India and Covid-19: Economic Challenges, Impact and Policy

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.

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Nilmani
Nilmani
2 years ago

How about Micro Indicator like Labour Movement in India. It remind us Quit India Movement.

It is seriously impact labour Intensive Industry.

danish
1 year ago

Yes, we have done whatever it takes, in the time when Illusion is sacred and truth profane. Higher degree of sacredness brings higher degree of illusion. In between there’s the accumulation of spectacles, a representation of truth, a copy of faces detached, fuse into a mass production: a declaration of unrealism of the real society. Data is information. Information is knowledge. Hope we could achieve a just, humane, and equitable society in a free market, neo liberal world. Or, we could become socialist on the right side. We just have a labor reform without the social security. We were told we have enough money and grains, but we’re saving them for the worst. In the meantime, let the hungry die in their Sisyphean struggle for a mere survival. And let the rest reconcile with the horror which is manifesting outside with their own rented freedom and privileged truth.

Faith of a Heretic
The land seems unfamiliar, so is the sun.
The symphony of destruction lay bare, afresh, always;
When, a Neocon fine-tunes the sax,
And readily amateurs marches on the drum
A chorus is heard. Ominous!
And rightly so, just before the play,
The stage dims out.

And the story unfolds,
For, you have willed this nothingness on yourselves,
A voice is heard reminding,
Of mayhem and dehumanization which unfold;
That you shouldn’t have befriended your corpse.
Too late! The walk back home is long and cold,
As your feet are stuck to the will of an iron throne.

Hear! The conductor’s still playing the barbaric march,
Chiefly, ‘The faith of all time’,
He and his predilection,
For a supra-sensible world.
In the name of giving meaning to yourself. he asks politely,
Of you to dance with the wandering flames of nostalgia.
Because, you are ‘the last men’.
While in the eternal flux, everything has changed.
The ideals, so has your God. How?
He is long dead, the rest presumes.

I was looking for the research paper on the human cost of this crisis, and found your paper. I found a sense of lost familiarity here. Hence the long reply. Hope you’re good. Stay safe.

Related Articles

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.