July 2020 Economic Affairs

Sakshi Education

Financial Stability Report: RBI
Recently, the Reserve Bank of India (RBI) released its Financial Stability Report (FSR) for the month of July 2020.

The FSR reflects the collective assessment of the Sub-Committee of the Financial Stability and Development Council (FSDC - headed by the Governor of RBI) on risks to financial stability and the resilience of the financial system.

The Report also discusses issues relating to development and regulation of the financial sector.

Key Points
Increase in Bad Loans:
The RBI warned that the Gross Non-performing Assets (GNPA) ratio of all Scheduled Commercial Banks (SCBs) may increase from 8.5% in March 2020 to 12.5% by March 2021.

The GNPA ratio may also worsen to as high as 14.7% by the end of the current financial year, if the adverse economic impact of the Covid-19 pandemic would be ‘very severe’.

According to experts at least 5% of the moratorium loans could turn into NPA if Covid-19 impact persists in the economy.

In the wake of Covid-19, the RBI had announced a six months loan moratorium to all term loans. The moratorium was first given for March-May (2020) but was later extended to June-August (2020).

The Covid-19 lockdown had a significant impact on all industrial activities in the economy resulting in major income loss. This has impacted their loan repayment ability.

This may lead to Gross Domestic Product (GDP) contraction by 8.9% in 2020-21.

Decreasing Capital Adequacy Ratio:
The RBI projected that Capital Adequacy Ratio (CAR) ratio could slide to 13.3% in March 2021 under the normal scenario and to 11.8% under the very severe stress scenario.

CAR is the ratio of a bank’s capital in relation to its risk weighted assets and current liabilities. It is also known as Capital-to-Risk Weighted Asset Ratio (CRAR). Indian SCBs are required to maintain a CAR of 9%.

Earlier the CAR of SCBs decreased to 14.8% in March 2020, from 15% in September 2019.

Risk Aversion by Banks:
Risk aversion in Public Sector Bank (PSBs) was more as compared to private banks. PSBs chose to give money only to high-quality borrowers.

However, the risk aversion tendency is also increasing in private banks.
RBI has warned that extreme risk aversion would have adverse effects on the economy.

Risk to Financial System:
The RBI said that the Indian financial system remained stable, despite the significant downside risks to economic prospects.

The downside risks to short term economic prospects are high due to the lockdown induced disruptions to both supply and demand side factors, diminished consumer confidence and risk aversion.

Issues Involved:
Recently, the former RBI Governor Urjit Patel has criticised the government for diluting the Insolvency and Bankruptcy Code (IBC) and the powers of the RBI.

He has said that this has undermined the efforts made since 2014 to clean up the bad loan mess.

The government uses ownership of banks as a means for day-to-day macroeconomic management rather than primarily for efficient intermediation between savers and borrowers.

Banks have poor asset quality, lack of profitability, loss of capital, excessive risk exposure, poor conduct, and liquidity concerns.

There is also a lack of a mechanism to address bank failures.

Stress on Non-banking Finance Companies (NBFCs) and mutual funds is emerging as a strain on the financial system.

Suggestions:
All the financial intermediaries need to assess the impact of Covid-19 on their balance sheet, asset quality, liquidity, profitability and capital adequacy for the FY 2020-21 and to work out possible mitigating measures.

The idea is to ensure continued credit supply to different sectors of the economy and maintain financial stability.

Financial intermediaries should make risk management in tune with the emerging contingencies.

The risk management includes, building buffers and raising capital, which will strengthen the internal defences of banks against the risks posed by Covid-19 and also ensure credit flow.

Recapitalization plan for Public Sector Banks (PSBs) and private banks since the minimum capital requirements of banks may no longer be sufficient enough to absorb the losses.

The minimum capital requirements of banks are calibrated based on historical loss events.
Electronics Manufacturing in India
Recently, the Government of India unveiled three schemes with an outlay of about Rs. 48,000 crore to promote electronics manufacturing in India. These schemes are:
Production Linked Incentive (PLI) Scheme.
Scheme for Promotion of Manufacturing of Electronic Components and Semiconductors (SPECS).
Modified Electronics Manufacturing Clusters (EMC 2.0) Scheme.

Key Points
The Indian electronics sector is tremendously growing with the demand expected to cross USD 400 billion by 2023-24.

Domestic production has grown from USD 29 billion in 2014-15 to nearly USD 70 billion in 2019-20 (Compounded Annual Growth Rate of 25%).

Most of this production takes place in the final assembly units (last-mile industries) located in India and focussing on them would help develop deep backward linkages, thus inducing industrialization.

This was an idea propounded by economist Albert O Hirschman in his theory of ‘Unbalanced Growth’.

The Economic Survey 2019-20 also promoted this idea and suggested “assembly in India for the world”, especially in “networked products”, in a bid to create four crore well-paid jobs by 2025 and eight crore jobs by 2030.

This is the strategy that helped China become the economic superpower it is today.

The recently launched PLI Scheme plans to achieve this goal by granting an incentive of 4-6% for domestic production.

Challenges
Missing Profits:
Despite the impressive growth of electronic production in India, the net value added by production units is very low.

The net value addition ranges between 5% and 15%, as most components are imported rather than locally sourced.

It implies that local value addition is a mere USD 7-10 billion out of a global market of USD 2.1 trillion.

Limited Indigenous Capability in Upstream Industries:
In the era of global supply chains, the value addition at the final stages of production is very low, especially in electronics because the more complicated processes, involving greater value addition, occur prior to assembly, in ‘upstream’ industries.

These include the production of processors, display panels, memory chips, cameras, etc.

Currently, these imports nearly constitute 80% of these components, with approximately 67% of the imports coming from China alone.

Absence of Foundries:
In the absence of foundries (semiconductor fabrication plants where microchips are produced), India has to rely on foreign contractors to produce microchips.

There are about 170 commercial foundries globally but India does not have a single one.

Chip manufacturers like Intel, TSMC and Samsung choose other countries instead of India citing uncertain domestic demand and poor cost efficiencies here.

Challenges in Set-up of Foundries:
It requires massive capital expenditure to the tune of USD 2 billion and more.

Foundries are also required to adopt newer technologies and processes almost every 18 months to ensure competitiveness which means high capital depreciation and often accounts for 50-60% of the production cost.

Domestic players have also shown low interest due to their inability to compete with tech giants in research and development (R&D) and investment.

Due to this, proposals to develop foundries in Gujarat and Uttar Pradesh in recent years were abandoned.

Many industry experts also cite the lack of a foundry as contributing to low R&D in this sector in India, which results in poor talent retention and eventually ‘brain drain’.

The Indian Space Research Organisation (ISRO) and the Defence Research and Development Organisation (DRDO) have their own foundries but their use is restricted for space and defence systems, respectively.

National Security Considerations:
Most of the chips, as well as components used in Indian communication and critical systems, are imported.

This could hamper national security and sovereignty as backdoors could be programmed in chips during manufacturing, which could compromise networks and cyber-security.

Backdoor refers to any method by which authorized and unauthorized users are able to get around normal security measures and gain high-level user access on a computer system, network or software application.

Increasing Imports:
It is expected that electronics imports will soon overtake crude oil as India’s largest import commodity which will result in assembly units ending up as little more than mere packaging units.

Suggestions
Increasing Investments: The total outlay of Scheme for Promotion of Manufacturing of Electronic Components and Semiconductors (SPECS) must be increased from the current Rs. 3300 crore, to attract the microchip giants.

The government launched SPECS to provide a 25% incentive on capital expenditure for semiconductor manufacturing among other core components.

The economic impact of a foundry is immense and ranges from 6 to 23 times the investment in the plant.

According to a recent report, a single foundry can offset imports worth USD 8 billion over a projected period and have a further multiplier effect of USD 15 billion on the Gross Domestic Product (GDP).

Profiting from Anti-Chinese Sentiments: Due to the USA’s allegations on China for worsening Covid-19 and India-China conflict and recent developments as a result of it, numerous multinational companies (MNCs) are shifting their production out of China.

The USA and the UK have blocked China's access to chip making tools and designated Chinese telecom giants as national security threats.

It is a golden opportunity for India to act fastly on it and attract this outgoing investment.

Pushing Make in India: There is a need to promote semiconductor manufacturing alongside assembly units in India.

This will induce greater local production of components and also fuel the growth of the industry as a whole, making Make in India successful.

In 2019, the Union Cabinet gave its approval to the National Policy on Electronics 2019 which envisions positioning India as a global hub for Electronics System Design and Manufacturing.
Direct Monetisation for Funding Deficit: SBI
Recently, a report by the State Bank of India (SBI) has recommended direct monetisation as a possible way of funding the Centre’s deficit at lower rates, without increasing inflation and affecting debt sustainability.

Key Points
Direct Monetisation:
It simply means that the Reserve Bank of India (RBI) directly funds the Central government’s deficit against government bonds or securities.

Until 1997, the government used to sell securities directly to the RBI. This allowed the government to technically print equivalent amounts of currency to meet its budget deficit.

However, this practice was stopped over its inflationary impact and in favour of fiscal prudence.

This is different from the “indirect” monetisation that RBI does when it conducts the Open Market Operations (OMOs) and/or purchases bonds in the secondary market.

Increasing Debt:
Most agencies expect India’s Gross Domestic Product (GDP) to contract by more than 5% in FY 2020-21 as a result of slump in economic activity. This has also led to reduction in revenues of the government.

This means the government will run short of its revenue targets, and will be forced to raise debt.

Further, SBI noted that the GDP collapse is pushing up the debt-to-GDP ratio by at least 4%.

India’s debt-to-GDP ratio is projected to rise to around Rs. 170 lakh crore or 87.6% of GDP in FY21, from Rs 146.9 lakh crore (72.2% of GDP) in FY20.

The higher debt-to-GDP ratio means, less probability of the country to pay back its debt and the higher its risk of default.

Recommendations of the SBI Report:
The report argued that the Fiscal Responsibility and Budget Management (FRBM) Act, 2003 also allows direct monetisation of deficit in certain exceptional circumstances, the Covid-19 pandemic being one such.

It expects this not to be inflationary, given the stagnant demand in the country.

The report argued that bringing growth back is more important to debt sustainability as compared to fiscal conservatism (which involves lower levels of public spending, lower taxes and lower government debt).

As the current level of foreign exchange reserves are sufficient to meet any external debt obligations. Also, since most of the debt is domestically owned, the debt servicing of the internal debt is also not an issue.

The real challenge is the contraction of economic growth, which can turn interest rate-growth differential into a positive trajectory.

Interest rate - growth differential is a key metric watched by agencies to gauge debt sustainability.

A negative interest rate-growth differential, which denotes growth is higher than interest rate on debt, is important from a sustainability perspective, as higher growth means government’s revenue expansion will outstrip any spike in debt repayment.
India aims to pare PSU bank count to just five: sources
India is looking to privatise more than half of its state-owned banks to reduce the number of government-owned lenders to just five as part of an overhaul of the banking industry.

Details:
The Centre is working on a privatisation plan to help raise money by selling assets in non-core companies and sectors when the country is strapped for funds due to lack of economic growth caused by the COVID-19 pandemic.

India expects bad loans at its banks to double after the crisis brought the economy to a standstill.

According to officials, the first part of the plan would be to sell majority stakes in Bank of India, Central Bank of India, Indian Overseas Bank, UCO Bank, Bank of Maharashtra and Punjab & Sind Bank, leading to an effective privatisation of these state-owned lenders.

Several government panels and the RBI have recommended a maximum of five state-owned banks.

At present, India has 12 state-owned banks.
Achieving Zero Hunger by 2030: UN Report
According to a study titled State of Food Security and Nutrition in the World, hunger and malnutrition is increasing around the world. In this scenario, achieving the Sustainable Development Goal (2) of ‘Zero Hunger’ by 2030 will be very difficult.

The State of Food Security and Nutrition in the World is the most authoritative global study tracking progress towards ending hunger and malnutrition.

It is produced jointly by the Food and Agriculture Organization (FAO) of the United Nations, the International Fund for Agriculture (IFAD), the United Nations Children’s Fund (UNICEF), the UN World Food Programme (WFP) and the World Health Organization (WHO).

Key Points
Increasing Hunger:
Steep Rise: The study estimates that almost 690 million people went hungry in 2019 – up by 10 million from 2018, and by nearly 60 million in five years (2014-2019).

Hunger is an uncomfortable or painful physical sensation caused by insufficient consumption of dietary energy.

For decades, FAO has used the prevalence of undernourishment indicator to estimate the extent of hunger in the world, thus “hunger” may also be referred to as undernourishment.

Chronic Hunger: There has been no change in the hunger trend since 2000, After steadily diminishing for decades, chronic hunger slowly began to rise in 2014 and continues to do so.

Regional Hotspots: Asia remains home to the greatest number of hunger (381 million). Africa is second (250 million), followed by Latin America and the Caribbean (combined 48 million).

Rate of Hunger: The rate of undernourishment (hunger) in Africa is double compared to Asia and it is expected that by 2030, Africa will be home to more than half of the world’s chronically hungry.

Impact of Covid-19: The Covid-19 pandemic could also push over 130 million more people into chronic hunger by the end of 2020.

Reasons: High costs and low affordability was the main reason behind the hunger.

Increasing Malnutrition:
Affordability: The study estimates that 3 billion people or more cannot afford a healthy diet.

In sub-Saharan Africa and southern Asia, this is the case for 57% of the population.

The key reason behind malnutrition is the high cost of nutritious foods and the low affordability of healthy diets for vast numbers of families.

According to the study, a healthy diet costs far more than USD 1.90/day, which is the international poverty threshold.

It puts the price of even the least expensive healthy diet at five times the price of filling stomachs with starch only.

Impact on Children: According to the study, in 2019, nearly a third of children under five (191 million) were stunted (too short) or wasted (too thin). Another 38 million under-fives were overweight.

Suggestions
Shifting of Diet: A global switch to healthy diets would help check the backslide into hunger while delivering enormous savings.

Shift to a healthy diet will reduce the health costs associated with unhealthy diets.

The diet related social cost of greenhouse gas emissions, estimated at USD 1.7 trillion, could also be cut by up to three-quarters by 2030.

Transform Food Systems: The transformation of food systems will not only reduce the cost of nutritious foods but also increase the affordability of healthy diets.

The study calls on governments:
To mainstream nutrition in their approaches to agriculture.

Work to cut cost-escalating factors in the production, storage, transport. distribution and marketing of food – including by reducing inefficiencies and food loss and waste.

Support local small-scale producers to grow and sell more nutritious foods and secure their access to markets.

Prioritize children’s nutrition as the category in greatest need.

Foster behaviour change through education and communication;

Embed nutrition in national social protection systems and investment strategies.
Investments in India
According to a recent survey by Projects Today, overall fresh investment announcements in India slumped to the lowest in five years in the first quarter of the financial year 2020-21.

The period saw extended pandemic-induced lockdowns.

During this time, Tamil Nadu emerged as the country’s top investment destination.

Projects Today is an independent firm that tracks investment projects in the country.

Key Points
Investments improved every passing month in the quarter (April to June).

In April, there was an announcement of 260 new projects worth Rs. 20,181.6 crore.

In May, it rose to 436 new projects worth Rs. 37,922 crore.

In June, after the announcement of Unlocking 1.0 of the economy, there was a further surge in the number of new projects. In all, the month saw the announcement of 545 new projects with a total investment of Rs. 39,755.43 crore.

Reliance secured investments from some of the world’s largest firms such as Google, Facebook (Jio-Facebook Deal) and Intel.

However, fresh project expenditure from Central government agencies dipped in June 2020, though it is expected to rise in coming months.

With falling revenues due to the lockdown and mounting expenses due to the pandemic, the government has blocked the initiation of approved/appraised new schemes by various ministries and departments for the next 9 months or till 31st March 2021.

Atmanirbhar Bharat and Pradhan Mantri Garib Kalyan Yojana have been insulated from the expenditure cut measures.

The coming quarters will also demonstrate the efficacy of the Centre’s stimulus packages, that included financial and fiscal reforms along with steps to enhance the agriculture and small scale industries, in attracting foreign and domestic private capital.

Investment projects were largely dominated by the government sector and private promoters also announced new projects.

Apart from investments, fresh capacity additions are expected in the healthcare and pharma sectors with immediate effect.

Covid-19 has led companies to do intensive research for its vaccinations which need fundings.

The pandemic gave boost to the production of Personal Protection Equipment (PPEs), masks, sanitisers etc. because of more emphasis on personal hygiene and products related to it.

Development of various anti-viral and immunity boosting medicines also went up.

States like Tamil Nadu and Maharashtra held investors meet and signed MoUs, Uttar Pradesh, Madhya Pradesh and Karnataka reworked labour laws, started building land banks and sent proposals to foreign companies.

Major Challenges: Country’s slow-moving official machinery, archaic land and labour laws are some of the things preventing foreign companies from bringing in their technology and capital to India.
NPCI launches UPI AutoPay feature for recurring payments
National Payments Corporation of India (NCPI) launched its one-stop fintech payment solution Unified Payments Interface (UPI) AutoPay in a virtual event of Global Fintech Fest.

Highlight:
UPI AutoPay is dedicated to recurring payments.

It can be used for multiple financial purposes such as utility payments, booking bus pass, train tickets, paying DTH subscriptions among others.

Customers can create e-mandate through their UPI ID or QR Scan for transactions up to Rs.2000.

For transactions above Rs.2000, the UPI PIN will be needed to authenticate the payment.
Display of ‘Country of Origin’ Must for e-Commerce Site
Recently, the Central government has told (via an affidavit) the Delhi High Court that all e-commerce entities have to ensure the mandatory declaration of ‘country of origin’ of imported products sold on their site.

The Consumer Protection Act 2019 also mandates to display the ‘country of origin’ by the e-commerce entities.

Key Points
The affidavit came in response to a Public Interest Litigation (PIL) seeking directions to the Centre to ensure that the name of the manufacturing country is displayed on products being sold on e-commerce sites.

The petitioner has sought implementation of the Legal Metrology Act, 2009 and the Legal Metrology (Packaged Commodities) Rules, 2011, which mandate that country of origin be displayed on products being sold on e-commerce sites.

Enforcement of the provisions of the said Act and Rules rests with the States and Union Territories governments.

The petitioner has contended that enforcement of the mandate is in sync with the recent ‘Vocal for Local’ and ‘AtmaNirbhar’ Bharat push by the government of India.

Earlier, the Central government has also mandated for all sellers on the Government e-Marketplace (GeM) to list the Country of Origin while registering new products.

GeM is a platform for public procurement.

Issues Involved
Most of the e-commerce sites function as a ‘marketplace-based’ e-commerce model in which they only act as an ‘intermediary’ i.e they merely provide their information technology platform to connect third-party sellers with their potential consumers.

The other form of e-commerce model is ‘Inventory-based,’ where the entities offer services or goods for sale from their own inventory.

The e-commerce entities say that they have ensured that a data field pertaining to ‘country of origin’ is available on their system, which may be filled in by a seller when creating a new product listing.

However, they have not made it mandatory, because the law does not mandate a disclosure of the ‘country of origin/manufacture/assembly’, in the case of India-manufactured goods.

In many cases, finished goods sourced from different countries are packed together or assembled in a third country, prior to their shipment into India.

Therefore, it could not be presumed that the rules intended that the last country of export alone be declared as the ‘country of origin,’ unless the law is amended or clarified to expressly state so.
Increase in Gold Prices
Recently, the gold prices crossed Rs. 50,000 per 10 grams after nine years in India.

Gold prices in India are dictated by international prices. India is the world’s second-largest gold consumer after China.

Key Points
Reasons:
Global uncertainties triggered by Covid-19 pandemic, weak dollar, low-interest rates environment and stimulus programmes have increased the demand for gold.

Rising virus cases and USA-China tensions have also led to increase in the gold price.

Gold as Safe Haven:
Whenever stock markets, real estate and bonds fall across the world, investors turn to gold to park their funds. It is considered as a safe haven for investors during periods of uncertainties.

As gold is highly liquid and carries no default risk. It is scarce which has historically preserved its value over time.

Liquidity describes the degree to which an asset can be quickly bought or sold.

Further, supply growth of gold has changed little over time, in contrast to fiat money (paper currency), which can be printed in unlimited quantities to support monetary policy.

Gold is an integral part of wedding ceremonies in India. It is traditionally used as a hedge against inflation.

Global economies are considering stimulus to boost growth which may lead to increase in inflation further.

Return on Gold:
Historically, gold has generated long-term positive returns.

The price of gold has increased by an average 14.1% per annum since 1973 after Bretton Woods collapsed and the gold standard system of pegging the currency to gold ended.

Bretton Woods System was a fixed exchange rate system, under which gold was the basis for the US dollar and other currencies were pegged to the US dollar’s value.

Gold has surged nearly 40% in the last one year while the Sensex (benchmark index of Bombay Stock Exchange) showed a loss of 0.41% in the same period.

India’s Gold Market:
According to the World Gold Council (WGC), households in India may have around 24,000-25,000 tonnes of gold. Various temples across the country also hold sizable gold holdings.

The Reserve Bank of India bought 40.45 tonnes of gold in the financial year 2019-20, taking its total holdings of the gold to 653.01 tonnes.

It is a part of RBI’s forex reserves.

India’s gold demand in 2019 was 690.4 tonnes compared to 760.4 tonnes in 2018.

The demand has reduced in 2020 due to lockdown caused by pandemic.

Around 120-200 tonnes of gold are estimated to be smuggled into India every year.
Restrictions on Public Procurement
Recently, the Government of India imposed restrictions on public procurement from bidders of countries that share a land border with India, citing grounds of defence and national security.

This was done by amending the General Financial Rules 2017.

Earlier the Central government has made it mandatory for sellers on the Government e-Marketplace (GeM) portal to clarify the country of origin of goods when registering new products.

The government also amended Foreign Direct Investment (FDI) rules mandating prior approval for investment by entities in countries that share land borders with India.

Key Points
Reason:
According to experts, this decision has been taken to prevent the influx of Chinese products and investments into India, following the clashes between Indian and Chinese troops in Galwan Valley.

To push for Atmanirbhar Bharat (self-reliant India).

New Order:
Bidders from these countries will be eligible only if they are registered with the Registration Committee (Competent Authority) constituted by the Department for Promotion of Industry and Internal Trade (DPIIT).

For national security reasons, the Registration Committee shall not be required to give reasons for rejection/cancellation of registration of a bidder.

Bidders will also be required to take mandatory political and security clearance from the ministries of External Affairs and Home respectively.

The order will be applicable for public sector banks and financial institutions, Autonomous Bodies, Central Public Sector Enterprises (CPSEs) and Public Private Partnership projects receiving financial support from the Government or its undertakings.

The order will not apply to procurement by the private sector.

Order Mandatory for State Governments:
The Central government has invoked the provisions of Article 257(1) of the Constitution, directing the state governments to implement this order for all public procurement.

For State government procurement, the Competent Authority will be constituted by the states but political and security clearance from Central government ministries will remain necessary.

Relaxations:
Relaxation will be provided for procurement of Covid-19 medical supplies till 31st December 2020.

The order for prior registration will not apply for countries to which India extends lines of credit or provides development assistance, even if they share a land border with India.

India shares its border with China, Nepal, Bhutan, Pakistan, Bangladesh, Afghanistan and Myanmar.

As per official data, out of these, the government has extended lines of credit to Bangladesh, Nepal, Myanmar.

India also provides various developmental assistance to Bhutan and Afghanistan.
No Merger of CBDT and CBIC
Recently, the Central government has clarified that it has no proposal to merge the Central Board of Direct Taxes (CBDT) and Central Board of Indirect Taxes and Customs (CBIC).

The clarification came after the news appeared in certain sections of media that the government was considering to merge the two boards.

Key Points
The merger proposal was one of the recommendations of the Tax Administrative Reforms Commission (TARC) under the chair of ParthasarathiShome that submitted its report in 2014.

However, the proposal was not accepted by the government.

CBDT and CBIC have been created under the Central Boards of Revenue Act, 1963. Both Boards are part of the Department of Revenue under the Ministry of Finance.

Central Board of Direct Taxes (CBDT):

It provides inputs for policy and planning of direct taxes in India and is also responsible for the administration of direct tax laws through the Income Tax Department.

Direct Taxes include income tax, corporation tax etc.

Central Board of Indirect Taxes and Customs (CBIC):

The Central Board of Excise and Customs (CBEC) was renamed as the Central Board of Indirect Taxes and Customs (CBIC) in 2018 after the roll out of Goods and Services Tax (GST).

It deals with the tasks of formulation of policy concerning levy and collection of customs, central excise duties, Central Goods & Services Tax (CGST) and Integrated GST (IGST).
RBI - REPO points downs by 135
From February 2019 till COVID-19 began, the Reserve Bank of India (RBI) has cut the repo rate by 135 basis points.

That was shared by RBI Governor Shaktikanta Das while delivering his keynote address on July 11, 2020 at the 7th SBI Banking & Economics Conclave.

Covid - 19's Adverse Effect on REPO Points
The RBI Governor said repo rate has been cut overall since February 2019 by 250 basis points to alleviate liquidity stress and provide financial stability in the economy. The main aim behind the move was to tackle the economic growth slowdown. Das stated that during the Monetary Policy Committee (MPC) meeting, they had extensively touched on economic growth issues. The MPC has agreed to slash the policy repo rate by 115 base points cumulatively.

Worst Health & Economic Crisis in 100 years Says RBI Governor
The RBI Governor claimed that this is the worst health and economic crisis of the last 100 years with unparalleled negative impacts on employment, production, and well-being. Das said the existing world order, global value chains, labor, and capital movements across the globe have been dented.

RBI Governor further claimed that the coronavirus pandemic has represented our economic and financial system 's largest test of resilience and robustness.

The new RBI initiatives seek to accelerate a cyclical turnaround in economic activity at a time when COVID-19 has struck the world along with other calamities, causing poverty and endangering thousands of people's lives and livelihoods.

According to Shaktikanta Das, COVID may result in higher non-performing assets (NPAs) and capital erosion of banks.
NABARD organised a ‘digital choupal’ to mark its 39th Foundation Day
On July 12, 2020, National Bank for Agriculture and Rural Development (NABARD) has celebrated its 39th Foundation day. On July 13, 2020, NABARD has organized its first “digital choupal”, a video conference which brought together farmers from across the country who have been associated with NABARD in 7 development projects in rural India viz. Rural Livelihoods Matter Immensely, Empowering Tribal Communities, Soil Health is Real Health, Direct Marketing to Urban Consumers, Climate Resilience, Climate Proofing of Koutuguda and Collectivisation of Weavers.

On this occasion, NABARD has announced Rs 5,000 crore of refinance scheme for banks and financial institutions and also earmarked another Rs 5,000 crore for turning Primary Agricultural Credit Societies (PACS), into multi service centres. These are explained as follows:

Rs 5,000 crore of refinance scheme for banks and financial institutions
NABARD has announced Rs 5,000 crore of refinance scheme for banks and financial institutions for providing finance to the beneficiaries of its 2,150 watershed development projects. The concessional line of assistance will be available for three years from 2020-21 to 2022-23.

These projects cover 23.04 lakh hectares of rainfed area watershed and tribal development project areas.

The scheme will help the migrants, who have returned to their villages from urban areas following the COVID-19 crisis, take up new occupations.

NABARD allocated Rs 5,000 cr for turning PACS into multi service centres
NABARD also introduced a grant-based scheme for computerisation of Primary Agricultural Credit Societies (PACS), which will enable these ground-level entities to turn into multi service centres for providing seamless credit services to their farmer members. PACS are building blocks of the country’s cooperative banking structure and are one-stop shops for meeting the varied needs of the farmers

5,000 PACS will be upgraded in 2020 followed by 15,000 PACS in FY 2022 and 15000 PACS in FY 2023.

PACS can support farmers in post-harvest and marketing activities in addition to playing a key role in the physical and financial supply chain of commodities by acting as spokes to the upcoming Gramin Agriculture Markets (GrAMs).
IRDAI mandated insurance companies to launch ‘Corona Kavach’ & ‘Corona Rakshak’ amid increasing COVID-19 cases
On July 10, 2020, Insurance Regulatory and Development Authority of India (IRDAI) made it mandatory for all general and health insurers to launch short-term standard health policies for coronavirus disease (Covid-19) viz. Corona Kavach and Corona Rakshak, due to rapid increase in COVID-19 cases in India. Notably, the premium under both the products shall be the pan-India basis and no geographic location or zone-based pricing will be allowed.

Minimum entry age for both the policies will be 18 years and the maximum 65.

Dependent children shall be covered from the age of three months to 25 years.

About Corona Kavach
Despite being a coronavirus-specific policy, the standard indemnity-based Covid-19 policy, ‘Corona Kavach’, will cover the cost of treatment of any co-morbid conditions, including pre-existing conditions, along with the treatment for the coronavirus infection or disease.

Tenure range– 3.5 months to 9.5 months.

Minimum sum insured– Rs 50,000

Maximum sum insured– Rs 5 lakh.

5% discount for healthcare workers.

Under an indemnity plan, a policyholder is reimbursed the hospitalisation expenses to the extent of the sum insured which includes room and boarding charges along with PPE kits, gloves, masks and such other similar expenses and even AYUSH treatment. It will also cover home care treatment expenses of up to 14 days.

About Corona Rakshak
Corona Rakshak is a single-premium plan which will pay out 100% of the sum insured as lump-sum if the policyholder is hospitalised, at least for 72 hours, after testing positive for Covid-19. The policy will cease to exist once the claim is paid out.

Minimum sum insured– Rs 50,000

Maximum sum insured– Rs 2.5 lakh

Tenure range– 3.5 months to 9.5 months.
Report on Active Pharmaceutical Ingredients: TIFAC
Recently, the Technology Information Forecasting and Assessment Council (TIFAC) has brought a report titled ‘Active Pharmaceutical Ingredients- Status, Issues, Technology Readiness, and Challenges’.

TIFAC is an autonomous organization under the Department of Science & Technology, Government of India.

Key Points
Recommendations from the Report:
Indigenous production of Active Pharmaceutical Ingredients (APIs) needs to be scaled up to a level where the production is economically viable.

Need for Mission mode Chemical Engineering with defined targets for uninterrupted synthesis of API molecules.

To create mega drug manufacturing clusters with common infrastructure in India.

Developing a Technology platform for biocatalysis for cost optimization and investing in the fermentation sector of large capacity.

Biocatalysis refers to the use of natural substances from biological sources (such as enzymes) to speed up (catalyze) chemical reactions.

Attention to technologies like hazardous reactions, cryogenic reactions, and membrane technology.

Cryogenic reactions are chemical reactions performed at very low temperatures (below -150 °C).

Membrane technology covers all engineering approaches for the transport of substances between two fractions with the help of permeable membranes.

Focus on antiviral drugs, which require nucleic acid building blocks - Thymine, Cytosine, Adenine and Guanine - none of which are manufactured in India because of lack of manufacturing plants.

Government encouragement for Indian companies working in chemical segments such as steroids, amino acids, carbohydrates, nucleosides, etc., to collaborate for technology development or quick technology transfer.

Need for closer academia-industry interaction for technology development and commercialization.

India’s Pharmaceutical Industry:
It is third largest in the world, in terms of volume, behind China and Italy, and fourteenth largest in terms of value.

It has a strong network of 3,000 drug companies and about 10,500 manufacturing units with a domestic turnover of Rs 1.4 lakh crore in 2019, with exports to more than 200 countries in the world.

Recently, India has approved two schemes, namely the Scheme on Promotion of Bulk Drug Parks and Production Linked Incentive (PLI) and Scheme to promote domestic manufacturing of critical Key Starting Materials/Drug Intermediates and Active Pharmaceutical Ingredients in the country.

Issues Involved:
Low-profit margins and non-lucrative industry forced domestic pharmaceutical companies to stop manufacturing APIs and start importing, which is a cheaper option with increased profit margins on drugs.

With the availability of cheaper APIs from China, the pharmaceutical industry relies heavily on imports. The imports from China have been increasing steadily and now stand around 68%.
India-EU Virtual Summit
Recently, India and the European Union (EU) held their 15th “annual” summit after a gap of more than two years.

The practice was put off due to disagreements over trade and investment that define their bilateral ties.

Key Points
India-EU Strategic Partnership:
India-EU Strategic Partnership: A Roadmap to 2025 has been endorsed between India and EU as a common roadmap to guide joint action and further strengthen the Strategic Partnership over the next five years.

Same Values: India and EU both are "unions of diversity", sharing values of democracy, rule of law and human rights. Both are equally convinced of the necessity to preserve the rules-based international order and effective multilateralism.

Common Interests: Both have a common interest in each other's security, prosperity and sustainable development. They can contribute jointly to a safer, cleaner and more stable world.

Trade Pact:
India and EU have agreed to launch a high-level trade dialogue to foster progress on “balanced, ambitious and mutually beneficial” trade and investment agreements, address trade irritants and discuss supply chain linkages.

High-level trade dialogue will be held between the EU trade commissioner and India’s Commerce Minister.

India and EU had launched talks for having a wide-ranging Free Trade Agreement (FTA), officially called broad-based Bilateral Trade and Investment Agreement (BTIA), long ago in 2007.

The BTIA was proposed to encompass trade in goods, services and investments.

However, the talks stalled in 2013 over differences on market access and movement of professionals.

The EU is India’s largest trading partner grouping (countrywise USA is India’s largest trading partner), while India is the EU 's ninth biggest trading partner.

Civil Nuclear Cooperation:
A civil nuclear cooperation agreement was signed between the European Atomic Energy Community or Euratom and Department of Atomic Energy, India.

The agreement will focus on research and development cooperation for peaceful uses of nuclear energy and on new ways of using nuclear energy.

Defence and Security Cooperation:
The two sides also agreed to scale up defence and security ties which included:

The launch of a new maritime security dialogue.

Consultations on crisis management and deeper cooperation between the Indian Navy and the European Union Naval Force Atalanta.

The EU’s counter-piracy military operation in the western Indian Ocean.

The EU officials described the recent India-China border standoff on the Line of Actual Control (LAC) as a matter of considerable concern.

India’s Central Bureau of Investigation (CBI) and Europol launched negotiations to combat organised crime and terrorism.

Both decided to intensify cooperation to tackle terror and its financing, radicalisation and abuse of the internet for such activities.

Pakistan’s support for terrorism aimed at India and other countries in the region was also figured in the discussions.

Other Negotiations:
A joint declaration on circular economy and resource efficiency.

A circular economy is an economic system aimed at eliminating waste and the continual use of resources.

The renewal of a science and technology cooperation agreement and stepping up cooperation in environment and climate change.

Issues Involved:
The EU is critical about India’s “protectionist” measures on tariffs, on opening up India’s services sector for European Companies and the termination of bilateral investment treaties with 25 EU member states.

The EU also views India's recent AtmaNirbhar Bharat Abhiyaan as an initiative which might lead to protectionism.

The trade relationship is also far below the potential, with India accounting for less than 3% of EU’s total trade.

The EU has been critical over the removal of Article 370 in Jammu and Kashmir as well as the Citizenship Amendment Act, which according to India is an internal matter.
Fall in Service Purchasing Managers’ Index
The IHS Markit India Services Business Activity Index (i.e Service Purchasing Managers’ Index (PMI)) has observed the contraction of services sector activity for the fourth consecutive month in June 2020.

India’s services sector activity remained in deep downturn in June as the Covid-19 pandemic curtailed intakes of new work orders and disrupted business operations.

The Index is compiled by IHS Markit for more than 40 economies worldwide. IHS Markit is a global leader in information, analytics and solutions for the major industries and markets that drive economies worldwide.

Key Points
Current Scenario of Service Sector:
The IHS Markit Services PMI in June rose to 33.7 from 12.6 in May (2020), indicating a pick-up from the previous month, although any reading below 50 on this survey-based index shows contraction.

The index stood at a record low of 5.4 in April (2020).

India's services sector activity reported the slower rate of decline which is reflective of some stabilisation in activity levels.

However, the closures and temporary suspensions are responsible for the stabilization in service activities.

Additionally, 59% of firms reported no change in output since May. Meanwhile, only 4% registered growth, while 37% recorded a reduction.

Reasons:
Sharp fall in total new orders due to reduced consumption habits.

Closure of businesses due to the unfavourable environment.

Steep drop in export sales.

Job losses due to lower business requirements.

Poor staff availability.
New National Logistics Law
The Ministry of Commerce and Industry is considering replacing the Multimodal Transportation of Goods Act, 1993 (MMTG) with a National Logistics Efficiency and Advancement Predictability and Safety Act (NLEAPS).

MMTG provides for the regulation of multimodal transportation of goods from any place in India to any place outside India.

Multimodal transportation refers to a combination of more than one mode of movement, such as rail, road or sea, for end-to-end delivery of goods.

It was introduced to facilitate the exporters and give them a sense of security in transporting their goods.

Key Points
Aim:
NLEAPS aims to streamline the logistics ecosystem in the country, with a view to promote growth of the sector.

Modernise and formalise the logistics services and promote digitisation in the sector, which is key for the smooth movement of goods.

To reduce the logistics cost from the present 14% of the Gross Domestic Product (GDP) to less than 10% of GDP.

Reason Behind New Law:
The new law tends to define various participants of the logistics sector and create a light regulatory ecosystem.

There is no clear definition of the logistics sector in the MMTG.

The logistics sector with a market size of USD 160 billion is complex, with more than 20 government agencies, 40 partnering agencies, 37 export promotion councils, 500 certifications and 10,000 commodities.

Benefit:
Effective implementation of the Act would help provide an impetus to trade, enhance export competitiveness, and improve India’s ranking in the Logistics Performance Index and Ease of Doing Business.
Equalisation Levy for Non-Resident E-Commerce Firms
Recently, the Central government has stated that it will not extend the deadline for payment of equalisation levy by non-resident e-commerce players, even though a majority of them are yet to deposit the first installment of the tax.

The equalization levy is aimed at taxing foreign companies which have a significant local client base in India but are billing them through their offshore units, effectively escaping the country’s tax system.

The step has come in the backdrop of the United States Trade Representative (USTR) investigations into taxes adopted or under consideration by 10 nations, including India, on revenues of American digital service companies like Netflix, Airbnb etc.

Key Points
Background for Equalization Levy:
Equalisation levy at 6% has been in force since 2016 on payment exceeding Rs 1 lakh a year to a non-resident service provider for online advertisements.

It is now applicable for e-commerce companies that are sourcing revenue from Indian customers without having tangible presence here in the country.

The amendments to the Finance Act, 2020 had expanded the ambit of the equalisation levy for non-resident e-commerce operators involved in supply of services, including online sale of goods and provision of services, with the levy at the rate of 2% effective April 1, 2020.

The tax applies on e-commerce transactions on websites such as Amazon.com. Google in particular as the tax applies on advertising revenue earned overseas if those ads target customers in India.

Changes in Challan ITNS 285:
The income tax department has modified challan ITNS 285 (relating to payment of equalisation levy) to enable payment of the first installment by non-resident e-commerce operators.

The challan also seeks mandatory PAN and provides for ‘Outside India’ option while seeking address.

Penalties Involved:
The non-payment could result in a penalty equal to the amount of equalisation levy, along with interest.

The late-payment would attract interest at the rate of 1% per month or part of the month.
Union Bank of India reduces MCLR by 20 basis points across tenors
State-owned Union Bank of India has announced reduction in its marginal cost of funds-based lending rate - MCLR by 20 basis points across tenors. The new rates will be applicable from today. The revised one-year MCLR stands at 7.40 percent as against 7.60 percent earlier.

The three-month and six-month MCLRs have been cut to 7.10 percent and 7.25 percent, respectively. This is the thirteenth consecutive rate cut by the lender since July last year. Another public sector lender Bank of Baroda has reduced its MCLR by five basis points across tenors from 12th July.

The country's largest lender State Bank of India has also reduced its MCLR by 5-10 basis points for shorter tenors. Besides, Indian Overseas Bank has cut its MCLR by up to 25 bps across tenors while Canara Bank and Bank of Maharashtra have also reduced their MCLRs by 10 bps and 20 bps, respectively, across all tenors.
Panel to push farm reforms in States
Finance Commission panel on agricultural sector reforms agenda.

Background:
Interim report of the Finance Commission:

In the framework for the Finance Commission’s interim report for 2020-21, the commission had recommended performance incentives to be given to States on the basis of three measurable indicators of agricultural reforms.

If State Legislatures enacted the Centre’s Model Acts on agricultural marketing and contract farming, as well as the Model Agricultural Land Leasing Act, 2016, prepared by NITI Aayog, they would be eligible for financial incentives from the Commission from 2021-22.

Details:
In the light of the government efforts of reforms in the agricultural sector, the 15th Finance Commission is considering the promotion of an expanded farm reform agenda for States over the next five years.

The Finance Commission has set up a panel to devise a mechanism for incentivization of States in areas of agricultural reforms agenda for the purpose of inclusion in the Commission’s recommendations in its final report.

The panel will consider new agricultural reform measures to promote among States, possibly including the Model Land Leasing Act.
Liquidity Measures Extended for Banks
Recently, the Reserve Bank of India (RBI) has extended the relaxation relating to Marginal Standing Facility (MSF) scheme till 30th September 2020.

It has also extended the relaxation relating to maintenance of Cash Reserve Ratio (CRR) up to 25th September 2020.

This was done in view of the hardships being faced by banks in terms of social distancing at work and consequent strain on reporting requirements.

Key Points
Marginal Standing Facility:
The RBI, as a temporary measure, had increased the borrowing limit of scheduled banks under the MSF scheme from 2% to 3% of their deposits with effect from 27th March 2020.

Earlier, the above relaxation was granted till 30th June 2020.

MSF is a window for scheduled banks to borrow overnight from the RBI in an emergency situation when interbank liquidity dries up completely.

Under interbank lending, banks lend funds to one another for a specified term.

Banks borrow from the RBI by pledging government securities at a rate higher than the repo rate under Liquidity Adjustment Facility (LAF).

Repo rate is the rate at which the RBI lends money to commercial banks against the securities in the event of any shortfall of funds.

Loans provided at repo rate are provided for a specified period with an obligation that the bank will repurchase the securities back at a predetermined rate.
Differences between Repo Rate and MSF
Repo rate is the rate at which RBI lends money to commercial banks, while MSF is a rate at which RBI lends money to scheduled banks.

The repo rate is given to banks that are looking to meet their short-term financial needs. While, the MSF is meant for lending overnight to banks.

Lending at repo rates involves a repurchase agreement of securities. While it is not so in MSF.

Under MSF, banks are also allowed to use the securities that come under Statutory Liquidity Ratio (SLR) in the process of availing loans from RBI.

Under SLR, commercial banks are mandated by RBI to maintain a stipulated proportion of their deposits in the form of liquid assets like cash, gold and unencumbered (free from debt) securities.
Extension of Food Grain Scheme
Recently, many states have demanded for the extension of the Pradhan Mantri Garib Kalyan Anna Yojana (PMGKAY).

Key Points
Pradhan Mantri Garib Kalyan Anna Yojana:

PMGKAY is a part of Pradhan Mantri Garib Kalyan Package (PMGKP) to help the poor fight the battle against Covid-19.

It was announced for a three month period (April, May and June), covering 80 crore ration cardholders. It will come to an end on 30th June 2020.

The scheme aimed at providing each person who is covered under the National Food Security Act with an additional 5 kg grains (wheat or rice) for free, in addition to the 5 kg of subsidized food grain already provided through the Public Distribution System (PDS).

The beneficiaries are also entitled to 1 kg of pulse for free, according to regional preferences.

Performance of the Scheme:
According to the Union Ministry of Food and Public Distribution, a total of 116.02 lakh metric tonnes (LMT) of food grains have been lifted under the scheme.

In April, 93% of the food grains were distributed targeting 74.05 crore beneficiaries.

In May, the distribution stood at 91% reaching 72.99 crore beneficiaries

In June 2020, 71% of allocated food grains have been distributed to 56.81 crore beneficiaries so far.

Sufficient Food Stock:
According to the Central government, the Food Corporation of India has “sufficient stock of food grains”.

It has a stock of 266.29 LMT rice and 550.31 LMT wheat as on June 28.

This is excluding the ongoing purchase of wheat and paddy stocks that have not yet reached the godowns.

Each month, only about 55 LMT of food grains is required for distribution to ration cardholders.

Issues Involved:
There is an excess of food stocks along with widespread hunger in the country.

Around 200 million beneficiaries did not get their due in April 2020– in the distribution of additional food grains and pulses under the scheme.

In April 2020 the government also allowed the conversion of surplus rice into ethanol for making alcohol-based hand sanitizer.

With the beginning of the monsoon, there is a danger of food grains getting rot.
RBI to conduct OMO to boost liquidity
The Reserve Bank of India (RBI) has announced that is is to conduct special "Open Market Operations (OMO)" on 2 July 2020. The aim is to pump up liquidity in the financial system.

Highlights:
RBI's special OMO session will see the simultaneous purchase and sale of government securities for Rs.10,000 crore.

RBI will sell short-term securities, that worth Rs.10,000 crore, that are maturing in the current band next year and purchase long-term securities of an equal amount maturing between 2027 and 2033.

The move by the Central Bank is expected to improve both liquidity and bond yields.

Open Market Operations (OMO):
Open market operations (OMO) refers to a central bank's buying and selling of government securities in the open market in order to expand or contract the amount of money in the banking system. Securities' purchases inject money into the banking system and stimulate growth, while sales of securities do the opposite and contract the economy.

In a multiple price-auction, each successful bidder pays the price stated in his bid. In case of 'uniform price' auctions, all successful bidders pay the same price that is the cut-off price at which the market clears the issue.
Core Sector Shrinks by 23.4%
According to the data released by the Ministry of Commerce and Industry, the eight core sector industries contracted by 23.4% in May, 2020.

In April 2020 the eight core sectors had contracted by 37%.

In May 2019 the eight core sectors had grown by 3.8%.

Key Points
Core Sector Data: Except fertiliser, all seven sectors — coal, crude oil, natural gas, refinery products, steel, cement, and electricity — had recorded negative growth in May.

The fertiliser production showed growth at 7.5% after two consecutive months of contraction.

The steel and cement showed a shrinkage of 48.4% and 22.2% respectively.

Reason: The main reason for contraction was factories remained affected by a lack of labour and cash shortages owing to the nationwide lockdown.

Impact: Experts are of the opinion that aftershocks of the lockdown will continue to affect domestic industry in coming months.

They will see a lower but certain contraction.

Core Sector Industries
The eight core sector industries include coal, crude oil, natural gas, refinery products, fertiliser, steel, cement and electricity

These comprise 40.27% of the weight of items included in the Index of Industrial Production (IIP).

The eight Core Industries in decreasing order of their weightage: Refinery Products> Electricity> Steel> Coal> Crude Oil> Natural Gas> Cement> Fertilizers.
Index of Industrial Production
The Index of Industrial Production (IIP) is an indicator that measures the changes in the volume of production of industrial products during a given period.

It is compiled and published monthly by the National Statistical Office (NSO), Ministry of Statistics and Programme Implementation.

IIP is a composite indicator that measures the growth rate of industry groups classified under:

Broad sectors, namely, Mining, Manufacturing, and Electricity.

Use-based sectors, namely Basic Goods, Capital Goods, and Intermediate Goods.

Base Year for IIP is 2011-2012.

Significance of IIP:
It is used by government agencies including the Ministry of Finance, the Reserve Bank of India, etc, for policy-making purposes.

IIP remains extremely relevant for the calculation of the quarterly and advance GDP estimates.
Special Liquidity Scheme for NBFCs/HFCs
Recently, the Central government has approved the proposal to launch a Special Liquidity Scheme for Non-Banking Financial Companies (NBFCs) and Housing Finance Companies (HFCs) to improve their liquidity position.

In the Budget Speech of 2020-21, it was announced that a mechanism would be devised to provide additional liquidity facility to NBFCs/HFCs over that provided through the Partial Credit Guarantee Scheme (PCGS).

HFCs are specialized NBFCs that have a separate regulator National Housing Bank (NHB).

Key Points
Details of the Scheme:
Under the scheme a Special Purpose Vehicle (SPV) would be set up to manage a Stressed Asset Fund (SAF) of the NBFCs/ HFCs.

The SPV will issue securities, which would be guaranteed by the Government of India and purchased by the Reserve Bank of India (RBI) only.

The proceeds of sale of such securities would be used by the SPV to acquire short-term debt of NBFCs/HFCs.

The Scheme will be administered by the Department of Financial Services (Ministry of Finance).

Eligibility for NBFCs/ HFCs:
They should not have net Non Performing Assets (NPAs) of more than 6% as on 31st March 2019.

They should have made net profit in at least one of the last two preceding financial years of 2017-18 and 2018-19.

They should not have been reported under SMA-1 or SMA-2 category by any bank for their borrowings during the last one year prior to 1st August 2018.

Banks classify borrowers into Special Mention Accounts (SMA) based on their delay in repayment.

SMA-0 loans are overdue between 1 and 30 days.

SMA-1 loans are overdue between 31 and 60 days.

SMA-2 loans are overdue between 61 to 90 days.

The asset turns NPA after 90 days of being overdue.

Benefits:
Unlike the Partial Credit Guarantee Scheme, NBFCs/ HFCs do not have to liquidate their current asset portfolio under this scheme.

Current assets are all the assets of a company that are expected to be used as a result of standard business operations over the next year.

The scheme would also act as an enabler for the NBFC to get investment grade for bonds issued.

The Scheme would benefit the real economy by augmenting the lending resources of NBFCs/HFCs/MFls.

This facility would supplement the liquidity measures taken so far by the Government and RBI.

Financial implication:
The direct financial implication for the Central government is Rs. 5 crore, which may be the equity contribution to the SPV.

Beyond that, there is no financial implication for the government until the guarantee involved is invoked.

However, on invocation, the extent of government liability would be equal to the amount of default subject to the guarantee ceiling, which has been set at Rs. 30,000 crore.