On 25 March 2020, amid the spread of unprecedented and life-threatening coronavirus which led everyone locked up in their homes, and resulted in the shutting down of the markets all over the world, the government of India was compelled to declare a nationwide lockdown in India as well which led to the shutting down of places. As a result of this, there was no money flow in the market. Although these lockdowns were lifted, there was a certain number of lockdowns imposed subsequently in the country. The economic strength of the country had fallen steeply and it was evident from the GDP of the country which suffered a major hit. The country suffered a severe economic contraction with Gross Domestic Product (GDP) estimated to have fallen by 24% in Q1 FY 2021 and by 7.3% in FY 2020-21 as a whole. But despite everything, the country needed the money, now more than ever in order to survive COVID-19. The Reserve Bank of India announced many policies from time to time to tackle the situation and curb the financial crisis going on around the country. One such step taken by RBI was ‘Open Market Borrowing’ by the states. This research paper attempts at analysing how the concept of OMB helped the country in managing its financial affairs and the benefits that came with it along with the drawbacks that were there in the scheme.
The sudden occurrence of the pandemic of COVID-19 had led to the disruption of the whole system of the world. Everything had become static. This also applied to the Finance department. The financial sector was one such sector that had been majorly affected by the COVID-19 pandemic. When the economy gets hit, everything else also gets affected because all the other things are directly or indirectly connected to the economy. In its fight against COVID-19, India was apparently and undoubtedly suffering from a mismatched cash flow. The states and the Union Territories were facing cash flow mismatches amid the coronavirus virus pandemic. In other words, the country was required to spend huge amounts of money in order to tackle the whole pandemic situation, but this expenditure was not in proportion to the income that the country was receiving at that time, because of the closed markets. The sources of income were decreasing as the nationwide lockdown had adversely impacted economic activities, but the expenditures were increasing on resources to fight the pandemic, on research, on providing basic amenities to the people of the country and most important of all, on their health. This is what is called a mismatched cash flow, where the expenditure and the income are not in conformity with each other. There had been many steps taken by the government in order to mitigate this situation of financial blockage. In one such relief measure, the Reserve Bank of India came out with a circular in which it stated an increase in the Ways and Means Advances or the WMAare temporary loan facilities provided by RBI to the government to enable it to meet temporary mismatches between revenue and expenditure, and is accompanied with interest that the government has to pay to the central bank.
This facility was provided to all the states and the Union Territories irrespective of the number of cases in the states. This came in as a big relief to the state governments who have been in a fight against this deadly pandemic. A few days later, the RBI came forward with another such relief measure in which it stated that the States and the Union Territories can be in overdraft continuously for a period of 21 working days which was previously 14 days. When a state takes the facility of WMA, and if the amount, along with interest is not returned within a period of 90 working days, then it is treated as Overdraft. In a quarter, a state can be in overdraft for a period of 50 working which was previously 36 working days. All these measures would come into effect immediately and be valid till the 30th of September.
Significance Of Open Marketing Borrowings By Reserve Bank Of India
In the circular, the RBI also mentioned the term “greater space.” All these measures certainly helped the states and the Union Territories in planning their market borrowing programs better. Different kinds of expenses were coming up in front of the states and the Union Territories and the country as a whole in its fight against COVID-19. The lockdown had resulted in snatching away income sources for the daily wagers. They needed to be looked upon because now they were left with no option after losing their sources of income. The government had to look after them and supply them with all the necessary and basic amenities required as it is their right and a part of Article 21 of the Constitution of India which states, Protection of Life and Personal Liberty: No person shall be deprived of his life or personal liberty except according to procedure established by law.”
To find an estimated amount of expenditure was also difficult because it was difficult to anticipate how long the lockdown was going to remain. Until it was lifted up, the labourers and the daily wagers needed to be taken care of. This was one such expense. Another major expense included the healthcare department. A major part of the fund went into the healthcare units like hospitals and isolation wards. Installation of isolation wards, health kits, disinfectant tunnels, etc. also demands money. These expenses came suddenly in front of the government and therefore the increment in the WMA limit and overdraft period proved to be of great help to the government. The governor of the Reserve Bank of India, on the scheme, stated, “these steps will help ensure liquidity in the market. The states and the Union Territories will also get a good source as well as time to plan accordingly.” Therefore, this came as a very significant step from the RBI amidst the whole coronavirus situation.
What Is The Facility That Has Been Provided By RBI?
RBI has permitted “greater space” and flexibility to the states and the Union Territories to avail the facilities of Ways and Means Advances and Overdraft (OD). In such an adverse situation, the states can borrow money from the RBI and in addition to that, it will also get additional time to return the money. But of course, there needs to be some justifiable reason while withdrawing the money because the states cannot, without any reason, merely an amount without backing it with a rational reason. They can only take what they would actually need. By increasing the limit of the Ways and Means Advance by another 30%, which amounted to a total of 60% as of then, the RBI had given its fair share contribution in the fight against coronavirus. With the increase in the borrowing limit, the states could now withdraw more money as per their requirement. This was a much-needed step in the then financially chaotic situation. Monetary aid has helped in mitigating many problems that as taking care of those whose source of income has been blocked amidst the lockdown situation or giving better facilities in the healthcare units. Apart from these, there were other many things that the government needs to do. There was no source of income for the government as of then because the market in the whole world was not running, and therefore the states were forced to rely heavily on WMA and overdraft. The increased period of overdraft also gave the states an extended amount of time to return the money. It also increased the quarterly period from 36 working days to 50 working days because there was no surety as to when the situation would get under control. This was a step taken to aid the government in overcoming the mismatch of cash flow and also in its role in mitigating the consequences of COVID-19. It also extended the realization period for export proceeds. To ease the impact of disruption caused by the Coronavirus/COVID-19 pandemic, the Reserve Bank of India (“RBI”) has provided an extension of the period for realisation of the export proceeds as prescribed under the Foreign Exchange Management (Export of Goods & Services) Regulations, 2015 (“FEM Export Regulations”) read with the RBI Master Direction on Export of Goods and Services (“RBI Master Directions on Exports”). In order to tackle situations that would arise post-lockdown, the RBI decreased the reverse repo rate from 4% to 3.75%. This helped in providing loans to productive sectors which otherwise, the bank would have deposited to the RBI. All these measures had been taken keeping in mind not only the pandemic/lockdown situation but both the pandemic situation and also the post-pandemic situation.
Pros And Cons Of Open Market Borrowing By States
Just as every coin has two faces, this very measure taken by the Reserve Bank of India also had two aspects to it.
Talking about the pros, the RBI could be seen actively aiding monetarily through such measures that it had taken in the last few days. The measures that included an increase in the limit of the WMA and an increase in the period in which a state can remain in an overdraft will certainly help the states and the Union Territories in balancing out the mismatches in their cash flow. With the increase in the amount of the WMA, they were able to help mitigate the consequences of COVID-19 in a better way, they were also able to give daily wagers and the healthcare units more facilities which were so necessary for the then situation. These facilities provided greater comfort to the states and they were able to plan things in a better way. Further, the RBI also decreased the reverse repo rate in order to encourage the banks to give loans to small and mid-sized corporates. These steps were necessary to be taken as it was the call of the situation. With the revenue getting decreased, the states were left with no income sources as such and therefore in such a situation these measures came to aid.
The cons of these measures cannot be seen immediately; it was not supposed to be an immediate effect but were to be seen in the long run. It was anticipated that too much reliance on the WMA and the overdraft facility would result in the following of the economy even more. These were nothing but loans that are taken by the governments in order to balance their economy. The conversion of WMA into an overdraft adds to the adversity. It was also anticipated that after the uplifting of the lockdown, there would be a lot of pressure on the government to get back on track because it will take further more time for everything to fall into place.
The governor of the RBI stated that these steps were taken in order to maintain adequate liquidity in the system, facilitate bank credit flows, ease financial stress and to ensure the normal functioning of the market. The RBI has taken a lot of burden upon itself to ensure help to the states and the Union Territories in the fight against the pandemic. With low revenues coming to the states, the states are left with the only option to borrow more money from the market. An increased amount of reliance on overdraft and WMA facilities reflects stress on finances. India cannot afford another setback in the economic sector. It already has the highest sub-national debts amongst BEICS nations. But in the present situation when there are not many sources of income, the only source of reliance is the two facilities but with every withdrawal, the states will have to be ready to face pressure after the pandemic gets over. As for the present situation, it has increased the WMA limit by a total of 60% so that the states and the Union Territories do not face a shortage of funds. It has also increased the overdraft period from 14 days to 21 days and in a quarter, from 36 days to 50 days. These steps will help the country against the pandemic situation. The RBI has also taken steps for a long-term situation whereby it has decreased the reverse repo rate from 4% to 3.75% or 25 basis points. The reverse repo rate is the rate that is applied to deposits made by commercial banks to the RBI. In order to boost the small and mid-sized economic sectors, the RBI has taken this step. With the decrease in the reverse repo rate, the commercial banks will get pumped up to lend loans to the other productive sectors of the country rather than merely depositing them to the RBI. This will help in boosting up the economy if these sectors post-lockdown. If these sectors are not encouraged, the country will have to face a sudden setback.
The scheme of open market borrowing by states was a helping hand during the times of pandemic. Recently RBI published a paper titled ‘States’ Fiscal Performance and Yield Spreads on Market Borrowings in India’. The relevant extract of the same are as follows:
“State Governments are borrowing significantly from the market to meet their budgetary requirements. As investors are risk-conscious, fiscal fundamentals may impact the yields, and states’ borrowing costs. Indicator-based assessment of the states’ performance is cumbersome, keeping in view a large number of indicators. Therefore, we develop a holistic measure of the states’ performance by developing a composite index that incorporates fiscal, debt and market-related indicators. We empirically find that the index has a statistically significant relationship with the yield spreads, which suggests that better performance of states is rewarding as it lowers borrowing costs.”
The Reserve Bank of India had stated that COVID-19 has severely impacted small and mid-sized corporates like NBFCs, Housing commercial real estate, etc. These will only grow when the bank gives loans to them and the 25 basis point cut will nudge the commercial banks to give loans to productive sectors of the country including agriculture rather than depositing the surplus to the RBI. The governor of the RBI has also stated “ The RBI will monitor the evolving situation continuously and use all its instruments to address the daunting challenges posed by the pandemic.” With this statement, the RBI hinted that it would come up with more such measures in order to tackle the current chaotic situation of the country. Steps have been taken in order to mitigate any adverse situation. Among various schemes, changes in the Open Market Borrowing have certainly helped India from overcoming the setback that occurred due to the COVID-19 lockdown by giving the country financial backing to rely upon. This is the significance of law, it can be changed with time and moulded according to the call of the time. A law that does not change with time becomes useless. Although the scheme had some setbacks, it was the call of the time.
This article is written and submitted by Varsha Kumari Mishra during her course of internship at B&B Associates LLP. Varsha is a law student from Law College Dehradun, Uttaranchal University.