The PM has announced the Atma-nirbhar Bharat Abhiyan (or Self-reliant India Mission) and said that in the days to come the government would unveil the details of an economic package — worth Rs 20 lakh crore or 10% of India’s GDP in 2019-20 — aimed towards achieving this mission.
Try a question:
‘Doubling Farmer’s Income’ and ‘USD 5 trillion economy’ seems more like slogans today in wake of COVID pandemic. Comment on the statement with keeping in view the Atmanirbhar Bharat Abhiyan of the government.
Atmanirbhar Bharat: With a special package
- PM has announced a special economic package and gave a clarion call for Self-reliant India.
- The package will provide a much-needed boost towards achieving self-reliance.
- This package, taken together with earlier announcements by the government during COVID crisis and decisions taken by RBI, is to the tune of Rs 20 lakh crore, which is equivalent to almost 10% of India’s GDP.
- The package will also focus on land, labour, liquidity and laws. It will cater to various sections including cottage industry, MSMEs, labourers, middle class, and industries, among others.
Five pillars of a self-reliant India
PM iterated that a self-reliant India will stand on five pillars viz.
1) Economy, which brings in quantum jump and not incremental change
2) Infrastructure, which should become the identity of India
3) System, based on 21st-century technology-driven arrangements
4) Vibrant Demography, which is our source of energy for a self-reliant India and
5) Demand, whereby the strength of our demand and supply chain should be utilized to full capacity
Is this a new package?
- The PM did not give the details, but he specified that this calculation of Rs 20 lakh crore includes what the government has already announced and the steps taken by the RBI.
- This means the total amount of additional money — that is over and above what the government would have spent even in the absence of a Covid crisis — will not be Rs 20 lakh crore.
- It would be substantially less.
Why?
- That’s because the PM has included the actions of RBI, India’s central bank, as part of the government’s “fiscal” package, even though only the government controls the fiscal policy and not the RBI (which controls the ‘monetary’ policy).
- Government expenditure and RBI’s actions are neither the same nor can they be added in this manner.
What did the RBI provide earlier?
- A rough estimate suggests that the RBI’s decisions have provided additional liquidity of Rs 5-6 lakh crore since the start of the Covid-19 crisis.
- Add this to the Rs 1.7 lakh crore of the first fiscal relief package announced by the Centre on March 26. Together, the two already account for 40 per cent of the Rs 20-lakh crore package.
- That leaves an effective amount of Rs 12 lakh crore.
- However, if the government is including RBI’s liquidity decisions in the calculation, then the actual fresh spending by the government could be considerably lower than Rs 12 lakh crore.
- That’s because RBI has been coming out with long term bond-buying operations (long term repo operation or LTRO, to infuse liquidity into the banking system) worth Rs 1 lakh crore at a time.
- If for argument’s sake, RBI comes out with another LTRO of Rs 1 lakh crore, then the overall fiscal help falls by the same amount.
Why shouldn’t RBI’s package be included in the overall package?
- That is because direct expenditure by a government — either by way of wage subsidy or direct benefit transfer or any, immediately and necessarily stimulates the economy.
- In other words, that money necessarily reaches the people — either as someone’s salary or someone’s purchase.
- But credit easing by the RBI — that is, making more money available to the banks so that they can lend to the broader economy — is not like government expenditure.
- That’s because, especially in times of crisis, banks may take that money from RBI and elsewhere and, instead of lending it, park it back with the RBI.
Back2Basics: Long Term Repo Operations (LTRO)
- The LTRO is a tool under which the RBI provides 1-3 year money to banks at the prevailing repo rate, accepting government securities with matching or higher tenure as the collateral.
- Funds through LTRO are provided at the repo rate.
- But usually, loans with higher maturity period (here like 1 year and 3 years) will have a higher interest rate compared to short term (repo) loans.
- According to the RBI, the LTRO scheme will be in addition to the existing Liquidity Adjustment Facility (LAF) and the Marginal Standing Facility (MSF) operations.
- The LAF and MSF are the two sets of liquidity operations by the RBI with the LAF having a number of tools like repo, reverse repo, term repo etc.
What are Repo and Reverse Repo rates?
- The repo rate is the rate at which the RBI lends money to the banking system (or banks) for short durations.
- The reverse repo rate is the rate at which banks can park their money with the RBI.
- With both kinds of the repo, which is short for repurchase agreement, transactions happen via bonds — one party sells bonds to the other with the promise to buy them back (or repurchase them) at a later specified date.
- In a growing economy, commercial banks need funds to lend to businesses.
- One source of funds for such lending is the money they receive from common people who maintain savings deposits with the banks. Repo is another option.
