Daily Editorial Analysis for 15th June 2021

Why fiscal prudence in a pandemic year?

Gross Domestic Product (GDP)

• According to the Ministry of Statistics and Programme Implementation, the real gross domestic product (GDP) at constant (2011­12) prices in 2020­21 is set to contract by 7.3 per cent due to the Covid­19 pandemic.
• The possibility of double-digit recovery of GDP is most unlikely due to the ongoing second wave and the risk of a third wave.
• The contraction in GDP has immediate implications on revenue mobilization of both the Central and State governments. CMIE data shows that 27 crore jobs were lost during April and May 2021. Most of them belong to the informal and low-income groups and would need income support and other social security measures.
• However, due to the fall in economic activity, the Central and State governments have suffered massive revenue losses.
• The staggering positivity rates in the second wave may further strain their financial position. The continuous deceleration in output, income and revenue would create challenging situations for the governments.
• The Central and State governments follow a rule based fiscal policy regime that does not give much leeway, especially for the States.
• However, Finance Minister has relaxed the Fiscal Responsibility and Budget Management (FRBM) rules, allowing States to borrow up to five per cent of their GDP. Similarly, the Reserve Bank of India has made extra room for borrowings.
• The monthly data from the Comptroller and Auditor General (CAG) is available for 18 States till March 2021. For better comparison, these States are classified into high-income (12) and low-income (6).
• States with higher per capita GSDP than the national average (₹1,08,620) are considered high- The 12 high­income States in descending order are: Sikkim, Haryana, Gujarat, Karnataka, Uttarakhand, Tamil Nadu, Telangana, Maharashtra, Kerala, Mizoram, Punjab, and Andhra Pradesh. The six low­income States, with less than the national average per capita GSDP, in descending order are: Tripura, Rajasthan, Odisha, Chhattisgarh, Madhya Pradesh and Uttar Pradesh.

Revenue loss

• During 2020­21, most of the low-income States suffered revenue loss – Uttar Pradesh (­30.5 per cent), Rajasthan (­4.24), Madhya Pradesh (­2.18) and Chhattisgarh (­1) — except Tripura (17.2) and Odisha (5.50).
• Of the 12 high-income States, five witnessed a healthy growth in revenue receipts — Uttarakhand (23.2), Punjab (20.4), Sikkim (13.5), Kerala (9.3), and Andhra Pradesh (5.2).
• The remaining seven witnessed a contraction in revenues — Mizoram (­13.1), Gujarat (­11.7), Karnataka (­10.53), Maharashtra (­6.5), Tamil Nadu (­2.8), Haryana (­2.8) and Telangana (­2.6).
• Except Uttarakhand (­36.8), Haryana (­16), Mizoram (­9.3) and Punjab (­7.6), most of the high-income States saw an increase in capital receipts (mostly through borrowing) — Karnataka (89), Tamil Nadu (67), Telangana (52.5), Gujarat (48.9), Kerala (38), Maharashtra (24.6), Andhra Pradesh (18.3) and Sikkim (9.9).
• Besides, the low-income States of Uttar Pradesh (110.8), Madhya Pradesh (53.7) and Rajasthan (14.9) that saw a slump in their revenue receipts increased their capital receipts.
• Whereas low­income States like Tripura (­114.7) and Odisha (­60.3), apart from registering a substantial hike in their revenue receipts, chose not to borrow and remain content with a reduction in capital receipts.
• Although Chhattisgarh suffered a loss in revenue receipts (­1) it went for a reduction in capital receipts (­3). High income States like Andhra Pradesh, Kerala and Sikkim preferred to increase their borrowings along with an increase in revenue receipts to augment their capital expenditure.

Slashing expenditure

• Despite revenue contraction, States are supposed to keep the expenditure high to compensate for private investment and check any further deceleration in output.
• On the contrary, majority of the States chose to slash expenditure to remain fiscally prudent.
• Mizoram (­11.2), Haryana (­6.7), Odisha (­6.5), Chhattisgarh (­3.8) and Uttar Pradesh (­1.4) recorded a fall in total expenditure compared to the last year.
• For unfathomable reasons, these States, except Uttar Pradesh, did not wish to borrow even though they had substantial fiscal space.
• Despite a crippled and inadequate healthcare system, rich States like Haryana (­258.4), Maharashtra (­22.6), Mizoram (­17.9) and Telangana (­5.3) and poor ones like Uttar Pradesh (­14.2) and Odisha (­10.7) sharply slashed the capital expenditure. In times of a recession, cut in spending on social sectors is worrisome.
• The pandemic has hit the informal economy and the poor and middle­class populations
• However, States such as Chhattisgarh (­57), Andhra Pradesh (­30), Rajasthan (­22), Uttar Pradesh (­20.5) and Haryana (­6.8) have reduced the percentage of year­on­year subsidy payments. The situation is worse in Karnataka, Sikkim and Mizoram, where the subsidies were minuscule.
• In these challenging times, a low-income State like Odisha and a high­income one like Uttarakhand preferred to maintain a huge revenue surplus of ₹11,350 and ₹14 crore, respectively, in 2020­21.
• In addition, Tripura, Odisha, Uttarakhand, Chhattisgarh, Mizoram and Punjab opted to reduce them fiscal deficit by 115, 63, 37, 13.5, 9.7 and 4.5 per cent, respectively, in 2020­21.
• Contrastingly, Uttar Pradesh (119), Karnataka (88.7), Tamil Nadu (74), Rajasthan (62.2), Madhya Pradesh (53.7), Telangana (52.6), Gujarat (49.7), Kerala (38.5), Maharashtra (25), Andhra Pradesh (24.8) and Sikkim (9.9) recorded a staggering year­on­year increase in fiscal deficit percentages.

Conclusion

• With the possibility of a second blow to the economy, the market may not invest enough to keep the economy afloat. In such a situation, State governments shouldn’t stick to fiscal discipline.
• Instead, the priority should be to increase public spending to revive the economy, generate employment, and provide all possible safety nets.

GS PAPER – III                   

RBI sharpens tools to fight Covid 2.0

Why in News

• Clearly prioritizing revival of the economy, the RBI retained the benchmark rates notwithstanding the upside risks to inflation. The stance of the monetary policy too remains accommodative so long as it is necessary to revive the economy.
• Looking to the distress from Covid 2.0, the RBI downgraded its GDP outlook to 9.5 per cent for 2021­22 down from its earlier estimate of 10.5 per cent. But it expects to maintain CPI inflation at 5.1 per cent well within the glide path though Wholesale Price Inflation (WPI) climbed to a 11­year high to 10.49 per cent in April.
• Normal monsoon and better farm sector prospects aided by the pass-through impact of frontloaded policy measures can potentially douse the inflation headwinds though rising commodity prices continue to cause concern.
• Taking forward the sector specific liquidity support announced on May 5, 2021, to fight Covid 2.0, the RBI has further earmarked ₹15,000 crore to the battered contact intensive sectors.
• This special liquidity window will be available to bank till March 31, 2022, with tenors of up to three years at the repo rate.
• Under the scheme, banks can provide fresh lending support to hotels and restaurants; and tourism-travel agents and other related sector entities.
• By way of an incentive, banks will be permitted to park their surplus liquidity up to the size of the loan book created under this scheme with the RBI under the reverse repo window at a rate which is 25 basis points (bps) lower than the repo rate or at 40 bps higher than the reverse repo rate.
• Similar incentive was offered for creation of ‘Covid loan book’ and an amount equal to it can be parked with RBI to earn better.
• As part of liquidity support to all-India financial institutions, ₹15,000 crore was granted to Small Industries Development Bank of India (SIDBI) on April 7 to meet funding requirements for micro, small and medium enterprises (MSMEs) sector for fresh lending.
• In order to further support the sector, another ₹16,000 crore is now provided to SIDBI. This special fund is intended for on­lending/refinancing through novel models and structures to mitigate Covid stress.
• This facility will be available at the prevailing policy repo rate for a period of up to one year, which may be further extended depending on its usage.

Operational flexibility

• Adding to the forbearance to enable borrowers to overcome the ongoing crisis, the RBI expanded the scope of debt Resolution Framework 2.0, announced on May 5, that covered restructuring of stressed loans to MSMEs as well as non-MSME, small businesses, and loans to individuals for business purposes.
• The loan limit covered by the scheme was ₹25 crore. It is now increased to ₹50 crores to extend the benefit of restructuring to more borrowers.
• The other flexibility, permitting RRBs (regional rural banks) to buy back their certificate of deposits for better liquidity management, is an apt move.
• Making available services of National Automatic Clearing House operating under the National Payment Corporation of India (NPCI) from bank working days to all days effective from August 1, akin to RTGS/NEFT, is a progressive move. It will provide convenience to bulk payers and recipients.
• With bank credit growth staying truncated at 6 per cent during 2020­21, it is time for banks to be aggressive in using the non­conventional liquidity windows provided by the RBI to channel credit to the ailing sectors to hasten revival.
• Even the modified Emergency Credit Line Guarantee Scheme (ECLGS) 4.0 of the government provides scope to lend to aviation and health sectors where banks can further disburse loans up to ₹45,000 crore, the unutilized out of the limit of ₹3 trillion.
• Beginning with its March 27, 2020, narrative, the RBI has been providing liquidity for various sectors through TLTROs/other measures that now sum up to ₹15.47 trillion excluding the current liquidity support of ₹31,000 crore proposed on June 4, 2021.

The RBI should come out with a disclosure statement about its utilisation by the lenders with details of its impact on incremental rise in the flow of credit to the targeted sectors. Why fiscal prudence in a pandemic year?

Gross Domestic Product (GDP)

• According to the Ministry of Statistics and Programme Implementation, the real gross domestic product (GDP) at constant (2011­12) prices in 2020­21 is set to contract by 7.3 per cent due to the Covid­19 pandemic.
• The possibility of double-digit recovery of GDP is most unlikely due to the ongoing second wave and the risk of a third wave.
• The contraction in GDP has immediate implications on revenue mobilization of both the Central and State governments. CMIE data shows that 27 crore jobs were lost during April and May 2021. Most of them belong to the informal and low-income groups and would need income support and other social security measures.
• However, due to the fall in economic activity, the Central and State governments have suffered massive revenue losses.
• The staggering positivity rates in the second wave may further strain their financial position. The continuous deceleration in output, income and revenue would create challenging situations for the governments.
• The Central and State governments follow a rule based fiscal policy regime that does not give much leeway, especially for the States.
• However, Finance Minister, has relaxed the Fiscal Responsibility and Budget Management (FRBM) rules, allowing States to borrow up to five per cent of their GDP. Similarly, the Reserve Bank of India has made extra room for borrowings.
• The monthly data from the Comptroller and Auditor General (CAG) is available for 18 States till March 2021. For better comparison, these States are classified into high-income (12) and low-income (6).
• States with higher per capita GSDP than the national average (₹1,08,620) are considered high- The 12 high­income States in descending order are: Sikkim, Haryana, Gujarat, Karnataka, Uttarakhand, Tamil Nadu, Telangana, Maharashtra, Kerala, Mizoram, Punjab, and Andhra Pradesh. The six low­income States, with less than the national average per capita GSDP, in descending order are: Tripura, Rajasthan, Odisha, Chhattisgarh, Madhya Pradesh and Uttar Pradesh.

Revenue loss

• During 2020­21, most of the low­income States suffered revenue loss – Uttar Pradesh (­30.5 per cent), Rajasthan (­4.24), Madhya Pradesh (­2.18) and Chhattisgarh (­1) — except Tripura (17.2) and Odisha (5.50).
• Of the 12 high­income States, five witnessed a healthy growth in revenue receipts — Uttarakhand (23.2), Punjab (20.4), Sikkim (13.5), Kerala (9.3), and Andhra Pradesh (5.2).
• The remaining seven witnessed a contraction in revenues — Mizoram (­13.1), Gujarat (­11.7), Karnataka (­10.53), Maharashtra (­6.5), Tamil Nadu (­2.8), Haryana (­2.8) and Telangana (­2.6).
• Except Uttarakhand (­36.8), Haryana (­16), Mizoram (­9.3) and Punjab (­7.6), most of the high­income States saw an increase in capital receipts (mostly through borrowing) — Karnataka (89), Tamil Nadu (67), Telangana (52.5), Gujarat (48.9), Kerala (38), Maharashtra (24.6), Andhra Pradesh (18.3) and Sikkim (9.9).
• Besides, the low­income States of Uttar Pradesh (110.8), Madhya Pradesh (53.7) and Rajasthan (14.9) that saw a slump in their revenue receipts increased their capital receipts.
• Whereas low­income States like Tripura (­114.7) and Odisha (­60.3), apart from registering a substantial hike in their revenue receipts, chose not to borrow and remain content with a reduction in capital receipts.
• Although Chhattisgarh suffered a loss in revenue receipts (­1) it went for a reduction in capital receipts (­3). High income States like Andhra Pradesh, Kerala and Sikkim preferred to increase their borrowings along with an increase in revenue receipts to augment their capital expenditure.

Slashing expenditure

• Despite revenue contraction, States are supposed to keep the expenditure high to compensate for private investment and check any further deceleration in output.
• On the contrary, majority of the States chose to slash expenditure to remain fiscally prudent.
• Mizoram (­11.2), Haryana (­6.7), Odisha (­6.5), Chhattisgarh (­3.8) and Uttar Pradesh (­1.4) recorded a fall in total expenditure compared to the last year.
• For unfathomable reasons, these States, except Uttar Pradesh, did not wish to borrow even though they had substantial fiscal space.
• Despite a crippled and inadequate healthcare system, rich States like Haryana (­258.4), Maharashtra (­22.6), Mizoram (­17.9) and Telangana (­5.3) and poor ones like Uttar Pradesh (­14.2) and Odisha (­10.7) sharply slashed the capital expenditure. In times of a recession, cut in spending on social sectors is worrisome.
• The pandemic has hit the informal economy and the poor and middle­class populations
• However, States such as Chhattisgarh (­57), Andhra Pradesh (­30), Rajasthan (­22), Uttar Pradesh (­20.5) and Haryana (­6.8) have reduced the percentage of year­on­year subsidy payments. The situation is worse in Karnataka, Sikkim and Mizoram, where the subsidies were minuscule.
• In these challenging times, a low-income State like Odisha and a high­income one like Uttarakhand preferred to maintain a huge revenue surplus of ₹11,350 and ₹14 crore, respectively, in 2020­21.
• In addition, Tripura, Odisha, Uttarakhand, Chhattisgarh, Mizoram and Punjab opted to reduce them fiscal deficit by 115, 63, 37, 13.5, 9.7 and 4.5 per cent, respectively, in 2020­21.
• Contrastingly, Uttar Pradesh (119), Karnataka (88.7), Tamil Nadu (74), Rajasthan (62.2), Madhya Pradesh (53.7), Telangana (52.6), Gujarat (49.7), Kerala (38.5), Maharashtra (25), Andhra Pradesh (24.8) and Sikkim (9.9) recorded a staggering year­on­year increase in fiscal deficit percentages.

Conclusion

• With the possibility of a second blow to the economy, the market may not invest enough to keep the economy afloat. In such a situation, State governments shouldn’t stick to fiscal discipline.
• Instead, the priority should be to increase public spending to revive the economy, generate employment, and provide all possible safety nets.

GS PAPER – III                   

RBI sharpens tools to fight Covid 2.0

Why in News

• Clearly prioritizing revival of the economy, the RBI retained the benchmark rates notwithstanding the upside risks to inflation. The stance of the monetary policy too remains accommodative so long as it is necessary to revive the economy.
• Looking to the distress from Covid 2.0, the RBI downgraded its GDP outlook to 9.5 per cent for 2021­22 down from its earlier estimate of 10.5 per cent. But it expects to maintain CPI inflation at 5.1 per cent well within the glide path though Wholesale Price Inflation (WPI) climbed to a 11­year high to 10.49 per cent in April.
• Normal monsoon and better farm sector prospects aided by the pass-through impact of frontloaded policy measures can potentially douse the inflation headwinds though rising commodity prices continue to cause concern.
• Taking forward the sector specific liquidity support announced on May 5, 2021, to fight Covid 2.0, the RBI has further earmarked ₹15,000 crore to the battered contact intensive sectors.
• This special liquidity window will be available to bank till March 31, 2022, with tenors of up to three years at the repo rate.
• Under the scheme, banks can provide fresh lending support to hotels and restaurants; and tourism-travel agents and other related sector entities.
• By way of an incentive, banks will be permitted to park their surplus liquidity up to the size of the loan book created under this scheme with the RBI under the reverse repo window at a rate which is 25 basis points (bps) lower than the repo rate or at 40 bps higher than the reverse repo rate.
• Similar incentive was offered for creation of ‘Covid loan book’ and an amount equal to it can be parked with RBI to earn better.
• As part of liquidity support to all-India financial institutions, ₹15,000 crore was granted to Small Industries Development Bank of India (SIDBI) on April 7 to meet funding requirements for micro, small and medium enterprises (MSMEs) sector for fresh lending.
• In order to further support the sector, another ₹16,000 crore is now provided to SIDBI. This special fund is intended for on­lending/refinancing through novel models and structures to mitigate Covid stress.
• This facility will be available at the prevailing policy repo rate for a period of up to one year, which may be further extended depending on its usage.

Operational flexibility

• Adding to the forbearance to enable borrowers to overcome the ongoing crisis, the RBI expanded the scope of debt Resolution Framework 2.0, announced on May 5, that covered restructuring of stressed loans to MSMEs as well as non-MSME, small businesses, and loans to individuals for business purposes.
• The loan limit covered by the scheme was ₹25 crore. It is now increased to ₹50 crores to extend the benefit of restructuring to more borrowers.
• The other flexibility, permitting RRBs (regional rural banks) to buy back their certificate of deposits for better liquidity management, is an apt move.
• Making available services of National Automatic Clearing House operating under the National Payment Corporation of India (NPCI) from bank working days to all days effective from August 1, akin to RTGS/NEFT, is a progressive move. It will provide convenience to bulk payers and recipients.
• With bank credit growth staying truncated at 6 per cent during 2020­21, it is time for banks to be aggressive in using the non­conventional liquidity windows provided by the RBI to channel credit to the ailing sectors to hasten revival.
• Even the modified Emergency Credit Line Guarantee Scheme (ECLGS) 4.0 of the government provides scope to lend to aviation and health sectors where banks can further disburse loans up to ₹45,000 crore, the unutilized out of the limit of ₹3 trillion.
• Beginning with its March 27, 2020, narrative, the RBI has been providing liquidity for various sectors through TLTROs/other measures that now sum up to ₹15.47 trillion excluding the current liquidity support of ₹31,000 crore proposed on June 4, 2021.
• The RBI should come out with a disclosure statement about its utilisation by the lenders with details of its impact on incremental rise in the flow of credit to the targeted sectors.
• The RBI may have to identify other tools if liquidity and credit flow continue to remain in silos.
• The fight of RBI against Covid 2.0 has to be joined by lenders and other stakeholders to make it work.
• The RBI may have to identify other tools if liquidity and credit flow continue to remain in silos.
• The fight of RBI against Covid 2.0 has to be joined by lenders and other stakeholders to make it work.