IMF summary of economic responses of India Govt on human and economic impact of COVID-19 pandemic

July 2, 2021


Background. The first case of COVID-19 in India was reported on January 30, 2020 and the number of cases continues to rise, in particular, during the ongoing second wave of the pandemic. For the first wave, the strict national lockdown was extended several times, and then followed by a gradual re-opening, with restrictions implemented in select containment zones. For the second wave, localized state-wide lockdowns have been implemented in most states in 2021Q2. The economic impact of COVID-19 has been substantial and broad-based. GDP contracted sharply in 2020Q2 (-24.4 percent year-on-year) due to the unprecedented lockdowns to control the spread of COVID-19. The contraction moderated to -7.4 percent year-on-year in 2020Q3, and growth returned to positive territory in 2020Q4 and 2021Q1, at 0.5 percent and 1.6 percent, respectively. The national statistical office revised up FY2020/21 GDP growth to -7.3% in the latest provisional estimate.

Reopening of the economy. Following the first COVID-19 wave and initial nation-wide lockdown, on April 15, 2020 with a view to supporting economic activities, the government announced several relaxation measures in geographical areas designated as non-hotspot, with effect from April 20, 2020. On April 29, 2020 the government permitted inter-state movement of stranded people, including migrant workers, managed by the nodal authorities who are designated by the states. Some graded relaxations in economic activities have been allowed in geographic areas designated as orange and green zones on May 4 and domestic air travel restarted on May 25. On May 12, the PM announced a relief package of around 10 percent of GDP, including previously announced monetary and fiscal measures. On July 29, the central government issued ‘Unlock 3.0’ guidelines further paving the way for a phased re-opening of activities across the country and limiting the lockdown only to containment zones till August 31. On August 29, the government issued (‘Unlock 4.0’) to further re-open the economy in September, removing restrictions on metro rail in a graded manner from 7 September, and allowing for social, academic, sports, entertainment, and other congregations of up to 100 people. On September 30, the central government issued “Unlock 5.0” guidelines to allow state/union territory governments to decide on reopening schools and coaching institutions after October 15 in a graded manner. Cinemas/theatres/multiplexes will be permitted to open with up to 50% of their seating capacity and entertainment parks will be permitted to open from October 15, 2020. The ceiling on congregations has been extended to 200 people. Following a second COVID-19 wave, most states have announced additional lockdown measures in 2021Q2. On January 3, 2021, India’s Central Drugs Standard Control Organization (CDSCO) provided emergency use authorization (EUA) to the AstraZeneca vaccine and the Covaxin (developed by local firm Bharat Biotech). Both are manufactured domestically in India. On January 11, 2021, the Prime Minister announced the start of the world’s biggest vaccination campaign from January 16th aiming to vaccinate about 300 million people in the coming months. From May 1, all persons above 18 are eligible for vaccinations; vaccine manufacturers are now permitted to sell 50 percent in the open market.

Key Policy Responses as of June 3, 2021

  • India’s central government fiscal support measures can be divided into two broad categories: (i) above-the-line measures which include government spending (about 3.5 percent of GDP, of which about 2.2 percent of GDP is estimated have been utilized in the past fiscal year), foregone or deferred revenues (about 0.3 percent of GDP falling due within the past fiscal year) and expedited spending (about 0.3 percent of GDP falling due within the past fiscal year); and (ii) below-the-line measures designed to support businesses and shore up credit provision to several sectors (about 5.3 percent of GDP). In the early stages of the pandemic response, above-the-line expenditure measures focused primarily on social protection and healthcare. These include in-kind (food; cooking gas) and cash transfers to lower-income households (1.2 percent of GDP); wage support and employment provision to low-wage workers (0.5 percent of GDP); insurance coverage for workers in the healthcare sector; and healthcare infrastructure (0.1 percent of GDP). The measures that were announced later in October and November 2020 include additional public investment (higher capital expenditure by the central government and interest-free loans to states, of about 0.2 percent of GDP) and support schemes targeting certain sectors. The latter includes a Production Linked Incentive scheme targeting 13 priority sectors and is expected to cost about 0.8 percent of GDP over 5 years, a higher fertilizer subsidy allocation benefiting the agriculture sector (0.3 percent of GDP) and support for urban housing construction (0.1 percent of GDP). Several measures to ease the tax compliance burden across a range of sectors have also been announced, including postponing some tax-filing and other compliance deadlines, and a reduction in the penalty interest rate for overdue GST filings.

  • Similar measures to ease tax compliance burden during the months of April and May 2021 were re-introduced in response to the recent surge in infections. Measures without an immediate direct bearing on the government’s deficit position aim to provide credit support to businesses (1.9 percent of GDP), poor households, especially migrants and farmers (1.6 percent of GDP), distressed electricity distribution companies (0.4 percent of GDP), and targeted support for the agricultural sector (0.7 percent of GDP), as well as some miscellaneous support measures (about 0.3 percent of GDP). Key elements of the business-support package are various financial sector measures for micro, small, and medium-sized enterprises and non-bank financial companies, whereas additional support to farmers will mainly be in the form of providing concessional credit to farmers, as well as a credit facility for street vendors. Agricultural sector support is mainly for infrastructure development. On February 1, 2021 the central government budget for FY2021/22 was tabled in the parliament. The budget expanded spending on health and wellbeing, including a provision for the country’s COVID-19 vaccination program (350 billion Rs). In April 2021, in response to the recent surge in infections, the central government announced that free food grains will be provided to 800 million individuals in May and June (with a cost of about 260 billion rupees), similar to the additional food rations provided in 2020 (which had expired in November 2020). The central government also extended a scheme for providing interest-free loans to states for capital expenditure to FY2021/22 (150 billion rupees) and expedited the release of Disaster Response Fund to state governments (from June to May). Finally, customs duties and other taxes on vaccines, oxygen and oxygen-related equipment were waived to boost their availability.

  • Since March 2020, the Reserve Bank of India (RBI) reduced the repo and reverse repo rates by 115 and 155 basis points (bps) to 4.0 and 3.35 percent, respectively, and announced liquidity measures across three measures comprising Long Term Repo Operations (LTROs), a cash reserve ratio (CRR) cut of 100 bps, and an increase in marginal standing facility (MSF) to 3 percent of the Statutory Liquidity Ratio (SLR) (now further extended to September 30, 2021) and open market operations (including simultaneous purchases and sales of government securities), resulting in cumulative liquidity injections of 5.9 percent of GDP through September. The RBI has provided relief to both borrowers and lenders (through end-August) and the Securities and Exchange Board of India (SEBI) temporarily relaxed the norms related to debt default on rated instruments and reduced the required average market capitalization of public shareholding and minimum period of listing.

  • The implementation of the net stable funding ratio and the last stage of the phased-in implementation of the capital conservation buffers were delayed by six months (the delay was later extended till October 2021). On April 1, the RBI created a facility to help with state government’s short-term liquidity needs, and relaxed export repatriation limits. Earlier, the RBI introduced regulatory measures to promote credit flows to the retail sector and micro, small, and medium enterprises (MSMEs) and provided regulatory forbearance on asset classification of loans to MSMEs and real estate developers (later extended to loans from NBFCs). CRR maintenance for all additional retail loans has been exempted, and the priority sector classification for bank loans to NBFCs has been extended for on-lending for FY 2020/21. During April 17-20, the RBI, along with additional monetary easing, announced: (a) a TLTRO-2.0 (funds to be invested in investment grade bonds, commercial paper, and non-convertible debentures of NBFCs); (b) special refinance facilities for rural banks, housing finance companies, and small and medium-sized enterprises; (c) a temporary reduction of the Liquidity Coverage Ratio (LCR) and restriction on banks from making dividend payouts; (d) a standstill on asset classifications during the loan moratorium period with 10 percent provisioning requirement, and an extension of the time period for resolution timeline of large accounts under default by 90 days. Furthermore, state’s Ways and Means Advance (WMA) limits have been increased by 60 percent and now extended till March 2021.

  • The RBI asked financial institutions to assess the impact on their asset quality, liquidity, and other parameters from the COVID-19 shock and take immediate contingency measures. On April 27, the RBI announced a special liquidity facility for mutual funds (SLF-MF) and a fixed-rate 90-day repo operation for banks exclusively for meeting the liquidity requirements of mutual funds, along with regulatory easing for liquidity support availed under the facility, later (April 30) extended to banks’ own deployed resources; and the SEBI reduced broker turnover fees and filing fees on offer documents for public issue, rights issue and buyback of shares. On May 13, the government announced measures targeting businesses: (i) a collateral-free lending program with 100 percent guarantee, (ii) subordinate debt for stressed MSMEs with partial guarantee, and (iii) partial credit guarantee scheme for public sector banks on borrowings of non-bank financial companies, housing finance companies (HFCs), and micro finance institutions.

  • The government also announced (i) a Fund of Funds for equity infusion in MSMEs, and (ii) a special purpose vehicle (SPV) to purchase short-term debt of the eligible non-bank financial companies and housing finance companies, fully guaranteed by the government and managed by a public sector bank. On May 22, the RBI undertook further regulatory easing, including the increase in the large exposure limit, relaxation of some of the norms for state government financing, credit support to the exporters and importers and extension of the tenor of the small business refinancing facilities. On June 4, the RBI extended the benefit under interest subvention and prompt repayment incentive schemes for short-term agricultural loans until August 31, 2020. On June 12, the GST council announced that it would halve the interest rate charged on overdue filings of small businesses. On June 21, the RBI directed banks to assignment zero percent risk weight on the credit facilities extended under the emergency credit line guarantee scheme. On August 6, RBI permitted banks to restructure existing loans to MSMEs classified as ‘standard” (as of March 1, 2020) without a downgrade in the asset classification. The restructuring of the borrower account is to be implemented by March 31, 2021. Banks are required to maintain additional provision of five percent over and above the provision already held by them for accounts restructured. The RBI also announced a resolution plan for corporate and personal loans that were classified as ‘standard’ as of March 1, 2020 but were stressed due to COVID-19. Resolution needed to be invoked by end-December 2020 and the eligible loans continue to be classified as ‘standard’ until the implementation of the resolution plan. Ten percent provisioning was required following the implementation of the resolution plan. On August 31, banks are allowed to hold fresh acquisitions of SLR securities acquired from September 1, 2020 under held-to-maturity up to an overall limit of 22 per cent through March 31, 2021. On September 22, the Parliament adopted the amendment to the Indian Bankruptcy Code (IBC), with no insolvency cases until December 25,2020.

  • The suspension of the IBC was later extended until end-March 2021. On October 9, the RBI announced that the risk weights for new housing loans sanctioned until March 31, 2022 will not be linked to the size of the loan, while they will remain linked to the LTV ratios; the maximum single counterparty exposure limit for retail loans by banks was eased from 5 to 7.5 crore. The RBI announced OMOs of state government securities on October 16. On-tap TLTROs up to three years tenor for a total amount of up to ₹1,00,000 crore at a floating rate linked to the policy repo rate were announced on October 21. The Government extended the Emergency Credit Line Guarantee Scheme (ECLGS) for MSMEs first till November 30th, 2020, then March 31, 2021, and now till September 30, 2021 while at the same time relaxing the eligibility criteria. The RBI has extended the Liquidity Adjustment Facility and the Marginal Standing Facility to the regional rural banks to improve their liquidity management since December 2020. On January 8, 2021, the RBI announced a phased resumption of operations under the revised liquidity management framework, including variable rate reverse repo auction. In February 2021, the reductions in cash reserve requirements against MSME loans for banks were extended until December 2021.

  • On May 4,2021, the RBI introduced a set of further measures aimed at easing liquidity and financing conditions, including on-tap liquidity support to COVID-related healthcare infrastructure and services and special Long-Term Repo Operations (SLTRO) for small finance banks. The resolution scheme for COVID-related stressed retail and MSME loans was re-introduced (extended for MSMEs)—with lenders allowed to invoke restructuring of loans until end-September 2021. Furthermore, for loans restructured under the previous (August 2020) resolution scheme, lenders can further extend moratoriums on repayments or the loan tenors up to a total of 2 years. Finally, banks were allowed to use the countercyclical provision buffers to make specific provisions for non-performing loans until end-March 2022. In late May, the RBI extended the timeline prescribed for compliance with various payment system requirements and the ECLGS scheme till September 30, 2021.

  • On March 16, 2020, RBI announced a second FX swap ($2 billion dollars, 6 months, auction-based) in addition to the previous one with equal volume and tenor. The limit for FPI investment in corporate bonds has been increased to 15 percent of outstanding stock for FY 2020/21. Restriction on non-resident investment in specified securities issued by the Central Government has been removed. Foreign direct investment policy has been adjusted requiring that an entity of a country that shares a land border with India can invest only after receiving the government approval.


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