Govt considers infra push, direct cash transfers to boost demand

With the economy opening up again in the wake of the easing of lockdown curbs in most parts of the country, the Centre is discussing a number of measures to help boost demand. These include an infrastructure push, which may lead to a higher capital expenditure than budgeted for 2020 -21, sources told Business Standard.

There are also discussions on increasing the scope and quantum of direct cash transfers to the beneficiaries who need it the most, two senior officials said.

“With activity picking up, the priority now is pushing demand. There are talks on infrastructure. Any boost there will help create jobs, which we need right now,” said one of the officials. “The National Infrastructure Pipeline is already in place, and that will serve as a starting point for our efforts.”

The official did not rule out the Centre spending more than the FY21 budgeted capital expenditure estimate of ~4.12 trillion. The idea, as is the case during slowdowns, is the Centre and PSUS will boost capex to encourage the private sector to start spending. There are also steps being taken to attract more foreign direct investment.

“The budgeted fiscal numbers don’t hold anymore. Revenue is stretched and we are depending on higher borrowing. If the need arises, capex will be increased,” the official said.

The final report of the National Infrastructure Pipeline was submitted to Finance Minister Nirmala Sitharaman in late April. The report was projecting total infrastructure investment of ~111 trillion during the period FY 2020-25, of which 40 per cent will be borne by the Centre and the states each.

Primary aim is to create jobs Discussions also on increasing scope and quantum of cash transfers

Transfer under Garib Kalyan package to be extended beyond June

The report is now being slightly amended to reflect the reality of the current severe slowdown due to the Covid-19 pandemic and the just ended nationwide lockdown. “The Finance Minister had said that the pipeline will be frontloaded and most of the investment will happen in the first two-three years. That commitment has not changed,” the second official said.

Earlier this month, the Cabinet had approved the setting up of an “Empowered Group of Secretaries (EGOS) and Project Development Cells (PDCS)” in various ministries and departments for attracting investments in India.

“This will make India a more investor-friendly destination and to handhold and further smoothen investment inflows into the country. It will give a fillip to our domestic industries and open up immense direct and indirect employment potential in various sectors,” the Centre had said.

There have also been discussions to boost demand by increasing cash handouts through direct transfer to Jan-dhan accounts, the second official said. As part of the PM Garib Kalyan and Aatmanirbhar Bharat packages, the finance minister had announced a one-time cash transfer to senior citizens, women and divyangs, in addition to increase in quantum of pay under NREGA and expediting PM Kisanp transfers.

“There are discussions being held on increasing the cash transfers. They will be extended beyond June,” said the second official.

The official said that while the Centre had put in place strict measures regarding spending, including no proposal for new schemes expect the ones under the Aatmanirbhar Bharat package, there would be no impact on infrastructure schemes and projects, as also existing rural and welfare schemes.

Two studies done by staff at the Reserve Bank of India (RBI) on non-banking finance companies (NBFCS) recommended more support for the sector to avoid systemic risk. They also advise mutual funds to improve liquidity by investing more in government securities, in the absence of a robust corporate bond market, to tide over redemption pressures.

The studies are not the view of the central bank, but are important as these could later help crystalise the RBI’S view on the matter.

The studies were authored by Yaswant Bitra, Manish Meena, and Anubhav Agarwal of the Financial Stability Unit, and Rituraj, M Jagadeesh, Abhishek Kumar, and Amit Meena of the Financial Markets Regulation Department.

One of the studies, titled ‘Market Financing Conditions for NBFCS’, noted that stress in the sector, which started after the IL&FS crisis last year, was accentuated because of Covid19 related disruptions, and development in the mutual fund sector. Another study 'Issues in Non-bank Financial Intermediation' largely discusses the NBFC sector's impact on the mutual fund industry. For the purpose of this report, we have quoted from the studies interchangeably, and as one.

Therefore, “further policy interventions may be needed to ensure flow of funds to credit-worthy NBFCS, especially small and medium-sized ones and to minimise systemic risks,” the first study said. These policy interventions should “go beyond liquidity related measures to credit related ones,” the first study said, adding that there is a need to ensure credit and liquidity flow to NBFCS with “concrete credit backstop measures to address the risk aversion in the system, bridge the trust deficit and restore confidence.”

The studies pointed out vulnerabilities in open-ended debt mutual funds because of lack of liquidity in shallow secondary corporate debt markets. Without naming the fund house, it alluded to the Franklin Templeton wind-up episode. “…the recent episode of a debt portfolio manager halting withdrawals has brought the spotlight to bear on the functioning of open-ended mutual funds.” About ~1.08 trillion, or 9 per cent, of outstanding market borrowings by NBFCS is expected to mature by July 30, while another ~1.6 trillion will be due in the following nine months.

“Some NBFCS could face challenges in rolling over/financing the redemption requirements at competitive rates, given the current financing conditions for the sector,” one study said, adding that the moratorium extended by banks and liquidity measures by the RBI could be of help.

The RBI has announced a number of liquidity enhancing measures, and the government has come up with credit guarantee schemes, but the issue is of solvency.

While sound policy frameworks should be supported by credible and effective financial safety nets, reinforced by short-term liquidity support from central banks, any amount of liquidity support “cannot address solvency

Apr ‘19 Oct ‘19 Jan ‘20 Feb ‘20 Mar ‘20 Apr ‘20 Corporate bond market conditions for top 100 NBFCS

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issues, weaknesses in investment design and incentives thereof for fund managers, and a widespread risk aversion,” one of the studies noted.

It is important to preserve NBFCS as their combined asset base was more than ~32 trillion at the end of September 2019, up from ~14.5 trillion at the end of March 2014, according to RBI. Most of the NBFC funding comes from banks, but NBFCS raised about 31 per cent of their liabilities till December 2019 through corporate bonds and commercial papers.

MFS are the major buyers of these market instruments — accounting for 61 per cent of total outstanding commercial papers issued by NBFCS as of March 2020. Some NBFCS have also recently raised funds from

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offshore markets as domestic liquidity dried up on risk aversion concerns.

As of April 30, outstanding market borrowings of the top 100 NBFCS, through CPS and bonds (both onshore and offshore), stood at around ~12.6 trillion, marginally higher than the ~12.5 trillion a year before. Monthly market borrowings in April fell to ~33,000 crore. The share of CPS has reduced in favour of foreign currency bonds even as the share of corporate bonds remained stable.

A suggestion was made on stipulating higher limits to debt papers offering higher liquidity as size of the debt scheme increases. The studies said a certain ratio of exposure to government securities in incremental holdings could be stipulated.