Hyderabad: The Reserve Bank of India’s package to prop up the Covid-19 ravaged Indian economy appears phenomenal if we do not delve deep to see the devil hiding in the detail. The Finance Minister Nirmala Sitharaman in her fifth and concluding package on 17 May has shown the RBI’s share, to be worth Rs. 8,01,603 crores in her Rs 2,097,053 crore total package.
Thus, the RBI’s package was 4% of the GDP or about 40% of the total stimulus package. After this, the RBI in its announcement on 22 May after the three days Monetary Policy Committee (MPC) meeting held from 20-22 May declared some more measures, further increasing its share.
True, the RBI’s concern to bail out the economy is indubitable and what it said about the economy is true: 0.12 microns size corona (one micron is equal to 1000th part of a millimeter) is petrifying and paralyzing the economy. The growth and inflation trends are uncertain to forecast and present trends are the disheartening world over and in India.
RBI rightly observes that the ‘global economy is inexorably headed into a recession. The global Manufacturing Purchasing Managers Index (PMI) contracted to an 11-year low in April 2020. The global services PMI recorded its steepest decline in the history of the index’. As per the United Nations Conference on Trade and Development (UNCTAD), the global trade value contracted by 3% in the first quarter of 2020.
Similarly, the World Trade Organization (WTO) projects the world trade volume to shrink by 13-32 percent in 2020. So, India cannot remain unaffected by these COVID 19 induced adverse world developments.
Demand and Production collapse
In India, the collapse in demand both urban and rural is palpable. Power and petroleum consumption steeply declined. Consequently, the fiscal and revenue statuses of the country are badly affected. The RBI notes, with concern, the halting of Investment demand, a decline of 36 per cent capital goods production in March together with the marked contraction in the import of capital goods in both in March (27%) and April (57.5%).
The effect of these adverse developments is seen in a steep 91 per cent fall in finished steel consumption in April and a 25 per cent fall in cement production in March.
Worse still, the private domestic consumption demand fell by 60%. Also, the consumer durables production slackened by 33 per cent in March 2020. Similar catastrophes are seen in other areas of both production and consumption.
Ineffective tools
So, these are extraordinary and uncertain times. The RBI has used the best of the weapons from its armory. But how far they are effective?
Unfortunately, they are not, to put it without mincing words!
Look at the recent measures. It has reduced the Cash Reserve Ratio (CRR) from 4% to 3%. The CRR is the requirement of the banks to park their funds with RBI. Its lower rate releases more funds to banks to deploy as a credit to the productive sectors. But that is not happening because the banks, in reality, are not in funds’ shortage.
Scrutiny these figures: the deposits of the scheduled commercial banks in the country aggregated to Rs. 13,850,438 crore as on May 8, 2020 as per RBI data; this sum equal to about 68% of the GDP and banks’ overall credit Rs.10,252,405 crore that is 74% per cent of deposits; the broad credit-deposit ratio.
Banks' investment in the government and other approved securities amounted to Rs.40,28,612.01 crore (state and central government securities: Rs. 40,27,030.98 plus in other approved securities Rs.1581.03). But as per the RBI norm, it is enough if the banks invest 18% of their deposits for Statutory Liquidity Ratio (SLR) purpose. This amount is much above that norm.
Liquidity is not the banks’ worry
On the current level of deposits, 18% amount to Rs. 2,493,078.84 crore which prima facie means banks are holding excess investments (more than SLR requirement) by Rs. 1,535,533.17 crores instead of lending to different economic activities including MSME.
Actual calculations and nuances may give different but not very significantly different figures. It is because banks have more funds than they can lend for productive purposes that they are investing excess sums in the range of Rs.15 lakh crore in the securities.
The RBI has also reduced the Repurchase option (Repo) rate from 4.4 to 4%. The Repo rate in simple terms is the RBI’s lending rate to the banks for their short-term fund requirements. The rate reduction should encourage banks to borrow.
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But as per the RBI’s admission, “the liquidity in the banking system remains ample, as reflected in the absorption of surpluses from the banking system under reverse repo operations of the LAF of the order of Rs 2.86 lakh crore on a daily average basis during March 1-25, 2020”. That means RBI is sucking excess liquidity from the banks and strictly speaking no need in general to provide more liquidity!
Again, the reverse repo rate (the rate at which RBI borrows from banks) reduction, which the RBI has effected (from 3.75 to 3.35), naturally reduces banks’ incomes.
Maybe there is an argument that the banks reduce the rates on lending which is good to the borrowers. But they will also reduce the deposit rates which would be bad to the savers – particularly to the pensioners and other senior citizens whose main income is interest on their savings.
Without going into details, due to space constraints, most of the remaining measures of RBI, like bank rate reduction, support to the agencies like NABARD, SIDB and Housing Bank, result in higher liquidity of the banks, which is not their real problem; therefore, not of a much benefit to the economy.
Since it is clear that the conventional measures are not efficacious to deal with the extraordinary times created by COVID 19, the RBI and government need to think out of the box and bring in the extraordinary measures to bail out the economy. Will they?
(Article by Dr P.S.M Rao, Development Economist. Views expressed above are author's own.)
