Covid-19: Ease fiscal policy, let states borrow from RBI, says Kerala FM

Emphasising that the central government should understand and be more liberal in its fiscal policy and support, the minister said more needs to be spent on relief
As states scramble to raise funds to fight the coronavirus pandemic, Kerala Finance Minister Thomas Isaac has urged the Centre to liberalise its fiscal policy by printing more currency and allowing states to borrow directly from the Reserve Bank.

While expressing optimism that Kerala will get nod for issuance of pandemic bonds, Isaac also warned that the current limitations on the fiscal policy front could push states into a "debt trap".

In a telephonic interview to PTI, Isaac said states should not be forced to go to the capital markets at this time and the Centre should first raise the fiscal deficit limit as well as permit direct borrowing from the Reserve Bank.

On Tuesday, Kerala had to offer an interest rate of 8.96 per cent for Rs 6,000 crore market borrowing for state development loan for a 15-year period.

RBI reduces the repo rate to 4.4 % but the coupon rate for 15 year Kerala SLR bonds bid by the banks is 8.96% .It is high time India Government follow the course adopted by all major economies for stimulus- borrow directly from the Central Bank and for the time ignore FRBM rules.

Thomas Isaac (@drthomasisaac) April 10, 2020
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"All states are going for a lower amount and a shorter period. Now, the coupon rate is an average of eight-plus. The question is why the market is behaving like this... there is a freeze in the credit market.

"There are limitations due to the fiscal policy. Government of India should directly borrow from the Reserve Bank, monetise the debt and also allow states to borrow from the Reserve Bank," he said.

Otherwise, Isaac said the situation would put all state governments in a debt trap.

"When the crisis ends, all state governments will be in serious unsustainable debt situation. GDP is going to be negative and paying around 9 per cent interest, then that is unsustainable. This policy will push state governments into a fiscal crisis," he said during the interview on Friday.

Kerala, which has put in place stringent measures to curb spreading of coronavirus infections and flatten the curve, has come out with a Rs 20,000 crore package to deal with the current situation by front loading borrowings.

"The central government is forcing state governments to cut their expenditure. This is a very crazy policy. In a slump, you are forcing state governments to cut expenditure," he said.

Presently, a state is permitted to borrow up to 3 per cent of its Gross State Domestic Product (GSDP).

"We already have hard budget constraints... We are permitted to borrow 3 per cent of the GSDP. We have front loaded our borrowings so that we are able to meet demands due to the crisis

"... unless you provide basic necessities to the entire population who are under the lockdown you are not going to get compliance. This is what is proved by the experience in the major cities in India with flights of lakhs of people undermining the very motive of the lockdown," he said.

Asserting that printing of money is "absolutely" practical and fits the time, Isaac cited the examples of the US Federal Reserve and the European Central Bank and said that is the pattern all over the world.

The Federal Reserve and many other central banks are directly purchasing bonds as part of efforts to ensure liquidity in the market.

While noting that the state government would be going to the market for raising a lower amount, Isaac stressed that if one is serious about fighting the coronavirus pandemic, then better that the money is available and there is no point in getting the money after one month when the whole country has gone to the dogs.

On Wednesday, the minister said Rs 6,000 crore borrowed from the market on Tuesday is Kerala's share in the first tranche of the Rs 1.27 trillion market borrowing that the Centre allowed for the states in 2020-21.

Paying 8.96 per cent interest for 15 years on this loan would leave the state in a deep debt trap from which it would be difficult to come out, Isaac had said.

Emphasising that the central government should understand and be more liberal in its fiscal policy and support, the minister said more needs to be spent on relief.

Kerala Chief Minister Pinarayi Vijayan has written to PM Narendra Modi regarding proposal to issue pandemic bonds, which will have a lower interest rate.

When asked whether he was optimistic about getting the Centre's nod for issuance of pandemic bonds, Isaac replied in the affirmative.

"Yes. Pandemic bonds will be specially for Covid related measures. It should be at a lower interest rate because it is not going to have any capital expenditure or revenue expenditure for giving relief to people...," he said.

Pandemic bonds would effectively work like monetisation of fiscal deficit -- which means the central bank prints more money to pay for government debt by buying up government bonds and booking the same on its balance-sheet.

To a query on whether any other practical option was being planned in case pandemic bonds issuance does not happen, Isaac said the central government has to change its policy.

"I am certain that compulsions of the current situation will force the central government to change its fiscal policy which is as idiotic as the demonetisation policy," he noted.

Later this month, Issac said he would be convening a webinar with representatives from states to discuss states' finances as well as the coronavirus situation. The webinar is scheduled to be held on April 27 and 28.


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