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Subject: Economics

  • Use the COVID crisis to transform the agri-marketing system

    This article discusses the impact of lockdown on farmers and how the disruption of the supply chain is adding to their difficulties in selling their produce in the markets.

    In the last two weeks or so, we have been reading about farmers and issues around the agri-marketing supply chain. If you have been following the story on Agriculture Marketing Reforms, you would remember us talking about it in the op-ed titled “A smarter supply line”

    There are 6 suggestions to overhaul our agri-marketing system. These are-

    1. Abolish/reframe the APMC Act

    • There is an urgent need for abolishing or reframing the APMC Act and encourage direct buying of agri-produce from farmers/farmer producer organisations (FPOs).
    • The companies, processors, organised retailers, exporters, consumer groups, that buy directly from FPOs need not pay any market fee as they do not avail the facilities of APMC yards.

    APMC Act restrict the farmers from selling their produce outside the market yard, so in the present context of Covid-19 this is a counterproductive restrictions. UPSC asked question on in in 2014.

    2. The warehouses can also be designated as markets.

    • The warehouse receipt system can be scaled up.
    • The private sector should be encouraged to open mandis with modern infrastructure, capping commissions.

    3. The futures trading should be encouraged by allowing banking finance to hedge for commodity price risks.

    A futures contract is a standardized legal agreement to buy or sell something at a predetermined price at a specified time in the future, encouraging this would help farmers assurance of price and help in making decion for the sowing based on price signal from he markets.

    4. Promote e-NAM through proper assaying and grading the produce and setting up dispute settlement mechanism; rope in major logistics players for delivery of goods.

    5. Avoiding rush in the markets: Procurement must be staggered through coupons and incentives that give farmers an additional bonus for bringing the produce to the market after May 10, or so.

    6. The amount provided under PM Kisan should be increased from Rs 6,000 to at least Rs 10,000 per farming family to partially compensate them for their losses.

    Way forward

    • Besides these, Prime Minister would benefit by taking a leaf out of the book of President Donald Trump. Modi should lead from the front by holding daily press briefings and announce a country-wide relief package amounting to around 8-10 per cent of GDP.
    • Whatever the causes of this disaster are, it is clear that the WHO failed in its duty to raise the alarm in time. India must ask for fundamental reforms in the UN System, including the WHO, making it more transparent, competent, and accountable.

  • How a dollar swap line with US Fed can help in uncertain times?

    India is working with the US to secure a dollar swap line that would help in better management of its external account and provide an extra cushion in the event of an abrupt outflow of funds.

    What are Currency Swaps?

    • A currency swap, also known as a cross-currency swap, is an off-balance sheet transaction in which two parties exchange principal and interest in different currencies.
    • The purpose of a currency swap is to lower exposure to exchange rate risk or reduce the cost of borrowing a foreign currency.

    Why do we need dollars?

    • According to RBI data, 63.7% of India’s foreign currency assets — or $256.17 billion — are held in overseas securities, mainly in the US treasury.
    • While FPIs investors looking for safer investments, the current global uncertainty over COVID outbreak have led to a shortfall in Indian stock markets.
    • This has pulled down India’s foreign exchange reserves.
    • This means that the government and the RBI cannot lower their guard on the management of the economy and the external account.

    How does a swap facility work?

    • In a swap arrangement, the US Fed provides dollars to a foreign central bank, which, at the same time, provides the equivalent funds in its currency to the Fed, based on the market exchange rate at the time of the transaction.
    • The parties agree to swap back these quantities of their two currencies at a specified date in the future, which could be the next day or even three months later, using the same exchange rate as in the first transaction.
    • These swap operations carry no exchange rate or other market risks, as transaction terms are set in advance.

    Benefits of currency swap

    • The absence of an exchange rate risk is the major benefit of such a facility.
    • This facility provides India with the flexibility to use these reserves at any time in order to maintain an appropriate level of balance of payments or short-term liquidity.
    • currency swaps between governments also have supplementary objectives like promotion of bilateral trade, maintaining the value of foreign exchange reserves with the central bank and ensuring financial stability (protecting the health of the banking system).

    Recent examples

    • India already has a $75 billion bilateral currency swap line with Japan, which has the second-highest dollar reserves after China.
    • The RBI also offers similar swap lines to central banks in the SAARC region within a total corpus of $2 billion.

    Note: Relate all other terminologies related to USD-INR convertiblity viz. Current Account, BoP etc.

  • [pib] Operation Lifeline UDAN

    To ensure a steady supply of essentials, even in the most remote locations, the Union Civil Aviation Ministry launched ‘Lifeline Udan’.

    Don’t get confused or correlate this with Ude Desh ka Aam Nagrik (UDAN) Scheme. The name clearly indicates that it is an HADR like operation. Whats HADR? Humanitarian Assistance and Disaster Relief

    Op. Lifeline Udan

    • Under this operation, flights are being operated to transport essential medical cargo to remote parts of the country amid the lockdown to support India’s fight against Covid-19.
    • The flights have been operated by Air India, Alliance Air, Indian Air Force, Pawan Hans and private carriers.
    • The cargo compulsorily supplies goods such as regents, enzymes, medical equipment, testing kits and PPE, masks, gloves and other essential items as applicable by the State and UT Governments.
    • Air India is shouldered to operate dedicated scheduled cargo flights to other countries for transfer of critical medical supplies, as per the requirement.

  • Coronavirus – Economic Issues

  • World trade fall mustn’t stoke export pessimism

    Context

    The WTO expects a sharp drop-off in global trade in the wake of Covid-19. But India must not withdraw inwards.

    Prospects of the exports

    • Impact on global trade: The World Trade Organization (WTO) predicts that global trade could fall by 13-32% this year on account of disruptions and all the turmoil.
    • At this point, we cannot even count on a quick recovery after this health emergency is past its peak.
    • A trade revival may have to wait till 2022 or later.
    • Indian exports have been in a slump for a large part of the past decade, and recent reports point to a rash of cancelled orders from abroad (except, notably, for drugs).
    • This, however, should not mean that we slip into export pessimism.
    • Opportunity in the crisis: Instead, a crisis such as this could serve as an opportunity to sharpen our competitive edge that has got blunt over the years.
    • Rupee and reform: This is best done through reforms, though a rupee on the decline vis-à-vis the US dollar should help too.

    Reasons for export orientations

    • The relation between growth and exports: No country is an island unto itself, and nations will continue to exchange goods and services so long as it makes economic sense.
    • Trade partners are usually better off producing what they’re best at, for all users, and buying from the rest what others turn out better—at a lower cost and higher quality.
    • Economies that participate in this game, as the historical record has shown, tend to grow faster.
    • There is another good reason for export orientation.
    • Foreign earnings: India needs foreign earnings, not just for oil imports and suchlike, but also for overall economic stability, given our reliance on foreign capital for growth.
    • In tough times such as these, when we may need to borrow money from abroad to bridge a hugely enlarged fiscal deficit, ensuring a stream of future dollar earnings becomes even more crucial.
    • To enable the issuance of dollar bonds and raise our chances of staging a less painful return to form, we need to get our export act together.

    Way forward to increase exports

    • Structural and policy changes: Export success goes by competitiveness, and for domestic businesses to achieve this, India would need to undertake several structural and policy changes.
    • We could begin with reversing the tariff barriers that have been raised in recent years.
    • Exposure to foreign competitors would force them to turn efficient and perform better.
    • Duties on inputs, especially, need to come down. So do other taxes that hold companies back. Other steps to raise productivity will help, too.
    • Good logistical backup is another big requirement.
    • The low value of rupee: The rupee’s slump is a plus for exporters, since their output is cheaper in dollar terms, but we may need to pursue a policy that does not let our currency’s value get over-inflated by inflows of foreign “hot money” (when they return).
    • Cost of capital: The cost of capital in India needs to be low, too, and this would depend on how well the government manages its finances.
    • India’s annual exports currently form less than 2% of the world’s. We should aim for 5%.

  • A plan for the aftermath

    Context

    Everyone is agreed that the whole world is hurtling towards an unprecedented economic recession. India, already facing a massive slowdown, is going to get hurt perhaps more than the others, because our economic immune system is already weak.

    Three things that we must do in the present situation

    • The first is containing the spread of the virus.
    • Apart from the manpower, medicines, protective equipment for frontline workers and other methods, it will need massive resources to tackle it.
    • Second, the poor are already suffering in more ways than one, including the daily wage earners. They will have to be taken care of, again needing massive resources.
    • Third, economic activity will have to be revived as soon as conditions return to normal or near-normal, for which businesses will have to be helped, again needing massive resources; both in terms of revenue foregone and actual cash outgo.
    • The question, therefore, on everyone’s mind is how much money will be needed for all this and where will it come from?
    • What the government and the RBI have done so far is clearly awfully inadequate. Other countries have done much more. India can be no exception.

    Where will the government will get resources?

    • Partly from market and partly form RBI: Broadly speaking, resources will come partly through market borrowings and partly from the RBI.
    • Manmohan Singh had decided in 1994 that in future the government of India would not monetise its deficit; in other words, would not borrow from the RBI but go to the money market and borrow from there.
    • Borrow from the RBI: In these unprecedented times, we may take leave from that very sound principle, which all governments have followed religiously since then, and borrow from the RBI.
    • What does it mean? This means printing of more currency notes with all its attendant problems including inflation.
    • Government of India will have to take the steps necessary to tackle the after-effects to the extent possible. It must ensure that the supply chains work smoothly.

    How will the money be spent?

    • The Important role of states: The states will have to play a very important role in this, as much of the work will have to be done by them.
    • Responsibility of finance commission: Since the finance commission continues to be in existence and has a clear idea of the state finances, it should be immediately tasked with the responsibility of discussing this matter with the state governments and making its recommendations available within a period of one month.
    • The task force under the finance minister could work out the needs of businesses and the government of India both in the short as well as the medium term.
    • Spending money properly and efficiently: It should not be wasted and each rupee spent creates its own multiplier effect.
    • Our system leaves much to be desired. And the moment it is known that funding is not a constraint, the system can go berserk.
    • We must guard against that and ensure that rules are in place, specially at the field level to ensure the proper use of resources.

    Role of banks, financial institutions and MGNREGA

    • The banks and other financial institutions will have to be provided with resources to help the private sector, especially the agricultural and MSME sectors.
    • In the rural areas, we must ensure that durable assets are created out of the funds made available.
    • The rules governing the MGNREGA scheme should be tweaked to the extent necessary in order to ensure that more material than labour is used wherever necessary.

    Conclusion

    India should and can come out of the present crisis with as little damage as possible if we tackle it together. We cannot control what happens in other countries, but we can surely learn from them and adopt their best practices. We must also play our role in defining the new global order because the world is more intertwined now than ever before.

  • Alternative Market Channel: Bypassing the Farmer Mandis

    The start of the coronavirus pandemic coincided with the peak vegetable harvesting season. As the markets were locked down, there was a threat to the crop in over 100 lakh hectares in the country.

    Alternative Market Channels

    • The alternative market channel works on the principles of decentralisation and direct-to-home delivery.
    • The idea is to create smaller, less congested markets in urban areas with the participation of farmers’ groups and Farmer Producer Companies (FPCs) so that farmers have direct access to consumers.
    • It is providing a valuable option against the lockdown when efforts to avoid crowding in the wholesale markets are likely to continue.

    Success in Maharashtra

    • Maharashtra is one of a handful of states where FPCs are robust.
    • The model, implemented by the state Agriculture Department and Maharashtra State Agri Marketing Board (MSAMB), requires urban and rural local bodies and other stakeholders to buy into the agricultural marketing chain.

    Innovations in food supply chain management are always a hot topic in mains answers. Talk about decentralization and give examples of a successful implementation and you are all set for a good answer.

    How does it work?

    • The government and MSAMB identify farmer groups and FPCs, and form clusters; local bodies choose the market sites and link the markets for direct delivery to cooperative housing societies.
    • The FPCs and farmers’ groups are allotted space for weekly markets in municipal wards or localities.
    • Some producers group park pick-up trucks loaded with fruits and vegetables at the gates of housing societies.

    Why need such a mechanism?

    • The traffic of both buyers and sellers in these decentralized markets can be controlled more effectively than in wholesale mandis — a key advantage when social distancing is critical.
    • Most FPCs have minimized contact, and have taken to selling pre-packed, customised packets of vegetables.
    • This will likely help create alternative market chains that could continue even after more normal times return.

    Conclusion: A boon for the farmer

    • The practices of rudimentary packing, sorting and branding are being inculcated in farmers, as they pack and send pre-ordered packets to housing societies.
    • With this, a larger numbers of vegetable growers in Maharashtra have got into direct selling to consumers thus bypassing middlemen.

    Also read:

    Is e-NAM portal capable of supporting farmers?

  • What is Market Intervention Scheme (MIS)? How does it compare with MSP

    Fruit and vegetable farmers are facing major losses due to obstacles in harvesting and marketing their perishable produce. The Centre has now directed all the States and UTs to implement the Market Intervention Scheme to ensure remunerative prices for perishable crops.

    Market Intervention Scheme

    • MIS is a price support mechanism implemented on the request of State Governments for the procurement of perishable and horticultural commodities in the event of a fall in market prices.
    • It is implemented when there is at least a 10% increase in production or a 10% decrease in the ruling rates over the previous normal year.
    • MIS works in a similar fashion to Minimum Support Price based procurement mechanism for food grains but is an ad-hoc mechanism.
    • Its objective is to protect the growers of these horticultural/agricultural commodities from making distress sale in the event of the bumper crop.
    • Under MIS, support can be provided in some years, for a limited but defined period, in specified critical markets and by purchasing specified quantities. The initiative has to emerge from the concerned state.

    UPSC Prelims can ask a question on the difference between MSP and MIP. All the agricultural and horticultural commodities for which Minimum Support Price (MSP) are not fixed and are generally perishable in nature are covered under Market Intervention Scheme (MIS).

    Commodities covered

    • The MIS has been implemented in case of commodities like apples, garlic, oranges, grapes, mushrooms, clove, black pepper, pineapple, ginger, red-chillies, coriander seed, chicory, onions, potatoes, cabbage, mustard seed, castor seed, copra, palm oil etc.

    Remuneration under MIS

    • MIS provides remunerative prices to the farmers in case of glut in production and fall in prices.
    • Proposal of MIS is approved on the specific request of State/UT Government, if they are ready to bear 50% loss (25% in case of North-Eastern States), if any, incurred on its implementation.
    • Further, the extent of total amount of loss shared is restricted to 25% of the total procurement value which includes cost of the commodity procured plus permitted overhead expenses.

    Implementation of MIS

    1) Market Intervention Price (MIP)

    • The Department of Agriculture & Cooperation is implementing the scheme.
    • Under the MIS, a pre-determined quantity at a fixed MIP is procured by NAFED as the Central agency.
    • There are other agencies designated by the state government for a fixed period or till the prices are stabilized above the MIP whichever is earlier.
    • The area of operation is restricted to the concerned state only.

    2) Funds transfer

    • Under MIS, funds are not allocated to the States.
    • Instead, central share of losses as per the guidelines of MIS is released to the State Governments/UTs, for which MIS has been approved, based on specific proposals received from them.

    The last 2 heads that you just read, Renumeration & Implementation, they have a lot of information on which you can be quizzed by UPSC Prelims. Make a note of the agency, %age share, state vs. center responsibility

    Back2Basics: Minimum Support Price

    • Minimum support price (MSP) is one of the instruments of Agricultural Price Policy (APP).
    • The basic intent of announcing MSP before the sowing season is to help farmers take a sowing decision keeping in mind that if they are not able to get a reasonable price by selling in the market, at least they will be able to get the MSP.
    • In that sense, MSP is an assured or guaranteed price (insured price).

    For additional reading on MSP, navigate to:

    Price Support Mechanism under MSP Operations

  • A time for extraordinary action

    Context

    The lockdown and other movement restrictions, backed by scientific and political consensus on their inevitability, have directly led to a dramatic slowdown in economic activity across the board. What is its impact on the Indian economy? This question calls for an urgent answer.

    The methodology used to estimate the impact

    • We provide an initial, quantitative response, using a methodology that is based on the technique of input-output (IO) models, first elaborated by the economist Wassily Leontief.
    • How the model works: Such models provide detailed sector-wise information of output and consumption in different sectors of the economy and their inter-linkages, along with the sum total of wages, profits, savings, and expenditures in each sector and by each section of final consumers (households, government, etc.).
    • Crucially, it pays attention to intermediate consumption, namely consumption by some sectors of the output of other sectors (as well as consumption within their own sector).
    • Advantage of the model: The key advantage of such a model is that it allows the calculation of the impact of any change in any sector in both direct and indirect terms, which has made this model somewhat ubiquitous in the computation of the economic impact of disasters.
    • This also renders it well-suited to estimating the economic consequences of COVID-19.
    • Regrettably, the last officially published IO table for India was for the year 2007-2008.
    • In our estimates, we use the IO tables for India published by the World Input-Output Database for the year 2014 that updates the IO tables for individual countries using time series of national income statistics.
    • To calculate the impact of the lockdown, there are four different scenarios of the number of workdays lost in different sectors.
    • How daily output loss is calculated? Assuming that the estimated annual output is distributed uniformly across the year, it is possible to calculate the daily output and therefore the daily output loss.
    • The direct and indirect impacts of the lockdown are then estimated using IO multipliers which are assumed to be constant.
    • We then calculate the percentage decline in the national gross domestic product (GDP) of 2019-2020 that this impact amounts to.

    What is the impact on various sectors?

    • Loss at 7% to 33% of GDP: Model (see table) shows that the loss of GDP ranges from ₹17 lakh crore (7% of GDP) in the most conservative scenario, where the average number of output days lost is only 13, to ₹73 lakh crore (33% of GDP) in the most impactful scenario, where the number of days of lost output averages 67.
    • In intermediate scenarios of 27 and 47 days of lost output, the GDP decline is ₹29 lakh crore (13% of GDP) and ₹51 lakh crore (23% of GDP), respectively.
    • OECD estimate: These estimates also accord well with other estimates, such as those of the OECD that suggest a 20% loss to GDP for India.
    • Impact of varying lockdown period: Even assuming that sectors will have varying lockdown periods, all sectors face serious losses due to their
    • If we take the scenario where a prolonged lockdown happens, averaging about 47 days across sectors, we find that the mining sector faces the largest drop of 42% in value-added despite that sector itself being shut down for, say, 35 days.
    • The electricity sector sees a 29% fall in value-added, even though it faces no shut down per se.
    • Losses are expected across all sectors in terms of both wage compensation and the availability of working capital.

    Incorporation of feedback effect in estimates

    • The linear character of our estimates, intrinsic to IO analysis, does not allow incorporation of feedback effects and assumes that output commences where it left off without further constraints.
    • An attempt has been made to correct for this by using a varying number of days of output loss across sectors, but this is quite possibly inadequate to capture the continuing economic impact.
    • We are faced today with a unique situation where both supply and demand have collapsed in several sectors.
    • Impact on agriculture: In some sectors such as agriculture, the impact may manifest in the delayed fashion, if the anti-COVID-19 measures, or the pandemic itself, affects agricultural operations in the next the kharif season, even if, as reports suggest, much of this year’s rabi has been successfully harvested.
    • The shortfall in export not accounted for: Given the database, we are using and the initial character of our analyses we have also not explicitly accounted for possible shortfalls in exports due to lack of demand elsewhere in the world, as well as the unavailability of intermediate imported goods that are crucial for the Indian economy.
    • Nor are we able to adequately separate the impact on the informal sector, that is partially aggregated with the formal sector in the database that we are using and partially unaccounted for due to lack of data.

    Need for the huge stimulus package

    • The most striking feature of even this simple calculation is the all-round pervasive impact on the economy of the anti-COVID-19 measures that we are currently undertaking and that are likely to continue in modified form for a short period.
    • Measures such as debt relief, postponement of revenue and tax collections, immediate relief in cash and kind to the poor, and revamping and scaling up public distribution are all undoubtedly necessary but far from sufficient.
    • Our numbers suggest that the resort to huge stimulus packages that developed countries have already started putting in place is by no means mistaken.

    Way forward

    • Package for all the sectors of the economy: We need to compensate and pump cash into the hands of not only wage workers in the formal and informal sectors, and also into the livelihood activities of the informal sector.
    • But businesses too need to be primed with handouts in the case of small and medium enterprises, and with a variety of concessions even in the case of larger businesses.
    • It is critical to preserve the productive capacities of the Indian economy across the board. The annual budget of the current year, already passed, clearly cannot cope with such a massive effort and needs to be revisited by suitable parliamentary measures.
    • Caring too much about fiscal deficit will not be helpful: Redistributing expenditure, seeking to keep the fiscal deficit “under control” as it were, through measures such as cutting back on government salaries, are unlikely to be helpful.
    • Apart from sending the wrong signal to private sector employers, who have so far been exhorted to maintain salaries and wages during the lockdown, it is quite likely to lead to further reduction in demand since the government is the biggest employer in the country.
    • Ensure the key role of the state: Finally, one must note that the current crisis is not a transformatory moment for the Indian economy, even if the scale of the impact and recovery process will undoubtedly push the economy in new directions.
    • But “greening” the economy or more radical transformative measures are not particularly relevant in its current state.
    • What is needed is ensuring the key role of the state to lift up an economy that is in danger of being brought to its knees, and to restore some semblance of its normal rhythm, by an unprecedented scale of state investment.

  • Financing the pandemic rescue package

    Context

    The priority for India is to ensure that it overcomes the COVID-19 pandemic and kick-starts GDP growth.

    Financing strategy for the 1.7 lakh crores package

    • Rather than fix the weaknesses in the macroeconomy: a high fiscal deficit of 7.49% and government indebtedness that was 69% of GDP in 2019, the government wants to overcome the pandemic.
    • When COVID-19 cases began to increase, the Government of India (GoI) swung into action by announcing a 21-day national lockdown and a ₹1.7-lakh crore (approximately $22.59 billion) rescue package.
    • Financing strategy: Available in the state disaster relief fund is ₹60,000 crore, comprising ₹30,000 crore of the outstanding balance and the Central government’s allocation of a similar amount for FY2021.
    • Hence, the GoI needs to raise an additional ₹1.1-lakh crore,e., 65% of the rescue package outlay.
    • Its financing strategy should be to raise long-term funds at cost-effective rates, with flexible repayment terms that allow it to take tactical advantage of market movements.
    • Following are some of the options that the government can explore to raise the required amount.

    1. GDP-linked bonds

    • The GoI may issue listed, Indian rupee-denominated, 25-year GDP-linked bonds that are callable from, say, the fifth year.
    • What GDP-linked means? The coupon (interest) on a GDP-linked bond is correlated to the GDP growth rate and is subject to a cap.
    • The issuer, the GoI, is liable to pay a lower coupon during years of slower growth and vice-versa.
    • The callable feature from the fifth year till maturity allows the GoI to effect partial repayments during high growth years and when it earns non-recurring revenues such as proceeds from disinvestment of public sector enterprises (PSEs).
    • The listing of bonds provides investors with an exit option.
    • Examples from the world: Costa Rica, Bulgaria and Bosnia-Herzegovina issued the first pure GDP-linked bonds in the 1990s.
    • Argentina and Greece issued warrant-like instruments similar to GDP-linked bonds in 2005 and 2012 respectively. India could learn from their experience.
    • Timely GDP data is a prerequisite: Publishing reliable and timely GDP data is a prerequisite for the successful issue of GDP-linked bonds, which the GoI may use to part-finance the COVID-19 rescue package and to diversify its borrowing sources.

    2. Streamlining PSEs

    • The 15 largest non-financial central PSEs (CPSEs) in the S&P BSE CPSE index contributed approximately 75% of the GoI’s ₹48,256.41 crore dividend income from PSEs in FY2020.
    • The Union Budget projected PSE dividends to increase by 25% to ₹65,746.96 crore in FY2021.
    • This milestone is unlikely to be achieved in the current environment.
    • The 15 CPSEs have accumulated sizeable non-core assets including financial investments, loans, cash and bank deposits in excess of their operating requirements, and real estate.
    • The return on these assets (excluding real estate) is around 200 basis points lower than the returns on their core businesses.
    • These CPSEs owe the government ₹25,904 crore as of end-March 2019.
    • These non-core assets must be monetised to repay statutory dues and upstream dividends to GoI.
    • Formation of HOLDCO: While loans and excess cash and bank deposits may be monetised within three months, streamlining investments and selling real estate is a time-consuming process.
    • It is imperative for the GoI to form a PSE and public sector bank holding company (‘Holdco’) along the lines of Singapore’s Temasek Holdings and Malaysia’s Khazanah Nasional Berhad.
    • The Holdco will enable PSEs to monetise their non-core assets at remunerative prices, maximise their enterprise value and focus on their core businesses.
    • The ₹30,168 crore loans that CPSEs have extended to employees, vendors and associates may be securitised or refinanced, with CPSEs guaranteeing loans extended to weak counterparties.
    • Excess liquidity with PSEs: It is essential that businesses maintain liquidity, especially during a downturn. However, the outstanding cash and bank deposits of the 15 CPSEs (₹64,253 crore) is in excess of their operating requirements.
    • CPSEs must determine the cash they require to meet, say, six months of operating expenses and use the excess cash to repay statutory dues and upstream dividends to the GoI.
    • Banks must extend to CPSEs committed lines of credit that the latter may draw down during exigencies.
    • Financial investments of PSEs be transferred to HOLDCO: The 15 CPSEs have accumulated ₹93,562 crore financial investments comprising listed and unlisted debt, equity and mutual fund units.
    • These exclude investments in associates and joint ventures.
    • The CPSEs ought to transfer these investments to Holdco, which can manage the portfolio and transfer the returns to the original investors.
    • Real estate holdings of PSEs: One important non-core asset, whose value is likely to exceed the combined value of other non-core assets, is the real estate holdings of PSEs.
    • In September 2018, the GoI identified properties of nine PSEs (Air India, Pawan Hans, Hindustan Fluorocarbons, Hindustan Newsprint, Bharat Pumps & Compressors, Scooters India, Bridge and Roof Co, Hindustan Prefab, and Projects & Development India) to be divested.
    • The GoI must mandate all PSEs and government departments to transfer their non-core properties to Holdco, which can opportunistically sell these properties and transfer the proceeds to the owners.

    Refrain from asking RBI to pay more dividend

    • The Reserve Bank of India (RBI) has allocated ₹1 lakh crore to carry out long-term repo operations in tranches and has reduced the repo rates by 75 basis points to 4.4% to help banks augment their liquidity in the wake of the pandemic.
    • Recognising the RBI’s liquidity requirements, the GoI must refrain from asking the RBI to pay more dividends that it can viably pay.
    • During the five years ending on June 30, 2019, the RBI paid the GoI 100% of its net disposable income, with its FY2019 dividends more than trebling to ₹1.76 lakh crore from ₹50,000 crore in FY2018.
    • The Bimal Jalan panel constituted in 2019 to review the RBI’s economic capital framework opined that the RBI may pay interim dividends only under exceptional circumstances and that unrealised gains in the valuation of RBI’s assets ought to be used as risk buffers against market risks and may not be paid as dividends.

    Conclusion

    The Bimal Jalan panel recommendation must be adhered to in letter and spirit. The GoI may finance the COVID-19 rescue package by issuing GDP-linked bonds, tapping PSEs’ excess liquidity and monetising non-core assets.