India – Financial Stimulus Packages to Tackle the Crises

Guest Blog by Poonam Sandhu


The Covid-19 pandemic has not just ravaged lives and health of people across the world, but has also impacted economies globally. Most projections show that that the world is headed toward an economic slowdown. The IMF estimates global GDP loss of $9 trillion.


Governments all over the world are helping their healthcare systems deal with the massive pressure they are currently facing. In addition, governments are also announcing finance and policy measures to cope with the economic slowdown. Emerging and low-income economies with limited resources are feeling the brunt more and their poor are hurting disproportionately. Industries are hamstrung and financial markets are grappling with capital outflows and volatile exchange rates.


Impact of Dual Crises

India, an emerging economy with the second largest population in the world, has announced measures to manage the dual health and economic crises. In its graduated approach, the Government of India has progressively announced relief measures since the nation-wide lock-down was implemented on 24th March 2020. The government announced a $23 billion (0.8% of GDP) package on March 27th. The package includes front-loading expenditure of previously announced cash transfers schemes, free food rations for the poor and vulnerable, and insurance for critical workers. The government will spend an additional 0.1% of GDP on ramping up health infrastructure to battle Covid-19.


The nationwide lock-down, though critical to “flatten the curve” and help the relatively inadequate health system prepare and cope with the health crisis, has adversely impacted the economy and in turn the financial sector. A number of companies, particularly the small and medium enterprises (SMEs) are now struggling to sustain business and are unable to meet loan repayments to lenders. Compounded by the overall drop in transactions due to reduced business activities, the liquidity and health of financial institutions, especially the smaller financial companies will be negatively impacted. Three rounds of monetary policy support measures for the economy have been announced by the country’s central bank, the RBI.


Reserve Bank of India (RBI) Measures

The Reserve Bank of India (RBI) announced its first set of policy measures on March 27th 2020 almost immediately after the lock-down, to enhance liquidity in the banking system. These measures included operations that can make available up to $13 billion, three-year funds and easing of policy rates, both with the objective of enhancing liquidity in the banking system and credit flows in the economy. Responding to the temporary cessation of business activities, RBI announced loan moratorium for three months and eased working capital norms to help businesses.


The second, and more substantive, round of financial support measures was announced on April 17th, 2020. In his speech, the Governor of the RBI explained that the measures taken by RBI since February 2020 have injected liquidity equivalent to 3.2% of GDP in the system.

He was careful to highlight India’s prudent approach. India’s current macro-economic and other data such as adequate foreign exchange reserves (equal to 11.8 months of imports), low crude prices, healthy buffer stocks of food grains, expectations of normal monsoons in 2020, allow the RBI to undertake expansionary measures. However, he conceded that that India’s production and export figures were disappointing. The Governor also referred to IMF’s projection for India’s GDP growth for the current financial year at 1.9%, and at 7.4% for the next year, pegging India as one of the better growth stories, post Covid-19.

A third round of measures indicating the continuing expansionary stance of the RBI was announced on May 22nd to progressively address the cash flow disruptions in the economy and to revive growth.

Key Measures announced by the RBI

Liquidity enhancement

  • The March 27th measures benefited mainly large highly rated corporates. On April 17th and 27th, the RBI facilitated $15 billion through special funding for commercial banks and development finance institutions to support the rural and agricultural sector, SMEs, non-banking finance companies (NBFCs), and the real estate and export sectors.
  • Reduction in policy rates such that banks can use the enhanced liquidity to invest in productive sectors of the economy over parking them in safe sovereign debt.
  • Enhanced ability of states to borrow from the RBI and also space out borrowings better over the year. 

Regulatory Measures

  • Allowed “standstill” of Non-Performing Assets (NPA) classification for moratorium accounts.
  • Instructed banks to set aside an additional 10% for “standstill” accounts (to ensure that banking system is geared to handle any future slippages on these accounts).
  • Stressed assets resolution plan period extended by 90 days.
  • Banks to shore up reserves and hence are temporarily restricted from making dividend payouts.
  • To ease liquidity in banks, the liquidity coverage ratio (LCR) is reduced down from 100% to 80% until October.


Looking Ahead

The objectives of the RBI’s measures are to ensure adequate liquidity in the economy and availability of credit for all sectors of the economy. The measures announced aim to enable normal functioning of the markets, and ease financial stress for a struggling economy.

The RBI measures are supplemented by other economic stimulus measures by the Finance Ministry. A key aspect to look out for is the ability of these new stimulus measures to address the multiple crises facing the country—climate, health, and economic. In her address on Earth Day 2020, UN Climate Chief Patricia Espinosa, spoke of the world’s chance to “recover better” from Covid-19, and significantly boost climate ambition in line with the Paris Agreement: “With this restart, a window of hope and opportunity opens…an opportunity for nations to green their recovery packages”.

We hope, economic stimulus measures in India and in other countries, will be channeled to support and incentivize sustainable development and “green” investments. If not, we will soon hit the climate crisis wall and be paying clean-up costs in multiples of the required investment, just as we are currently paying a huge economic cost for under-investment in health research and infrastructure. Just think about it, can we afford the cost of a climate disaster when the world is recovering from the Covid-19 pandemic?


Poonam Sandhu leads NRDC's finance work and is based as a consultant in New Delhi.