Tag: world bank

Subbarao, BFSI News, ET BFSI

Banking & Finance

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The central bank can directly print money and finance the government, but it should avoid doing so unless there is absolutely no alternative, former RBI governor D Subbarao on Wednesday said while pointing out that India is ‘nowhere’ near such a scenario.

In an interview with PTI, Subbarao suggested that to deal with the second wave of COVID-19 induced slowdown in the economy, the government can consider Covid bonds as an option to raise borrowing, not in addition to budgeted borrowing, but as a part of that.

“It (RBI) can (print money) but, it should avoid doing so unless there is absolutely no alternative. For sure, there are times when monetisation – despite its costs – becomes inevitable such as when the government cannot finance its deficit at reasonable rates.

“We are nowhere near such a scenario,” he said.

India’s economy contracted by less-than-expected 7.3 per cent in the fiscal ended March 2021. For 2021-22, the deficit has been put at 6.8 per cent of the GDP, which will be further lowered to 4.5 per cent by 2025-26.

The Reserve Bank has lowered the country’s growth projection for the current financial year to 9.5 per cent from 10.5 per cent estimated earlier, amid the uncertainties created by the second wave of the coronavirus pandemic, while the World Bank on Tuesday projected India’s economy to grow at 8.3 per cent in 2021.

According to Subbarao, when people say the RBI should print money to finance the government’s deficit, they don’t realise that the central bank is printing money even now to finance the deficit, but it is doing so indirectly.

For example, he said, when the Reserve Bank of India buys bonds under its open market operations (OMOs) or buys dollars under its forex operations, it is printing money to pay for those purchases, and that money indirectly goes to finance the government’s borrowing.

“The important difference though is this when RBI is printing money as part of its liquidity operations, it is in the driver’s seat, deciding how much money to print and how to channel it into the system,” the former governor noted.

In contrast, Subbarao said, monetisation is seen as a way of financing the government’s fiscal deficit, with the quantum and timing of money to be printed being decided by the government’s borrowing requirement rather than the RBI’s monetary policy.

“That will be seen as RBI losing control over the money supply, which will erode the credibility of both the RBI and the government with costly macroeconomic implications,” he observed.

The RBI’s monetisation of fiscal deficit means the central bank printing currency for the government to take care of any emergency spending to bridge its fiscal deficit.

Asked whether a Covid bond is an option that the government can consider to raise some borrowing, the former RBI governor said, “It is something worth considering, not in addition to budgeted borrowing, but as a part of that”.

In other words, Subbarao said instead of borrowing in the market, the government could raise a part of its borrowing requirements by issuing Covid bonds to the public.

“Appropriately priced and structured, they can provide relief to savers who are short-changed by the low-interest rates on bank fixed deposits.

“Moreover, such Covid bonds will not add to the money supply and will not, therefore, interfere with RBI’s liquidity management,” he pointed out.

To a question on whether the RBI can generate more profits to help relieve the government’s fiscal stress, Subbarao said the central bank is not a commercial institution and profit-making is not one of its objectives.

According to Subbarao, in the course of its business, the RBI makes some profit and withholds a part of that to meet its expenditure and to build its reserves, and transfers the ‘surplus profit’ to the government.

“How much it can hold back for buffering its reserves is now prescribed by the Bimal Jalan Committee.

“The RBI should not do anything with the express intent of making profits,” he emphasised.

The RBI has transferred Rs 99,122 crore to the government as its surplus profit, nearly twice the budgeted amount.

Asked what else can the RBI do to help the economic recovery, Subbarao said since the pandemic hit us over a year ago, the RBI has acted briskly and innovatively.

“What the RBI can do going forward is what the Governor said in his recent policy statement which is to see that there is an ‘equitable distribution of liquidity, which is to say that the credit support must go to the most distressed sectors,” he noted.

To a question – can the RBI embrace even more unconventional policies, Subbarao said there are limits to what an emerging economy central bank like the RBI can do as compared to rich-country central banks like the Fed or the ECB.

“Developed economies have the policy room and the firepower to throw the kitchen sink at the problem. They borrow in hard currencies, which everyone craves.

“We do not enjoy those comforts. Moreover, markets are less forgiving of excesses by emerging market central banks,” he observed.



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An informal economy is a biggest challenge for lockdown in India, say Experts, BFSI News, ET BFSI

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As many states in India seem to be heading for a total lockdown, the World Bank chief economist Carmen Reinhart has opined that less extreme forms of lockdown can work in a country like India, sparking a debate on their efficacy.

While some favour total lockdown because it can protect lives, others think that a lockdown would destroy livelihoods and thus lives.

A lockdown was necessary to help India develop its healthcare infrastructure to deal with the Covid-19 crisis. Now that is in place along with treatment protocols, there is no need for another lockdown, opine many.

World Bank view

“I think in countries like India, a very big challenge to the lockdown approach has been the informal sector, she told ET.

There are ways of addressing, perhaps less extreme forms of lockdown that allow for some flexibility. But vaccines alone have to still be supplemented with health emergency measures, she said, adding “I have no doubt that that is still the case. And I do think the big challenge remains the tension between needing to work for survival and the tension of containing the pandemic.”

“The informal economy has been and continues to be a big challenge for India but I would say vaccines alone, at this stage, don’t do it. You still need the other protection mechanisms of social distancing and the like,” she said.

Lancet Commission

The Lancet Covid-19 Commission India Task Force has not recommended a blanket national or state lockdown, as opposed to localized, phased restrictions or closures.

Its report said the experience of the past year has shown that economic closures are most disruptive to the poorest sections of the society. In urban areas, daily wage earners, informal sector workers, and low-skill workers are the most likely to be impoverished from disruptions in economic activities.

Yet, experience from other countries has shown that lockdowns do assist in bringing down transmission rates.

Middle approach

A middle ground approach will be needed in India. “We recommend that in areas of high infection rates, the focus is on breaking the chain of transmission through local actions. We recommend that advisories be issued that strongly encourage anyone that can to remain at home (white collar workers, for example, who can work from home) to do so”, the report said.

“We also recommend that venues that host large congregations should be closed, and activities that encourage large gatherings should be banned”, it added. But restrictions on the movement or work of the working urban and rural poor should be minimized and locally determined through the creation of micro-containment zones in high case-load areas.

Localised trends

Decisions on local lockdowns or curfews are best left to local authorities and must be based on localised trends in epidemiological data (transmission, test positivity rates, hospitalisation, and mortality rates). These decisions should be made after in-depth consultations with local businesses, community leaders, and workers associations.

More importantly, extra care needs to be taken in terms of testing and vaccinations to ensure that workers are protected and are safe during this current phase of the pandemic, the report said.

The central government take

Union Health Secretary Rajesh Bhushan had written to Maharashtra Chief Secretary Sitaram Kunte stating that the state’s focus should be on strict and effective containment, not the imposition of a lockdown.

“Measures such as night curfews, weekend lockdowns, have very limited impact on containing/ suppressing the transmission. Hence the district administration should focus on strict and effective containment strategy,” Bhushan wrote.



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World Bank, IMF to consider climate change in debt reduction talks, BFSI News, ET BFSI

Personal Finance

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By Andrea Shalal

WASHINGTON – The World Bank is working with the International Monetary Fund (IMF) on ways to factor climate change into the negotiations about reducing the debt burdens of some poor countries, World Bank President David Malpass told Reuters in a Friday interview.

Three countries – Ethiopia, Chad and Zambia – have already initiated negotiations with creditors under a new Common Framework supported by the Group of 20 major economies, a process that may lead to debt reductions in some cases.

Malpass said he expected additional countries to request restructuring of their debts, but declined to give any details.

The coronavirus pandemic has worsened the outlook for many countries that were already heavily indebted before the outbreak, with revenues down, spending up and vaccination rates lagging far behind advanced economies.

China, the United States and other G20 countries initially offered the world’s poorest countries temporary payment relief on debt owed to official creditors under the Debt Service Suspension Initiative (DSSI). In November, the G20 also launched a new framework designed to tackle unsustainable debt stocks.

Malpass said the Bank and the IMF were studying how to twin two global problems – the need to reduce or restructure the heavy debt burden of many poorer countries, and the need to reduce fossil fuel emissions that contribute to climate change.

“There’s a way to put together … the need for debt reduction with the need for climate action by countries around the world, including the poorer countries,” he said, adding that initial efforts could happen under the G20 common framework.

Factoring climate change into the debt restructuring process could help motivate sovereign lenders and even private creditors to write off a certain percentage of the debt of heavily-indebted poorer countries, in exchange for progress toward their sustainable development and climate goals, experts say.

The World Bank and the IMF play an important advisory and consultative role in debt restructuring negotiations since they assess the sustainability of each country’s debt burden.

Many developing countries require huge outlays to shore up their food supplies and infrastructure as a result of climate change. Governments must also spend a large amount on alternative energy projects, but lack the resources to pay for those needed investments.

“There needs to be a moral recognition by the world that the activities in the advanced economies have an impact on the people in the poorer economies,” Malpass said.

“The poorer countries are not really emitting very much in terms of greenhouse gases, but they’re bearing the brunt of the impact from the rest of the world,” he added.

IMF Managing Director Kristalina Georgieva earlier this month told reporters about early-stage discussions underway about linking debt relief to climate resilience and investment in low-carbon energy sources.

Doing so, she said, could help private sector creditors achieve their sustainable development targets, she said.

“You give the country breathing space, and in exchange, you as the creditor can demonstrate that it translates into a commitment in the country that leads to a global public good,” she said.



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