart from 19 of the biggest economies of the world, G20 also includes the European Union. For 2020, Spain, Jordan, Singapore and Switzerland are the invited countries.

Detailed plan expected

•For Prime Minister Narendra Modi, this will be the second virtual leadership summit after the video meet of the South Asian Association for Regional Cooperation (SAARC), which he initiated on March 15 and led to the creation of the SAARC COVID-19 Emergency Fund. It is expected that the G20 virtual summit will yield a detailed plan for confronting the pandemic caused by COVID-19.

•Leaders of the grouping had been in contact over the last few weeks and held preparatory consultations. External Affairs Minister S. Jaishankar discussed the upcoming virtual summit with his Chinese counterpart Wang Yi on Tuesday. “Global challenges require global cooperation,” he said after the conversation.

•Elaborating on the video conference of Thursday, a Saudi release said Vietnam would represent the Association of the Southeast Asian Nations, South Africa the African Union, the United Arab Emirates the Gulf Cooperation Council and Rwanda the New Partnership for Africa’s Development.

πŸ“° FinMin writes to RBI for relaxing farm loan NPA norms

Cites stress in agriculture sector; relaxation a prerequisite to interest subvention

•The Finance Ministry has asked the Reserve Bank of India (RBI) to relax asset classification norms for farm loans extended by banks following the stress faced by the agriculture sector.

•In a letter addressed to RBI Governor Shaktikanta Das, the Ministry said, “it is requested to consider making appropriate relaxation in asset classification norms in respect of short-term agricultural crop loans for a period up to 30th June 2020.”

•The letter, reviewed by The Hindu , cited a communication from the Agriculture Ministry which is considering an extension of the interest subvention scheme for the farm sector which, in turn, would require relaxation of NPA norms. As per the RBI’s asset classification norms, a loan is classified as non-performing by banks if repayment is due for more than 90 days.

•“The Department of Agriculture, Cooperation and Farmers’ Welfare, Government of India, has [said that] in view of the unprecedented situation prevailing in the country on account of increasing incidence of COVID-19 infection and consequent lockdown across the country, they are actively considering the possibility of extending the benefit of interest subvention and prompt repayment incentive to short-term crop agriculture loans falling due between 29th March 2020 and 30th June 2020, if the loans are repaid by 30th June 2020,” the letter said.

•“They have further stated the extension of the repayment date would require relaxation in asset qualification by RBI,” it added.

•The spread of COVID-19 has resulted in a lockdown across the country with economic and other activities coming to a grinding halt. As a result, industry and bankers have demanded a relaxation in bad loan norms, apart from economic stimulus from the government.

πŸ“° Union Cabinet approves recapitalisation of RRBs

Centre’s share fixed at of Rs. 670 crore

•The Centre has approved a Rs. 1,340-crore recapitalisation plan for regional rural banks (RRBs) to improve their capital-to-risk weighted assets ratio (CRAR), strengthening these institutions that are critical to the provision of credit in rural areas.

•On Wednesday, the Cabinet Committee on Economic Affairs gave its nod for an outlay of Rs. 670 crore as the central share for the scheme on the condition that the release of the funds will be contingent upon the release of the proportionate share by the sponsor banks, an official statement said.

•This would provide minimum regulatory capital for one more year viz. up to 2020-21 for those RRBs that are unable to maintain the minimum CRAR of 9%. This has been an ongoing scheme since 2011.

•The RRBs are required to provide 75% of their total credit as priority sector lending with primary focus on agricultural credit, including small and marginal farmers, as well as micro entrepreneurs and rural artisans.

•At a time of lockdown due to the COVID-19 crisis, financially stronger rural banks could also be crucial to ensuring liquidity in rural areas.

πŸ“° Banks get ready for merger, albeit reluctantly

Process can wait, given the lockdown the country is under, say some bankers

•Almost half of the Indian public sector lenders — 10 to be precise, which will be merged to create four banks — are getting ready to amalgamate themselves in an exercise that takes effect from April 1.

•The mergers, announced in August last, will start amid an unprecedented nationwide lockdown to fight the rapid spread of COVID-19.

•Banking services are exempt from the lockdown, but are operating with minimal staff at branches with curtailed business hours, primarily focussing on essential services such as withdrawals and deposits. Banks are encouraging customers to make use of their digital platforms for transactions.

•“The entire focus right now is how to continue the essential services to customers with minimum staff,” said the chief executive of a public sector bank, who did not wish to be named.

•“In such crisis times, customer service is the key. Merger can wait for a quarter, at least,” the executive added.

•In August 2019, Finance Minister Nirmala Sitharaman announced the merger of 10 public sector banks into four. Oriental Bank of India and United Bank of India will be merged with Punjab National Bank; Andhra Bank and Corporation Bank will be merged with Union Bank of India; Allahabad Bank will be merged with Indian Bank; and Syndicate Bank will be merged with Canara Bank.

•According to the plan, only the balance sheets of these banks will be merged on April 1. All the branches of the transferor banks will become branches of the transferee bank. The actual integration of systems and processes of these banks will take time (up to a year). For example, if a customer of Andhra Bank goes to a branch which belonged to Corporation Bank before the merger (and a branch of Union Bank post merger), then the entry would still be made in Andhra Bank’s system. All the branches of Union Bank will have to maintain three separate software systems in the branches. The same is the case with all other merger-bound banks.

‘Logistical nightmare’

•Also, the branding of the branches will have to change. The branches of the transferor banks will have to don the brand of the transferee bank. “With limited staff that are operating now and also the lockdown that is in place, it is going to be logistical nightmare to change the branding,” said a banker with a public sector bank.

•Some bankers said the issue of postponing the merger was discussed among them informally, but no formal requests have been made to the Finance Ministry.

•There are also performance-related concerns of the merged entity since economic activity has almost come to a halt due to the crisis, which will inevitably have a bearing on the bank’s performance.

•A section of bankers is also of the view that it is too late to postpone the merger at this point of time since only less than a week is left for the process.

•“It will be business as usual after the merger as there is no impact on the customer since only the balance sheets are merged,” said the chief executive of another merger-bound public sector bank.

πŸ“° Beware of a lopsided lockdown

The poor seem to count for very little in the Central government’s curfew plan

•“I am willing to go hungry if there is no other way to stop this virus, but how will I explain that to my children?” We heard these poignant words two days ago from Nemi Devi of Dumbi village in Latehar district, Jharkhand. Her son and husband, both migrant workers, are stranded far away. In village after village, many other women expressed similar worries. And that was even before the Prime Minister announced a drastic 21-day lockdown, from Wednesday.

•The enormity of the coronavirus crisis is gradually dawning on India. For you and me, it is still in the future. But for many informal-sector workers and their families, the crisis is already in full swing: there is no work, and resources are running out. Things are all set to get worse as the privileged hoard with abandon and food prices go north.

•Hopefully, the Central government’s decision to impose a 21-day lockdown will prove right in due course. But the lockdown (a virtual curfew) is crying out for relief measures, including income support for poor families. As it happens, most of them already receive a limited form of income support: food rations under the Public Distribution System (PDS). Under the National Food Security Act, two-thirds of Indian families (75% and 50% in rural and urban areas, respectively) are covered. In most States, including the poorest, the PDS works — not perfectly, but well enough to protect the bulk of the population from hunger.

Use excess food stock

•The PDS is the country’s most important asset in this situation. It is essential to keep it going, even to expand it, in terms of both coverage and entitlements. Fortunately, India has gigantic excess food stocks. In fact, it has carried excess food stocks (more than twice the buffer-stock norms) for almost 20 years, and this is the time to use them. Nothing prevents the Central government from, say, doubling PDS rations for three or even six months as an emergency measure. That will not make up for most people’s loss of income, but it will ensure that there is food in the house at least.

•Some bold steps are required to make food distribution effective. For instance, biometric authentication (fingerprint scanning) is best removed at this time — it is a source of exclusion as well as a health hazard. Distribution needs to be staggered and tightly supervised, to avoid crowds and cheating at the ration shop. Dealers who are caught cheating must be swiftly punished. All this is well within the realm of possibility; the main thing is to release the stocks without delay.

•Having said this, the PDS is not enough. For one thing, many poor people are still excluded from it. Large-scale cash transfers are also required, starting with advance payment of social security pensions and a big increase in pension amounts (the Central government’s contribution has stagnated at a measly Rs. 200 per month since 2006). Here, one possible hurdle is the payment system. Many pensioners collect their pension from “business correspondents” (BCs) – a kind of human automated teller machine (ATM), who dispenses money on behalf of the bank. The problem is, unlike ATMs, most BCs use biometric authentication rather than smart cards. And mass biometric authentication could accelerate the transmission of the novel coronavirus.

Payment arrangements

•Ideally, biometric authentication should be abandoned for now. Even if it is not, many BCs may vanish for fear of infection (most of them are poorly-paid employees of poorly-regulated private entities). Under both scenarios, something has to be done to ensure safe crowd management at the bank. New payment arrangements are also possible. For instance, social security pensions could be paid in cash at the panchayat bhavan on a given day of the month, obviating the need for everyone to go to the bank: this has been done in Odisha for years, with good results. Cash could also be disbursed, with due safeguards, through anganwadis or self-help groups. Cash transfers need not be limited to social security pensions. Revamping the PDS and social security pensions would go a long way, but a significant proportion of vulnerable families are likely to fall through the cracks. Further, food rations may prevent hunger but people have many other basic needs; they will need money to cope with this spell of unemployment.

•There are several possible ways of extending the reach of cash transfers beyond pensions. For instance, money could be sent to the accounts of Mahatma Gandhi National Rural Employment Guarantee Act job-card holders, or Pradhan Mantri Kisan Samman Nidhi (PM-KISAN) beneficiaries, or PDS cardholders. How these lists are best used and combined is a context-specific question, perhaps best handled at the State level (my sense is that in many States, the MGNREGA job-cards list is the best starting point). These are just some examples of possible emergency measures. Many other valuable suggestions have been made, relating for instance to midday meals, community kitchens and relief camps for stranded migrant workers. The first step is to make relief measures an integral part of the lockdown plan. Failing that, it may do more harm than good. For one thing, a hungry and enfeebled population is unlikely to fight the virus effectively. A constructive lockdown should empower people to fight back together, not treat them like sheep.

•Finally, Centre-State cooperation is essential. Many State governments have already initiated valuable social-security measures, but they are far from adequate. The Central government, for its part, has been struck with inexplicable paralysis on this. Adequate relief measures require big money (lakhs of crores of rupees) from the Central government. Implementation, however, should be led by the States. They all have their own circumstances and methods. The Central government is unlikely to do better on their behalf. If it foots the bill, that will be a good start.

πŸ“° Dressing a wounded economy

The two major tools that the government has available before it are monetary policy and fiscal actions

•The impact of the coranavirus pandemic is now felt by almost every country. First, there are the health effects of the virus, and second is the economic impact of the various actions that have to be taken to combat the virus. The world is experiencing an additional slowdown on top of the contracting tendencies already present and India is no exception. The economic impact on India can be traced through four channels: external demand; domestic demand; supply disruptions, and financial market disturbances.

External, domestic demand

•As the economies of the developed countries slow down (some people are even talking of recession), their demand for imports of goods will go down and this will affect our exports which are even now not doing well. In fact after six months of negative growth, it was only in January that Indian exports showed positive growth. The extent of decline will depend on how severely the other economies are affected. Not only merchandise exports but also service exports will suffer. Besides these, the IT industry, travel, transport and hotel industries will be affected. The only redeeming feature in the external sector is the fall in oil prices. India’s oil import bill will come down substantially. But this will affect adversely the oil exporting countries which absorb Indian labour. Remittances may slow down.

•To ward off the spread of the coronavirus, the government has declared a lockdown of the country. As passengers travel less, the transportation industry, road, rail and air, is cutting down schedules, sometimes drastically. This will affect in turn several other sectors closely related to them. The laying off of non-permanent employees has already started. As people in general buy less, shops stock less, which in turn affects production. Perhaps retail units will be first to be affected and they will in turn transmit this to the production units. One is unable to make an estimate of the reduction in economic activity at this point. If the situation is not reversed soon, there can be a serious decline in the growth rate during 2020-21.

•Supply disruptions can occur because of the inability to import or procure inputs. The break in supply chains can be severe. It is estimated that nearly 60% of our imports is in the category of ‘intermediate goods’. Imports from countries which are affected by the virus can be a source of concern. Domestic supply chain can also be affected as the inter-State movement of goods has also slowed down.

Financial market issues

•Financial markets are the ones which respond quickly and irrationally to a pandemic such as the coronavirus pandemic. The entire reaction is based on fear. The stock market in India has collapsed. The indices are at a three-year low. Foreign Portfolio Investors have shown great nervousness and the safe haven doctrine operates. In this process, the value of the rupee in terms of dollar has also fallen. The stock market decline has a wealth affect and will have an impact on the behaviour of particularly high wealth holders.

•How does the government deal with this sudden decline in economic activity which has come at a time when the economy is not doing well? The two major tools that are available are monetary policy and fiscal actions.

•Monetary policy in a situation like this can only act to stimulate demand by a greater push of liquidity and credit. The policy rate has already been brought down by 135 basis points over the last several months. There is obviously scope for further reduction. But our own history as well as the experience of other countries clearly show that beyond a point, a reduction in interest rates does not work. It is the environment of the overall economy that counts. Credit may be available. But there may not be takers. You can lead a horse to water but you cannot make it drink. Any substantial reduction of policy rate can also affect savers. Interest is a double-edged sword.

•The Reserve Bank of India (RBI) needs to go beyond cutting policy rate. A certain amount of regulatory forbearance is required to make the banks lend. Even commercial banks on their own will have to think in terms of modifying norms they use for inventory holding by production units. Repayments to banks can be delayed and the authorities must be willing to relax the rules. Any relaxation of rules regarding the recognition of non-performing assets has to be across the entire business sector. The authorities must be ready to tighten the rules as soon as the situation improves. This is a temporary relaxation and must be seen as such by banks and borrowers.

•Fiscal actions have a major role to play. Once again, the ability to play a big role is constrained by the fact that the fiscal position of the government of India is already difficult. Even without the pandemic, the fiscal deficit of the Central government will turn out to be higher than that indicated in the budgets for 2019-20 and 2020-21. Revenues are likely to go down further because of the virus related slowdown in economic activity.

•In this context, the ability to undertake big ticket expenditures is constrained. But there are some ‘musts’. The virus has to be fought and brought down. All expenditures to test (there is some concern that the extent of testing that we are doing now is low) and to take care of patients must be incurred. Now that private hospitals are allowed to test, the cost of the people going to private hospitals must also be met by the government. The involvement of private hospitals has become necessary. It is mentioned that a test costs ₹4,500. The total cost can be substantial if the numbers to be tested run in the thousands and more. This may sound exaggerated. But we must be prepared so that we avoid the tragedy of Italy. Therefore, the first priority is to mobilise adequate resources to meet all health related expenditures which includes the supply of accessories such as masks, sanitisers and materials for tests. The challenge is not only fiscal but also organisational.

The job sector

•Serious concerns have been expressed about people who have been thrown out of employment. These are mostly daily-wage earners and non-permanent/temporary employees. In fact some of the migrant labour have gone back to home States. We must appeal to the business units to keep even non-permanent workers on their rolls and provide them with a minimal income. Some relief can be thought of by the government for such business units even though this can be misused. However, in general, in the case of sectors such as hospitality and travel, the government can extend relief through deferment of payments of dues to the government.

•There is also talk of providing cash transfer to individuals. There is already a programme for rural farmers with all the limitations. For a system of cash transfer to be workable, it has to be universal. At this moment when all the energies of the government are required to combat the virus, to institute a system of universal cash transfer will be a diversion of efforts. The burden on the government will depend upon the quantum of per capita cash transfer and the length of the period.

•As mentioned earlier, the government should advise all business units not to retrench workers and provide some relief to them to maintain the workers. A supplemental income scheme for all the poor can be thought of once the immediate problem is resolved. Provision of food and other essentials must be made available to the affected as is done at the time of floods or drought. States must take the initiative.

•The fiscal deficit is bound to go up substantially. The higher borrowing programme will need the support of the RBI if the interest rate is to be kept low. Monetisation of deficit is inevitable. The strong injection of liquidity will store up problems for the next year. Inflation can flare up. The government needs to be mindful of this. All the same, the government must not stint and go out in a massive way to combat the virus. This is the government’s first priority.

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