Can the deluge of packages revive the Indian economy?

The more significant market related measures were announced by the RBI Governor on March 27. Clearly, the measures showed that the RBI was attacking the problem on a war footing.

Mar 27, 2020 02:03 IST India Infoline News Service

There was literally a deluge of packages after the prime minister announced a total lockdown for 21 days to stave off the risk of Coronavirus pandemic spreading in India. The first package came from the Finance Minister on March 26. The intent of the package was essentially to take care of the more vulnerable sections of the Indian economy directly exposed to the economic slowdown resulting from the lockdown. The package included helicopter payouts to families, direct transfers to housewives for home expenses, double quota of food grains from the fair price shops as well as medical insurance up to Rs50 lakhs for the healthcare workers at the forefront of the battle against the pandemic. All these may not stimulate growth but are meant to essentially take care of the BPL families. In addition, for the lower income groups, the government will also contribute to EPF on behalf of the employee and the employer for a period of 3 months. That would be essential to ensure that jobs and savings were not lost in the interim.

The more significant market related measures were announced by the RBI Governor on 27 March. Clearly, the measures showed that the RBI was attacking the problem on a war footing. Some of the key measures were as under.
  • The repo rate was cut by 75 basis points from 5.15% to 4.40%. This is one of the sharpest rate cuts by the RBI and shows the sense of urgency. In addition, the reverse repo rate has been reduced by 90 bps to 4% to make funds cheaper.
  • In addition, the RBI has also cut the CRR rate by 100 basis points to 3% of net demand and time liabilities (NDTL). This CRR cut is likely to release Rs.137,000 crore into the banking system.
  • The RBI has also undertaken a massive LTRO program to infuse regular liquidity into the financial markets. The total liquidity infusion will be to the tune of $50 billion (Rs374,000cr). This is likely to support markets.
  • Along expected lines, the RBI has announced that any moratorium on term loans and working capital will not lead to asset downgrade. In addition, EMIs for consumer loans will be allowed to be frozen for a period of 3 months.

All these measures put together would most likely keep the liquidity taps flowing.

That brings us to the central question of whether this will really help GDP growth. Moody’s in its latest assessment had downsized India’s GDP growth for calendar year 2020 from 5.3% to just 2.5%. That would most likely mean negative GDP growth in the March quarter and either negative to flat growth in the June quarter. However, what this package will help to achieve is a rapid revival in growth post June 2020. That will be the big bet for the stock markets to show signs of a genuine revival.

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