ETMarkets.comWe did see the RBI saying that they will use all the arsenal in their kitty and rightly so. We are seeing liquidity measures to the tune of Rs 3.7 lakh crore along with rate action by the RBI’s one percentage point cut in CRR as well, and this is coming in after the welfare package of Rs 1.7 lakh crore that the Indian government unveiled for the BPL families as well. How far will this go in ensuring that India’s growth does not fall further? We have seen how Moody’s has said that India’s growth in 2020 could fall to a 2.5% level.
Both were good first steps. The government did actually do what we expected them to do which is to start off by providing income support. We think a lot more needs to be done in terms of providing income support. It is not just income support to households, it has to be income support to SMEs and corporate because you do not want this lockdown to impact the economy and on earnings. What you do not want is also to create a balance sheet problem where balance sheets of households and firms get destroyed because if that happens, then the recovery is going to take much longer.
On the LTRO and on providing credit support to corporate bonds and moratorium, we had more or less thought that those were the right things to do. But there needs to be much more that has to be done and the reason I am saying that is because if the MPC is unable to tell us what they think the growth and inflation will be for the next few quarters, then the degree of uncertainty must be really high. And in that kind of degree of uncertainty, you require policies to respond to it.
And I do not think that policies both on the fiscal side or monetary side are adequately reflecting that degree of uncertainty. The policy has to be commensurate in addressing that degree of uncertainty and that is not the case so far.
Desperate times call for desperate measures. You saw the first of many economic packages that Finance Minister Nirmala Sitharaman is likely to unveil. And then there was some ammunition by the RBI Governor Shaktikanta Das. Like you pointed out there is so much uncertainty. You got a black swan with coronavirus. Look at the number of cases in the United States. Look at our own density of population. Having said that, like you kind of alluded to it, we need out of the box thinking, we need to go outside of the picture, we need to think of something mega, we need to think of something big. Is this the time to actually tap into our treasury, come out with many more out of the box measures?
In another public interaction, I said it is time to do the unimaginable. I think we are still thinking out of the box and out of the box thinking is not going to be sufficient because this shock is not an out of the box shock. This is an unimaginable, unprecedented shock. And some of the unimaginable things are already being done. Who would have imagined that the Fed will actually say that they will directly lend to corporates? These things are already being done and India will need to do that. One of the things that India needs to do is to ensure that the risk-free yield curve, the government bond yield curve is normalized. Right now, it is behaving in a completely unnormalized fashion. Given the steepness the curve is showing, one needs to normalize that first before we even think about what can happen to credit spreads and other things. The key is to invoke the emergency clauses that are in the FRBM and essentially say that from now onwards to a period of time, say three-six months, all auctions of government bonds are suspended and instead the government will be financed directly by the RBI.
This is something that I never imagined I would say in my life that an emerging market central bank goes back to funding the government directly from its balance sheet. But, unfortunately, these are unprecedented times and this is one of the things that they need to do to assure the risk-free market that they are not going to be brought under this period pressure and periodic spikes. If you do not get the risk free yield curve normalized, the other lending rates cannot be normalized. It is essential that the government invokes the escape clause or the natural disaster clause in the FRBM and says we are not going to do any more public auctions of government bonds, instead the RBI is going to directly fund us. It is clean. Everybody understands that. There is no ambiguity in it. It will help a great deal to normalize the risk-free curve. If we do that, then all other lending curves get normalized because right now these curves are completely abnormal, moving in completely abnormal fashion; the RBI is cutting rates and the yield curve is steepening.
In fact, one of the suggestions that are already being mulled upon as we speak between the Indian government as well as RBI is whether the RBI can directly fund India’s fiscal deficit, something that the global central banks are also doing. Having said that we are also given to understand that the Indian government could be mulling almost 5% of the GDP kind of a stimulus; will that be enough? We are yet to see any kind of relief coming in for India Inc as well, what would be your suggestions for the finance minister as we go into that?
As RBI could not forecast what was going to be the growth, inflation dynamics going forward, I do not think even the government can forecast that. If we do not know what will be the size of the impact on growth, there is no number that we can provide saying this is enough or that is not enough. There is likely to be overshooting or undershooting of support. In this world, I would rather err on the side of overshooting or over supporting the economy than under supporting it. This brings us to the question of how does one design policies at a time when there is this kind of unprecedented uncertainty. And I think it involves policies that are designed to automatically respond to the size of the shock. So if the size of the shock is 2% of GDP, the policy measure is going to respond by providing support adequate for 2% of GDP. If it is 5%, then the response will be 5%. The design of the policy becomes important and the design of the policy has to be demand-driven. If the economy demands that or the participants in the economy demand that, whether it is corporates or houses, you provide it. And unfortunately, we have only one program and it is a very small program that is actually demand driven which the MNREGA of the last 15 years. That is the only demand-driven program we have, none of the other programs are demand-driven. This idea that I am going to give Rs 500 to women in the Jan Dhan account etc, these all assume that we know what the size of the shock is. Is Rs 500 enough? We do not know. My sense is they need to start delivering programs that are driven by demand and not driven by what they can afford to pay or not pay. The conversation right now seems to be on the size rather than the design of the program. We really need to bring back that conversation to what is the right design of programs in times of uncertainty, rather than say 5% is enough or 2% is enough.
How do you create demand when everyone is locked down, when services are collapsed? Where the markets are under pressure today, what can be the learning that we can take from the US which seems to have been in overdrive in trying to stimulate the economy?
Again, we are looking for local solutions to a global problem. All of us are sitting in our own country silos and saying what can be done within the ambit of that country’s capacity to support the economy. This is a global problem and needs a global solution. The one factor that has not really played a major role in all of this is the G-20. The G-20 really needs to step in and say what are the lending or the backstopping facilities available in the world and how the world can use them.
Now, let us take the IMF; the IMF at this point in time has trillions of dollars of resources that they can deploy and that is sufficient to backstop almost every emerging market economy. That is going to calm down a lot of nerves in the global market if the IMF says that look we can backstop up to $1 trillion. It has the resources; the problem is the IMF cannot deploy those resources because if it actually deploys $1 trillion to emerging markets, then emerging markets debt is going to be completely unsustainable and the IMF cannot possibly go ahead and give money to a country knowing full well that it will be unsustainable.
What needs to be done is to provide greater flexibility to the IMF programs now. By flexibility I mean they need to have much longer repayment periods. If it requires grace periods for repayments. so be it. This will ensure that the debt of these countries, the receiving countries, is made sustainable. And if that happens and if they can increase the SDR allocation, let us say double the SDR allocation, then we will finally have a global solution to a global problem. And if the G-20 can get the IMF rules changed and provide that kind of a backstop, it will go a long way of trying to resolve this issue.
We are trying to find local solutions to a global problem and we will keep on running after what the US is doing or what some other country is doing when in reality the only way to solve it is through a global coordinated solution.
You are talking about solutions but in absence of a scientific answer or a vaccine to coronavirus will all these packages and stimulus really help?
That is part of the global solution. We need laboratories across the world to work seamlessly, with the seamless transmission of knowledge, the information in order to find a vaccine rather than individual pharmaceutical companies, individual research labs trying to find a solution to the vaccine.
Both were good first steps. The government did actually do what we expected them to do which is to start off by providing income support. We think a lot more needs to be done in terms of providing income support. It is not just income support to households, it has to be income support to SMEs and corporate because you do not want this lockdown to impact the economy and on earnings. What you do not want is also to create a balance sheet problem where balance sheets of households and firms get destroyed because if that happens, then the recovery is going to take much longer.
Similarly, the RBI took the measures that we had expected them to take. But it surprised us on two fronts. One, the rate cut was little higher than what we had thought of and they did something which India should have done a long-long time back which was to remove the arbitrate between NDF and onshore FX rates by allowing Indian banks to participate in the NDF market. This is a distortion that has been a problem in India for a long time and unfortunately, it took up the virus to get that distortion cleared. That is a structural change and I am glad that the RBI did it.
On the LTRO and on providing credit support to corporate bonds and moratorium, we had more or less thought that those were the right things to do. But there needs to be much more that has to be done and the reason I am saying that is because if the MPC is unable to tell us what they think the growth and inflation will be for the next few quarters, then the degree of uncertainty must be really high. And in that kind of degree of uncertainty, you require policies to respond to it.
And I do not think that policies both on the fiscal side or monetary side are adequately reflecting that degree of uncertainty. The policy has to be commensurate in addressing that degree of uncertainty and that is not the case so far.
Desperate times call for desperate measures. You saw the first of many economic packages that Finance Minister Nirmala Sitharaman is likely to unveil. And then there was some ammunition by the RBI Governor Shaktikanta Das. Like you pointed out there is so much uncertainty. You got a black swan with coronavirus. Look at the number of cases in the United States. Look at our own density of population. Having said that, like you kind of alluded to it, we need out of the box thinking, we need to go outside of the picture, we need to think of something mega, we need to think of something big. Is this the time to actually tap into our treasury, come out with many more out of the box measures?
In another public interaction, I said it is time to do the unimaginable. I think we are still thinking out of the box and out of the box thinking is not going to be sufficient because this shock is not an out of the box shock. This is an unimaginable, unprecedented shock. And some of the unimaginable things are already being done. Who would have imagined that the Fed will actually say that they will directly lend to corporates? These things are already being done and India will need to do that. One of the things that India needs to do is to ensure that the risk-free yield curve, the government bond yield curve is normalized. Right now, it is behaving in a completely unnormalized fashion. Given the steepness the curve is showing, one needs to normalize that first before we even think about what can happen to credit spreads and other things. The key is to invoke the emergency clauses that are in the FRBM and essentially say that from now onwards to a period of time, say three-six months, all auctions of government bonds are suspended and instead the government will be financed directly by the RBI.
This is something that I never imagined I would say in my life that an emerging market central bank goes back to funding the government directly from its balance sheet. But, unfortunately, these are unprecedented times and this is one of the things that they need to do to assure the risk-free market that they are not going to be brought under this period pressure and periodic spikes. If you do not get the risk free yield curve normalized, the other lending rates cannot be normalized. It is essential that the government invokes the escape clause or the natural disaster clause in the FRBM and says we are not going to do any more public auctions of government bonds, instead the RBI is going to directly fund us. It is clean. Everybody understands that. There is no ambiguity in it. It will help a great deal to normalize the risk-free curve. If we do that, then all other lending curves get normalized because right now these curves are completely abnormal, moving in completely abnormal fashion; the RBI is cutting rates and the yield curve is steepening.
In fact, one of the suggestions that are already being mulled upon as we speak between the Indian government as well as RBI is whether the RBI can directly fund India’s fiscal deficit, something that the global central banks are also doing. Having said that we are also given to understand that the Indian government could be mulling almost 5% of the GDP kind of a stimulus; will that be enough? We are yet to see any kind of relief coming in for India Inc as well, what would be your suggestions for the finance minister as we go into that?
As RBI could not forecast what was going to be the growth, inflation dynamics going forward, I do not think even the government can forecast that. If we do not know what will be the size of the impact on growth, there is no number that we can provide saying this is enough or that is not enough. There is likely to be overshooting or undershooting of support. In this world, I would rather err on the side of overshooting or over supporting the economy than under supporting it. This brings us to the question of how does one design policies at a time when there is this kind of unprecedented uncertainty. And I think it involves policies that are designed to automatically respond to the size of the shock. So if the size of the shock is 2% of GDP, the policy measure is going to respond by providing support adequate for 2% of GDP. If it is 5%, then the response will be 5%. The design of the policy becomes important and the design of the policy has to be demand-driven. If the economy demands that or the participants in the economy demand that, whether it is corporates or houses, you provide it. And unfortunately, we have only one program and it is a very small program that is actually demand driven which the MNREGA of the last 15 years. That is the only demand-driven program we have, none of the other programs are demand-driven. This idea that I am going to give Rs 500 to women in the Jan Dhan account etc, these all assume that we know what the size of the shock is. Is Rs 500 enough? We do not know. My sense is they need to start delivering programs that are driven by demand and not driven by what they can afford to pay or not pay. The conversation right now seems to be on the size rather than the design of the program. We really need to bring back that conversation to what is the right design of programs in times of uncertainty, rather than say 5% is enough or 2% is enough.
How do you create demand when everyone is locked down, when services are collapsed? Where the markets are under pressure today, what can be the learning that we can take from the US which seems to have been in overdrive in trying to stimulate the economy?
Again, we are looking for local solutions to a global problem. All of us are sitting in our own country silos and saying what can be done within the ambit of that country’s capacity to support the economy. This is a global problem and needs a global solution. The one factor that has not really played a major role in all of this is the G-20. The G-20 really needs to step in and say what are the lending or the backstopping facilities available in the world and how the world can use them.
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Now, let us take the IMF; the IMF at this point in time has trillions of dollars of resources that they can deploy and that is sufficient to backstop almost every emerging market economy. That is going to calm down a lot of nerves in the global market if the IMF says that look we can backstop up to $1 trillion. It has the resources; the problem is the IMF cannot deploy those resources because if it actually deploys $1 trillion to emerging markets, then emerging markets debt is going to be completely unsustainable and the IMF cannot possibly go ahead and give money to a country knowing full well that it will be unsustainable.
What needs to be done is to provide greater flexibility to the IMF programs now. By flexibility I mean they need to have much longer repayment periods. If it requires grace periods for repayments. so be it. This will ensure that the debt of these countries, the receiving countries, is made sustainable. And if that happens and if they can increase the SDR allocation, let us say double the SDR allocation, then we will finally have a global solution to a global problem. And if the G-20 can get the IMF rules changed and provide that kind of a backstop, it will go a long way of trying to resolve this issue.
We are trying to find local solutions to a global problem and we will keep on running after what the US is doing or what some other country is doing when in reality the only way to solve it is through a global coordinated solution.
You are talking about solutions but in absence of a scientific answer or a vaccine to coronavirus will all these packages and stimulus really help?
That is part of the global solution. We need laboratories across the world to work seamlessly, with the seamless transmission of knowledge, the information in order to find a vaccine rather than individual pharmaceutical companies, individual research labs trying to find a solution to the vaccine.
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...moreDownload The Economic Times News App to get Daily Market Updates & Live Business News.
Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.
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