In many ways, Coronavirus (Covid-19) is impacting human life that very few could ever imagine. Although, coronavirus is just like a common cold, but it has a unique combination of higher R0 (Rate of transmission) and higher mortality rate. A lot of research has placed R0 of Covid-19 b/w 2&3, which means that every infected person transmits the virus to 2 or 3 humans. Further, the younger population tends to show symptoms with considerable delay of 5 to 14 days. These asymptomatic patients continue their day to day interaction, thus spreading the virus at an exponential rate. A lot of countries have been trying to force social distancing via lockdown to reduce the spread of the virus. This current piece talks about economic fallouts of lockdown and fiscal & monetary response for the same. Covid-19 warrants multiple blog posts to understand – Economic, Social, Mathematical, Biological, Healthcare and many more. This blog will try to cover these in near future.
Background – Indian economy has been struggling in last few years amid global and domestic headwinds. As shown below – Consumption(C) and Investment (I) are two main drivers of Indian economy as we continue to have a trade deficit (X-M) with rest of the world. India witnessed steady decline in consumption, while investment remained lacklustre, thus forcing government spending as only driver for growth. India missed fiscal deficit target in current fiscal, this hampers the government’s ability to push fiscal expenditure to support the economy in near term.
GDP = G + I + C + X -M
(G =Government Spending, I=Investment, C=Consumption, X=Export, M=Import)
Many analysts point out that consumption has been steadily falling in last 8 quarters and it is prime reason for economic slowdown. Arvind Subramanian has authored a great paper – which points out India’s main economic problem is very little investment activity and slowing consumption is just a symptom of the same. In any case, Indian economic activity has been under steady decline and Covid-19 might push to all time low levels.
Our Prime Minister, Narendra Modi has announced a 21 day lockdown to reduce the virus spread. It is noteworthy that many countries like Italy, Spain have taken same path but at a later stage. Of-course, India has very weak healthcare infrastructure with very less no-bed per million population. In many ways, such weakness would have made the choice of lockdown much simpler, as irrespective of economic impact India can not risk spreading the virus.
Fiscal Response – As lockdown tends to have an asymmetric impact on public with poor paying maximum cost in terms of monetary and adversaries. Government has rightly directed INR 1.7 trillion benefits to them.
- Insurance cover of INR 50 Lacs for healthcare professional
- Addition 5 kg Rice, 5 kg Wheat and 1 Kg pulse for three months for 80 cr people
- Farmer to get INR 2000 (in addition of yearly transfer of INR 6000) to benefit 8.7 Cr farmer
- MNREGA 11% increase in wages from 182 to 202
- Senior citizen, Poor widow, Handicap will get INR 1000
- Women Jan Dhan account holder will get INR 1500 in three instalments of INR 500
- Women beneficiaries to get free gas under Ujwala scheme (8.3 Cr family)
- SHG will get collateral free loan upto 20 Lacs
- Government will fund employee and employer’s contribution for organised sector workers.
Clearly, the Government has channelized its package to support in short term survival. This package is not for economic welfare rather for survival. Hopefully, direct benefit transfer should be very effective and support public at large.
Government Monetary Response –Major central banks are taking Covid-19 market crash head on. Major central banks (more on it later) have eased rate, flushed market with liquidity and promised to do whatever it takes to calm the markets.
RBI has also taken the same approach and provided much needed monetary support. Yet again, these measures are taken to support markets rather than fueling economic activity.
- RBI has cut interest (repo) rate by 75 basis points to 4.4.
- SBI has passed full benefit to its client, thus lowering their cost.
- Reserve Repo cut by 90 basis points to 4%.
- Disincentiving banks to keep fund with RBI, liquidity positive
- Cut CRR by 100 bps to 3%
- This should release additional liquidity of INR 1.37 trillion
- Moratorium loans
- Borrower can delay EMI by 3 months, without attracting penal charges
- But interest will continue to accrue.
- USDINR sell/buy swaps to eases dollar crunch
- OMOs (Open Marker Operations) to infuse INR liquidity
- Targeted Long-term Repo operations
- RBI will lend banks INR 1 trillion at repo rate for three years
- Banks will have to invest in corporate bonds, commercial paper and NCDs
RBI EMI Moratorium FAQs
The RBI has allowed deferment for interest payments for all working capital loans taken by businesses. This will be applicable in respect of all working capital facilities outstanding as on March 1, 2020. The accumulated interest for the period will be paid after the expiry of the deferment period. Moratorium/deferment will not be treated as change in terms and conditions of loan agreements and will not result in asset classification downgrade.
The RBI guidelines specifically mention retail loans. So a business loan is unlikely to qualify.
The RBI guidelines do not address this specifically but since credit card dues are covered, it is likely that loans taken on credit card may also be covered.
While credit cards are defined as revolving credit and not term loans, the RBI’s operational guidelines made it clear that credit card dues are also covered.
The RBI policy statement explicitly mentions term loans, including agriculture term loans and crop loans besides retail loans.nnRetail loans are typically home loans, personal loans, education loans, auto and any loans that have a fixed tenure. They also include consumer durable loans, such as EMIs on mobiles, fridge, TV etc
Yes. It does. You will be exempt from payment of your entire EMI, including payment and interest for three months. This will be applicable on all loans outstanding as on March 1, 2020.
Unlikely, as the RBI’s statement suggests the tenor may be shifted. That is: the loan may end 3 months later than was originally slated. But more clarity is awaited on this.
This is not a waiver, but a deferment. RBI has recommended that the repayment schedule and all subsequent due dates as also the tenor for such loans may be shifted across the board by 3 months.nn”Interest shall continue to accrue on the outstanding portion of the term loans during the moratorium period,” the RBI said in its guidelines.
All commercial banks (including regional rural banks, small finance banks and local area banks), co-operative banks, all-India Financial Institutions, and NBFCs (including housing finance companies and micro-finance institutions) can extend the moratorium.
Yes. It does. If announced by your bank, you can forego payment of your entire EMI, including payment and interest.
All commercial banks (including regional rural banks, small finance banks and local area banks), co-operative banks, all-India Financial Institutions, and NBFCs (including housing finance companies and micro-finance institutions) included
This is not a waiver, but a deferment. You will have to pay the EMIs at a later as decided by the bank. The RBI has told banks to have board approved policies in place on moratorium/deferment.
The RBI has only allowed banks to allow a moratorium. Individual banks will have to allow suspension of EMIs. The borrower will have to request the bank and show that his or her income has been impacted by the coronavirus disruption. This means that unless you have specific approval from your bank, your EMIs will still be deducted from your account.