Daily Editorial Analysis for 28th March 2020

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RBI announces much-needed measures

Paper: III

For Prelims: Open Market Operation.

For Mains: Indian Economy and issues relating to Planning, Mobilization of Resources, Growth, Development and Employment.

Context of News:

  • Governor of the Reserve Bank of India announced a slew of measures to supplement government efforts to address the economic upheaval caused by the corona virus. This measure was much anticipated and was on the cards considering the plight of various sections of society came to forefront since the beginning of the 3 week lockdown.

Open Market Operation:

  • An open market operation is an activity by a central bank to give liquidity in its currency to a bank or a group of banks. Open market operations refer to central bank purchases or sales of government securities in order to expand or contract money in the banking system and influence interest rates.
  • Open market operations or OMOs are conducted by the Reserve Bank of India (RBI) by way of sale and purchase of G-Secs (government securities) to and from the market with an objective to adjust the rupee liquidity conditions in the market on a durable basis.

About RBI Measures:

RBI measure follows a three-pronged approach:

  1. First, lowering the cost of capital.
  2. Second, ensuring ample liquidity and a narrowing of the credit spreads of corporate.
  3. Third, providing a moratorium on instalments for three months on all term loans of retail and corporate borrowers.
  • In light of the unprecedented economic disruption, and the uncertain growth and inflation, the benchmark repo rate has been cut by 75 basis points to 4.4 per cent, from 5.15 per cent earlier.
  • Reverse repo rate has also been cut, thereby disincentivising banks from parking their funds with the RBI, and prodding them to lend more to the broader economy. On the liquidity front, the measures are equally significant. The central bank has cut the cash reserve ratio by 100 basis points to 3 per cent. It has also announced targeted long-term repo operations of Rs 1 lakh crore. Liquidity availed through this route will have to be deployed in corporate bonds, commercial papers, and debentures.
  • RBI has also decided to three-month moratorium on instalments of all term loans is another welcome step as it will provide relief to all retail and corporate borrowers who are finding it difficult to service their loans. As is the deferment of interest on working capital, which will help businesses whose revenues will take a massive hit during the lockdown.

Moratorium of three months on the payment of instalments:

  • Amid the lockdown caused by the COVID-19 outbreak, the Reserve Bank of India has permitted banks to allow a moratorium of three months on the payment of instalments for all term loans outstanding as on March 1, 2020.
  • What is moratorium?
  • A moratorium is not a loan waiver and does not offer any discount on interest payout. But it provides stressed customers extra time to repay without their accounts being labelled non-performing assets (NPA) or their credit score being affected.
  • Who can avail of these benefits?
  • Individuals and companies who have availed term loans; such as home loans, car loans, corporate loans can benefit from this move. Therefore, any temporary disruption in their income or cash flows caused by the lockdown will not affect their repayment schedule for the next three months, at least.
  • Moratorium facility is now available on terms loans extended by all commercial banks including regional rural banks, small finance banks and local area banks, co-operative banks, all-India Financial Institutions.
  • Even term loans extended by Non Banking Finance Companies, including housing finance companies and micro finance institutions, will benefit from the move.

Way Forward:

  • These were much needed measures and will help ease the financial burden, prevent credit market dislocation and keep credit channels working, and protect against defaults.
  • Repo rate cut will bring liquidity to the corporate bond market, and will lead to a fall in yields which have risen in the past few weeks, indicating market dislocation. But the amounts involved may not be enough, and will probably have to be expanded. Further, the challenge will be to ensure liquidity transmission to the larger economy, not just to investment grade companies.
  • These measures are an indication that RBI is ready to take tough decisions for economy. Efforts of the central bank will now have to be supplemented by more fiscal measures as the economic distress continues. The expansion of the scope and size of cash transfers, and more targeted interventions for stressed sectors, especially the unorganised/informal parts of the economy, should be considered.


Plight of Farmers amid Corona Virus

Paper: III

For Mains: Issues related to farming.

Context of News:

  • A black swan event like the corona virus could not have come at a worse time. India’s economy was already decelerating. With crop harvesting due in coming one month, plight of farmers looks graver. Understandably, India’s arsenal to respond economically stood depleted because of past policies, but the present relief package is wanting in greater depth.

Existing challenges for farming amid Corona Virus:

  • Distress Supply chain Mechanism:
  • Wheat harvesting has started in many parts. As wheat is procured under the Centre’s MSP programme, the onus lies with the government to assuage the unease among the states and the farmers that harvest will begin on time, procurement will happen, stocks will be lifted and payments received as in the past. In case the process is delayed, the government must assure farmers it will, if required, compensate them and extend the wheat procurement season.
  • Anxiety for cereals and perishable items:
  • Closure of markets has created anxiety amongst farmers as cereals, fruits and vegetables are ready for harvest across the country. The poultry industry, in particular, is severely hit. They need to be permitted to transport goods to functioning mandis.
  • The lockdown has hindered the supply chain. Allowing the movement of tractors and labour between villages will ensure that harvesting isn’t impacted and supply chains can resume.

Major Challenges for Farming in India:

  • Non-availability of institutionalised credit facilities and high rates of interests: 
  • It is highly cumbersome for a farmer to get institutionalised loan because of the elaborate paperwork requirements and guarantees required to be furnished.
  • Since, the small/ marginal farmers are unable to obtain institutionalised loans, they resort to taking loan from the unorganised sector through moneylenders to meet their domestic and agro related express requirements.
  • Invariably, the farmers are unable to pay up such high interest rate and are often seen harassed by the goons of the moneylender. In such extreme cases the farmer is left with no other option but ‘cancel his captivity’.
  • Inadequacies in implementation of safety nets:
  • Successive governments have been incapable of effectively implementing social welfare schemes appropriately.
  • Government schemes to safeguard the bare necessities of the underprivileged such as running of fair price shops (FPS), various forms of food for work schemes and correct regulation of public distribution system has been grossly inadequate in the country.
  • Delayed and ridiculously meagre compensation for the crops damage caused due to natural calamities is never enough for the farmers to pay their debts and also have adequate capital for sowing of the next crop.
  • Minimum Support Price (MSP) does not support the increased inflation: 
  • The farmers, who sell their farm produce to the private buyers (middle men) designated by the Food Corporation of India (FCI) are routinely duped, harassed and paid inadequate compensation.
  • Many times the private buyers hold the farmers to ransom by threatening them that they will not pick up their perishable items, which are “supposedly” not meeting the quality tests being conducted at times by corrupt officials of FCI.
  • Disproportionate increase in the cost of agriculture inputs:
  • The relative increase in the cost of agriculture inputs like seeds, fertilizers, pesticides, diesel, etc is not commensurate with the annual increase of minimum support price announced by the government.
  • The reducing scale of crop productivity and diminishing land holdings, coupled with high input costs has progressively declined the profit margins of the farmer. Consequently, their basic sustenance has become a major challenge.
  • Unpredictable weather conditions:
  • The weather conditions have become extremely erratic and unpredictable owing to climate change.
  • The cumulative crop losses force the farmers to take loan from multiple unethical sources. This vicious cycle leads them into an abyss of unmanageable debt.
  • Farmers are then haunted by the moneylenders, their own growing domestic demands and the need for more money to sow next crop.
  • Shrinking land holdings: 
  • A successive property division, leading to very small land holdings, has made agriculture unviable as a profession. The small landowners still continue to cultivate low-value conventional crops, which makes their farming unsustainable.
  • Large scale cultivation of conventional subsistence crops, like wheat and rice has resulted in creating a surplus, which affects its price negatively.

Way Forward:

  • The Rs 70 lakh crore stimulus is not what it appears to be, it’s possibly half the size of the announced quantum. Even though the price of crude has halved since October 2019, the common man is paying an extra Rs 35 per LPG cylinder. Consumers are being forced to pay higher prices for essential commodities, as profiteers begin to cash in on the supply chain disruption. This negates the benefits of cash transfers or free gas cylinders to BPL families.
  • The average annual days of employment provided per household under the MGNREGA is about 45 and not 100 as claimed? Due to the lockdown, work under the scheme has come to a standstill. Instead of ensuring the availability of 100 days of work and those farmers will receive the promised MSP for once, government should assurances of timely release of farmer’s salaries.
  • Unprecedented circumstances require bold and swift decisions. The announcement under PM Kisan is only about releasing outstanding dues. The government should double the PM Kisan payments to Rs 12,000 for this year. Distribution of grains to 80 crore people is commendable but it will remain a mystery as to why it wasn’t announced and distributed in February when the crisis was on the horizon. Transferring three monthly instalments of Rs 500 each to 20 crore women in Jan Dhan accounts is a good targeting of resources but amounts to less than two days of minimum wages per month.

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