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Impact of second wave on economy (8 May 2021)

Impact of second wave on economy (8 May 2021)

Context:

  • As the second wave of COVID-19 continues unabated, inducing lockdowns in many parts of the country, the finance ministry said that it has posed a downside risk to economic activity in the first quarter of this financial year. Although, it added that the damage will not be as severe as was seen during the first wave of the pandemic last year.

Background:

  • In its monthly economic report, the finance ministry said the fiscal position of the central government has witnessed an improvement in recent months with a revival in economic activities during the second half of the financial year 2020-21.

Summary of the Debate

Key highlights of the report:

  • As per provisional figures, net direct tax collections for 2020-21 are 4.5% higher than Revised Estimates and 5% higher than collections in 2019-20.

  • GST mop-up registered a good growth and collections exceeded Rs 1 lakh crore in each of the last six months owing to economic recovery.

  • GST revenue registered another record high of Rs 1.41 lakh crore in April, indicative of continual economic recovery.

  • The second wave of the pandemic hit the market sentiment as Nifty 50 and the S&P BSE Sensex recorded losses of 0.4 per cent and 1.5 per cent, respectively in April.

  • The rupee depreciated by 2.3 per cent in April.

  • The domestic financial conditions, nevertheless, continue to remain comfortable with RBI’s support to liquidity, with open market operations worth Rs 3.17 lakh crore carried out in 2020-21.

Kind of impact on Indian economy with the second wave:See the source image

  • In comparison to the first wave, the impact of the second wave on the real economy appears to be limited, according to the RBI.

  • The ability of the economy to sort of start works and keep on doing the work is getting affected a big time because of the spread of the COVID.

  • The government finance is going to hit because economic activity has stopped, tax payment will be lower, consumption has been hit because of lockdown, so GST collections are bound to be lower.

  • The consumer sentiments have turned negative and this is the long-term impact. The general optimism is down because the expectation of the consumer is low at the moment. They are also worried more about their family safety, their health.

  • Income is also impacted.

  • A lot of inflation is linked to food and partly to commodity prices which are risk at the moment certainly oil prices are going up.

  • The infrastructure strengthening will not address the immediate problem of COVID-19 because it will take time.

Measures taken by the government to lessen the impact of the second wave on economy:

  • Experts more than ever are now being brought in to decision making in a sense that what will it take to chain of transmission to be broken.

  • The way state governments are moving, they are very aware, they are far better prepared now than they were earlier.

  • State governments have been given additional flexibility to spend on capital projects and to recycle their asset monetize.

  • There is special assistance to states for capital expenditure.

Some key measures taken by the government in enhancing Oxygen (O2) production in the country:

  • Efforts are being made for improving oxygen production, enhancing tanker availability to optimize logistics, improving oxygen storage at the last mile, and easing norms of procurement.

  • Oxygen production has increased from 5700 MT/day in August 2020 to 9,446 MT/day in May 2021.

  • The production capacity has increased from 6817 MT/ day to 7314 MT/day, and capacity utilization has gone up from 84% to 129% during this period.

  • 50,000 MT of Liquid Oxygen is being imported from overseas.

  • In Delhi, the DRDO has installed 2 oxygen plants, each capable of producing 1,000 litres of oxygen per minute.

How challenges being met in terms of mismatch between Oxygen consuming and Oxygen producing states?

  • Most of the O2 production is happening in eastern part and most of the consumption is happening in western part of India.

  • It ranges from 8-10 percent of the people would be requiring O2 support in a particular day.

  • The allocation is based on parameter that which are the states which have the facility for administering the O2 beds, because if a person is desaturated, it requires other treatment also apart from giving the O2 therapy.

Challenges in transportation:

  • Since it’s being a liquid, it is very hazardous liquid and a person require lots of training to transport that from plant to the end place.

  • Transporting it in container is a major challenge because O2 container were limited.

  • Turnaround time was one of the difficult options for transportation.

Measures taken by the RBI to boost fund flow to the healthcare sector:

  • On-tap liquidity window: To boost provision of prompt funding for ramping up Covid-related healthcare facilities and services in the country, the RBI has introduced an on-tap liquidity window of Rs 50,000 crore with tenors of up to 3 years at the repo rate of 4% until March 31, 2022.

  • Fresh lending support: Banks can provide fresh lending support to hospitals, vaccine manufacturers, importers and suppliers of vaccines and Covid-related drugs, manufactures and suppliers of oxygen and ventilators.

  • Incentives to the Banks: Under the initiative, banks are being incentivised for quickly delivering of loans by extending priority sector classification to such lending until March 31, 2022.

  • Transferring of loans: Banks may provide these loans to borrowers directly or through RBI-regulated financial intermediaries.

  • Covid loan book: Under the scheme, banks are intended to create a Covid loan book.

  • Parking surplus liquidity: As an added incentive, such banks will be able to park their excess liquidity up to the size of Covid loan book with the RBI under the reverse repo window at a rate that is 25 basis points lower than the repo rate or 40 basis points higher than the reverse repo rate.

Measures taken by the RBI to boost fund flow to small borrowers and units:

  • Liquidity support for small finance banks: To provide support to small business units, MSMEs, and other unorganised sector adversely affected during the current wave of the pandemic, the RBI has decided to launch Special Three-year Long-term Repo Operations (SLTRO) of Rs 10,000 crore at repo rate for small finance banks, to be deployed for fresh lending of up to Rs.10 lakh per borrower.

  • Resolution framework 2.0: Borrowers with aggregate exposure of up to Rs 25 crore who have not taken advantage of restructuring under any of the previous restructuring frameworks and who were classified as ‘Standard' as of March 31, 2021 will be eligible to be considered under Resolution Framework 2.0.

  • Credit to MSME entrepreneurs: For the computation of the cash reserve ratio (CRR), banks were allowed to deduct credit issued to new MSME borrowers from their net demand and time liabilities (NDTL) in February 2021. This exemption is now available for exposures up to Rs 25 lakh and credit given up to the fortnight ending October 1, 2021 is being extended till December 31, 2021 in order to further incentivize the entry of unbanked MSMEs into the banking sector.

  • Overdraft (OD) facility for states: The RBI also announced some changes to Overdraft (OD) facilities of state governments to help them better manage their cash flows and market borrowings.

  • KYC rationalization: The RBI has decided to simplify some components of the existing KYC regulations.

Significance of the measures taken by the RBI:

  • The RBI steps will encourage entrepreneurs to take the chances to develop further health care facilities.

  • RBI is building up the ability of the country to handle the COVID impact going on for a longer which is necessary and which is exactly what is expected. It wasn't expected to be an immediate support for current situation, it is expected to be a big support for the months ahead.

  • The on-tap facility which the RBI has opened for investment in health sector is a good one because, it basically incentivizes manufacturers in the critical pharmaceutical support, oxygen and so on, to take out additional investments, to build up capacities, because most estimates say that this capacity would be needed for a very long time.

  • While the government has given the permission to set up those facilities, RBI is providing the money, the incentive for the banks to go ahead and to start helping the investors who come to them, to be able to build those facilities.

  • RBI consistent efforts to maintain adequate liquidity support and the open market operation has been fine tuning the availability and flexibility in the banking system.

  • The stage is well set for additional liquidity to be injected particularly through small finance, banks, SMEs and the NBFC sectors.

Way Forward:

  • More aggressive spending on capital expenditure and asset creation, which has its advantage in terms of creating demand and creating jobs.

  • The other focus area is bound to be on MSMEs because there were lots of damage to the sector during the last lockdown.

  • More investment should be on healthcare because this pandemic has shown that we don’t have the required level of infrastructure.

  • The government has to do fine balancing act between its revenue collection and price management.

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