Regulatory Forbearance

● Pandemic has increased the distress in

the economies around the world and

India is no exception to this.

● The emergency measures such as

forbearance prevent the spill over of

the failures in the financial sector to the

real sector, thereby avoids the

deepening in the crisis.

● However this forbearance must be

used as a emergency medicine and

not as a staple diet.

The original sin - seven year forbearance

● The forbearance has had desired shortterm economic effects

○ GDP growth recovered from3.1% in FY09 to 8.5% within twoyears.

○ There was a markedimprovement in other parametersas well such as IIP, exports, etc.

○ Growth in total revenue of thelisted firms increased from 4.88%in the crisis year to 20% in 2011.

○ Growth in bank credit had fallento 16.9% in FY10 recovered to21.5% in FY11

The original sin - seven year forbearance

● During the Global Financial Crisis(GFC) the policy worked well butas the banks got the wind ofcontinuation in the policy, varioustypes of distortion’s crept in

○ The number ofrestructured loansincreased from 0.74% inFY08 to 6.94% in FY15

○ The gross NPAs of thebanking sector increasedmodestly from 2.2% inFY08 to 4.3% in FY15

Adverse impact of forbearance

● Undercapitalisation of banks.

● Lending to zombie firms.

○ Loans increased from 5%

(FY08) to 27% (FY15)

● Evergreening of loans.

● Failed to boost investment.

○ The Gross Capital Formation

(GCF) fell from 34.7% in 2008 to

28.7% in 2015

● Misuse of the funds by the

incumbent management.

● Performance of the firms

deteriorated.

Bank clean-up without adequate capitalisation

● RBI mandated AQR in 2015

● This clean-up is different in two

ways compared to the one done

in developed countries

○ It was done not in a year of

crisis

○ There was no forced

recapitalisation nor capital

backstop provided by RBI

Issues with AQR

● Underestimation of NPAs

○ PSBs added NPAs worth ₹ 5.6

lakh Cr between FY16 to FY19

● All the ways of evergreening were

not covered

● Underestimation of required capital

● Banks were unable to raise equity

capital from the market

● With banks reducing their lending

activities, their loans to investments

and capital expenditures have also

come down. Post AQR, the stalled

projects have increased

Implications for the current forbearance regime

● Withdrawal of such measures.

● Clean up bank balance sheets.

● Based on the capital requirements,

the clean up must be accompanied

with capital infusion.

● Improve the quality of governance in

the banks.

● Strengthen the legal infrastructure

for recovery

Innovation

● Technological Progress and higher growth rate in the economy

Global Innovation Index

Global Innovation Index

India’s innovation performance

● Though India has performed above

expectation on innovation w.r.t to its

level development, it lags behind

most other large economies

● India has performed in line with its

development, but ranks second

lowest after Brazil on the overall GII

Trends in India's innovation performance

● India has been improving its ranking under

GII from 81st in 2015 to 48th in 2020

● Though it has performed well, there’s still s

scope for improvement

● To put the things in perspective, China has

improved its ranking from 29th to 14th during

the same period and has put in place a very

ambitious R&D roadmap (China launched

MLP - Medium to Long Term Plan)

R&D expenditure in India

● India’s Gross Expenditure in R&D (GERD)

though is in line with development, there is

a scope of improvement

● Out of the total govt in India contributes

around 56% of GERD

● The business sector contribution is much

smaller

● Govt’s contribution to total R&D personnel

is 36% and researchers is 23%, the

highest among other top ten economies

India’s performance on patents and trademarks

● The total number of patents filed has risen

since 1999

● The patents filed by residents have

increased post 1999

● In case of trademarks the steep rise in

filings post 1999 is on account of

applications filed by residents

R&D activities in India

● India has been a attractive R&D

destination

● Tax incentives

● India has been able to translate the

investments in innovation inputs to

produce higher levels of innovation

outputs.

Policy implications

● Increase the GERD

● Business sector needs to step up

● Filing of patent applications

The Bare Necessities

● What are Bare Necessities (BN)

● BN are durable assets and some

have direct linkage to the health of

the members of households

Bare Necessities Index (BNI)

● Water (6)

● Sanitation (5)

● Housing (3)

● Micro-environment (4)

● Other facilities (8)

Findings

● Access to bare necessities is

highest in states such as Kerala,

Punjab, Haryana, Gujarat,

Uttarakhand etc

● Inter-state disparities have declined

both in rural and urban areas

● The access has improved

disproportionately more in case of

poorest households when compared

to the richest households across

India

Findings

● Health outcomes

● Education outcomes

Fiscal Developments

● Fiscal policy along with the monetary

policy emerged as the effective

policy tools in the times of crisis

Fiscal situation and response to covid

● Classification of ministries

● Increased capex

● Increased market borrowing

● Reforms in taxation

Trends in govt finances

● Revised market borrowings and FD

● Transfer to states – 15th FC

● Central govt debt

Central govt debt

Central govt debt

Central govt debt

General govt finances

External Sector

● As per WTO, merchandise trade will

drop by 13 to 32% in 2020, however

post the easing of lockdown, the

trade has been picking up in the

months of June and July. WTO

accordingly revised the contraction

to 9.2% with a growth rate of 7.2% in

2021

External Sector – cushion for resilience

● Current account surplus

● Resumption of portfolio capital inflows

● Robust FDI inflow

● Huge forex reserves

India - “pharmacy of the world”

● India has almost doubled its share in

global exports in a decade from

1.4% in 2010 to 2.6% in 2019

● Global pharmaceutical market is set

to exceed US $ 1.5 tn by 2023.

India’s pharmaceutical industry is

currently valued at $41 bn and is

expected to grow to $65 bn

● Issues

○ Excessively dependent on

imports

India - “pharmacy of the world”

● Govt has implemented Production

Linked Incentive (PLI) to promote

production in this industry

● Strategy

○ Should broaden the base

○ Restructure current regulatory

mechanism and upgrade and

build capacities at various

National Institute of

Pharmaceutical Education and

Research

○ Greater R&D expenditure

External Sector – data

● Current Account

○ India’s CAD averaged 2.2%

of GDP in last 10 years

○ In the Q4 this trend

reversed with a CAS of

0.1% of GDP

External Sector - Data

● External Debt

○ At the end of September 2020,

India’s external debt reached

$556.2 bn

○ Has reduced by $2 bn i.e. 0.4%

compared to March 2020 levels

● Exchange rate and forex reserves

Initiatives to promote exports

● Trade Facilitation Agreement (TFA)

● RoDTEP

● PLI

India & WTO

● Appellate Body

● Issue of public stockholding

● Fishery subsidy

Monetary Management and Financial Intermediation

● Monetary Developments

○ Accommodative stance

○ Reduced repo and reverse repo

○ In later part has held rates

Liquidity Management

● OMO Purchases – ₹ 2.7 lakh Cr

● TLTRO - ₹ 1.13 lakh Cr for

investment in corporate bonds,

commercial papers and non-

convertible debentures

● ₹ 1.25 lakh Cr through LTRO

● Reduction in CRR from 4 to 3%

● Raining the limit for overnight

borrowing for the banks from 2% to

3% of NDTL

Banking Sector

● Monetary Policy Transmission

● Transmission has improved since march 2020. It is because of reforms/measures such as

○ External benchmarking

○ Policy rate cuts

○ Accommodative policy stance etc

● Weighted Average Lending Rate (WALR) on fresh loans declined by 94 bps between March to November 2020 in response to reduction of 115 bps repo rate

○ PSBs exhibited greater transmission

Regulatory measures in banking sector

● Merger of PSBs

● Restructuring of MSME loans

● External benchmarking

Cooperative banks

● PSL increased from 40% to 75%

● Amending Banking Regulation Act

○ RBI can issue directions relating to

management of UCBs

○ RBI – approval of appointment / removal of

statutory auditors of UCBs

○ RBI can supersede the board of directors

○ Allow the UCBs to raise equity capital

○ RBI is empowered to sanction

voluntary/compulsory amalgamation and to

prepare scheme for reconstruction of a UCBs

Digital Payments

● Overall transactions worth ₹ 19.35 lakh Cr have been done under UPI and ₹ 1.02 lakh Cr under RuPay cards in 2020-21 (up to October 2020)

● RBI-DPI consists of 5 broad parameters

○ Payment Enablers (weight 25%)

○ Payment Infrastructure – Demand-side factors (10%)

○ Payment Infrastructure – Supply-side factors (15%)

○ Payment Performance (45%)

○ Consumer Centricity (5%)

IBC

IBC