Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.
Financing the Pandemic rescue package
When COVID-19 cases began to increase, the Government of India (GoI) announced a 21-day national lockdown and a ₹1.7-lakh crore rescue package.
Challenges
There are expectations of further such packages (aimed at businesses & middle class) and the challenges of financing these relief measures.
Also, the financing strategy should be to raise long-term funds at cost effective rates, with flexible repayment terms.
How can government fund its relief packages?
Utilizing the availability of unused resources in the state disaster relief fund to the tune of ₹60,000 crore
Issuing of GDP-linked bonds
Indian rupee denominated 25-year GDP-linked bonds that are callable from, say, the fifth year
The interest on a GDP-linked bond is correlated to the GDP growth rate and is subject to a cap
The issuer, the GoI, is liable to pay a lower coupon during years of slower growth and vice-versa.
Precedence: Costa Rica, Bulgaria and Bosnia-Herzegovina issued such GDP-linked bonds in the 1990s, from whose experience India could learn
Prerequisite: Publishing reliable and timely GDP data
Utilizing the resources of Public Sector Enterprises(PSEs)
Paying dues to GoI: The 15 largest non-financial central PSEs (CPSEs) owe the government ₹25,904 crore as of end-March 2019
Using cash and bank deposits of these 15 CPSEs (₹64,253 crore) that is in excess of their operating requirements, to increase dividend to government
Monetization of non-core assets of these CPSEs as they generally yield 200 basis points lower than the returns on their core businesses.
Forming Public sector bank holding company (‘Holdco’) along the lines of Singapore’s Temasek Holdings to enable PSEs to monetise their non-core assets at remunerative prices
Securitization of ₹30,168 crore loans that CPSEs have extended to employees, vendors and associates – to ensure that associated businesses remain liquid
RBI has allocated ₹1 lakh crore to carry out long-term repo operations and has reduced the repo rates by 75 basis points to 4.4% to help banks augment their liquidity in the wake of pandemic
Government already enjoys handsome dividends pay-outs by RBI
During the five years ending on June 30, 2019, the RBI paid the GoI 100% of its net disposable income
In FY2019 dividends from RBI more than trebled to ₹1.76 lakh crore from ₹50,000 crore in FY2018.
The Bimal Jalan panel constituted in 2019 to review the RBI’s economic capital framework opined that:
The RBI may pay interim dividends only under exceptional circumstances
The unrealised gains in the valuation of RBI’s assets ought to be used as risk buffers against market risks and may not be paid as dividends
Therefore, it is in India’s self-interest to allow a robust and independent RBI to defend the financial sector’s stability
Conclusion
The GoI may finance the COVID-19 rescue package by issuing GDP-linked bonds, tapping PSEs’ excess liquidity and monetising non-core assets
