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Growth Engine (Stimulus Package) is Unable to Pull Bogies

AUGUST 01, 2020

By TIOL Edit Team

RBI's Financial Stability Report Should Serve as Fresh Alarm

The growth engine and bogies are largely disjointed even after repeated promotion of more than Rs 20 lakh crore fiscal-cum-monetary package. This is the unwritten message of Financial Stability Report (FSR) released by Reserve Bank of India (RBI) on 24th July.

In the foreword to FSR, RBI Governor Shaktikanta Das notes that the report coincides with "a growing disconnect between the movements in certain segments of financial markets and real sector activity".

In the financial sector, FSR notes that the existing stock of non-performing assets (NPAs) and bankers' risk aversion remain "big worries and impediments to economic growth". Despite roll-out of multi-pronged monetary stimulus, transmission of liquidity and rate actions is still slow.

Even FSR's assumptions for key economic indicators for macro stress tests (MSTs) of banking sector in the baseline scenario are depressing, leave aside worst-case scenario.

The baseline assumptions for macro-economic indicators are: GDP growth of - (minus) 4.4%, Combined gross fiscal deficit-to-GDP ratio of 10.9%, current account balance-to-GDP ratio of -0.5%, weighted average lending rate of 10.1% and consumer price inflation of 4.1% and Exports-to-GDP ratio of 10.2%.

FSR has thus pressed alarm at the bleak near-term prospects for the economy. It finds economy impacted by "lockdown-induced disruptions to both supply and demand side factors, diminished consumer confidence and risk aversion".

According to the Report, risk aversion and lacklustre demand have impeded the fuller flow of finance from both banks and non-banks into the economy.

It notes: "Credit growth (y-o-y) of scheduled commercial banks (SCBs), which had considerably weakened during the first half of 2019-20, slid down further to 5.9 per cent by March 2020 and remained muted up to early June 2020. This moderation was broad-based across all bank groups".

As put by Mr. Das, "while risk management has to be prudent, extreme risk aversion would have adverse outcomes for all".

Says FSR, "A combination of fiscal, monetary and regulatory interventions in India has kept financial markets from freezing and financial intermediaries functioning normally. Bank credit shows clear signs of risk aversion".

The Banks' aversion to lend more money has to be understood and moderated. One obvious reason is the fear that money lent during the crisis might go down the drain as non-performing assets (NPAs).

MSTs for credit risk indicate that the gross NPA (GNPA) ratio of all SCBs may increase from 8.5 per cent in March 2020 to 12.5 per cent by March 2021 under the baseline scenario. If the macroeconomic environment worsens further, the ratio may escalate to 14.7 per cent under very severe stress. SCBs here means public sector banks, private sector banks and foreign banks.

The second reason is uncertainty over pandemic dynamics and the governments' response towards spread of Covid-19 infection. Modi Government is keeping close to chest its internal assessment based on modelling studies. The stakeholders have thus no option but to keep waiting and watching for clarity.

The third reason is the States & districts administration's infatuation for mini-lockdowns. They serve as road blocks to restoration of supply chains and business continuity. Industry leaders and other stakeholders have categorically stated that raging mini-lockdowns are holding back economic revival.

FSR, along with Prime Minister Narendra Modi's latest call for economic revival, should ring in fresh initiative in National and State capitals. In his 'Maan Ki Baat' address delivered on 26th July, Mr. Modi stated: "On one hand we have to fight against Coronavirus, on the other hand, with hard work, we have to take our businesses, jobs, the duties we perform, to new heights".

Unfortunately, PM avoid dreaded word 'lockdown'. He thus missed an opportunity to tell State and local governments categorically that enough is enough.

India has already exhausted its over-generous quota of lockdowns. Now, we all must learn to fight Covid as responsible citizens without repeated fallback on lockdown. This means strict adherence to all safety guidelines - from social distancing to wearing masks to self-isolation/quarantine, as the case may be.

Let Pune Metropolitan Region's 10-day lockdown ending 23rd July 2020 serve as a reminder in this regard. A story in financial daily with headline "Pune lockdown ends with no impact on virus spread" narrated the flop-show well. Another headline in another daily also gives thumbs-down: "Experts: Lockdown unfortunate, will not stop infections."

Web of lockdown spun at the State, city and district levels are fuelling business uncertainty, thereby prolonging economic revival. This is not good governance keeping in view the fact that Pakistan and China are adopting aggressive postures against the Nation.

It is here pertinent to recall late Atal Bihari Vajpayee's sage advice given a month after Kargil war victory. Addressing the Nation from ramparts of the Red Fort on 15th August 1999 "If our economy is not strong, and if we are not self-reliant in important matters of national security, then we cannot successfully face external challenges".

Mr. Vajpayee added: "The battle is not over. New challenges are knocking at our doors. The patriotism that coursed through the veins of Indians should be made a permanent feature of our lives".

Such wisdom should guide Nation's destiny and not authorities' panic reaction to Covid-19. They must understand Lockdowns are proving counter-productive for long-term national interests. They are now only helping Corona virus and two enemy countries in fine-tuning their plots.