Category: Economy and Finance

Despite a brutal second wave with cases peaking in April-May 2021, India’s Gross Domestic Product (GDP) grew at a record pace of 20.1 percent in the April-June 2021 quarter compared to the corresponding period last year. The GDP, in absolute terms, stood at Rs 32.38 lakh crore (constant prices). This was actually lower by 9.2 percent than the numbers seen in the April-June quarter of 2019-20. In fact, as the figure below shows, the April-June 2021 GDP numbers are closer to the levels seen during the January-March 2017 quarter.

Source: MOSPI (Annual and Quarterly Estimates of GDP at constant prices, 2011-12 series)

While growth in the April-June 2021 quarter is promising and reflects recovery from the deep plunge seen in April-June 2020, comparisons are being drawn with the pre-Covid levels. 

But what are these pre-covid levels? Should numbers of a single quarter, say April-June 2019-20 be used as the benchmark, or an average growth seen in the previous few quarters be considered as a benchmark for comparison? 

An alternate strategy

We propose an alternative way through which, we compare the present Gross Value Added (GVA) numbers (in level terms) with the numbers obtained using simple univariate time-series forecasts. These forecasts are obtained by exploring the time-series properties of the variable of interest. In particular, these forecasts are arrived at using the Autoregressive Integrated Moving Average models (ARIMA models). ARIMA is a statistical analysis model that uses time-series data to better understand the facts and to predict future trends. 

This comparison helps in assessing how distant are the current GVA numbers from the levels which would have been achieved had there been no shock in the form of the COVID-19 pandemic.   

Since GDP includes taxes, we look at the activity-based variable after excluding the impact of taxes. The variable of interest, therefore, is the Gross Value Added (GVA). We use the GVA data available from June 2011 till December 2019 and extend it using the projections obtained from a univariate ARIMA model. As mentioned before, in this model previous observations are used to predict future values. Therefore, we have excluded the period post-December 2019 to ensure that the trend is not influenced by the COVID-19 shock. 

The figure below shows the raw data along with the projections for the subsequent six quarters (from March 2020 onwards) based on the ARIMA model. These projections present a picture of the GVA trends under normal circumstances, i.e. if the economy would not have been subjected to the COVID-19 shock.

Adjustment for seasonality 

An economy, over the long term, experiences a concept known as seasonality. These are seasonal fluctuations, movements, that recur with similar intensity in a given period (such as months) each year, thus showing a clear pattern of peaks or troughs over a sufficiently long time period. Broadly, seasonality arises from several calendar related events such as – weather-based factors: monsoon, winter or summer months, agricultural seasons: harvest or sowing season, administrative procedures: tax filings, financial year closure, working days, festivals: Diwali, Christmas, etc., institutional: Annual budgets or Fiscal year ending, social and cultural factors: Statutory holidays, etc.

Such seasonality needs to be adjusted to comprehend the underlying trend, cyclicality, and other movements for a better understanding (Pandey et. al, 2020). 

The quarterly GVA series shown above exhibits seasonality and therefore we seasonally adjust the extended GVA series (GVA values till December 2019 along with the forecasted values) and compare with the seasonally adjusted actual data post-December 2019.  

The difference between the series till December 2019 extended with time-series forecasts and actual series post-2019 (both adjusted for seasonality) would give an assessment of the shortfall in economic activity arising due to the COVID-19 shock. 

Shortfall due to COVID-19

The table below shows the differences between the estimates based on the time-series forecasting and the actual values. We present this exercise for the overall GVA as well as its components. The key highlights of the comparison exercise are as follows:

Table 1: Difference between the Actual values and Estimated values (Rs. Lakh Cr)

*Both Actual and Estimated Values are seasonally adjusted

1. In the January-March 2020 quarter, the difference between the forecasted (estimated) values and the actual values is small. This is due to the limited impact of the pandemic during this quarter. 

2. However, the difference widened to Rs 8.7 lakh crore in the April-June 2020 quarter. This was the period of the nationwide lockdown. As a result, the economic activity was adversely impacted. The major difference was seen in the contact-intensive trade, hotels, and transport sectors. Since agriculture was not impacted by the pandemic, the projected and the actual agricultural GVA is the same. 

3. With the gradual opening up from the July-September quarter, we see that the gap between our estimates and actual values is reduced. However, the financial sector continued to reel under the impact of the pandemic. While some improvement was seen in the GVA of the trade, hotels, and transport sectors in the July-September quarter, there still was a significant shortfall of Rs. 1.4 lakh crore.4. In the October-December 2020 and the January-March 2021 quarter, a distinct improvement is seen in the actual overall GVA numbers. The gap between the estimated and the actual values for the overall aggregate GVA narrowed to Rs 0.8 lakh crore and Rs. 0.3 lakh crore for Oct-Dec 2020 and Jan-Mar

2021 quarter respectively. Except for the trade, hotels, and transport sector, the gap was less than Rs 1 lakh crore for all the sub-sectors. 

5. But, the April-June 2021 quarter revealed that the gap has widened to the tune of Rs. 5.3 lakh crore. This shows that while the recovery was underway, the onset of the second wave and the consequent partial lockdowns pulled back the growth momentum to some extent. The sectoral variations are also worth noting. While agriculture, mining, and manufacturing showed stellar performance despite the second wave, the contact-based services sector (trade, hotels and transport) pulled down the growth. The construction sector also bore the brunt of the second wave.

The above exercise presents an alternative approach to assess the shortfall in GVA numbers due to the COVID-19 shock. There are sectoral variations: while agriculture posted a robust growth and the manufacturing sector was relatively less impacted, it is the contact-intensive sector that primarily got affected due to the shock. Our exercise shows that after the April-June 2020 quarter, the economic recovery was gaining momentum. However, the second wave led to a pause in the recovery process. 

Going forward, with a sustained pick-up in the pace of vaccinations, we should see economic recovery getting back on track. The high-frequency variables such as exports, PMI manufacturing and services, petroleum products consumption, electricity consumption, and GST collection, etc., also suggest a pick-up in economic activity since the beginning of the second quarter. 

The authors are Senior Fellow and Fellow respectively at the National Institute of Public Finance and Policy (NIPFP), New Delhi. Views are personal.

The Union Budget for FY 2021-22 presented on February 1, 2021 has the distinction of being the first budget after Covid-19 devastated much of the world, including India. India registered a historic contraction of nearly 24% in its Gross Domestic Product (GDP) in the first quarter of the current financial year, unemployment surged, small enterprises suffered acutely and vulnerable households slipped into poverty. During the course of the year, the government announced a series of measures to alleviate the Covid-19 induced stress. Since then, there have been signs of a nascent recovery in the economy. In this context, there has been tremendous anticipation around this budget to put India firmly back on the growth path. 

Towards this end, the budget has made many noteworthy announcements. Two key announcements stand out viz., a push to the privatisation agenda by announcing the privatisation of two public sector banks and an insurance company, and the establishment of an asset reconstruction company to take over the Non-Performing Assets (NPAs) of banks. 

Privatisation of public sector banks

Signalling a clear and key policy shift, the government has announced an ambitious and strategic privatisation policy by proposing to disinvest/strategically sell public sector entities (PSEs). Towards this end, the government has approved four sectors as strategic, where it will retain a minimum number of entities. It will pare down its presence above this minimum in strategic sectors, and completely in non-strategic sectors. Notably, banking, insurance and financial services have been identified as  strategic sectors.  

A number of central PSEs (including Air India, Shipping Corporation of India and the Container Corporation of India) have also been identified by the budget for divestment this fiscal year. Further, the NITI Aayog has been tasked with identifying the next pipeline of central PSEs for disinvestment.  Within this overall context, the current budget has also proposed to privatise two public sector banks (PSBs) in addition to Industrial Development Bank of India (IDBI), and a general insurance company.  

Privatisation of PSBs is not a new idea. It was attempted earlier as well.  The former Finance Minister, Yashwant Sinha, proposed to bring government stake below 51% in PSBs in early 2000s. However, this did not garner enough support. Given the burgeoning requirement of capital by PSBs and the limited fiscal space with the government, it has now become imperative to find other avenues to bridge the gap.  The proceeds of the disinvestment could help release government resources to more productive uses, particularly as government finances too have come under tremendous pressure in the wake of the pandemic.  

Moreover, with the approval of banking as a strategic sector, and the maintenance of public sector presence, the government should be able to avoid any compromise on its social agenda – a key concern that has been flagged earlier on privatisation of banks. 

Resolution of bad assets

Flow of credit is an imperative to meet the needs of a growing economy. A surge in bad or non-performing assets impedes the flow of credit. This is because banks must make higher provisioning to cover their bad assets, reducing the overall credit available to firms and households. It also makes banks risk averse. 

Measures to provide relief to borrowers such as the moratorium on loans – could exacerbate the problem of bad loans. An improvement in the NPA ratio of the banks was visible before the pandemic but the policy support extended to borrowers could impact the asset quality of banks through postponement in recognition of bad assets. 

The Financial Stability Report released by the Reserve Bank of India (RBI) in January this year estimates a sharp rise in the stressed assets on the banks’ books, particularly in the case of public sector banks. A number of measures were taken by RBI to improve the flow of credit by banks; however, the offtake of credit is still slow. The need of the hour therefore is to resolve these bad assets and clean up banks’ balance sheets so they can begin to lend more freely. 

The budget tries to address the problem of bad loans by announcing an asset reconstruction company (ARC) and an asset management company (AMC). This mechanism is expected to take over the stressed assets from banks, manage and eventually dispose them for value. The assets may be disposed of to potential buyers which include alternative investment funds (AIFs).  

The idea of a “bad bank” has apparently been inspired by the experience of countries such as the US and Malaysia. The Malaysian government, for instance, set up “Pengurusan Danaharta Nasional Burhad” – a government-backed AMC – that successfully bought and resolved bad assets in the Malaysian financial system in the aftermath of the Asian Financial Crisis in late 90s. 

While details on the Indian initiative are sparse at this point, the proposed mechanism is understood to not be a government owned entity. Instead, this mechanism would be primarily led by banks, with the government offering some support – perhaps in the form of a guarantee. The success of this proposal would depend on how well the proposed entity is managed. It will also depend on the capital allocation strategy by banks and how much money the government sets aside for this entity.

The reference to Alternate Investment Funds (AIFs) and other entities as potential buyers perhaps hints at measures for improving the efficiency of the stressed assets market – an important step that must go hand in hand with the creation of a “bad bank”.  However, a pitfall that the proposed mechanism must guard against is the potential “moral hazard”. It must disincentivise, rather than incentivise, poor decision making by the banks that led to the bad assets in the first place. 

Both the above announcements mark important interventions in the banking sector. Their success will however depend on the actual details – of the institutional structures and enabling frameworks put in place. Implementation will also be key, given the competing interests when it comes to privatisation and the government’s own poor track record on divestment.  This will, therefore, be a keenly watched space in the coming year.  

The views expressed in the post are those of the author and in no way reflect those of the ISPP Policy Review or the Indian School of Public Policy. Images via open source.

On February 01, 2021, Finance Minister Nirmala Sitharaman introduced the Budget for FY 2021-22 in the Parliament. Budget announcements are always a highly anticipated event in India; this time the expectations were even higher for the government to provide a credible roadmap for recovery. However, ahead of the Budget, another bill rumored to be proposed during the session was making news. The to-be-proposed Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 has taken the nascent crypto-industry in India by surprise. The Bill has dual objectives of (i) banning ‘private’ cryptocurrencies in India and (ii) creating a framework for the Reserve Bank of India to issue official digital currency. While further details on the Bill are awaited, now is an opportune time to look at the current status of digital currencies in India and around the world.

The Reserve Bank of India (RBI) has viewed cryptocurrencies with a jaundiced eye. In April 2018, the RBI issued a circular, “prohibiting banks and entities regulated by it from providing services in relation to virtual currencies.” The circular was subsequently overturned by the Supreme Court on grounds of being a “disproportionate” response by the RBI. It further asserted that there was no evidence that any regulated entities had indeed incurred losses or instability on account of virtual currencies. 

Understanding Digital Currency

For a preliminary understanding of digital currency, one can look towards its most popular example – BitCoin. It was launched against the backdrop of the 2008 global financial crisis (GFC) as a bulwark against excessive printing of currency by central banks. The mystery surrounding the inventor, the legendary Mr. Satoshi Nakamoto, only added to the allure of the new digital currency. Here was a currency that was decentralized and maintained user anonymity while ensuring complete transparency for all transactions. BitCoin is limited to 21 million units, which are mined by solving complex mathematical problems (a.k.a. proof of work) and can then be traded on BitCoin exchanges. Blockchain technology, upon which BitCoin is built, has a certain democratic appeal; blockchain ledgers are immutable and can be changed only when such a change is validated by a given number of participants. Despite these advantages, there has been criticism against BitCoin or any of the non-fiat digital currencies to be used as a reserve currency, especially on account of limitations to being used as a medium of exchange

Opportunity for a Central Bank Digital Currency

In recent years, and perhaps consequentially, central banks around the world have begun to evaluate the possibility of a sovereign-backed digital currency also known as a central bank digital currency or a CBDC. This begets an obvious question – what indeed is a CBDC? Traditionally, money comprises cash, deposits maintained by commercial banks with the central bank and deposits with commercial banks. A CBDC introduces a new form of digital money which is a liability of the central bank. In theory, even retail participants could hold a CBDC in the future. Secondly, one might wonder, what are the motivations for issuing such a form of money? A report published by the Bank for International Settlements (BIS) in 2020 broadly categorizes the merits and risks of a CBDC as follows:

a. Payment systems – motivations and challenges

This category includes a multitude of motivations such as ensuring continued access to risk-free money in societies where cash is going out of fashion, improving financial inclusion, enhancing efficiency of cross-border payments, etc. Key risks in this category include ensuring cyber resilience and balancing public privacy needs with anti-money laundering requirements.

b. Monetary policy – motivations and challenges

If CBDCs are designed as interest-bearing instruments, then monetary policy transmission would, in theory, be immediate. This could incentivize commercial banks to accelerate passing on the effects of changes in policy rates. Whether CBDCs should indeed be interest-bearing instruments is a design challenge requiring further study.

c. Financial stability – motivations and challenges

A key motivation for central banks to evaluate issuance of CDBCs is to pre-empt the risk of loss of monetary sovereignty on account of displacement by privately issued digital currencies such as Diem (previously called Libra) by Facebook. However, introducing a CBDC introduces the possibility of a bank run in times of crisis from commercial deposits to central bank money.

Way Ahead

Money is an economic, social, and political phenomenon. Introduction of CBDCs requires careful planning, analysis, and balancing risks with efficiency motivations. Design choices abound in terms of technological architecture as well as features embedded in the instrument. In the Indian context, a well-designed pilot project aligned with social and economic realities is paramount. Internationally too, interest in CBDCs has increased, partially on account of the COVID-19 pandemic. A survey conducted by the BIS in 2020 revealed that 86% of central banks (out of a total of 65 respondents) were actively engaged with CBDC research, evaluation, and/or development (see figures below). China famously leads the pack in digital currency development adding a currency dimension to its competition with the United States.

Figure 1 Source: BIS Central bank survey on CBDCs. 1 Share of respondents conducting work on CBDCs.

Adoption of new technology is often scary, and rightly so, especially in cases where it has the power to improve or destroy entire systems. India’s financial system has been revolutionized by fintech, especially in the digital payments space. It is indeed time we re-visited the idea of money in light of the technology now available at our disposal. The to-be-proposed Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 signals India’s willingness in this regard.

The views expressed in the post are those of the author and in no way reflect those of the ISPP Policy Review or the Indian School of Public Policy. Images via open source.

Background

The onset of the Covid-19 pandemic has presented a unique set of challenges, especially in areas where data are needed for policy formulation and impact evaluation. Policy formulation requires a wide range of datasets; agriculture production, industrial and price statistics, employment figures, public finance statistics and the national accounts, among others, that provide a summary assessment of the economy. The range of data also includes a variety of high frequency indicators that capture short term movements in key economic variables. 

Beginning March 2020, the spread of Covid-19 led to an unprecedented situation as containment measurements included lockdowns, restrictions on physical movements of persons, and goods and temporary closure of industrial and commercial establishments. Such administrative decisions have implications for data collection and overall availability of statistics for policy. This article highlights the state of data availability for various policy analysis and discusses key issues that affect data quality, especially in times of a pandemic.

Landscape and State of data

Some of the most important indicators required for a macroeconomic assessment come from industrial statistics, employment and the national accounts. Most national aggregates such as GDP/GVA estimates by sectors, consumption expenditure, Gross Capital Formation, Imports/ Exports, etc. come with considerable delays as the process of compilation is long and cumbersome.1 Given the nature of compilation, these aggregates offer a point comparison (or change) and have limited ability to capture economic shocks (positive or negative) in real time with higher frequency

The broader picture of the economy can only be understood by datasets such as the Economic Census (EC), Supply and Use Tables (SUTs) and Input-Output Tables (IOT). These datasets provide the detailed structure and composition of the economy, inter-industry flows of goods and services, and more importantly, the distribution of value added by economic activities in the economy. However, in times such as the Covid-19 pandemic, most of these datasets serve a limited purpose as they capture the past, whereas the requirement for policy is to make assessments for the present and future. Using these aggregates for current and future assessments implies making a host of assumptions and dealing with limitations. For instance:    

  1. The EC gives a complete enumeration of all kinds of establishments with a distribution upto the district level, however the present 6th EC data are dated by at least six years (2013-14). Thus, while making any assessment, one has to make an untenable assumption that the distribution of establishments has remained unchanged.
  2. SUTs and IOTs are dated by at least four years (2015-16) and thus the last known structure of the economy may not fully capture recent changes.
  3. National Accounts follow a long revision cycle and GDP estimates for any year are revised six times over a three year period. Therefore, while the focus is on making current and future assessments, the past may equally be uncertain as the magnitudes and directions of revisions are unpredictable.
  4. Consumption Expenditure of households is an important demand side macro aggregate and is the single largest component in GDP. The last available household survey is NSS 68th Round 2011-12, which is considerably dated and may not reflect the changes in composition of expenditures that have happened in recent times.
  5. The most recent surveys of the NSSO are from the 77th Round (Jan-Dec. 2019) that are expected to cover socio-economic expenditure, situational assessment of agricultural households, debt and investment are likely to be available in a span of two years.
  6. As of 2020, the annual employment figures from the Periodic Labour Force survey are available only for 2018 and for urban regions on a quarterly basis till 2019.

Given such a data landscape, the data availability for the current year captures pre-crisis situations at different time periods, leaving only high frequency indicators for assessing short term (month-on-month) movements in few important indicators. In addition, the structure of the economy equally imposes data constraints. Assessing the unorganised sectors (which primarily include unincorporated/ household enterprises) is much more complex as information on such entities is available only from sample surveys. Existing surveys of unorganised manufacturing and service enterprises are available with gaps of three to four years and thus information is unavailable for any immediate policy formulation.

Impact due to the pandemic 

One of the major impacts of the pandemic has been on data collection. With restrictions on physical movements, collection of data on prices, agricultural and industrial production, periodic surveys on employment had been severely impacted during the initial phases of the pandemic. In the passage of time, data collection can only capture information from the point of resumption of economic activities, thus leaving out critical information of the extent of pandemic. Such situations can create statistical inconsistencies as data for missing periods are usually interpolated or imputed and do not necessarily provide a fair and accurate picture of the state of affairs. Data users are often agnostic or unaware of the limitations and constraints faced in compilation of statistical data. Thus, in absence of any information, data users may even naively assume that the impact of such errors, omissions or imputations is negligible. The problem gets compounded when such data are put to empirical use without any information on quality and limitations. 

In summary, policy analysis and impact assessment becomes difficult especially when currently available data captures a dated picture. The problem becomes severe in cases of a crisis as past data do not serve any purpose in taking decisions for the present and future.2,3 In times of a pandemic, measurement issues assume far more importance as unavailability of data is usually bridged by statistical methods that may not reflect the state of affairs. Data driven policy requires state of the art collection frameworks and methods for important macro variables that provide valuable assessment of the economy. Till such systems are available, policy analysis has to rely on information that is dated and best used with judgement and intuition.

The views expressed in the post are those of the author and in no way reflect those of the ISPP Policy Review or the Indian School of Public Policy. Images via open source.

References:

  1. See Sapre, A., & Sengupta, R. (2017). Analysis of revisions in Indian GDP data. World Economics Journal, 18(4).
  1. Roy, R. (2020, June 4). Intuition, not Prediction. Business Standard
  1. Ghosh, A., Raha, S., et al. (2020). Jobs, Growth and Sustainability: A New Social Contract for India’s Recovery. CEEW and NIPFP Report, New Delhi: Council on Energy, Environment and Water.
Author:
June 16, 2020
COVID-19 has provoked a migrant crisis in India which has uncovered the incalculable socio-economic vulnerabilities confronted by a vast segment of the country’s workforce. This article dissects the impact of the recent labour law relaxations by many state governments on the stated agenda of labour formalisation. It also probes the adequacy of the proposed labour code reforms by the central government for the protection of migrant workers. The article culminates with recommendations for systemic reforms towards formalisation of labour, based on best practices achieved by different states in India.

Introduction

The COVID-19-induced lockdown imposed by the government of India has brought to fore some of the country’s harshest realities. The ongoing migrant crisis is perhaps the most prominent illustration of the same, since it uncovers the socio-economic vulnerabilities confronted by a vast segment of India’s workforce and the apathy being displayed by governments in securing their health, well-being and transportation arrangements for the journey back to their homes. 1

Over the course of the lockdown period, lakhs of migrant workers in affluent cities have left – some of them on foot – for their native constituencies after being stripped of their wages and livelihoods amidst an unrelenting battle with hunger and unhygienic living conditions. 2 While none of the adversities faced by the migrant workers are a consequence of the COVID-19 pandemic or the lockdown alone, the magnitude of the crisis must invoke a reassessment with regards to the legislative and administrative framework governing the status of these workers. The focus must shift from ad-hoc and often, poorly implemented welfare policies, towards formalising the labour market and getting migrant workers on the socio-economic map of India.

While Census 2011 pegs the total number of migrants in India at 139 million, the Economic Survey of India 2017 estimates that inter-state migration in India was close to 9 million annually between 2011 and 2016. 3,4 Much of the latter can be attributed to circular or seasonal migration where workers from poor states like Uttar Pradesh, Bihar or Madhya Pradesh migrate to industrialised areas of Maharashtra and Delhi to work as construction and transport workers or even as street vendors and domestic helpers in urban residences. These are temporary workers with no official count or identity and find no place in India’s social security framework.

Their informality can be gaged by the Periodic Labour Force Survey (PLFS) 2018 which estimates that among regular wage/salaried employees in the organised or non-agriculture sector, more than 71 percent had no written job contract and nearly 50 percent were not eligible for any social security benefit. 5 The conditions would be even worse for the estimated 10 million street vendors and 50 million domestic workers in India. 6,7

As stated earlier, the COVID-19 pandemic has reinforced the notion that the migrant workforce is the most neglected strata amongst the Indian electorate. In this context, it is important to evaluate the potential impact of labour law relaxations announced by a bunch of Indian states on the indicated formalisation agenda. Likewise, the proposed labour code reforms by the central government must be scrutinised to assess whether they are comprehensive enough to address the many nuances of labour market formalisation, especially in the aftermath of the COVID-19 crisis.

Finally, it is imperative to locate best practices from selected Indian states where demonstrated success has been achieved with respect to formalisation of migrant workforce across sectors like construction, transportation, inter alia. This would provide useful guidance to follow given that much of the administrative burden in respect of the migrant workers lies with state governments.

Current Issues and Proposed Reforms

The migrant crisis due to COVID-19 poses dual problems for the Indian economy. On one hand, manufacturing establishments in major industrial clusters around the country are facing labour shortages due to the return of migrant workers to their native villages. This state of affairs adds to the economic voes by creating supply bottlenecks in a scenario where aggregate demand conditions have already deteriorated due to the lockdown. 8 Conversely, the native states are not adequately prepared to support the returning migrants given the stressed rural economy and the underwhelming stimulus package announced by the Central government. 9

In consequence, many of the source states of migrant workers, including Uttar Pradesh and Madhya Pradesh, have approved labour law relaxations in order to augment their prospects in attracting fresh investment and with the objective of fiscally supporting the returning workforce.10,11 Meanwhile, many industrial states like Haryana, Rajasthan or Maharashtra have also increased their maximum weekly work hours in factories to limit supply chain disruptions. 12 This is even as corporations have no other option left but to invest on the central government’s labour code reform agenda to provide strong incentives for migrant workers to return to work once the crisis is over.

Labour Law Relaxations Across States

Labour is a subject that falls under the concurrent list of the Indian constitution. This implies that state governments carry the right to amend central legislation, subject to the assent from the President of India. In view of the same and due to the fiscal uncertainty brought about by COVID-19, the states of Uttar Pradesh, Madhya Pradesh and Gujarat have recently sanctioned sweeping moderations to their labour governance frameworks.

The Uttar Pradesh government has approved an ordinance which would exempt all new factories and manufacturing establishments from all labour laws for a period of three years, subject to the fulfillment of a few very basic conditions pertaining to bonded labour and death or disability compensation. 13 Surprisingly, even a leading industrial state like Gujarat has decided to adopt a similarly unsystematic and short-term approach on the issue. 14 In fact, the Madhya Pradesh government has a far more measured outlook with respect to labour law relaxation in the state. While even the latter has relaxed thresholds and requirements on employers with respect to employment conditions and workers welfare, and also amended the Industrial Disputes Act, 1947, it has chosen to retain crucial provisions pertaining to lay-off and retrenchment of workers, as well as closure of establishments. 15

In a scenario where 90 percent of the India’s workforce is employed informally, these changes are deeply problematic in that employers will be freed from even basic obligations with respect to job security, health and social protection of their workers. This will encourage worker exploitation, given that employees will not have access to any grievance redressal mechanisms and also drive down wages sharply, in view of the suspension of the Minimum Wages Act, 1948. 16 It will disincentivise formal employment and is unlikely to spur economic growth, taking into account the excess capacity in the industrial sector and the expected drop in consumer demand due to the imminent suppression of wages.

The state governments could have chosen to extend work hours on the lines of Rajasthan and Maharashtra or partner with the industry in shouldering some of the burden in respect of wage payments or worker welfare. They could have even expedited the central government’s planned agenda on labour law rationalisation, which incorporates meaningful relaxations to India’s labour laws, but in a methodical and well thought-out manner. Instead, they have chosen to adopt what amounts to a huge step backwards with respect to formalisation of the Indian workforce.

The Inter State Migrant Workmen (ISMW) Act, 1979 and the Occupational Safety, Health and Working Conditions (OSHWC) Code, 2019

Currently, there are over 40 central laws and 100 state laws governing various aspects of labour in India. With the objective of reducing compliance costs for industrial establishments and ensuring uniformity for ease of enforcement, the Central government is in the process of streamlining labour laws under four codes. They are (i) industrial relations, (ii) occupational safety, health and working conditions (OSHWC), (iii) wages, and (iv) social security. The code on wages has already been passed by Parliament. The standing committee on labour has also submitted its report on the OSHWC code, which seeks to replace 13 labour laws, including the one governing inter-state migrants i.e. the Inter-State Migrant Workmen (Regulation of Employment and Conditions of Service) Act, 1979. 17

The ISMW Act, 1979, was enacted with the purported objective of preventing exploitation of inter-state migrants by labour contractors and to ensure fair and decent conditions of work in establishments where they have been employed. The law carries strict requirements on contractors to get licenced and report to relevant authorities, in both the source and host state of workers, the details pertaining to wages paid, work hours and essential amenities provided to the migrants. 18 The establishments hiring them are also required to obtain a certificate of registration. There are also strict obligations with regards to paying the migrant workers at par with regular workers, providing suitable residential accommodation and even displacement allowance in case of dislocation from host state. 19

The COVID-19 pandemic and the ensuing migrant crisis has conclusively proven that the ISMW Act is not being implemented in the country. Had contractors been reporting the required details, state governments would have possessed sufficient information regarding the size and distribution of inter-state migrants in their territories and could have potentially taken corrective measures during the lockdown. Had residential accommodation or medical facilities been provided or dislocation allowance paid to migrant workers, some wouldn’t have had to undertake the arduous journeys back to their villages on foot. Further, the contractors and the employers who left the migrant workers to fend for themselves would have faced heavy monetary penalties or even criminal action suits.

However, it needs to be acknowledged that the onerous conditions prescribed in the ISMW Act can be a major disincentive for both contractors and industrial employers to comply with the same. It deters the formalisation of the migrant workforce by making the process of hiring them even more burdensome than regular workers. The OSHWC Code was conceived precisely with the stated objective of reducing the compliance burden on corporations and incentivising formalisation of the workforce by prescribing uniform standards for contract and migrant workers employed in sectors like, inter alia, building and other construction, motor transport and plantations. It does so by necessitating only a single licence for contractors, irrespective of the sector and amalgamating or combining certain special provisions pertaining to inter-state migrant workers and contract labour. 20

The OSHWC Code provides that where inter-state migrant labour is employed by an industrial establishment through an unlicenced contractor, the former would be deemed the principal employer. While this provision does address the gaps left between the existing legislation on contract and inter-state migrant labour, the Code has left out certain provisions from the ISMW act which may be detrimental to the formalisation of the migrant workforce. These include provisions pertaining to furnishing details of migrant workers to the two concerned states and providing the workers a passbook with those details in their language of preference. 21  Further, while it retains the provision of displacement allowance, it removes all statutory obligations with regards to maintaining certain health and safety conditions of employees and delegates the concerned rule-making powers to the state governments

The COVID-19 crisis has revealed that migrant workers enjoy no security on employment or wages and are subject to inhumane treatment by their contractor and employers. Their needs are distinct and demand a separate chapter in the Code. The standing committee on labour in Parliament argues the same. 22 This chapter must include the obligation on contractors or principal employers to maintain a digital register on the particulars of inter-state migrants commissioned under them, which would enable better decision-making by state governments. It must also include a clause which provides these workers with the equivalent of an identity card that would make them eligible for welfare schemes run by various governments. Finally, the chapter should provide for certain minimum health and safety standards which employers must maintain in order to ensure welfare for the migrants.

Best Practices on Formalisation of Migrant Labour in India

With the above discussion, we can infer that central legislation on labour is expected to remain inadequate with respect to formalisation and welfare of the migrant workforce in the country. This is while the indicated agenda continues to be kept on the margins of politico-economic priorities of most state governments in India. In this context, it is important to identify those sectors which serve as the largest source of employment for migrant labour and uncover best practices and case studies from across the country where a measurable level of formalisation has been achieved with respect to the same. This would provide much-needed guidance to governments in India on a collection of policies, “institutional innovations and grass-roots intervention which complement each other and jointly contribute to progressive formalisation” of the migrant workforce in the country. 23

Building and Other Construction Workers

The construction sector attracts a large number of migrant workers due to the labor-intensive nature of the industry and low skill requirement. An estimated 50 million workers are employed in the construction industry. 24 The level of informality is high in that workers are made to work at a daily wage rate and often without formal contracts. Besides, due to the ineffectual implementation of the legislation pertaining to working conditions, the workers are usually made to reside on the construction site itself with inadequate safety measures and no provision of essential amenities. The high prevalence of children and women in construction makes it even more important to address the informality of labour in the industry.

The Building and Other Construction Workers Cess Act, 1996, is one of the principal legislations governing the construction sector. It mandates the registration of workers with state-level construction worker boards as well as the usage of funds – collected as a 1 percent tax on the cost of construction – towards their welfare. The estimates from the labour ministry of the central government show that the registration of workers and use of the funds is improving but remains dismally low.  25

However, the success story in this regard can be found in Gujarat where the Self Employed Women’s Association (SEWA) has established itself as a “legitimate representative voice of informal construction workers” in the state. 26 Not only was it instrumental in setting up the workers welfare board in the state but it also got the Gujarat government to accept certificates, which would guarantee welfare access to the construction workers, issued by SEWA as proof of work. Further, it has supported the establishment of construction cooperatives which undertake independent construction contracts, thereby enabling members to access the market and upgrade to skilled workers from mere labourers.

The above example demonstrates that coordinated efforts by civil society and a responsive state government can bring informal workers into the mainstream. In this respect, every state government must endeavor to have a functioning construction workers welfare board and ensure all informal workers, including migrants, are registered with the same. It is important that funds collected under the law are fully utilised in order to ensure welfare of informal workers, especially during times of crisis. Finally, it is imperative that minimum health and safety conditions for construction projects are updated in the context of COVID-19 to ensure physical distancing and monitored strongly to guarantee compliance. Governments can play a crucial role in this regard, by mandating a compliance requirement for all their infrastructure projects being auctioned to private players.

Informal Transport Workers

Informal transport like auto rickshaws or e-rickshaws are critical instruments for last mile connectivity in urban India. Although this market is characterised by a high degree of informality, it often marks the first point of entry for migrant workers into the labour market. 27 The sector is marked with long working hours, irregular payment and intense competition due to the prevalence of a large number of players. The sector is highly diversified with working conditions are arguably the poorest for those at the bottom of the pyramid, i.e. head loaders, rickshaw pullers or porters on railway stations. They are seldom supported by municipal bodies and, in fact, end up skirting safety regulations prescribed for official transport vehicles.

In this regard, two social enterprises, Ecocabs in Punjab and G-Auto Nirmal Foundation in Gujarat, have been quite successful in addressing the informality of transport workers. 28 In both cases, they were given strong incentives to join an external platform and, on joining, were trained on safety regulations as well as service delivery in order to ensure a standard code of conduct. Both these initiatives have not only helped the transport workers transition towards proper legal recognition but has also facilitated a much-improved quality of life with increased income, access to health services and insurance programmes along with a substantial network of peers.

In both cases, government support was extremely crucial in that the requisite infrastructure was incorporated within the urban design plans of municipal councils. The respective governments also facilitated network support through state telecom companies and financial assistance by offering advertisement contracts on the vehicles concerned. 29 The improved service delivery and customer satisfaction has led to a rapid expansion of the initiatives in their respective states.

This example demonstrates that governments, while being an enabler for private sector ingenuity, can produce mutually beneficial outcomes. In the context of COVID-19, well laid out ‘Code of Conduct’ guidelines are going to be crucial in order to ensure social distancing just as much the framework to track the number and distribution of transport workers in any urban conglomeration. The lessons derived from the above examples can be extremely valuable in this respect.

Street Vendors, Restaurant Workers and Domestic Helpers

Occupations such as street vendors, helpers in restaurants or domestic helpers in urban households are prolific job creators for migrant workers and often an easy point of entry into the labour market. As stated earlier, the number of street vendors in India are estimated to be 10 million, while domestic helpers stand at 50 million. In both cases, the actual numbers may be much higher given the lack of recognition accorded to them under India’s legal and administrative system. All these occupations share a high degree of informality with no written job contracts, long working hours and poor implementation of regulations where they exist.

In this context, Aajeevika Bureau, with its presence in both the ‘source’ and ‘destination states’, has achieved a degree of success in helping migrant workers acquire registration cards, legal protection and even written job contracts. An estimated 60,000 migrant workers have increased their income by 50-80 percent due to the efforts put in by Aajeevika.30

Similarly, a few state governments have accomplished formalisation of domestic helpers through a variety of interventions. For instance, Kerala managed to register 35,000 domestic workers in 2012 due to its decision to delegate that responsibility to the direct stakeholders like trade unions, resident welfare associations and even employers of domestic workers. 31 Jharkhand issued nearly 3,000 smart cards to domestic workers in 2012 due to its decision to include them in the Minimum Wages Act, 1948. 32 Finally, Maharashtra introduced a comprehensive piece of legislation exclusively for domestic workers with a mandated requirement of a welfare board. 33

Due to the highly tactile nature of their work, COVID-19 represents an existential threat to this category of workers. It is essential that some of the best practices mentioned above are calibrated upon by various governments before the migrant workers start pouring back to the cities.

Conclusion

The aftermath of the COVID-19 pandemic has demonstrated that migrant workers are arguably the most vulnerable section in the Indian electorate. They are away from their homes and are made to work in unsafe and unhealthy conditions with low or irregular payment. The contractors through whom they are hired and the establishments that employ them face no repercussion on deserting them in times of crisis, without any cash for essentials or travel. Further, poor implementation of laws leaves them without legal protection and precludes them from availing any government compensation or welfare schemes.

In this context, it is important that formalisation of migrant labour is adopted as a priority policy objective by governments at various levels across the country. Given the same, the relaxation of labour laws announced by state governments is an eminently erroneous decision, bearing in mind the subject of the legislation, i.e. migrant workers, are going through their worst crisis. Further, it is imperative that the Central government recognises the plight of the migrants and introduces an exclusive section for them in the new labour code. Finally, considering that state governments are going to be primarily responsible for administering the migrant workforce, it would be useful that relevant case studies with respect to labour formalisation from within the country are identified and adopted into state policies.

REFERENCES


[1] “In Long Walk Back Home, Migrants Battle Hunger, Scourge of Covid-19,” Hindustan Times, May 16, 2020, https://www.hindustantimes.com/india-news/in-long-walk-back-home-migrants-battle-hunger-scourge-of-disease/story-TizRfUz69osJQ0Uqmm6jZN.html.

[2] Sarah Farooqui, “89% Stranded Migrants Hadn’t Been Paid Wages during Lockdown Period: Report,” Business Standard India, April 17, 2020, https://www.business-standard.com/article/economy-policy/89-stranded-migrants-hadn-t-been-paid-wages-during-lockdown-period-report-120041700786_1.html.

[3] “Census of India Website : Office of the Registrar General & Census Commissioner, India,” accessed May 23, 2020, https://censusindia.gov.in/2011census/migration.html.

[4] “UNION BUDGET & ECONOMIC SURVEY,” accessed May 18, 2020, https://www.indiabudget.gov.in/budget2017-2018/e_survey.asp.

[5] Annual Report, Periodic Labour Force Survey, July 2017 – June 2018

[6] National Policy for Urban Street Vendors

[7] “Domestic Workers – NDWM,” accessed May 23, 2020, http://ndwm.org/domestic-workers/.

[8] “Govt Nod for 12-Hour Shifts in Factories Facing Labour Shortage | India News,The Indian Express,” accessed May 24, 2020, https://indianexpress.com/article/india/govt-nod-for-12-hour-shifts-in-factories-facing-labour-shortage-6397633/.

[9] “Overpopulated, Too Reliant On Agriculture, Rural India Can’t Absorb Reverse Migrants,” accessed May 24, 2020, https://www.indiaspend.com/overpopulated-too-reliant-on-agriculture-rural-india-cant-absorb-reverse-migrants/.

[10] “Relaxation of Labour Laws across States,” accessed May 20, 2020, https://www.prsindia.org/theprsblog/relaxation-labour-laws-across-states.

[11] Gautam Chikermane and Rishi Agrawal, “COVID19: Shivraj Singh Chouhan Initiates Reforms 2.0 in Madhya Pradesh,” ORF, accessed June 9, 2020, https://www.orfonline.org/expert-speak/covid19-shivraj-singh-chouhan-initiates-reforms-2-madhya-pradesh-65867/.

[12] “Relaxation of Labour Laws across States,” accessed May 20, 2020, https://www.prsindia.org/theprsblog/relaxation-labour-laws-across-states.

[13] Ibid

[14] Prashant K. Nanda, “Gujarat Offers 1,200-Day Labour Law Exemptions for New Industrial Investments,” Livemint, May 8, 2020, https://www.livemint.com/news/india/gujarat-offers-1-200-day-labour-law-exemptions-for-new-industrial-investments-11588959474848.html.

[15] “Relaxation of Labour Laws across States,” accessed May 20, 2020, https://www.prsindia.org/theprsblog/relaxation-labour-laws-across-states.

[16] “Explained: What Labour Law Changes by States Mean,” The Indian Express (blog), May 16, 2020, https://indianexpress.com/article/explained/what-labour-law-changes-mean-coronavirus-6403611/.

[17] “The Occupational Safety, Health and Working Conditions Code, 2019,” PRSIndia, July 23, 2019, https://www.prsindia.org/billtrack/occupational-safety-health-and-working-conditions-code-2019.

[18] “INTER-STATE MIGRANT WORKMEN | Chief Labour Commissioner,” accessed May 22, 2020, https://clc.gov.in/clc/acts-rules/inter-state-migrant-workmen.

[19] Ibid

[20] Brief Note on The OSH Code 2019 – 5 March 2020 – Swaniti Initiative

[21] Ibid

[22] “Chapter At A Glance,” PRSIndia, accessed May 25, 2020, https://www.prsindia.org/node/844922/chapters-at-a-glance.

[23] Sandra; Kring Rothboeck, “Promoting Transition towards Formalization: Selected Good Practices in Four Sectors,” Report, December 15, 2014, http://www.ilo.org/newdelhi/whatwedo/publications/WCMS_344607/lang–en/index.htm.

[24] “Report of the Working Group on Migration | Smartnet,” accessed May 23, 2020, https://smartnet.niua.org/content/b4f11a35-aa13-4f28-bd71-733ca66fd055.

[25] Ibid

[26] Sandra; Kring Rothboeck, “Promoting Transition towards Formalization: Selected Good Practices in Four Sectors,” Report, December 15, 2014, http://www.ilo.org/newdelhi/whatwedo/publications/WCMS_344607/lang–en/index.htm.

[27] Ibid

[28] Ibid

[29] Ibid

[30] Ibid

[31] Ibid

[32] Ibid

[33] Ibid

Author:
May 21, 2020
Financing responses to the COVID-19 pandemic would have been difficult for the Indian government irrespective of its financial and economic health. The authorities responsible for mitigating the spread of the coronavirus, the state governments, are acutely hamstrung given the existing federal fiscal framework. Read on to find out how in times of ill-health, amidst the ongoing pandemic crisis, their capacities have been shackled further.

The novel coronavirus pandemic has cast a long shadow of financial uncertainty for both the Centre and states. The impact of the pandemic on the economy and the lives of the economically and socially disadvantaged requires a sizeable government funding exercise to try and limit the ripple effects of the pandemic. Livelihoods need to be supported, funding requirements closed, and the economy be given a financial helpline. Thus, the act of financing said requirements, given finite resources, is of the utmost importance. This, however, is extremely challenging given the tools at the disposal of the authorities tasked with mitigating the deleterious effects of COVID-19 – the state governments.

A glance at the macroeconomic indicators

To begin with, finances at the Centre are under severe duress, and this was the case even before the COVID-19 pandemic struck. As per Nirmala Sitharaman’s budget speech in February of this year, national economic growth for the financial year (FY) 2020-21 was forecasted to grow at a nominal rate of 10%.1 Even though growth figures for the entire FY of 2019-20 are yet to be released, the dismal reading of growth registered in the year’s third quarter, that of a seven year low 4.7%, does not spell good reading for the entire year, let alone a financial year-end ravaged by a pandemic.2 Add to that over-optimistic tax collection forecasts, with a 33% increase in both direct and indirect tax mop up required in the current FY in order to meet budgeted tax revenue predictions, off the back of grossly overestimated forecasts laid out in the revised edition of last year’s budget.3 With direct tax collection contracting 5.4%, despite net receipts rising due to a substantial fall in the refunds paid out, in the first month of this FY, actual tax collection for the entire year does not appear to be ending up anywhere close to the forecasts.4 If anything, the announcements made by the FM regarding Atmanirbhar Bharat Abhiyan demonstrates the extremely precarious fiscal position of the Centre given the relatively small amounts of fiscal outlay it would require compared to the overall quantum of the economic stimulus measure which is Rs. 20 lakh crore.

The Centre’s largest sources of revenue are corporation tax, income tax, the Goods and Services Tax (GST) and gross market loans, as per the last two budgets.5, 6 The next biggest contributors to the Centre’s coffers, non-tax revenue and excise duties, is half of any one of these four. With the government reducing effective corporation tax rates to 25.17% from 35%, and with GST and income tax gross collections put under severe pressure from the drastic fall in economic activity as a result of the lockdown, revenues collected by the Centre are sure to take a considerable hit.7 Therefore, the only avenue that can propel greater government expenditure towards efforts to revive the economy is gross market borrowings. Fiscal Responsibility and Budget Management (FRBM) fiscal deficit limitations, even beyond the current invoking of the exception clause that mandates a 3.8% adherence level for the current FY, would have to be further relaxed by the Finance Commission as a result. India’s sovereign external debt to GDP ratio is one of the lowest of the world at 5%. 8 Although the country’s fiscal deficit, when taking into consideration all levels of government, is 7.5% as per the International Monetary Fund (IMF), an emerging market high, and reservations abound with regards to external sources of debt, authorities might be left with no choice but to keep aside fiscal prudence for the time being in order to construct an able economic recovery. 9

Coming to the states and their finances, as per a Reserve Bank of India(RBI) report on the status of state finances, nearly half (45%) of states’ revenues come from their own taxes while 47.5% arrive via the Centre and its transfers. 10 Out of the revenue collected by the state through its own taxes, 90% comes from just four avenues – taxes collected through the sale of liquor, petroleum products, stamp duty and registration of vehicles. With automobile heavyweights such as Maruti Suzuki and Hyundai announcing no domestic vehicle sales in the month of April, flights and cars parked idle, and property registrations taking a hit due to falling real estate sales, it is no wonder states welcomed news of liquor shops being allowed to function during the latest variant of the lockdown that began on May 4. According to the State Bank of India’s  Ecowrap research publication, combined fiscal deficit of 19 states could rise to 3.5% of GDP in FY2021 from the budgeted 2.04%. 11 Further, a collection of states has called for easing of FRBM fiscal deficit and borrowing limits, besides a frontloading of this market-led borrowing. 12 With allocations under the State Disaster Risk Management Fund being called into question, GST dues to the tune of 40,000 crore yet to be received, revenue deficit grants, as recommended by the 15th Finance Commission, falling short by another 44,000 crore and the suspension of Members of Parliament Local Area Development Scheme, states are extremely restricted when it comes to their potential financing options. 13

The COVID-19 relief package

Union finance minister announced a COVID-19 relief package on March 26 that incorporated cash transfers to senior citizens, women, widows, differently abled, and farmers, the distribution and disbursement of ration, gas cylinders, loans to self-help groups and higher Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) wages, as also PF withdrawals. 14 Till April 14, the government had released just under 50% of the promised cash amount as also the food grains and cooking gas cylinders, as per a statement put out by the ministry of finance. 15 However, with stories of migrant workers trudging along highways on their way home, many not able to make it, home shelters in dilapidated conditions, food not making its way to these persons, as attested to by surveys, disinfectants being sprayed on them by police and the Aurangabad train incident, amongst other atrocities, the relief package and responses to countering the spread of the COVID-19 virus does not do enough for those most socio-economically disadvantaged. 16 Further, with the country’s relief package, including the recently announced Atmanirbhar Bharat Abhiyan, at 10% of GDP, compared to Malaysia (16.2%), Singapore (12.2%), Japan (20%), and the UK (17% as on April 13), there have been vociferous calls for a sizeable increase in the country’s subsequent relief packages, should they arrive. 17, 18 The economic aid must also be utilised to prop up demand and income, instead of the liquidity relief that has been announced by Nirmala Sitharaman over past week. With systemic changes such as the amendment to the Essential Commodities Act and agricultural marketing reforms potentially being met with bureaucratic red-tapism, and with no additional income support to be given, coupled with the absenteeism of those most marginalized from the formal credit system, India’s economic stimulus does not provide immediate relief to those most affected by the country’s stringent lockdown.

What about the unutilised funds?

In the build-up to announcing the March relief package, the Union finance minister had also announced that states should utilise District Mineral Foundation (DMF) funds and cess funds created for the welfare of construction workers for COVID-19 response preparedness and welfare service delivery for that category of workers, respectively. With the utilisation pattern of the construction workers’ cess funds highlighting not only dormant usage but also excessive capacity, pressure needs to be applied on states to use these resources for the betterment of their citizens. 19 DMF are non-profit trusts set up by the Mines and Minerals (Development and Regulation) Amendment Act, 2015. They were established with the objective to work for the benefit and interest of people and areas affected by mining-related operations. Besides there being doubts about the utilisation of these funds, problems of oversight and monitoring of the funds earmarked for welfare purposes persist. 20 Further, there are doubts about utilising resources that cater to at-risk populations, like the indigenous tribal groups, for dealing with an emergency crisis. It might set similar precedents for future events wherein resources that have been targeted at specific populations get exhausted even before other means are explored.

A similar question can be raised against the suspension of the Member of Parliament Local Area Development Scheme and its funds being repatriated to the Consolidated Fund of India under the Centre. This, even as the main relief fund set up by PM Modi, the Prime Minister Citizen Assistance and Relief in Emergency Situations (PM CARES), continues to collect donations such as the railways’ recent rupees 151 crore pledge while lacking on transparency and accountability.21 The fund could also divert resources away from other non-profits and localised solutions since donating to it is recognised as CSR contributions, besides it completely sidestepping the existence of the Prime Minister’s National Relief Fund that has been in existence since 1948 for the very same national disaster management purposes. 22

RBI’s measures

The RBI has, so far, announced additional liquidity measures such as lowering of the cash reserve and liquidity coverage ratio, policy repo and reverse repo rate, targetted long-term lending directed at priority sector funding houses such as mid- to low-tier non-banking finance companies, Small Industries Development Bank of India, National Bank for Agriculture and Rural Development and National Housing Bank, and money injection exercises like the provision of 1- to 3-year bonds. 23 However, doubts remain as to the risk coverage and high credit spreads of these instruments. Without the government taking over risk management for financial institutions, like the federal government in the US providing credit guarantees to lenders, targetted long-term lending instruments such as targetted long-term repo operations of the RBI’s will continue being under-subscribed, even with the regulatory forbearance in asset classification the central bank has announced. 24

With transmission of lower interest rates to lenders and the uptick in demand for these loans issues, the Central government might just have to borrow more, as described above. Although its external sovereign debt is relatively low as a percentage to GDP, risk aversion and capital outflow from emerging economies in emergency situations put such debt at increased risk. The nation’s foreign exchange reserve kitty of $476 billion can also be put to the test but an already sizeable current account deficit and high public debt financing issues, in light of the expected widening of the fiscal deficit, restricts the extent to which it can be harnessed. 25 Finally, there have been calls to monetise the fiscal deficit through the printing of fiat currency by the RBI. Even though inflation risks persist, March’s inflation numbers were the lowest in four months. 26 Plus, with the economy requiring a massive, but temporary, sustenance boost, even if inflation were to get pushed up in the near-term, it should fall back within the central bank’s preferred 2-6% range in the medium- to long-term. Emergency situations call for new inflationary frameworks. All eyes will be on RBI’s annual household inflation expectation survey to be released this month.

Budget rationalisation

Lastly, another potential source of financing could be the redrawing of the budget. Measures are already in place to bracket all COVID-19 related expenditure in a separate bucket in order to prevent budget constraints coming in the way of necessary revival-focused expenditure. 27 A shift in current allocations of budgets and the revenue and grant structure of states could also be implemented. At present, for example, the ministry of health has been accorded a paltry sum of 41% of the ministry of home affair’s FY2021 rupees 1.67 lakh crore budget. 28 Also, further non-essential and wasteful expenditure such as that carried out on the central vista redevelopment project (rupees 20,000 crore), and non-merit subsidies like food, fertiliser and petroleum, besides the examples mentioned previously, seemingly make room for significant financial priority reallocations. States, too, spend a great majority of their pools of financial resources on non-merit subsidies and goods. Some of them spend as much as 80% of their health budgets on salaries. 29 It has also been estimated that a rationalisation of non-merit subsidies of states can lead to the freeing up of fiscal space equivalent to 6% of GDP. 30 However, even the outlay on merit subsidies or public goods by states is hamstrung by the current fiscal architecture. The primary source of money for said expenditure is through central transfers to states through centrally sponsored schemes and central sector schemes. 31 This arrangement hampers and restricts not only the financial autonomy of states but also decision-making independence as central schemes (such as Integrated Child Development Scheme and National Health Mission) are the main modes through which state public good expenditure is done. The line ministries responsible for each of these schemes are too many and coordination amongst them is tempered by bureaucracy and red tape.

Conclusion

Wasteful and unnecessary expenditure needs to be tapered. States require a significant overhaul of their fiscal framework. The Centre needs to obey their end of the federal bargain. Fiscal and monetary policies seem to be too risky but emergency situations call for relaxation of otherwise prudential constraints. Without these measures in place, it is no wonder states like Maharashtra and Delhi have resorted to severe budget cuts, halting of any new project, and hikes in excise duties on petrol and diesel as also taxes on liquor, respectively.32, 33 In order to respond adequately to the next crisis therefore, fungible, flexible, autonomous and sustainable financing is of the utmost significance.

REFERENCES


[1] Rao, Govinda. 2020. “Financing The Covid-19 Response: Challenges And Choices.” BloombergQuint. Bloomberg Quint. April 27, 2020. Accessed May 4, 2020. https://www.bloombergquint.com/coronavirus-outbreak/financing-the-covid-19-response-challenges-and-choices.

[2] Waghmare, Abhishek. 2020. “GDP Growth Slows to Nearly 7-Year Low of 4.7% in Q3 on Weak Manufacturing.” Business Standard. Business-Standard. February 28, 2020. Accessed May 4, 2020. https://www.business-standard.com/article/economy-policy/gdp-growth-slows-to-nearly-7-year-low-of-4-7-in-q3-on-weak-manufacturing-120022801654_1.html.

[3] Rao, Govinda. 2020. “Financing The Covid-19 Response: Challenges And Choices.” BloombergQuint. Bloomberg Quint. April 27, 2020. Accessed May 4, 2020. https://www.bloombergquint.com/coronavirus-outbreak/financing-the-covid-19-response-challenges-and-choices.

[4] Seth, Dilasha. 2020. “Refunds Save the Day for April Direct Tax Collection; Mop-up down 5%.” Business Standard. Business-Standard. May 2, 2020. Accessed May 4, 2020. https://www.business-standard.com/article/economy-policy/refunds-save-the-day-for-april-direct-tax-collection-mop-up-down-5-120050300014_1.html.

[5] Mazumdar, Ronojoy. 2019. “Budget 2019: What Is India’s Biggest Revenue Source.” Livemint. July 8, 2019. Accessed May 4, 2020. https://www.livemint.com/budget/news/budget-2019-what-is-india-s-biggest-revenue-source-1562554222302.html.

[6] India Budget. Accessed May 4, 2020. https://www.indiabudget.gov.in/doc/rec/ar.pdf.

[7] Dave, Sachin, and Vishal Dutta. 2019. “MAT Treatment Splits India Inc after Tax Cuts.” The Economic Times. Economic Times. September 28, 2019. Accessed May 4, 2020. https://economictimes.indiatimes.com/news/economy/policy/mat-treatment-splits-india-inc-after-tax-cuts/articleshow/71346691.cms?from=mdr.

[8] Press Trust of India. 2019. “Govt to Start Raising Part of Its Gross Borrowings from External Markets: FM.” Business Standard. Business-Standard. July 5, 2019. Accessed May 4, 2020. https://www.business-standard.com/article/pti-stories/govt-to-start-raising-part-of-its-gross-borrowings-from-external-markets-fm-119070500713_1.html.

[9] Bhatia, Surbhi. 2020. “India’s Fiscal Performance, in Nine Charts.” Livemint. February 16, 2020. Accessed May 4, 2020. https://www.livemint.com/news/india/india-s-fiscal-performance-in-nine-charts-11581857139177.html.

[10] RBI. Accessed May 4, 2020. https://rbidocs.rbi.org.in/rdocs/Publications/PDFs/STATEFINANCE201920E15C4A9A916D4F4B8BF01608933FF0BB.PDF.

[11] Bureau, Our. 2020. “Covid-19 Impact: Budget Numbers of States Need Major Revisions, Says SBI Report.” @Businessline. The Hindu BusinessLine. March 31, 2020. Accessed May 4, 2020. https://www.thehindubusinessline.com/economy/covid-19-impact-budget-numbers-of-states-need-major-revisions-says-sbi-report/article31219925.ece.

[12] Bureau, Our. 2020. “States Petition Centre for Economic Lifejacket.” @Businessline. The Hindu BusinessLine. May 1, 2020. Accessed May 4, 2020. https://www.thehindubusinessline.com/economy/policy/states-petition-centre-for-economic-lifejacket/article31484147.ece.

[13] . The Wire. Accessed May 4, 2020. https://thewire.in/political-economy/15th-finance-commission-states-covid-19.

[14] Ohri, Nikunj. 2020. “What India Has Released From Its Rs 1.7 Lakh Crore Relief Package For The Poor .” BloombergQuint. Bloomberg Quint. April 14, 2020. Accessed May 5, 2020. https://www.bloombergquint.com/coronavirus-outbreak/what-india-has-released-from-its-rs-17-lakh-crore-relief-package-for-the-poor.

[15] Ohri, Nikunj. 2020. “What India Has Released From Its Rs 1.7 Lakh Crore Relief Package For The Poor .” BloombergQuint. Bloomberg Quint. April 14, 2020. Accessed May 5, 2020. https://www.bloombergquint.com/coronavirus-outbreak/what-india-has-released-from-its-rs-17-lakh-crore-relief-package-for-the-poor.

[16] Srivastava, Ravi. 2020. “No Relief for the Nowhere People.” The Hindu. The Hindu. May 3, 2020. Accessed May 5, 2020. https://www.thehindu.com/opinion/op-ed/no-relief-for-the-nowhere-people/article31495460.ece.

[17] Kannan, KP. 2020. “No Excuse for a Niggardly Covid-19 Relief Package.” @Businessline. The Hindu BusinessLine. April 13, 2020. Accessed May 5, 2020. https://www.thehindubusinessline.com/opinion/india-needs-a-better-covid-19-relief-package/article31297141.ece.

[18] Rajan, Ramkishen S., and Sasidaran Gopalan. 2020. “COVID-19 and India’s Fiscal Conundrum.” The Hindu. The Hindu. May 5, 2020. Accessed May, 5, 2020. https://www.thehindu.com/opinion/op-ed/covid-19-and-indias-fiscal-conundrum/article31504085.ece.

[19] “Centre for Policy Research.” 2020. Analysis: How Secure Are Construction Workers in India During COVID-19 Pandemic? | Centre for Policy Research. April 1, 2020. Accessed May 5, 2020. https://www.cprindia.org/news/8724.

[20] Pti. 2018. “Need a Monitoring Mechanism to Ensure Prompt Use of Funds under DMF: Parliamentary Panel to Mines Ministry.” The Economic Times. Economic Times. December 30, 2018. Accessed May 5, 2020. https://economictimes.indiatimes.com/industry/indl-goods/svs/metals-mining/need-a-monitoring-mechanism-to-ensure-prompt-use-of-funds-under-dmf-parliamentary-panel-to-mines-ministry/articleshow/67308833.cms?from=mdr.

[21] “Covid-19 Update: Row over Migrants’ Rail Fare as Congress Offers to Foot the Bill.” 2020. Hindustan Times. May 4, 2020. Accessed May 5, 2020. https://www.hindustantimes.com/india-news/row-over-migrants-rail-fare-as-cong-offers-to-foot-the-bill/story-XrPFuQeVL9Mu3irfpbAQgM.html.

[22] http://www.ETHealthworld.com. 2020. “Donations Pour in but India’s ‘PM CARES’ Coronavirus Fund Faces Criticism – ET HealthWorld.” ETHealthworld.com. April 8, 2020. Accessed May 5, 2020. https://health.economictimes.indiatimes.com/news/industry/donations-pour-in-but-indias-pm-cares-coronavirus-fund-faces-criticism/75047270.

[23] Bloomberg. 2020. “The Steps India Has Taken so Far to Contain Economic Fallout of Covid-19.” The Economic Times. Economic Times. April 22, 2020. Accessed May 5, 2020. https://economictimes.indiatimes.com/news/economy/policy/the-steps-india-has-taken-so-far-to-contain-economic-fallout-of-covid-19/articleshow/75285944.cms?from=mdr.

[24] Rajan, Ramkishen S., and Sasidaran Gopalan. 2020. “COVID-19 and India’s Fiscal Conundrum.” The Hindu. The Hindu. May 5, 2020. Accessed May 5, 2020. https://www.thehindu.com/opinion/op-ed/covid-19-and-indias-fiscal-conundrum/article31504085.ece.

[25] Rajan, Ramkishen S., and Sasidaran Gopalan. 2020. “COVID-19 and India’s Fiscal Conundrum.” The Hindu. The Hindu. May 5, 2020. Accessed on May 5, 2020. https://www.thehindu.com/opinion/op-ed/covid-19-and-indias-fiscal-conundrum/article31504085.ece.

[26] Mishra, Asit Ranjan. 2020. “Retail Inflation Eases to 4-Month Low in Mar on Lower Food Prices.” Livemint. April 13, 2020. Accessed on May 5, 2020. https://www.livemint.com/news/india/retail-inflation-eases-to-below-6-in-march-11586779208538.html.

[27] Sikarwar, Deepshikha. 2020. “Talks Held on Separate Covid Budget.” The Economic Times. Economic Times. April 18, 2020. Accessed on May 5, 2020. https://economictimes.indiatimes.com/news/economy/finance/talks-held-on-separate-covid-budget/articleshow/75209728.cms?from=mdr.

[28] Kannan, KP. 2020. “No Excuse for a Niggardly Covid-19 Relief Package.” @Businessline. The Hindu BusinessLine. April 13, 2020. Accessed on May 5, 2020. https://www.thehindubusinessline.com/opinion/india-needs-a-better-covid-19-relief-package/article31297141.ece#.

[29] Yadav, Jyoti, Fatima Khan, and Policy Research. 2020. “Covid Fight Will Leave States Exhausted. India Needs to Re-Think Its Funds Transfer System.” ThePrint. May 4, 2020. Accessed on May 5, 2020. https://theprint.in/opinion/covid-fight-will-leave-states-exhausted-india-needs-to-re-think-its-funds-transfer-system/414036/.

[30] NIPFP. Accessed May 5, 2020. https://www.nipfp.org.in/media/medialibrary/2019/11/WP_282_2019.pdf.

[31] Yadav, Jyoti, Fatima Khan, and Policy Research. 2020. “Covid Fight Will Leave States Exhausted. India Needs to Re-Think Its Funds Transfer System.” ThePrint. May 4, 2020. Accessed on May 5, 2020. https://theprint.in/opinion/covid-fight-will-leave-states-exhausted-india-needs-to-re-think-its-funds-transfer-system/414036/.

[32] Amey Tirodkar. 2020. “COVID-19 Lockdown: Maharashtra Govt Announces Budget Cuts, No to New Projects and Recruitment.” NewsClick. May 5, 2020. Accessed on May 5, 2020. https://www.newsclick.in/COVID-19-lockdown-maharashtra-govt-announces-budget-cuts-no-new-projects-recruitment.

[33] Sharma, Sharad, and Debanish Achom. 2020. “Delhi To Charge 70% ‘Corona Fee’ On Liquor From Today.” NDTV.com. May 4, 2020. Accessed on May 5, 2020. https://www.ndtv.com/india-news/delhi-to-charge-extra-70-tax-on-liquor-from-tomorrow-amid-coronavirus-crisis-2223273.

Author:
May 11, 2020
India’s fight against COVID-19 has been on for some time, yet, new ambiguities and uncertainties surface with the ever-evolving nature of the crisis. Sukanya Mukherjee in her article engages with the numerous challenges facing the Indian economy, the impact of the crisis and whether the policy responses have been robust.

The Socratic Paradox has presented itself to the world once again. If there is one thing we know for certain about COVID-19 at this point in time, it is that we don’t know anything for certain. This uncertainty around the absolute knowledge is necessary to establish upfront since it ideally opens us up to the fact that this is an evolving situation.

In this paradigm, it becomes acceptable that an initial announcement of masks being unnecessary is discarded for the latest advisory that everyone should wear masks. It ideally also becomes suitable that a situation reassessment can mean that a 21-day lockdown is extended beyond twice and if need arises, may again be extended in some form or the other.

In February, when the virus was largely limited to its origin country, China responded with strict lockdowns – a move that was deemed draconian by the world at large. After all, a lockdown would not only severely capsize the Chinese economy, which it did: the consensus 2020 growth pre-COVID was at a range of 5-6% and has now been estimated at 1.2%, but it would also impose a massive cost on human rights. 1 The Human Rights Score which determines the degree to which the governments protect, and respect human rights wasn’t great to begin with for China. In 2017, China ranked at 170 out of the 195 countries in scope, that is at the 13th percentile.2 For reference, India placed at 172, the 12th percentile.

But, as the virus began to take over, governments across the world were quick to take cues from the widely read Imperial College paper that made a case for the pointed ability of non-pharmaceutical interventions, in the form of quarantine and isolation, to reduce the rate of infection, the rate of mortality and also, the demand on healthcare.3 Soon after, the lockdowns began.

The stringency of lockdowns though has varied considerably. The Oxford COVID-19 Government Response Tracker placed India, which effectively put 1.3 billion people under lockdown, at the top of the strictness indicator with a score of 100 for the first phase of the lockdown. The number has come down to 94 as of 6th May.

Can we extrapolate this to say that the lockdown will continue to ease? Not necessarily.

 China’s peak strictness was recorded in the beginning of March at 76 and came down to 43 as on 16th April. It is back up to 62 as on 6th May 2020, after hints of a second wave of infections.4

Note that while the United States, Spain and Italy are at the top of the list of COVID-19 infections, their stringency index is at 70, 89 and 94 respectively.

Most of these countries are ahead in the epidemiological curve, so it is inaccurate to compare them to India. But statistically still, by no means is India the only one at the top of the list. We share the spot with countries like Israel, Bermuda, Egypt, Portugal, Vietnam amongst others.

Figure 1: Countries by Stringency as on 30th March 2020,
Source: Oxford COVID-19 Government Response Tracker

The challenges for us are labyrinthine, owing to multiple metrics, some of them being –

  1. High population density


The 2011 Census of India notes that the population density of India was at 382 per square kilometer. 5 World Bank’s data repository suggests the 2011 national value was at c.420 per square kilometer. At an approximate increase of 8%, 2018 data is recorded at c.455 per square kilometer, which is 18.4 times the low-income countries subgroup’s population density, 11.4 times the middle-income subgroup and 111.6 times the high-income subgroup.6

A higher population density implies social distancing becomes harder to follow through and the rate of infection, R0, can be higher and hence ceteris paribus, the rate of mortality might be higher too.

Often, all of India’s problems have a simpleminded underpinning of population as the root cause. However, if it were only population density, Singapore with 7952 people per square kilometer would be in trouble, and not a model of first phase lockdown. One of the explanatory differences? Singapore is a high-income country and India is a low-income country.

  • Government’s squeezed spending capacity

The way most economies are set up, the power to prevent the disease from spreading further by effectively locking the country down, protect the people by offering accredited healthcare support, palliate the economy from the induced slowdown, respectively rests with the government. To do any of the three, our government needs quite a bit of money.

The Indian government runs a fiscal deficit. India’s current debt to GDP ratio is at 70%. A year of low GDP growth and a wider fiscal deficit will further deepen the debt. A higher debt to GDP ratio impairs the credit worthiness of a nation,  that is India may have to struggle to finance her expenses.

Now again, this is not the only measure. United States has a debt to GDP ratio of 107%, Italy of 135% and Japan of 238%.7 But United States and Japan are both highly graded nations with their sovereign credit ratings in the top rung. While Italy is a lower medium grade like India, but unlike India, it sits within the Eurozone and has access to its corpus.8

A crisis situation also often means that there is a capital outflow from emerging markets which are seen at a higher risk because of above mentioned reasons. We’re already witnessing that. Foreign portfolio investors FPIs) and foreign institutional investors (FIIs) together pulled out Rs.619 bn from the equity segment and Rs.603 bn from the debt segment in March. The trend has continued in April.9  

                                    Source: https://www.fpi.nsdl.co.in

While India’s major source of financing deficit is not external commercial borrowing, it is an indicator of how much confidence the market retains and in turn influences the amount of market borrowing facility available to us.10

                                     Source: http://www.indiabudget.gov.in

Having noted the above, we must remember these are unprecedented times and thus, this is certainly not a time for fiscal prudence. There are a variety of funding opportunities still available to us – government bonds, special purpose vehicles, aids etc.

  • A skewed labour composition

The opportunity to run the economy from home is severely limited in India. The unorganized sector employs 83% of the total Indian work force. There are 92.4% informal workers (with no written contract, paid leave and other benefits) in the economy.11

3-crore manufacturing workers, 5 crore non-manufacturing workers and 6-crore service sector employees are estimated to not have a written contract. 12

If employers are affected in the economic downturn, which they surely are, it is hard to rely on their benevolence to continue paying these at-risk workers.

The CMIE survey notes the unemployment rate has shot up to 26.7% in rural India and 25.1% in urban India as of 19th April. A month ago, before the lockdown began, the survey recorded unemployment rate between 6-8%. 13

An extended lockdown automatically implies that most workers will struggle to meet their ends and dip into their savings if any. The household savings ratio has also been steadily on the decline since its global financial crisis peak.14

The prospects of getting a job afterwards will be driven by investments patterns. Looking at business confidence, the chances of a boost in the economy looks bleak.

Movement towards automation in all sectors is expected to speed up, putting low-skilled jobs at further risk.

  • An Untested Health Infrastructure

According to the Global Health Security Index 201915, India ranked 57th among 100 countries on a scale to gauge preparedness for the outbreak of serious infectious diseases.

There are multiple issues that surround the spectrum of healthcare –

  1. Awareness around assessing one’s own health status –
    Apart from there being alternate traditional and modern notions of health which accounts for misinformation, there is also low priority for health and hygiene related matters.
  2. Access to healthcare –
    1. Physical reach is one of the basic determinants of access, defined as “the ability to enter a healthcare facility within 5 km from the place of residence or work”.
      As per this definition, a 2012 study found that in rural areas, only 37% of people were able to access IP facilities within a 5 km distance.16
    1. Even if one manages to reach a primary health center, it is likely that they will lack basic infrastructural facilities such as beds, wards, toilets, drinking water facility, clean labor rooms for delivery, and regular electricity.
  3. Human Power in Healthcare –

A 2011 study estimated that India has roughly 20 health workers per 10,000 population, with allopathic doctors comprising 31% of the workforce, nurses and midwives 30%, pharmacists 11%, AYUSH practitioners 9%, and others 9%.

  1. Affordable Healthcare –
    1. Almost 75% of healthcare expenditure comes from the pockets of households. Health expenditures are responsible for more than half of Indian households falling into poverty; the impact of this has been increasing, pushing around 39 million Indians into poverty each year. 17
    1. A public health care system is essential to tackle a disease like COVID-19. India currently spends less than 1% of GDP on healthcare. The comparative data from 2016 mentioned in the NHP shows among the 10 South East Asia Region countries, India, at 0.93% of the GDP, was above only Bangladesh at 0.42%.
    1. India’s neighbors, such as Sri Lanka (1.68%), Indonesia (1.40%), Nepal (1.17%) and Myanmar (1.02%) are spending far more than India on healthcare.18

While the Union Budget 2020-21 allocated 2.2% to healthcare, the need is significantly higher.19 The government is reaching out to different areas to finance this need now. The World Bank, for instance, has approved $1 bn for India COVID-19 Emergency Response and Health Systems Preparedness Project. 20

With the above considerations and more surrounding us, the decision of a complete lockdown only goes to show how beleaguering the health crisis is.

If the virus can be proactively contained, albeit through harsh measures of a lockdown, we have a chance to boost the economy back up. China’s current trajectory looks like it follows a V-shape: a quick sharp downfall and a quick recovery. It is starting to show up in the statistics.

China’s GDP fell by 6.8% year on year in 2020 Q1, which is the worst ever recorded. However, Industrial Production Operation saw a 32% increase in March over the previous lockdown month.21 Almost 96% of China’s large and medium-sized enterprises have resumed production, up 17.7 percentage points from February.22

This V-shape is an optimistic hopeful case. The more likely outcomes could be a prolonged slowdown, or a recovery that doesn’t quite bring us back on the same track.

IMF has cut India’s FY 2020-21 growth forecasts from January’s 5.8% to 1.9%. So have many other economists –

Source: IMF

The intensity and duration of the economic shock will entirely be defined by the virus. In such a case, policy responses, no matter how intricate, have a fair chance of falling short.

India’s policy response at this stage, by all means, is only the beginning.

The Central Government’s response –

  1. India COVID-19 Emergency Response and Health System Preparedness Package (15000 crores, 0.1% of GDP):
    1. Building health infrastructure, including testing facilities for COVID-19, personal protective equipment, isolation beds, ICU beds and ventilators.
  2. Pradhan Mantri Garib Kalyan Package (1.7 lakh crores, 0.8% of GDP):
    1. Offer in-kind (food; cooking gas) and cash transfers to lower-income households;
    1. Insurance coverage for workers in the healthcare sector;
    1. Wage support to low-wage workers (in some cases for those still working, and in other cases by easing the criteria for receiving benefits in the event of job loss).

Several measures to ease the tax compliance burden across a range of sectors have also been announced, including postponing some tax-filing and other compliance deadlines.23

The State Government’s response –

Many state governments have announced measures to support the health and wellbeing of lower-income households, primarily in the form of direct transfers i.e. free food rations and cash transfers.

RBI’s response –

The Reserve Bank of India (RBI) has the power to regulate monetary policy and in turn ensure that the money keeps flowing in the economy. The RBI has made it clear that it will not hesitate to use any instrument — conventional or unconventional — to mitigate the impact of COVID-19, revive growth, and preserve financial stability.

Some of the actions are listed below-24

  1. Boosters for MSMEs.
    The micro, small, and medium enterprises MSMEs contribute to 29% of India’s GDP and have often been deemed as the “backbone” of the economy, primarily because it has managed to remain insulated from economic shocks. However, a lockdown is unlike any other and affects them significantly.

RBI has announced 50,000 crores for (MSMEs).

  • Reduction of the repo and reverse repo rates.
    Currently, Rs 6.9 trillion are being absorbed under RBI’s reverse repo operations wherein banks are parking their extra funds. There is a systemic liquidity surplus that has averaged Rs 4.36 trillion during March 27-April 14, 2020. The reduction of reverse repo rates to 3.75% should encourage the banks to divert the funds.
  • Increased Liquidity.

Liquidity measures to the tune of Rs. 3.7 trillion (1.8% of GDP) have been set in place.

  • Empowering States to borrow.

The ways and means limit has been increased to 60% till September increasing the funding for state governments to tackle the downturn.

  • Relief to both borrowers and lenders

Companies are allowed a three-month moratorium on loan repayments. Further, the Securities and Exchange Board of India (SEBI) temporarily relaxed the norms related to debt default on rated instruments

  • Contingency Measures and Risk Management

The RBI asked financial institutions to assess the impact on their asset quality, liquidity, and other parameters due to spread of COVID-19

The above seems like a lot but is all of this enough?

The welfare package does need to be expanded to offer a comprehensive safety net for affected sectors and the larger population depending on the extent of the lockdown.

The adequate amount of relief will be determined by need, which is for now broadly in two categories – building up healthcare facilities and supporting the economy. We’ve looked at some of the challenges surrounding both these categories above. But how much could the demand run up to?

Former Chief Economic Adviser in the finance ministry, Arvind Subramanian, has said the government will have to spend c.10 lakh crore, an amount equivalent to 5% of GDP, to deal with the disruption caused by the pandemic. 25

There are multiple aspects of this disruption. We have discussed some of these – human cost, labor supply, unemployment, wages, MSME hit, etc. There are many others like the change in consumer spending patterns and domestic demand, hit to exports, cost to real estate, accrual of bad debt, etc. that need to be thought of.

Now that the lockdown has been relaxed in some form, we could witness a second wave – the curve hadn’t really come down for us in the first place though. This may exacerbate the situation further. The trade-offs are by no means easy.

This may mean a more expensive as well as a longer-term relief package. As of now, the highest fiscal stimulus as % of GDP in the world has been approved by Germany at 60%, inclusive of immediate relief, deferrals and other liquidity guarantees. 26

India’s policy response undoubtedly needs to expand and will have to maneuver difficult decisions. But as leaders and economists across the world have hinted, we have to do whatever it takes.

REFERENCES:-


[1] “World Economic Outlook Database April 2020,” accessed May 9, 2020, https://www.imf.org/external/pubs/ft/weo/2020/01/weodata/index.aspx.

[2] Christopher Fariss, “Latent Human Rights Protection Scores Version 3” (Harvard Dataverse, May 27, 2019), https://doi.org/10.7910/DVN/TADPGE.

[3] N Ferguson et al., “Report 9: Impact of Non-Pharmaceutical Interventions (NPIs) to Reduce COVID19 Mortality and Healthcare Demand” (Imperial College London, March 16, 2020), https://doi.org/10.25561/77482.

[4] “OxCGRT,” accessed May 9, 2020, https://covidtracker.bsg.ox.ac.uk/.

[5] “Profile – Population Density – Know India: National Portal of India,” accessed May 9, 2020, https://knowindia.gov.in/profile/population-density.php.

[6] “Population Density (People per Sq. Km of Land Area) – India | Data,” accessed May 9, 2020, https://data.worldbank.org/indicator/EN.POP.DNST?locations=IN&most_recent_value_desc=false.

[7] “Country List Government Debt to GDP,” accessed May 9, 2020, https://tradingeconomics.com/country-list/government-debt-to-gdp.

[8] “Sovereigns Ratings List 2020,” countryeconomy.com, accessed May 9, 2020, https://countryeconomy.com/ratings.

[9] “FPI / FII Investment (Calendar Year),” accessed May 9, 2020, https://www.fpi.nsdl.co.in/web/Reports/Yearwise.aspx?RptType=6.

[10] “Union Budget,” accessed May 9, 2020, https://www.indiabudget.gov.in/.

[11] Ramana Murthy, SV, “Measuring Informal Economy in India_Indian Experience”,

 Session II: Traditional Estimation Practices: Determining the Level and Growth of the Informal Economy, IMF

[12] “136 Million Jobs at Risk in Post-Corona India,” Livemint, March 30, 2020, https://www.livemint.com/news/india/136-million-jobs-at-risk-in-post-corona-india-11585584169192.html.

[13] “CMIE,” accessed May 9, 2020, https://cmie.com/kommon/bin/sr.php?kall=warticle&dt=2020-04-21%2010:40:01&msec=873.

[14] “India Gross Savings Rate [1951 – 2020] [Data & Charts],” accessed May 9, 2020, https://www.ceicdata.com/en/indicator/india/gross-savings-rate.

[15] “India,” GHS Index, accessed May 9, 2020, https://www.ghsindex.org/country/india/.

[16] “IMS Health Study Establishes Roadmap to Address Healthcare Access Barriers in India,” July 19, 2013, https://www.businesswire.com/news/home/20130719005083/en/IMS-Health-Study-Establishes-Roadmap-Address-Healthcare.

[17] Yarlini Balarajan, S Selvaraj, and S V Subramanian, “Health Care and Equity in India,” Lancet 377, no. 9764 (February 5, 2011): 505–15, https://doi.org/10.1016/S0140-6736(10)61894-6.

[18] National Health Profile 2019, 14th Issue, Central Bureau of Health Intelligence, Ministry of Health and Family Welfare, Government of India

[19] “KEY HIGHLIGHTS OF UNION BUDGET 2020-21,” accessed May 9, 2020, https://pib.gov.in/newsite/PrintRelease.aspx?relid=197836.

[20] “World Bank Fast-Tracks $1 Billion COVID-19 (Coronavirus) Support for India,” Text/HTML, World Bank, accessed May 9, 2020, https://www.worldbank.org/en/news/press-release/2020/04/02/world-bank-fast-tracks-1-billion-covid-19-support-for-india.

[21] “Industrial Production Operation in March 2020,” accessed May 9, 2020, http://www.stats.gov.cn/english/PressRelease/202004/t20200420_1739746.html.

[22] “Purchasing Managers Index for March 2020,” accessed May 9, 2020, http://www.stats.gov.cn/english/PressRelease/202004/t20200401_1736207.html.

[23] “Policy Responses to COVID19,” IMF, accessed May 9, 2020, https://www.imf.org/en/Topics/imf-and-covid19/Policy-Responses-to-COVID-19.

[24] “Reserve Bank of India – Database,” accessed May 9, 2020, https://www.rbi.org.in/Scripts/bs_viewcontent.aspx?Id=3853.

[25] “Coronavirus Crisis: ₹10 Lakh Crore Stimulus Need of the Hour, Experts Estimate,” Hindustan Times, April 10, 2020, https://www.hindustantimes.com/business-news/coronavirus-crisis-10-lakh-crore-stimulus-need-of-the-hour-experts-estimate/story-wBMSel9Bf6z71Mp5UEbFiK.html.

[26] Silvia Amaro, “Germany Is Vastly Outspending Other Countries with Its Coronavirus Stimulus,” CNBC, April 20, 2020, https://www.cnbc.com/2020/04/20/coronavirus-germany-vastly-outspends-others-in-stimulus.html.

In conversation with Shefali Srivastava, scholar at ISPP, Dr. Sanjaya Baru, Director for Geo-Economics and Strategy at the International Institute of Strategic Studies, makes pointed predictions about the evolution of foreign policy post the detection of COVID-19 in China. He also talks about India’s trade policy under the present government. This interview was recorded in January 2020 with inputs from Shahaji Kadam, staff writer, and researcher at IPR

Author:
April 11, 2020
Irish whiskey has remained less popular than Scotch whisky. This article explores how the original inventors of whiskey have may regain their lost prominence with the grant of the geographical indication status by the European Union. It also delves into the potential impact of Brexit and the Covid-19 epidemic on the Irish Whiskey industry.

The word ‘Scotch’ is synonymous with whisky and in most instances, people interchange them without clearly realising what Scotch means. Scotch whisky is nothing but whisky that has been distilled and matured in Scotland. However, there is always confusion as to what is Scotch and the term is mostly used to describe any premium whisky. This is because of the novelty value that Scotch whisky had gained over the last 50 years, making it the most premium and desired whisky globally. Hence, Scotch became so popular that when you think of whisky, you instantly think of Scotch whisky. Some commodities are so specialised in certain countries that they become synonymous with those country names. For example, when you think of chocolates, you think of Belgian chocolates as the most desired chocolate,or when you think of premium watches, you tend to think of Swiss watches. Certain commodities are very specific or deeply rooted in certain countries.[1]

To understand the challenges faced by the Irish whiskey industry, it was first important to analyse how Scotch whisky is perceived across the masses. Many are unfamiliar with the fact that whisk(e)y was first produced by an Irish and not the Scots. There have been multiple debates and arguments over this fact between the 2 countries, however, it was finally proven that an Irishman, Pah-Dee was the first to create whiskey out of grain and water in the pre-Christian era.[2]Irish whiskey was leading the spirits market by a gulf especially in the United States (US) until the 1900s. This was when the Irish war of independence took place and the prohibition act was imposed in the States that banned all alcohol consumption and sale. The rigorous acts imposed by Britain on Irish exports further hit Irish distilleries.[3]There was also reluctance on the part of Irish distilleries to be innovative and use column still to create blended whisky with grain and malt as the Scots did. The new blended whisky could be produced at an economical price than single malt whisky and had complex flavour characteristics that appealed to the masses, especially in overseas markets like the US.[4]

The resurgence of Irish whiskey only began in the late 1980s when one of world’s leading distiller Pernord Ricard bought the Irish Distillers who owned the most reputed Irish whiskey brands, Jameson. This brought in heavy investment in the industry and resurrected the sales of Irish whiskey. More international drinks companies started putting their weight behind other Irish distilleries which lead to fast growth in Irish whiskey sales. However, Irish whiskey has always played the catch-up game with Scotch whisky since the mid-1900s, even after it gained massive reputation and became proud inventors of whiskey.[5]It failed to attain the same stature as Scotch even though the procedure to distil both whiskies was highly analogous and both industries followed the highest standards of the craft in whisky production. 

The United Kingdom (U.K.) had implemented strict policies and regulations to secure Scotch whisky from being faked or copied by different distilleries around the world. In case of Irish whiskey, no such regulations existed up until April 2019 when the European Commission laid down the policy that awarded Irish whiskey special geographical indication (GI) status. Under this policy, Ireland issued a comprehensive & technical guideline that clearly stated the procedure for producing Irish whiskey, methods involved, ingredients used, and outlined these links to the country of Ireland.[6]The policy was adopted to not only protect Irish whiskey from imitations or enforce actions against misleading versions, but to bring back the reputation that Irish whiskey had before the 1900s and become one of the most sought-after whiskies globally. 

Another key observation that could be made from this policy from 2019 was that with imminent withdrawal of the UK from the European Union (EU), the latter was bound to lose on trade it generated with export of Scotch whisky that was already recognised & been granted special status under the European Commission since 1989. This gave Ireland and Irish whiskey an opportunity to stake its claim as the highest quality and most sought after whiskey being produced out of the EU. The policy would put Irish whiskey as a safe-guarded tradable commodity under the bracket of the European Union, hence, it was bound to receive numerous tax rebates not only within the EU but also with countries who are key trade partners of the EU. It not only helped Irish whiskey industry or Ireland, but also boosted the trade for the EU. With Brexit destined to happen soon, the EU would not be able to export Scotch whisky under its umbrella. Hence, it was not a coincidence that the rise of Irish whiskey coincided with the approval of its special GI status under the European Commission.[7]EU trade commission had ample to gain from the approval of this policy which has safeguarded Irish whiskey. 

Even though the formal withdrawal of the UK took place in January 2020, it is still under the process of holding and finalizing trade negotiations with the EU. Currently the UK is undergoing post Brexit transition period, which means it will continue with the EU customs and trade rules until 31stDecember 2020. There is a possibility that there is no deal between UK and EU leading to high tariffs & barriers for Irish whiskey in UK. On the contrary, if both parties come to term for a favourable deal, most tariffs are likely to remain unchanged which will benefit the trade of both Scotch and Irish whiskey in UK and outside of it.[8]With the global economy and the world currently battling with the Covid-19 pandemic it is highly unlikely that any deal could be finalised this year which can further push the transition period for up to two years.[9]

Even though the grant of special GI status permitted to Irish whiskey is not even a year old, substantial developments have taken place to understand whether the policy will achieve its goals. As discussed above, one of the main challenges and goals for Irish whiskey has been to reclaim its position as the whiskey of the highest standard vis-a-vis Scotch whisky. With the growing demand for Irish whiskey around the world and the European commission approving the policy to give special status to Irish whiskey, many major countries also granted the special status to Irish whiskey in the latter half of 2019. Likes of Japan, China, Australia, South Africa and lately India have agreed to safeguard & grant special GI status to Irish whiskey. Hence, Irish whiskey being sold in these countries must be authentic Irish whiskey distilled in Ireland that complies with the GI policy guidelines.[10],[11]This truly signified that Irish whiskey has set a high standard for itself in the whiskey industry and global markets expect it to maintain that standard, hence this policy is being accepted beyond the realm of the EU. 

Another development that suggested that granting special GI status has enhanced Irish whiskey’s reputation and demand in the US market (which is also the largest market for Irish whiskey globally) was the exemption of trade tariffs imposed by the US. In October 2019, Trump administration had imposed high tariffs at upwards of 25 percent on numerous EU goods which included Scotch whisky. However, it exempted Irish whiskey given the standard it had maintained in the last decade and the continuously rising demand for the spirit in its market.[12]

The initial signs post the grant of GI status of Irish whiskey have been encouraging. Although, it cannot be inferred that it has been successful in achieving its goals within such a limited time frame. The growing demand for Irish whiskey has brought in support from many countries, but the bigger challenge remains as to how long the growth can continue, especially with the multitude of new whiskies entering the market and gaining popularity like American Bourbon whiskey, Japanese whisky, etc. It was the reluctance in innovation that set Irish whiskey behind Scotch in the 1900s. With such policies that encourage and safeguard Irish whiskey, the future once again looks bright for the industry, but only time will tell.


[1]“What’s the Difference Between Scotch, Whiskey and Bourbon?,” March 22, 2012, https://www.mentalfloss.com/article/30278/what’s-difference-between-scotch-whiskey-and-bourbon.

[2]“Proof at Last – the Irish Invented Whisk(e)y! – Whisky Magazine,” accessed April 9, 2020, https://whiskymag.com/story?proof-at-last-the-irish-invented-whiskey.

[3]“Irish Whiskey Through The Ages | Walsh Whiskey Distillery,” Walsh Whiskey | The Irishman Premium Whiskey Range | Writers’ Tears Irish Whiskey(blog), accessed April 9, 2020, http://walshwhiskey.com/our-story/a-history-of-irish-whiskey/.

[4]Peter Bodkin, “A Century Ago Irish Whiskey Dominated the World – so What Happened?,” TheJournal.ie, accessed April 9, 2020, https://www.thejournal.ie/irish-whiskey-history-2098395-May2015/.

[5]Ibid

[6]“Irish Whiskey Gains GI Status from European Commission,” accessed April 9, 2020, https://www.thespiritsbusiness.com/2019/04/irish-whiskey-gains-gi-status-from-european-commission/.

[7]Sunday, August 18, and 2019-04:34 Pm, “Irish Whiskey Wants to Turn Brexit on Its Head,” August 18, 2019, https://www.irishexaminer.com/breakingnews/business/irish-whiskey-wants-to-turn-brexit-on-its-head-944662.html.

[8]“UK Plans to Introduce Border Controls on EU Goods after Post-Brexit Transition,” Reuters, February 10, 2020, https://www.reuters.com/article/us-britain-eu-border-idUSKBN20425O.

[9]Adam Rasmi, “The UK and EU Brace for a Brexit Problem They Didn’t Anticipate,” Quartz, accessed April 9, 2020, https://qz.com/1821343/will-the-brexit-transition-period-be-extended-due-to-coronavirus/.

[10]“Irish Whiskey Awarded GI Protection in India,” September 2, 2019, https://www.just-drinks.com/news/irish-whiskey-awarded-gi-protection-in-india_id129206.aspx.

[11]“Irish Whiskey to Benefit from EU-China Trade Deal,” accessed April 9, 2020, https://www.thespiritsbusiness.com/2019/11/irish-whiskey-to-benefit-from-eu-china-trade-deal/.

[12]“Irish Whiskey Dodges Tariffs While Scotch Malt Whisky Takes a Hit – Potstilled,” accessed April 9, 2020, https://potstilled.com/2019/10/03/irish-whiskey-dodges-tariffs-while-scotch-malt-whisky-takes-a-hit/.

Author:
February 4, 2020
The past three years have witnessed rapidly increasing stress on the Indian banking sector, with non-performing assets (NPAs) steadily climbing from under 3% to over 11% of total assets. Loan-loss provisioning for these NPAs has seriously eroded the capital base of a number of banks, thereby limiting their ability to make further loans. There is now a general consensus that the state of Indian banking is one of the biggest challenges facing the country in accelerating investments and growth. Pronab Sen in his article argues that much of the problems currently being faced by the banking sector arise from a fundamental change that occurred in the Indian banking sector after 2002.

The past three years or so have witnessed rapidly increasing stress in the Indian banking sector, with non-performing assets (NPAs) steadily climbing from under 3% to over 11% of total assets. Loan-loss provisioning for these NPAs has seriously eroded the capital base of a number of banks, thereby limiting their ability to make further loans.1  There is now general consensus that the state of Indian banking is one of the biggest challenges facing the country in accelerating investments and growth.2  Expectedly, given the magnitude and gravity of the problem, much has been written and debated about ways of tackling current NPAs and of preventing recurrence of such a problem in the future.3

There is certainly urgency in finding a solution to the current NPA problem, but diagnosing the cause(s) and putting correctives in place is perhaps even more important.  Unfortunately, the entire discourse around this issue appears to have boiled down to the governance practices in public sector banks (PSBs), particularly political interference and crony capitalism.  The solutions, therefore, have more or less polarised around two ideologically coloured views – (a) privatisation of PSBs; or (b) strengthening independence and capacity of PSBs. While this is a perfectly legitimate debate and may well lead to a part of the solution, it should not forestall the search for other causes, which may be just as important, and perhaps more tractable.

The Causes

The purpose of this article is to argue that much of the problems currently being faced by the banking sector arise from a fundamental change that occurred in the Indian banking sector after 2002. Prior to that, Indian banks mainly had two types of loans: (a) working capital loans to production entities, firms and farmers, which accounted for 76% of the banking portfolio; and (b) retail term loans to households for housing and durable goods, which was somewhat less than 20%.4  Since then the banks have been aggressively making term loans to companies for fixed capital investments, such as land, building and machinery. This now accounts for 38% of the banking portfolio, with working capital at 42% and retail at about 20%.  It so happens that the bulk of the NPAs by value are long-term loans to corporates.

This shift from short term working capital loans to long term loans has not gone entirely unnoticed.  Concern has been expressed in many quarters about the serious asset-liability mismatch in the banking sector, whereby the average tenor of assets (read loan portfolio) has been rapidly going up relative to that of the liabilities (deposits).  While this is certainly a matter of concern, it should be made clear that this is not the cause of the NPA problem. 

What is missed by the commentators is that there is a significant difference between the de jure (contractual)and the de facto (behavioural)tenors of bank deposits.  The average de jure tenor is usually computed by taking the weighted average of the contractual tenors of demand and term deposits, which works out to around 2 years.5  However, most deposits, both demand and term, usually remain with banks for much longer periods, which can be as high as 14 or 15 years.  Thus, the de facto average tenor is probably above 10 years, which may well be higher than the average maturity of the loan portfolio.  This difference between the de jure and the de facto means that the asset-liability mismatch becomes a problem only when there is a loss of depositor confidence and withdrawal of deposits.6 This is not the situation as yet.

In my opinion, the NPA problem has arisen from four features that characterised bank loans for fixed capital formation:

  • Banks did not, and even today do not, have the capacity to assess the long-term credit-worthiness of borrowers.  They rely almost exclusively on assessments made by credit-rating agencies.  Unfortunately, the credit-rating agencies provide ratings only when the company concerned intends to raise debt capital directly from the market.  Therefore, in cases where the company has not issued long-term bonds, there is no real basis to judge the viability of the company.7
  • Banks have no capacity to monitor the use of the long-term loans by the borrower.  This is particularly egregious for project loans, especially when it is without recourse.8  The consequence of this inability is that the parent company can use the funds for purposes other than for which they were borrowed without the banks being any the wiser.  As a result, whatever little appraisal was done initially becomes seriously vitiated.
  • Most importantly, such loans create an existential problem for the borrower since attaching such assets essentially means “winding up” the companies.    It is only natural that company promoters would fight such an eventuality tooth and nail.  Since winding up petitions, especially with multiple lenders, was a complex legal process, which frequently took 7 to 10 years in the courts, with promoters using every possible trick to stall proceedings, banks faced the alarming prospect of making large loan loss provisions which would stay on the books for many years with very little recovery at the end. It is no wonder that bank managements have allowed these potential NPAs to simply accumulate over the years through myriad forms of “ever-greening”.9 Reserve Bank of India’s (RBI) forced recognition of these NPAs since 2015 has now brought the problem to light.10
  • Finally, there was gross mispricing of loans by the banks.  In practically all banks, the yield-curve is almost parallel to, and sometimes even flatter than, the yield-curve on government securities. Even if the banks were unable to assess the appropriate risk premium at different tenors due to (a) above, there is no reason why a premium was not attached to the illiquid nature of the underlying collateral, which is also related to (c) above.

The Origins

This high exposure of banks to companies in fixed assets, especially in project finance, did not happen by itself, but at the behest of successive governments.  It really begins with a decision taken by the government in 1997 to stop issuance of tax-free bonds by the Development Finance Institutions (DFIs), which were the main source of term finance for corporates.11 This closed the only source of relatively low cost funds for these institutions, and was instrumental in some of them converting to commercial banks and others shutting down.  Consequently, Indian commercial banks were forced to fill the vacuum and, in effect, convert themselves to ‘universal banks’.12

The problem escalated due to the government’s focus on infrastructure during the 2002 to 2009 period, especially with the efforts made in promoting ‘public-private partnerships’ (PPPs).13  This led to a rapid increase in project financing to private infrastructure firms.  The global financial crisis in 2008-09 again required the banks to take substantial further exposures in long-term loans as external loans taken by Indian corporates simply dried up.14  If the Indian banks had not stepped in at that time, many large and important projects would have simply collapsed with enormous collateral damage to the economy.  No government could tolerate such a possibility.

The question then arises that whether compelling banks to enter project finance in the absence of any alternate source of finance or back-stopping the cessation of external loans amounts to ‘crony capitalism’?  A bit of rational thinking should convince one that such is not the case.  This of course does not necessarily mean that crony capitalism was not present, but putting it all down to that one factor requires a lot more evidence than exists.  Therefore, to pin all the blame on poor governance in PSBs, especially by government interlocutors, appears gratuitous.  There needs to be far more thought given to fixing the structural limitations within which the Indian banking sector exists.

The Current Solutions

The first and, by far, the most important solution to the NPA problem is to provide for rapid resolution of defaults. It should be remembered that something similar used to happen earlier with working capital loans as well.  This was taken care of by the promulgation of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act in 2002, which resulted in Gross NPAs being reduced from 19% in 2002 to 6% by 2006 and even lower thereafter.  However, the SARFAESI Act is of consequence only in cases where the collaterals are moveable assets, and especially where there is a single claim-holder.  It is simply not appropriate for fixed capital loans with multiple lenders.

The need for a Bankruptcy Act was anticipated and recommended in the Tenth Five Year Plan as far back as 2002.  After much delay, the Insolvency and Bankruptcy Code (IBC) was eventually passed in 2016, which has now made it much easier for banks to effect recovery through liquidation of fixed assets.  As the IBC institutions and processes are strengthened, it should take care of the existing NPAs and, up to a point, the need for banks to do ever-greening.  However, it does not in itself address the other issues associated with long-term loans, especially that of mispricing.

Other than the promulgation of IBC, the government’s response to the banking crisis has rested on two pillars: (a) recapitalisation of the public sector banks (PSBs); and (b) merger of PSBs.  Unfortunately, both these measures only serve to improve the capacity of the banking sector to extend new loans, but does nothing to address the underlying the structural problem faced by it.  The recapitalisation is an essential measure to restore the CRAR to levels at which the banks’ can lend again. Fair enough; this is a price that has to be paid for imprudent loans in the past and the ever-greening that had taken place.  The bank mergers have been presented as a way of creating fewer, larger and stronger banks which can take on international competition.  This is really eye-wash.  The Indian banking sector faces absolutely no challenge from foreign banks, and it is really difficult to argue that we have too many banks in the country in view of the fact that we are still a severely under-banked country by global standards.  In reality what this measure does is to take a number of banks which were under RBI’s Prompt Corrective Action (PCA), and therefore unable to expand their loan portfolio, out of this constraint.  Does this improve matters? Sadly, the answer is: no.

The Needed Remedy

The real solution lies in tackling the structural problem being faced by all Indian banks, whether they are presently in trouble or not.  There is, in particular, one measure that is essential to address the fundamental change that has taken place in Indian banking, and which is not even under discussion.  Indian banking laws follow the “Anglo-Saxon” model in which there is a fire-wall between commercial and investment banks.  The shift to ‘universal’ banking should have been accompanied by amendments to these laws, but we chose to follow a ‘reform by stealth’ approach.15  The key change is that countries which have a “universal” banking model, such as Europe and Japan, permit banks to issue bonds for financing term loans. Our Banking (Regulation) Act 1949 does not do so. Banks can issue bonds only for raising their own capital. 

The only way to correct this problem would be to amend the Banking Act to permit issuance of bonds by banks for on-lending.16  Ideally, banks should be required to ensure that a minimum percentage of their term loans are financed by long-term market borrowings. Such a measure would have a number of positive effects.  First, if the banks are required to issue bonds to finance a part of their term loans, it would lead to a much more rational (read steeper) yield curve on bank loans since the interest rate on bank bonds would be significantly higher than those on deposits.

Second, a more rational yield curve would also probably drive some corporates to borrow directly in the bond market, thereby reducing the pressure on banks.  The Security and Exchanges Board of India (SEBI) is considering making it mandatory for listed companies to raise a part of their long-term debt from the market, but this can potentially be very distortionary in terms of credit allocation in the economy.17  A more rational bank yield curve would obviate some of this distortion since there would be a self-selection element in companies’ decision to issue long-term bonds.18

Third, this would automatically correct the growing asset-liability mismatch problem, and thereby improve the credibility of the banking sector as a whole.

Finally and perhaps most importantly, since banks would have to get themselves periodically rated, the yield curve of individual banks would reflect the strength of their loan portfolios.  As a result, banks with weaker balance sheets will have to offer higher interest rates on their bonds, which will get reflected in higher interest rates that they will have to charge to the same potential client.  This should have the effect of introducing a self-correcting mechanism in the lending behaviour of banks well before they run into serious problems.

Thus, the choice facing the government is clear: either revert to the status quo ante where banks eschew lending for fixed capital formation; or amend the banking laws to reflect the new reality.19 The patchwork tinkering that is going on at the moment simply postpones judgement day; but that day will certainly come, sooner or later.


REFERENCES :-

1. Banking laws require banks to limit their loan portfolios to a particular multiple of their capital base, referred to as the Capital Adequacy Ratio (CAR).

2. The other two major challenges being: (a) the precarious state of the world economy; and (b) rural distress.

3. A simple web search reveals that there are more than 100,000 articles on how to tackle the NPA problem in Indian banks and more than 200,000 on its causes.

4. The remainder was term-loans to enterprises, mostly as ‘bridge finance’.

5. Demand deposits (termed CASA in banking parlance) can be withdrawn immediately, i.e. a contractual tenor of zero, and term deposits have contractual tenor that vary between one and five years.  Since CASA usually is between 40 to 50% of total deposits, the average comes to around 2 years.

6. A ‘bank run’ is an extreme case of this.

7. Most corporates do have ratings for shorter durations, and banks tend to use these as proxies for long-run risk.

8. ‘Without recourse’ means that the lender has no claim on the assets of the parent company, but only on those of the project (which are usually developed through special purpose vehicles (SPVs).  Most infrastructure loans fall into this category.

9. Since balance sheets and profit and loss accounts are the basis on which management is evaluated, ‘kicking the can down the road’ is a time-honoured practice of top management in non-promoter driven companies, which almost all banks are.

10. The ‘poor governance in PSBs’ narrative, which hinges around higher NPAs in PSBs relative to private banks is driven by two, not necessarily independent,  factors: (a) private banks tend to have lower proportion of project loans than PSBs; and (b) some private banks are in fact promoter-driven.

11. The main DFIs were Industrial Credit and Investment Corporation of India (ICICI), Industrial Development Bank of India (IDBI), Industrial Finance Corporation of India (IFCI) and Industrial Investment Bank of India (IIBI).

12. ‘Universal’ banks perform the roles of both commercial banks and investment banks.

13. At this time, infrastructure was included in the ‘priority sector’ list.

14. There had been a sharp increase in external commercial borrowings by Indian corporates, which rose from about $3 billion in 2002 to $28 billion in 2008.

15. The U.S.A., which also followed the same model, adopted a legislative approach to move to universal banking by diluting the Glass-Steagal Act.  The U.K. too acted similarly.  In both cases, there has been a reversal after the global financial crisis, which we would do well to bear in mind.

16. It surprises me that RBI has not demanded this change.  I can only ascribe it to ‘lazy’ regulating – to use RBI’s own expression.

17. The logic of the proposal, at one level, is sound in that it will force all listed companies to obtain long-term ratings, which will be useful not only for banks but also for equity investors.  However, it can work against younger companies, especially those which are recently listed.

18. This could of course lead to an adverse selection problem, which implies that banks need to improve their appraisal capabilities in any case.

19. In all fairness, over the years the government has tried to create new institutions for infrastructure lending, but with a singular lack of success.

Author:
February 3, 2020
The world is currently in increasing turmoil because of factors such as the global economic slowdown, protectionist policies adopted by the USA, and the withdrawal of the United Kingdom from the European Union. It is imperative that cooperative federalism between the Union and the States is encouraged for India’s economy to remain resilient in the face of international economic turbulence. Ashima Mahajan speaks to Sudipto Mundle about fiscal federalism, GST, Finance Commission, and possible solutions to having a cooperative fiscal arrangement between the Center and states.

India has emerged as one of the fastest-growing economies in the world.[i] To reform its governance structure and promote ease of doing business in this era of globalization and increased competitiveness, India is working to change the landscape of its Center-State relations by promoting a more cooperative structure.[ii] Post-independence, India has followed a quasi-federal constitutional model, which it is now trying to upgrade. For this reason, various reforms have been initiated by the government, like the setting up of the NITI Aayog, formation of the GST (Goods and Services Tax) Council, devolving more grants to the states by the 14th Finance Commission, withdrawing from Regional Comprehensive Economic Partnership (RCEP), and relaxing foreign investor rules.[iii] However, it is clear that a lot more needs to be done on the reforms side, given that India faces a slowing growth rate, rising corporate and household debt, and increasing unemployment.[iv] The Government of India must work in unison alongside State governments to reverse the downturn the economy and also to entrench cooperative federalism in the country. The world is currently in increasing turmoil because of factors, inter alia, like the global economic slowdown, protectionist policies adopted by the USA, and the withdrawal of the United Kingdom from the European Union. It is imperative that cooperative federalism between the Union and the States is encouraged for India’s economy to remain resilient in the face of international economic turbulence. Ashima Mahajan speaks to Sudipto Mundle about fiscal federalism, GST, Finance Commission, and possible solutions to having a cooperative fiscal arrangement between the Center and states.

Sudipto Mundle is a Distinguished Fellow at the National Council of Applied Economic Research (NCAER). He was formerly an Emeritus Professor at the National Institute of Public Finance and Policy (NIPFP), New Delhi. He has also been a member of the Fourteenth Finance Commission, the erstwhile Monetary Policy Advisory Committee of the RBI, the Chairman of the National Statistical Commission as well as the Chairman of the Research Advisory Committee of Research and Information System for Developing Countries (RIS), a think tank affiliated to the Ministry of External Affairs. Mundle has spent much of his career at the Asian Development Bank, Manila. Currently, he is a visiting faculty member at the Indian School of Public Policy (ISPP), New Delhi.


1. Fiscal federalism in India has its roots in the British colonial rule. It primarily dates back to the Government of India (‘GoI’) Act of 1919 and Government of India Act 1935. While the GoI Act of 1919 saw a revenue sharing model between the Center and the Provinces, the GoI Act of 1935 enabled a further revenue redistribution to the Provinces with the provision of Grants-in-Aid.  What are your views on this with respect to the evolution of fiscal federalism in India?

These observations are context-specific. The 1919 Act wanted a more centralized picture and the 1935 Act was a bit decentralized. The specific context of why the Acts were designed so relates to the historical moment of the time. But what is relevant for us from today’s perspective, is why the founding fathers adopted a Constitution which was more centralized.

There were many compulsions.  There was a concern about regulatory capture by the local elites at the state level. Another concern was that, given the absence of a strong Centre, there would be fissiparous tendencies that could lead to Balkanization. We have seen this happening around many countries that became independent at that time. So, I think these were the driving concerns of the founding fathers and the reasons why they incorporated unitary features in the federal system, giving us a system today that is only quasi-federal in nature.

2. How has the implementation of the Goods and Services Tax (GST) affected the federal structure of India?  Has the GST Council circumscribed the fiscal autonomy of states?

I am not sure I agree that the GST has compromised the fiscal autonomy of the States. If it has compromised their fiscal autonomy, then it would imply that it has also compromised the fiscal autonomy of the Center. This is because all decisions relating to GST are made by the GST Council which is made up of all State Finance Ministers along with the Union Finance Minister as its chair – this body then collectively makes decisions. As an institution, if states have given up some power, then the Centre has also given up power (because central taxes have also been subsumed under it). Additionally, the GST Council has a very cleverly balanced alignment of voting powers. The decisions are made by a 75 percent majority, but Center has a larger voting power compared to individual states. The Center has a voting power of 33 percent, so no decisions can go through without its agreement. But equally a collection of states also has veto power, since the voting power of states adds up to more than 25 percent.

We cannot say that it has reduced the autonomy of states vis-à-vis the Centre. To address the fear among the states that they might lose revenue, assurance was given that the Centre would compensate the states for five years at the then prevailing growth rate of 14 percent. At the time, the inflation rate was higher, and the states have been more than compensated for some state-level taxes being subsumed under the GST. The Centre is now finding it difficult to keep to its commitment. But it also can neither renege on its commitment nor can it increase the compensation cess because the economy is growing at a much slower rate.

GST exemplifies how an institution of cooperative federalism can work with a fine balance of powers of the Center and the States. The institution is very well designed; however, it has not been able to work properly because of three reasons. First, the tax design that the government came up with was flawed. It had half a dozen rates.  Most countries would have just one rate. At the most, we can have three rates but having six is completely irrational.

Second, it is actually a very good tax, but it depends critically on an extremely well-functioning tax information system. We need an efficient system to manage the tax crediting component of the law and to be able to match invoices. If such systems are not in place, GST mechanism is meaningless. There is a belief that something is wrong with the way GST has been designed.  However, the core of the problem is not design but the inefficient machinery in place that is unable to implement the Act properly.

Third, GST needs sound professional secretariat of experts to implement it. I see no reason why the GST Council cannot employ such a body of experts. But, by default, the matter has been left to the Finance Ministry, which in turn, has put in place a Committee essentially composed of bureaucrats from the Central Board of Indirect Taxes and Customs (CBIC). The CBIC officers are interested in their own power rather than making the system work. They are bureaucrats and not experts at running a complex value-added system.

With multiple rates, there is room for discretion in the classification of goods and services. Given that and a complete GSTN system not being in place, there is much room for leakage and corruption. This is damaging the reputation of what is actually a very good tax. If GST administration could be assigned to a permanent secretariat of the GST Council, a professional body of properly trained officials who are permanently based there, then the system would work. There are too many vested interests working against the GST. If the GST is allowed to work properly, then it is such a good transparent tax that there would be little room for any leakages.

3. There are overlapping functions between the GST Council and the Finance Commission (FC). While the Finance Commission recommends distribution of revenue between the Union and the States; everything with respect to GST rates, exemptions, changes, and implementation of indirect taxes are entirely within the domain of the GST Council. How can we achieve coordination between these two bodies without conflict?

I think this is a very good question and is something that the 15th Finance Commission is contemplating. They are both constitutional bodies and can have a formal interaction. Though, a meeting of the FC with GST council is not going to be very productive because then about 29-30 ministers of states would be in attendance with a much leaner FC. Also, within the GST council, we have half a dozen professionals, economists, another three or four chartered accountants, but the rest are not experts in finance. So, there is a lot of herd mentality at work there. If we look at the minutes of the meetings of the GST Council, it leaves much to be desired with respect to its functioning. But that does not mean that a good productive relationship between the FC and the GST Council cannot be developed. I think coordination between them is very essential. This is because a major part of tax revenues which the FC has to factor into its award on tax devolution or grants are the revenues from the GST. A lot can be achieved through informal discussions between the Chairman of FC with some members of the GST Council, and also with more informed professionals among the State Finance Minister(s). 

4. Schedule 7 of the Indian Constitution has three lists – Union, State and Concurrent. Over the recent years, the State List has shrunk and the Center has expanded its influence in State policies, encroaching territory of the States. What are your views on the same?

First of all, it is a fact that there has been an encroachment and that is not desirable. But I think it is incorrect to think that the lists that were made 70 years are cast in stone. The circumstances have changed, and we must revisit them. Flexibility also needs to be there and, in the way, that the concurrent list has been expanded, we can see the presence of flexibility in India’s administrative structure.  However, the argument against too much decentralization is that all states are not equal – some have high capacity while others have low capacity. Sometimes being more centralized is more equitable than more decentralization. With high decentralization, the states are competing with each other and obviously the stronger ones will gain, while others will lose out. Therefore, it is always beneficial to have a kind of referee who can be more even-handed and more concerned about equity.

5. The 15th Finance Commission (FC) amended the Terms of Reference by seeking a separate fund allocation to the defence and internal security before dividing money between the Center and the States. If implemented, this would reduce the fiscal space available to states while increasing it for the Central government. This may be considered a threat to federalism in India. In case need arises, how are we to combat this situation?

First of all, it is for the Finance Commission to decide the scope of their mandate. Constitutionally, it is their responsibility. It is not for any other institution to direct the Finance Commission to look into an issue or not. I think there has been some overstepping on part of the central government in trying to lay down the scope for the Finance Commission’s domain. If the FC wants, it can completely ignore it.

Secondly, defence is a national subject but internal security is not (internal security is enlisted in the Concurrent List). Whatever is earmarked for internal security is not reducing the fiscal space of the states. It’s simply reducing their autonomy in deciding the allocation. Anyway, the states were spending money on internal security but they were the decision makers with respect to, say, the number of battalions in the state police force. Now, the Center will. The Center is trying to co-opt some of the autonomous functions of the States rather than their fiscal space as far as internal security is concerned. Defence, in any case is under its own domain.

It is unconstitutional to ask FC to carve out money for defence and internal security before allocating to the States. For instance, when the 14th FC decided to transfer 42 percent of net tax revenue to the States, it was part of a larger scheme because the Center had other resources like public enterprises’ profit, cesses, surcharges, and so on. In fact, all that put together, the allocation worked out to be 62 percent of the total resources for the States, given that some of the money belonging to the Central government got transferred to States through the framework of centrally-sponsored schemes. The ultimate division of resources was something like 63 percent-37 percent in favor of the States, which was not very different from what it was during the 13th FC.

In the case that this proposal is adopted, the provision for defence and internal security would need to be factored in while deciding the devolution amount. When an allocation for defense is set aside before the devolution, then this will be reflected in the devolution formula as a lower share for the Centre. It is only after budgeting for all center’s responsibilities, including defence, that a devolution share can be estimated. So, again, what is there to be set aside? If you really think about this, it’s quite meaningless because the allocation of the tax share of the center is to provide for this allocation.

6. Why has the 14th FC transferred funds directly from Center to Gram Panchayats, the third tier of governance, bypassing the State Finance Commissions (SFCs)?

The grant that was given said very clearly that the utilization of funds was to be done in accordance with the recommendations of the SFCs. So it was, in fact, also an attempt to empower the SFCs along with the local governments, because in order to use that money the State governments have to take the SFC report seriously. It was certainly not the intention of the 14th FC to bypass the SFCs but an attempt to empower them by making them a stakeholder with respect to the decision regarding how the transferred money was to be used by the local governments.

7. Why is the fiscal balance always tilted in favor of the Center while the States have been interested in the welfare and developmental tasks? Why is this imbalance seen?

It is the quasi-federal constitutional allocation of assigning funds which gives greater importance to the Center as compared to the States. There are other reasons why it is important for the central government to be the authority which collects certain types of taxes and not the states. In principle,  there is nothing wrong with having a difference in the assignment of revenue-raising powers and the assignment of expenditure spending powers. We have an instrument to deal with that, which is transfers, that’s why we have the Finance Commissions. Constitution makers envisaged this need and mandated the appointment of Finance Commissions to make decisions with respect to  the allocation of tax revenues between the Center and the States. That particular imbalance is already provided for through the instrument or institution of the FC.

8. The NK Singh Committee has recommended a fiscal deficit of 2.5% of GDP by FY 2022-23 but currently, the FY 2016-17 fiscal deficit is 3.5% of the GDP (Fiscal Responsibility and Budget Management (FRBM) Act mentions it to be around 3%). Arvind Subramanian didn’t agree with this target and recommended to eliminate the government’s primary deficit over the next 5 years. What are your views on the same?

First of all, I think the way the FRBM Committee recommended the fiscal deficit is flawed, completely, because it makes it pro-cyclical. If you fix the percentage, then when growth is high, the amount also goes up, and when the growth is low, the amount goes down. The movement of the fiscal deficit should be exactly the opposite, as it is supposed to be counter-cyclical. The idea  in theory, and it is being implemented in many countries, is to target the structural fiscal deficit or a cyclically adjusted fiscal deficit which is kind of a self-correcting device. You fix it so that when the growth is too high, then the deficit becomes low and when growth is too low, the deficit becomes high. But the FRBM Committee did not do that. Some of us pointed it out then, some of us have continued to mention it. And I’m very pleased to say that I think the 15th Finance Commission is contemplating whether it should revisit this predicament.

9. With the protectionist approach adopted by the USA and the recent withdrawal of India from RCEP agreement, do you think this will affect India’s economic prospects? If yes, how can we improve the situation because we cannot opt for being a closed economy again?

Given the terms of RCEP, I don’t think India was in a position to sign up and had no option but to withdraw. But not joining RCEP is also not an option because the global multilateral trading system is more or less falling apart. Trade is increasing being conducted through regional agreements and RCEP is a mega one for Asia. So, India will have to get into it. But before we do that, we need to do a couple of things. First of all, you need a body of professionals and not leave it to bureaucrats in the Commerce Ministry to deal with trade agreements.  They are not equipped and do not have the requisite professional skills to do so. You need specialized technical experts, trade experts, economists, lawyers, and so on – a solid body secretariat for RCEP to do in-depth analysis. Any serious country will do that.

Second is that, at the end of the day, India will have to become competitive while joining free trade bodies. India will lose its trade share if it is not competitive. We need to fix our infrastructure, ease up our business system, and sort the mess with GST. We need efficient governance systems, efficient infrastructure and a competitive environment rather than a protected environment. Korea for instance, forced the manufactures to compete and stand up to global competition. In 1991, when we liberalized, the manufacturers were scared but actually, mostly they all did well. Some fell but others came up and India did quite well. We had a long period of very good export growth. This will again happen when we join RCEP and we should prepare for it properly.

10. The National Council of Applied Economic Research (NCAER), National Institute of Public Finance and Policy (NIPFP), and other think tanks that work closely with the government are assigned projects by the Ministry of Finance regularly. How does the government use the work and the analysis produced by these organizations? How can these institutions be further developed to assist the government in its functions?

The institutions mentioned are being used by the government from time to time. It’s good that NIPFP is used in a more focused way for public finance issues than NCAER, which is used for various other things as well. In my view, an attitudinal change is required in government in order to build a systematic relationship with think-tanks and use them in a more organized way. It should not be piecemeal and there is a need to build structured relationships of the kind you may find in countries like the United States, Korea, Japan and China. Think tanks need to be taken much more seriously because they have greater expertise than the government. It is unfortunate that these think tanks are not very market-oriented and are getting priced out. The government is not realizing that they are giving up efficient and cheaply priced assets. There has to be funding for think tanks. We need to look at China on how they are spending a lot of money on research. We should learn from the US on how they are working.


ENDNOTES

[i] World Economic Forum. “Why Cooperative and Competitive Federalism Is the Secret to India’s Success.” Accessed January 4, 2020. https://www.weforum.org/agenda/2019/10/what-is-cooperative-and-competitive-federalism-india/.

[ii] Sahoo, Niranjan. “Center-State Relations in India: Time for a New Framework.” ORF. Accessed January 4, 2020. https://www.orfonline.org/research/Center-state-relations-in-india-time-for-a-new-framework/.

[iii] Modi’s Labour Reform Push May Remove Key Hurdle for Investors – The Economic Times.” Accessed January 4, 2020. https://economictimes.indiatimes.com/news/economy/policy/modis-labour-reform-push-may-remove-key-hurdle-for-investors/articleshow/72234136.cms?from=mdr.

[iv] December 6, Raghuram Rajan, 2019 ISSUE DATE: December 16, 2019UPDATED: December 9, and 2019 21:06 Ist. “Exclusive: Raghuram Rajan Explains How to Fix the Economy.” India Today. Accessed January 4, 2020. https://www.indiatoday.in/magazine/cover-story/story/20191216-how-to-fix-the-economy-1625364-2019-12-06.

write for us!

The ISPP Policy Review invites articles that are insightful, thought-provoking and enriches the dialogue in Health Policy and Management; Education Policy and Design; Environmental Studies; Science, Technology, and Infrastructure Policy; Urbanization and Governance; National Security.


The following is the form for submission of articles. Once submitted, ISPP Review will get back to you within four weeks.