File image of MoS Finance Anurag Thakur, Finance Minister Nirmala Sitharaman and RBI Governor Shaktikanta Das | Photo: ANI
File image of MoS Finance Anurag Thakur, Finance Minister Nirmala Sitharaman and RBI Governor Shaktikanta Das | Photo: ANI
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The Reserve Bank of India cut interest rates, reduced cash reserve ratio (CRR) and announced a moratorium on payments of EMIs, among other measures, to provide credit and liquidity to the Indian economy under the Covid-19 lockdown.

These measures will provide relief to the middle classes with EMIs, but could have limited immediate effect for keeping the economy going, unless additional steps accompany these measures.

Credit measures alone will not be adequate in the present context without being accompanied by health safety plans: This is not a financial crisis, but fundamentally, a health emergency.

The RBI’s financial package will work if accompanied by a credible roll-out plan of how to get production as well as consumption back on track with the ultimate lifting of the lockdown, through putting adequate health safety norms in place. Through this, policy makers can ensure that businesses have the capacity to serve the economy during the lockdown period, and bounce back when the lockdown is over.

Also read: RBI has also liberalised forex trading by allowing banks to trade in offshore markets

The first, and most crucial, step

First, firms will make few new investments in the next three weeks. What businesses are in need of now is working capital, or loans to pay salaries of workers. Will banks give companies fresh working capital loans when production has stopped? If it is clear that the lockdown is only for three weeks, or even less, and not more, this may be possible. If not, and bankers do not know how long the lockdown may last, they may be reluctant to do so.

For greater clarity on this issue, the government needs to prepare a plan for how the lockdown will be lifted. One approach that has been proposed is to open up the economy sector by sector, like how Europe is planning to do.

The first set of sectors that may be allowed to start production at their manufacturing locations can be essential services like food and medical supplies. This may include bread, milk, edible oil, salt, wheat and rice mills, medicines, medical equipment, soaps, detergents and masks.

This approach sounds reasonable, but it must be understood that there are huge backward and forward linkages among sectors. There cannot be long time-lags in between opening up different parts of a supply chain.

For example, while bread and soaps are essentials, can they be sold without the wrapping? While edible oil is essential, bottles or bags are needed to sell them in. Medicines are essential, but cannot be produced and sold without chemical ingredients and foils. Inventories of required inputs may only last for a few days.

The roll-out plan for safe production, if sequenced like this, has to be rolled out very rapidly to protect supply chains, given the linkages between industries and firms.

It will be important to enforce safety norms for workers and provide for large-scale testing of workers at these factories, as well as supplies of required precautionary equipment such as masks. This will be a critical element, not just in bringing essential services back on their feet as soon as possible for humanitarian reasons, but also for keeping these firms as going concerns to whom banks can start lending working capital.

Before the Covid-19 crisis, the banking system in India was already in a difficult place and was not willing to lend. Now with greater uncertainty, the reluctance to lend will be greater. To encourage lenders to lend, interest rate cuts will not be sufficient. Policy-makers need to give a clear plan on how production will be sustained during the health crisis, and how provisions will be put in place to ensure safety of workers.

The next few steps

Second, small shopkeepers and producers in India often take personal credit to run their business. The banking system may need to provide uncollateralised and top-up emergency loans to such businesses during this the lockdown period to help them survive. This is similar to the step the government has taken in raising the loan amount under Self-Help Group loan schemes to Rs 20 lakh from Rs 10 lakh.

Third, millions of self-employed and small businesses depend on daily sales of their services to customers. From rickshaw-pullers, auto drivers and vegetable sellers to the millions of retail shops around the country, the consumer of these informal sector businesses is the supplier of funds. If consumers are locked down, these businesses will very soon fail.

Opening credit lines are inadequate for the self-employed, unless accompanied by an immediate plan of how customers will be allowed back in markets. The present curfew conditions and restrictions on movement will need to be immediately replaced by health safely rules and provisions, so that consumers may continue to purchase goods and services.

For this, India needs large-scale testing of citizens, like in South Korea and Singapore, who were able to test and isolate in ways that can cover the entire population, without locking the country down.

Finally, at present, with manufacturing halted under the all-India lockdown, the demand for new credit is low. So, in the immediate context, we need to consider the impact of the rate cut on existing borrowers.

What will help borrowers immediately is the moratorium on payments. Rate cuts invariably take time to get transmitted through the system, as savings rates can change but the returns on fixed deposits are made at old rates. This limits the immediate impact of the decisions taken Friday by the RBI.

The author is an economist and a professor at the National Institute of Public Finance and Policy. Views are personal.

Also read: 3 critical steps Modi govt must take to protect people and economy during Covid-19 lockdown


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  1. Ila’s point about more testing for the Virus is brilliant ,but would go with Shri Navya Kumar ‘s criticism of it in adopting Korean or Singapore models.

    The concept of General Average in the Shipping industry where in Sacrifices and expenditure on common good borne by a broader base of constituents on an agreed basis ,is appealing to me and worth exploring in this context.(Courtesy Vijay Galande)
    The entire exercise of lock down is to save lives and tide over a health crisis ,followed all over the world
    as per WHO ‘s guidelines, the economic and other strategies can only be made as the situation
    progresses and uncertainty is reduced.
    I really don’t understand why the interest rates on PF.PPF etc are cut when the rates are already low.

  2. Most suggestions in this article are well and good, except exhortation to follow Singapore and South Korea models of testing and containment. Please get real. The geographic and population sizes of these countries are miniscule in comparison to India. The levels of income, education, religious beliefs, and other determinants of public behaviours are also relatively more homogeneous in these countries than in India. We cannot be expected to emulate their approaches.

  3. There is concept of General Average in shipping, which just may apply to the current and future situations.
    There is a general average act when, and only when, any extraordinary sacrifice or expenditure is intentionally and reasonably made or incurred for the common safety for the purpose of preserving from peril the property involved in a common maritime adventure
    General average sacrifices and expenditures shall be borne by the different contributing interests on the basis of their share in the venture.

  4. Why constructive criticisms are not entertained in the NATIONAL SPORTIVE SPIRIT, WHICH LAGS IN NATIONAL PROGRESSIVE EVENTS IN REALITY?

  5. Why censure genuine complaints of National and Public Interest thereby not displaying citizens valued voice.?

  6. Why at all delays in explanation for ALL THE ANOMALIES AND COMPLAINT LODGES WITH RESERVE BANK OF INDIA through R.B.I. Chennai, not adhering to basic. The matter referred by DVAC Chennai to CBI, probably waiting for the nod of the Politicians in Power, to work on it, orelse their efforts go waste.goes

  7. Ila type good for nothing experts expect the government to arrange cleaning their toilet and serve morning tea to them as they can’t do any thing other than criticise, accuse and abuse..

  8. Why, this author and the publication don’t want to see any life after the present lockdown? Height of sadism!

  9. What is the conclusion? Is it that the government must ensure a proper lockdown and once lockdown is lifted, a swift and sector by sector unwrapping as per priority. Or is it the model adopted by Singapore n South Korea, to test and isolate. N if this is done as planned then only that the effects of RBI policy is felt.

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