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RBI on Financial Stability of India and outlook on Govt finances

RBI has come out with its latest Financial Stability Report of the country last week.This is the first report after the outbreak of Covid 19 since this report is released once in six/seven months by RBI.The last report was released in Dec 2019.

Some of the macro financial indicators like CRAR(capital to risk-weighted assets ratio)at 14.8% ,, PCR (provision coverage Ratio) at 65.4% and GNPAs at 8.5% of all SCB improved all but marginally between Sep 2019 and March 2020.

But the bad news is GNPAs can worsen due to economic distress induced by  Covid pandemic and the Stress tests due to credit risk show a probability of this widening  to anywhere between 12.5% and 14.7% by March 2021.

Nomura India Business Resumption Index (NIBRI) which is published every week on Monday says in its latest published on July 27th that the Business Resumption shows signs of flatenning due to increase in Covid nos..According to  its short term outlook  the Indian Business which was set back by 30% from its pre pandemic Feb levels, will continue to languish at the same level. NIBRI index which hit 70.5 by end June after recovering from the slump , was at 69.2 by week ending July 5th, 68.7 by July 12th, 70 by  July 19th  and 70.1 by week ending July 26th .(link)(link) Pl. see these links to HT and ET reports.

Also in the Mint column of Dr.VAN (Bare Talk) on July 28th ,the real GDP contraction is projected to be at - 5% approx this year 20-21 with some other economists predicting it to be  direr than that i.e higher contraction of GDP.(link).Even a contraction in nominal terms is in their prediction as things stand.

The Govt. would have seen the writing on the wall. If the economic activity plunges its tax revenues will be hit and consequently its ability to finance its deficit and spend through its way. Already the impact of this is seen in dip in GST collections .In the previous fiscal itself there was a huge shortfall in GST collections vis-a-vis Budgeted nos.In FY 18-19,GST collections had fallen below 5% of GDP and in FY 19-20, it would have fallen still further. The shortfall in its Cess collections has impaired its ability to transfer the share of the States as promised by the Union Govt when GST was introduced.This lament by the Finance Secy about the need to invoke lower threshold for transfer invited sarcastic comments in the social media that this is the first case of GOI asking for moratorium and one time restructuring.

A timely disinvestment proceeds would have come in handy for the Govt. at this hour.But that is not to be as divestment of Air India and BPCL or other disinvestments are many months away, if not years.

So, the next two quarters will define the future course in terms of GDP growth,Tax revenues and the medium term plan of the Govt in finding new resources for funding.Since other macro factors like Current Account deficit, Foreign exchange reserves, Debt to GDP esp. outside Debt, Oil prices are all slightly better, if not favourable, Govt may bite the bullet and go for monetising of its fiscal deficit.When it decides on this, it should do that with a targeted loosening with a medium term clawing back to its fiscal glide path to 3% fiscal deficit in another 3/4 yrs.

Two days back RBI Governor has indicated where to target- five major dynamic shifts -infra, farm sector, renewables, leveraging ICT & start-ups, shifts in supply and value chains in domestic and global arena.

I would add my pet Auto sector to start with in terms of GST cut, which can be a game changer in terms of employment, investments and GDP growth with its ripple multiplier effects across the economy.!!!

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