Indian Economic Policies in times of Covid-19

Monetary Policies

RBI Moratorium

The Reserve Bank of India announced measures to ease financial stress further and
improve debt management in response to the COVID-19 crisis. The earlier moratorium which was ending on 31st May 2020, has now been extended by three months, i.e. August 31, 2020. EMI payments can now be deferred until the end of August. Although the more intricate details have not been clarified, yet it is assumed to provide some relief to the Indian Economy.

Reduction in Repo Rates and Reverse Repo Rates

On March 27, the Reserve Bank of India (RBI) reduced the repo and reverse repo rates by 75 and 90 basis points (bps) to 4.4 and 4.0 percent, respectively, and announced liquidity measures to the tune of 3.7 trillion Rupees (1.8 percent of GDP) across three measures comprising Long Term Repo Operations (LTROs) and a cash reserve ratio (CRR) cut of 100 bps.

Repo Rate

It is the rate at which the central bank lends to other banks. It is an important tool for fighting inflation in India. An increase in the repo rate would disincentivize commercial banks to borrow and reduce the supply of money in the markets. The central bank takes the contrary position in the event of a fall in inflationary pressures. Repo and reverse repo rates form a part of the liquidity adjustment facility.

Reverse Repo Rate

It is the rate at which commercial banks lend to the central bank in India. Reducing repo rates makes it easier for commercial banks to borrow and they are required to extend this benefit to other customers. But again the loans being made are short term while the commercial banks make long term loans. Also given that even before the COVID 19 struck, Indian banks were already facing bad debt problems, it is highly unlikely commercial banks would play their part of giving out loans.

Cash Reserve Ratio

The commercial banks are required to keep a portion of their assets locked away. They cannot use this money for lending purposes. It acts as a cushion should the bank face crises like a sudden jump in the number of withdrawals or if a liquidity crisis is imminent. The CRR being lowered leads to more funds with banks to lend out spurring economic activity in the country. On lending occurs when loans given to the NBFCs are lent again leading to third parties. Such kinds of loans would not come under the priority sector loans before.

Helping the Commercial Banks and NBFCs

CRR maintenance for all additional retail loans has been exempted, and the priority sector classification for bank loans to NBFCs has been extended for on-lending for
FY 2020/21.

Fiscal Policies

Nirmala Sitharaman, the Finance Minister of India, announced one of the largest economic packages amounting to almost 10% of our GDP. The intricacies of the package can get convoluted, but we will try to scratch the surface of this package. The Government of India decided to reclassify institutions as Micro, Small, and Medium Enterprises (MSMEs). They were trying to set up an incentive structure to usher a new era of growth. Cheap loans, fewer compliance standards, tax benefits, and host of other freebies. Though this looks like the panacea we all were waiting for, it does have a dormant problem lying within it. The current system of classification has rather small windows for each category, meaning you could very well grow from a micro to a small enterprise in a short period whilst letting go of some of the freebies that came along with it. This sort of disincentivizes enterprises to grow at breakneck speeds. India also has plans to use its sizable foreign exchange reserves to deal with the crisis. However, this is a precarious option given India’s sizeable current account deficits and high dependence on short term capital inflows.

Suspension of IBC (2016)

Insolvency and Bankruptcy Code was a landmark decision made by the government in 2016 to help struggling banks and creditors get their due from wilful defaulters. This act seeks to consolidate the existing framework by creating a single law for insolvency. Earlier borrowers used to pressurize creditors into extending the time limit for payments and get away by paying less than what they owed. Court processes were long and tiresome before the advent of the IBC. But in the wake of the current pandemic the government has put the IBC on hold meaning no company as of now can be brought to court for defaults in payment. Moreover, COVID 19 related debt has also been put on hold.

Income Tax Rebates

1. The pending income tax refunds to charitable trusts and non-corporate businesses
and professions including proprietorship, partnership, and LLPs (Limited Liability Partnerships) and cooperatives will be issued immediately. 2. The withholding tax rates for all non-salaried payments, i.e. contract, professional, rent, dividend, commission, brokerage, etc. to residents and tax collected at source rate will be reduced by 25% of the specified rates for the remaining period of the fiscal year 2020-21 with effect from 14 May 2020. Withholding tax rates are levied by employers on their employees whereby a part of their income is to be withheld and paid directly to the government as income tax. Reduction in these rates will lead to a decrease in government revenue but would help people save whatever they can. 3. The due date of filing all Income Tax Returns for the fiscal year 2019-20 will be extended to 30 November 2020. Similarly, the due date for tax audit under income tax law will be extended to 31 October 2020.

Could the COVID 19 trigger a trade war between India and China?

Tackling the Red Dragon

Although it is highly debatable, it seems that China has overcome the virus and economic activity has resumed. With property prices and land prices slashed all over the world, China has seen this moment to be apt to reassert its dominance around the world.

“Loot the house when it is burning”.

– that’s what the chinese say

The Indian government has announced that any non-resident of a country which shares its land borders with India can invest in India only post approval of the Government. This also includes investments whose beneficial owner is situated in or is a citizen of such a country that shares its land borders with India. This act is a concealed attempt at stopping Chinese companies from buying out Indian MSMEs at low prices. Note that India and China are both parts of the WTO and thus they cannot have outright discriminatory laws targeted against one another. This does seem to be a smart move to circumvent the trade agreement to protect our industries. Employment benefit: On March 27, 2020, the government announced that the withdrawal of money from the EPF would be allowed to withdraw up to 3 months’ salary without being taxed for it. It is important to understand what EPF is.

EPF stands for Employment Provident Fund. Under the EPF scheme, an employee has to pay a certain contribution towards the scheme, and an equal contribution is paid by the employer. The employee gets a lump sum amount including self and employer’s contribution with interest on both, on retirement. This is to protect retired employees in India financially. Withdrawing money from the EPF was not allowed until now. This should give some more relief to cash strapped unemployed people.

CONCLUSION

Well that’s all folks. We do hope that these pair of issues have cleared some air regarding monetary and fiscal policies being adopted by India and the US and have ignited your interest in public policy(if you are a newbie). We shall keep in touch and have curated a few more articles that shall be up soon. Do connect with us on Telegram or WhatsApp and have fun learning!!