Coronavirus – Economic Issues

Restructuring to cushion impact on the economy

Note4Students

From UPSC perspective, the following things are important :

Prelims level : MPC

Mains level : Paper 3- Impact of covid and the role of government and the central bank

“The article analyses the present scenario of the economy and impact of the steps taken by the central bank and the government.” 

Context

  • Monetary policy committee (MPC) members, through a unanimous vote, decided to keep policy rates unchanged.
  • MPC also maintained an accommodative stance.
  • This was the result of inflation hovering around 6% i.e. above the MPCs target of 4%.

Restructuring package after moratorium ends

  • Moratorium on loans ends 31 August, RBI said the way forward is a restructuring package for businesses and households.
  • Recent data released by large banks indicate that there has been a sizeable reduction in moratorium in June from 50% in April for all scheduled commercial banks (SCBs).
  • As economic activity normalizes further, the need for restructuring will be even lower.

What do the trends indicate

  • Most indicators—manufacturing and services Purchasing Managers’ Index(PMI’s) electricity output, vehicle sales, exports, imports—point to economic momentum settling at 10-15% below covid levels in the near-term.
  • The RBI’s consumer confidence survey—gauge of consumer spending—was at its lowest in May, and the one-year outlook is not promising.
  • This implies that consumption demand, especially discretionary demand, will be far lower.
  • With muted consumption, capacity utilization, which had fallen to 68.2% last December, has fallen further in the last few months.
  • Thus, investment demand is not likely to see upward momentum in the near term, even with lower interest rates.

How RBI’s intervention made the difference

  • An economic slowdown of such proportions leads to an increase in risk premium.
  • Rating upgrade to downgrade ratio of the corporate sector had fallen to 0.05 as in May from a high of 1.11 in December 2018.
  • Spread between 3-year AAA corporate bonds and sovereign bonds rose to 276 basis points on 26 March.
  • But the spread has since fallen to 50bps.
  • This was possible because of the abundant liquidity made available by RBI and credit enhancement provided by the government.

Way forward

  • RBI and the government will have to work together to revive demand.
  • Centre has already expanded its gross borrowing to ₹12 trillion.
  • Even with net tax collections at 53% of last year’s levels, the Centre has increased its spending by 13% over 2019-20.
  • The government better understand that this is the time to apply Keynesian economics.
  • Global central banks have become large buyers of sovereign debt to support the larger roles being played the governments.
  • In India, too, the Centre and states will have to spend to crowd-in private sector spending.
  • RBI’s role will be important not only as the lender of last resort but also as a buyer of government securities.
  • It has carried out its function as a central bank well, and brought a semblance of stability to financial markets.
  • It will have to do the same in the sovereign bond market.
  • More importantly, it will have to remain vigilant of impending risks to growth and inflation, and be ready to act.

Consider the question “To what extent the steps taken by the RBI and the government to stabilise the economy battered by the covid pandemic were helpful? 

 Conclusion

As India’s central bank comes towards the end of its interest rate reduction cycle, it will have to navigate the economy through financial and macroeconomic stability. The government will also have to act in tandem with the central bank in steering the economy through this storm.

Original

articles:https://www.livemint.com/opinion/columns/opinion-restructuring-to-cushion-impact-on-the-economy-11596758908360.html

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