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India's economic policy response to Covid-19 lags global peers: Edelweiss

A sound and credible financial/economic plan is the need of the hour
With the coronavirus (Covid-19) casting its shadow on the global economy, most governments and central banks have initiated a strong policy response to battle the pandemic. Analysts at Edelweiss Securities, however, suggest that India has not done enough compared to its global peers to combat the situation. 

The macroeconomic response so far since the outbreak of the Covid-19 pandemic, they feel, pales in comparison to what has happened globally so far, or even compared with the policy steps undertaken by India during the global financial crisis (GFC). For instance, in 2008 (GFC), the RBI had cut the cash reserve ratio (CRR) by 300 basis points (bps) in one day within 15 days of the Lehman collapse. Fiscal authorities had also unveiled a large stimulus to turn around the economy. Surely, the context is not altogether same now, but we think Indian policymakers must catch up and that too in a short time, they said.

“Against this macroeconomic backdrop and the fresh shock arising out of global pandemic (slowdown in exports, derailment in consumption, potential financial sector problems due to lockdowns, etc), India’s macroeconomic policy response has been slow to say the least, even though the government is acting aggressively to prevent the spread of Covid-19,” wrote Aditya Narain, head of research for institutional equities at Edelweiss Securities.

Meanwhile, the Reserve Bank of India (RBI) has decided to conduct open market operations (OMOs) on March 20 in the form of purchase of an aggregate amount of Rs 10,000 crore of government securities through a multi-security auction using the multiple price method. Earlier in March, the RBI offered a $2 billion dollar swap for six months — a step that aimed at easing the pressure on the rupee.

At the global level, the European Central Bank (ECB) launched new bond purchases worth 750 billion euros at an emergency meeting late on Wednesday in a bid to stop a pandemic-induced financial rout. However, the central bank left the deposit rate unchanged at a negative 0.5 per cent. The move comes on the heels of the US Federal Reserve's decision to relaunch financial crisis-era purchases of short-term corporate debt. It had recently cut short-term rates to a target range of 0 per cent to 0.25 per cent.

So, what should the government and other authorities do then?

A sound and credible financial/economic plan is the need of the hour, advises Narain, to deal with the fallout of the global slowdown and domestic lockdowns on cash flows of businesses, earnings of households and debt repayments of debtors. Should the pandemic spin out of control in India and lockdowns rise, the government and the RBI will have to step up their response for the markets as well as the economy, he says. 

“In this backdrop, the recent hike in fuel taxes is ill-suited. Post-GFC, there was a deep cut in the excise duty and a large ramp-up in government spending. Globally, such a response is already in full swing now, particularly in the G7 countries — such as refinancing of loans at cheap rates for businesses that are facing shutdowns or a sharp drop in businesses, handouts to households/individuals, forbearance for the banking system in the event of delays or no debt repayment, etc,” Narain wrote.

But, how long will these measures go in addressing the problem? Well, things will not change overnight, but will go a long way in assuaging concerns. That said, economists estimate rationalization of Rs 1.2-lakh crore may be required in the current fiscal, if India has to stick to mandated 3.8 per cent fiscal deficit. This, at a time when the economy is being hit hard by the COVID-19 pandemic.

“We are already estimating that the impact of a 5 per cent inoperability shock could be 90 basis point on GDP from trade, hotel and transport, storage and communication segment, which could be spread over FY20 and FY21, with a larger impact in FY21. It will be completely foolhardy to stick to any mandated fiscal rules in times of current crisis that is now threatening to rip apart the entire global financial ecosystem. Globally, state loans, income subsidies and tax deferrals are the most common fiscal packages being offered,” says Dr. Soumya Kanti Ghosh, group chief economic adviser at State Bank of India.

On the other hand, Madan Sabnavis, chief economist at CARE Ratings says the impact of monetary measures on containing the Covid-19 spread will be limited. However, it can be a sentiment booster and a palliative at best, in the sense that the debt service burden can be reduced and funds be made available if required.

“Hence, when we look at what the US Fed has done, the market has not reacted positively as it is believed that rate cuts and liquidity cannot really change the situation. Yet central banks all over have gone ahead with these two measures," Sabnavis says.

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