Daily Financial News Analysis – 26th Oct’20

Table of Contents

Arvind Panagariya on fiscal stimulus

Is there a need for fiscal stimulus?
If yes, how much?
And what form should the stimulus take?
Fiscal stimulus can help when production capacity is underutilised due to deficient demand.
It may be argued that as workers return to work, output and employment will be restored to pre-Covid-19 levels and growth will resume thereafter.
Therefore, why add to public debt by providing additional fiscal stimulus?
Left to itself, restoration of normalcy and return to healthy growth will take longer with concomitant losses of output and income along the way.
Such losses can add up to hundreds of billions of dollars.
There is, thus, a good case for fiscal stimulus at this point.
The main factor pushing in the opposite direction is the added risk of increased debt and future cost of servicing the higher debt.
If this affirmative case for a stimulus is accepted, the next question concerns its extent.
Here, we are in more uncertain territory, and judgements would differ.
Fiscal stimulus of 2-3% of GDP.
Given all kinds of uncertainties associated with Covid-19, a pragmatic target for the stimulus may be 2% of GDP.
The final question one must confront concerns the form that the stimulus should take.
An argument could be made that the stimulus should target sectors such as construction, trade, transport and hotels, which have been hit hardest.
An alternative to targeting specific sectors is a one-time cash transfer to both rural and urban poor.
The common argument against such transfers has been that Covid-related uncertainties have made households cautious when it comes to spending.
Therefore, any additions to incomes through transfers will only translate into additional savings.
Transfers could be made more effective if they could be channeled through coupons with an expiry date.
That would force the beneficiaries to convert them into spending before the expiry date.
But the administration of such coupons could be a nightmare.
The bigger part of the stimulus should, however, be spent on infrastructure and, perhaps, on urban housing.
These are areas in which India’s needs far outstrip the current availability.
To the extent that such spending will create jobs, we can also expect increased second-round spending and improved confidence in the economy.
Finally, though unrelated to fiscal stimulus, we need to double our efforts to put the financial sector back on its feet.
This will require recapitalisation of public sector banks (PSBs) on a sizeable scale in anticipation of the spike in bankruptcies in the wake of the Covid-19 shock.
It will also require giving PSBs greater autonomy in decision making and faster resolution of nonperforming assets (NPAs).

Reliance-Future Group Deal

The Singapore International Arbitration Centre (SIAC) has passed an interim order asking Future Group to put its plans of selling its retail business to Reliance Group on hold and wait for the final judgment on the plea filed by Amazon.
SIAC order cannot be enforced in India until ratified by an Indian court.
Future Group is likely to move Delhi High Court in the next few days challenging the interim order.
Amazon had filed an arbitration petition with SIAC claiming that Future Group breached the contract under which the US online giant took an indirect stake in its retail business in 2019.
The proposed deal between Future Retail and RIL does not have its approval and hence should not go through, it had said.

Antitrust, Privacy Concerns

RBI + NPCI are examining whether the digital payments ecosystem needs tighter regulatory oversight, with the rethink prompted by growing antitrust and data privacy issues along with technology inadequacy of banks.
These are also the primary issues that are holding back WhatsApp Pay’s permit to start operations in India.
NPCI, which enables digital retail payment and settlement, had told the Supreme Court in August that WhatsApp Pay had fulfilled all its data localisation obligations, and had been given permission to commence the service.
WhatsApp Pay allows payments via WhatsApp’s messaging platform. It had received clearance for testing in early 2018.
According to the people, at present the total number of users on the NPCI-operated Unified Payments Interface is about 100 million.
WhatsApp alone has more than 400 million users and a bulk of them could switch to WhatsApp Pay as soon as the service is launched.
1. Will the UPI platform be instantly able to handle this load? Could this lead to antitrust issues?
2. What regulations are required to avoid misuse or abuse by existing players and new entrants with the immense amount of personal data generated?
As things stand, all the UPI-based payment platforms claim they do not have access to any personal information and that all transactions are encrypted.
But the regulator wants to ensure if at a later stage, they could start using their algorithms to map consumer data, consumption habits and begin advertising.
Brazil’s central bank in June had suspended WhatsApp Pay within a week of permitting the service in that country.