Limited impact

Context: The recent rate cuts by the RBI might not be able to solve the problem of both demand and supply in the economy. More versatile steps based on lending, spending, and bending of the rule must be evaluated to reap results.

Present Problems:

• Fiscal Deficit: The impact of fiscal deficit is far higher as there is a drop in revenue generation.
• The decline in global ratings: Moody’s lowered the outlook on India’s rating to negative from stable. This impacts overseas investments that are leaving the Indian shore for green pastures.
• Swelling Bad Loans: Bad loans among the banks will be on the rise in the future due to non-payments.
• Depressed economic activity: Combined impact of compression in demand and supply disruptions will keep the economy depressed.
• Inflation: to remain firm in short term and easing in the second half of the fiscal year.

The inefficiency of RBI measure:

• Declining non-food credit: 75 basis point cut in March did not help spike in credit off-take from the banks.
• Unwillingness of firms and banks: in taking loans during the economic uncertainty and to lend, expecting a rise in Non-Performing assets, respectively.

• Excessive burdens on banks to review economy might increase difficulties for them.

• Weakening the position of lenders : By restructuring the Insolvency and Bankruptcy Code (IBC), there is a danger of it becoming irrelevant and might repel investors and promoters. 

• The suspension of insolvency for one year should be reviewed.

Measures to be taken:

• Lending Push: 

• Government guarantee: Banks lack the appetite for credit risks, thus government guarantee would encourage them (E.g. cabinet’s approach for Rs 30,000 crore support to NBFC has pushed for lending.)
• Recapitalization of public sector banks and one-time restructuring of loans.
• Supported Spending: Government must increase spending in the short term without concern on fiscal slippage. The decline in credit ratings would be compensated in long term with increased growth.
• Bending the rules: In an emergency situation, bending the rules to go for a higher stimulus would reap benefits in the future.

Conclusion:

• Even if India does not spend much, credit rating downgrade cannot be avoided. India’s comparatively low spending (1% of GDP) with the world’s average (4%) might affect long term growth which should be addressed in the short term.