RBI Governor’s statement dated May 5, 2021: Indian economy now, and its bright future

RBI Governor in his statement dated May 5, 2021 has dealt with the performance of Indian economy for the financial year 2020-2021 mentioning its appreciable position at the end of the year gaining its original position of growth, flattening of infections curve, and envisioning a better performance to follow. Unfortunately, sudden emboldened infections coupled with increasing mortalities later, did throw a dangerous situation to deal with resulting from new mutant strains destabilizing the efforts of front-line warriors like medical fraternity, security personnel, on line suppliers of essential items.

His statement to be studied in minute details is reproduced below:

https://taxguru.in/rbi/rbi-governor-statement-times-pandemic.html

The following facts from his speech will enthuse any- one without boundaries.

“The quarantine facilities of the RBI continue to operate with more than 250 RBI personnel and service providers – away from their homes – to ensure continuity of various segments of financial markets and RBI operations.

Since the pandemic began, I have on several occasions expressed my genuine faith in India’s resilience and capacity to overcome all odds. To quote Mahatma Gandhi – “My faith is brightest in the midst of impenetrable darkness1.” Over a year now, we have struggled to free ourselves from the pandemic’s deadly grip. Between mid-September and February, as a country, we did manage to lower infections at a time when the rest of the world was reeling under malevolent surges of the virus. This time around, we have to marshal our resources and fight it again with renewed vigor, ignited by the determination to overcome, and to return to normalcy and sound health.”

Let us now get ready mentally from the most depressing effects of the harshest pandemic and analyze his inspiring statement in details.

Assessment of current economic situation

Due to encouraging monetary and fiscal stimulus by developed economies and many emerging market economies, International Monetary Fund in April 2021, revised the its global growth projection for 2021 to 6.0 per cent (from 5.5 per cent projected in January 2021) on the assumption that vaccines would be available in advanced economies (AEs) and some emerging market economies (EMEs) by the summer of 2021.

Interestingly, world merchandise trade too maintained its upward movement at 5.4% in February 2021 on a year -on-year basis.  and in most other countries by the second half of 2022. World merchandise trade maintained its recent uptrend, growing by 5.4 per cent in February 2021 on a year-on-year (y-o-y) basis.

Consumer price index (CPI) inflation remained benign for major AEs; in a few EMEs, however, it persisted above targets on account of firming global food and commodity prices.

What about the Indian economy with its complexities due to COVID 19?

  • The record foodgrains production and buffer stocks in 2020-21 provided food security and support to other sectors of the economy in the form of rural demand, employment and agricultural inputs and supplies, including for exports. With the gloomy scenario due to the pandemic, this is an encouraging news. The forecast of a normal monsoon by the India Meteorological Department (IMD) is expected to sustain rural demand and overall output in 2021-22, while also having a soothing impact on inflation pressures. It is a welcome sign from heavenly designs.
  • Following statistical delights may remove some of our doubts on the economy. “Manufacturing units so far is minimal. Consumption demand is holding up, with sales of consumer goods rising in double digits in January-March 2021, and average daily electricity generation up by 40.0 per cent year-on-year in April.
  • Rail freight has registered growth of over 76 per cent year on-year in April. Toll collections in April suggest that mobility has declined but quite unlike the abrupt halt in mobility during April last year.
  • Registration of automobiles in April 2021 has shown moderation compared to March. The tractor segment continues its robust pace.
  • The Purchasing managers’ index (PMI) for manufacturing continued in expansion mode at 55.5 in April 2021 compared to 55.4 in the preceding month.
  • Overall, the high frequency indicators are emitting mixed signals.”
  • RBI governor has given a reassurance that RBI would closely monitor the incoming data and take appropriate steps.

C.P.I. inflation at 5.5% in March 2021 as compared to 5.0% a month ago, further softening of cereals and key vegetables, and some moderation in prices of petrol and diesel in April 2021 were other information of relevance. It is not unusual to visualize the effects of infections under COVID 19 and its effects on shutting down of local areas resulting in consequential results on supply chains and logistics.

In the external sector, the statement that, India’s merchandise exports and imports rose sharply in March 2021 and that for the year 2020-21 as a whole, the merchandise trade deficit shrank to US $98.6 billion from US $ 161 billion a year ago has been very encouraging.

 Preliminary data released by the Ministry of Commerce & Industry has indicated that India’s merchandise exports and imports continued to witness broad-based robust growth performance in April 2021.

 To alleviate any constraint from the financing side for all stake holders what action is being taken is the next logical question.

Additional measures

Term Liquidity Facility of ₹50,000 crore to Ease Access to Emergency Health Services

To help health related infrastructure and services, an on-tap liquidity window of Rs 50,000 crores with tenors up to 3 years at the repo rate is being opened till March 31, 2022.

To boost provision of immediate liquidity for ramping up COVID related healthcare infrastructure and services in the country, an on-tap liquidity window of ₹50,000 crore with tenors of up to three years at the repo rate is being opened till March 31, 2022. Under the scheme, banks can provide fresh lending support to a wide range of entities including vaccine manufactures; importers/suppliers of vaccines and priority medical devices; hospitals/dispensaries; pathology labs; manufactures and suppliers of oxygen and ventilators; importers of vaccines and COVID related drugs; logistics firms, and also patients for treatment.

To an unidentified question from banks about incentive to advance finance under infrastructure related COVID 19, it is specifically informed in the statement that such lending would be classified under priority sector lending till March 31, 2022.

Banks are expected or advised to create a COVIC loan book under this scheme and such banks will be eligible to park their surplus liquidity up to the size of the COVID loan book with the RBI under the reverse repo window at a rate which is 25 bps lower than the repo rate or, termed in a different way, 40 bps higher than the reverse repo rate, to quote from the statement itself.

Lending by Small Finance Banks (SFBs) to MFIs for on-lending to be classified as Priority Sector Lending

Your guess work is the same like mine thatin view of the fresh challenges brought on by the pandemic and to address the emergent liquidity position of smaller MFIs, SFBs are now being permitted to reckon fresh lending to smaller MFIs (with asset size of up to ₹500 crore) for on-lending to individual borrowers as priority sector lending to be available up to March 31, 2022.

In view of adverse reactions due to COVID, what will happen to Credit to MSME Entrepreneurs?

To incentivize, credit to MSME entrepreneurs, in February 2021, Scheduled Commercial Banks were allowed to deduct credit disbursed to new MSME borrowers from their net demand and time liabilities (NDTL) for calculation of the cash reserve ratio (CRR).

Further it is worthwhile to know that this exemption currently available for exposures up to ₹25 lakh and for credit disbursed up to the fortnight ending October 1, 2021 is being extended till December 31, 2021.

Another hot subject which attracted the headlines of news media was “Resolution Framework 2.0 for COVID Related Stressed Assets of Individuals, Small Businesses and MSMEs.”

To explain further development, the following information culled out of the RBI governor’s statement may answer appropriately.

  • “Borrowers i.e., individuals and small businesses and MSMEs having aggregate exposure of up to ₹25 crore and who have not availed restructuring under any of the earlier restructuring frameworks (including under the Resolution Framework 1.0 dated August 6, 2020), and who were classified as ‘Standard’ as on March 31, 2021 shall be eligible to be considered under Resolution Framework 2.0. Restructuring under the proposed framework may be invoked up to September 30, 2021 and shall have to be implemented within 90 days after invocation.”
  • In case of previously accommodated borrowers under the above category for up to one year under Resolution framework 1.0, the period can easily be extended up to 2 years, if requested by the borrowers.
  • Yes, banks can review the loans sanctioned earlier with regard to margins, working cycle etc. This is an obvious detection since COVID wrecked the normal working of the economy and its consequential effects are known to everyone.
  • Further the KYC related new directions issued by RBI merit special mention. These include (a) extending the scope of video KYC known as V-CIP (video-based customer identification process) for new categories of customers such as proprietorship firms, authorized signatories and beneficial owners of Legal Entities and for periodic up dation of KYC; (b) conversion of limited KYC accounts opened on the basis of Aadhaar e-KYC authentication in non-face-to-face mode to fully KYC-compliant accounts; (c) enabling the use of KYC Identifier of Centralized KYC Registry (CKYCR) for V-CIP and submission of electronic documents (including identity documents issued through DigiLocker) as identify proof; and d) usage of digital channels for KYC purposes periodically.
  • (Some of the wording has been directly drawn from original statement so that we do understand these terms for the first time in case of many of our readers, including myself).
  • Is there any development on capital conservation by banks in view of the adverse economic developments?

Yes, banks are being allowed to utilize 100 per cent of floating provisions/countercyclical provisioning buffer held by them as on December 31, 2020 for making specific provisions for nonperforming assets with prior approval of their Boards. Such utilization is permitted with immediate effect and up to March 31, 2022.

Relaxation in Overdraft (OD) facility for States Governments

The recent upheaval of infections combined with uneven deaths has unsettled the fiscal position of many state governments and to manage their fiscal situation in terms of their cash-flows and market borrowings, certain relaxations have been permitted with regard to availing of Overdraft (OD) facilities. Accordingly, the maximum number of days of OD in a quarter is being increased from 36 to 50 days and the number of consecutive days of OD from 14 to 21 days. This facility will be available up to September 30, 2021. The Ways and Means Advance (WMA) limits of states have already been enhanced on April 23, 2021.

Detailed instructions are yet to follow to engage the liberal overdraft facilities.

Conclusion

I am very happy to echo the feelings of RBI Governor who has felt that they are in battle readiness to face the unpredictable COVID which was reportedly contained last year to reemerge again this year to subject our citizens to undergo extreme travails. By taking both small and big steps to even out the effects on economy, RBI is resolutely focused on a post pandemic future of strong and sustainable growth with macroeconomic and financial stability. He has called upon all stakeholders to come forward boldly like last year and overcome the travails boldly now and remaining on guard for future waves.

He has rightly quoted the words of Mahatma Gandhi as under:

Our faith should be like an ever-burning lamp which not only gives us light but also illuminates the surroundings.”

Our father of nation and other illustrious founding fathers/mothers of India have shown us to travel untrodden paths always uneven but emerge successfully as a nation to take care of its citizens as promised in the constitution. This article was clearly written to lift us from miseries of the pandemic and move towards a brighter tomorrow.

*****

Disclaimer: The contents of this article are for information purposes only and do not constitute an advice or a legal opinion and are personal views of the author. It is based upon relevant law and/or facts available at that point of time and prepared with due accuracy & reliability. Readers are requested to check and refer relevant provisions of statute, latest judicial pronouncements, circulars, clarifications etc before acting on the basis of the above write up.  The possibility of other views on the subject matter cannot be ruled out. By the use of the said information, you agree that Author / TaxGuru is not responsible or liable in any manner for the authenticity, accuracy, completeness, errors or any kind of omissions in this piece of information for any action taken thereof. This is not any kind of advertisement or solicitation of work by a professional.

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