Are we Resilient now ?

 GFC (2008) to Taper tantrum (2013) to Covid crisis (2020)

The above table describe some of the macroeconomic indicators during the three crisis. In recent months, scaling back of pandemic-related stimulus programme amidst persistent inflationary pressures in advanced economies, particularly the US, have reignited some fears of taper tantrum. However, India’s external sector – well supported by strong exports, capital inflows, low CAD and external financing requirements and high foreign exchange reserves, with various external vulnerability indicators well within manageable limits – is far better prepared this time to face any external shocks arising out of tightening of the monetary policy stance by the advanced economies in coming months.

The Federal Reserve embarked on a programme of asset purchases under the Quantitative Easing (QE), as part of a broader policy response to the Global Financial Crisis in 2007-08. As the US economy gained traction, in an attempt to unwind the QE, on May 22, 2013, the Fed announced the intent to start tapering asset purchases at a future date, which triggered a tantrum in the form of spike in bond yields and resulted in disruptions on the external front for India as well.

In response to the pandemic, since June 2020, the Fed had been buying US$ 80 billion of Treasury securities and US$ 40 billion of agency mortgage-backed securities (MBS) each month. In late July 2021, the Fed signalled that it would start reducing the volume of its bond purchases later in the year. 

On November 3, 2021, the Federal Open Market Committee unanimously voted to scale back its asset purchases. In line with this, the Reserve Bank of Australia (RBA) has also abandoned its yield curve target. As yields on government debt climbed, the RBA chose not to intervene to defend its target of 10 basis points for debt maturing in April 2024. 

Bank of Canada has gradually tapered its asset purchases in recent months. Thus, the long-awaited taper process has commenced by the systemically important central banks, renewing thereby an element of interest - within the academia and policy circles - in the potentially destabilizing spill-over impact on the emerging market and developing economies as also for India. There is evidence that, inter alia, these emerging markets, including India, have succeeded in strengthening their external economic and financial position since 2013 and the ramifications of the taper on the Indian external sector would be limited (Barry Eichengreen et al (2021).

India’s Improved Resilience        

Since the taper episode of 2013, India’s salient external sector sustainability indicators improved. Illustratively, the conventional metric of import cover in terms of number of months of imports is more than double since the episode of taper tantrum.

Evidently, the Indian economy has exhibited greater resilience so far to the current episode of taper. In the immediate aftermath of the taper tantrum in 2013, India experienced portfolio outflows aggregating to ₹79,375 crore from capital markets, including ₹19,165 crore from equity markets and ₹60,210 crore from debt markets during May 23-August 30, 2013. The latest announcement of reduction in asset purchases on November 3, 2021 by the Fed had relatively muted impact on portfolio flows. The total portfolio outflows amounted to ₹34,178 crore, comprising ₹29,168 crore from equity markets and ₹5,010 crore from debt markets during the period November- January 20, 2022.

While acknowledging India’s transformation from being among the Fragile Five countries in the wake of the earlier episode to the 4th largest forex reserve holder during the current episode, Indian economy stands guard with an added advantage of plenty of policy room for maneuvering as the process of normalization of monetary policy by systematically important central banks takes hold.

Reference

Barry Eichengreen, Poonam Gupta and Rishabh Choudhary (2021): The Taper This Time; NCAER Working Paper, November

 

Asset Monetization The National Infrastructure Pipeline (NIP) envisaged a projected infrastructure investment of Rs 111 lakh crores during FY 2020 to FY 2025. The NIP task force report has estimated that about 15-17 per cent of this outlay is to be met through innovative and alternative initiatives such as asset monetisation, funding through a new Development Finance Institution (DFI) etc. The Union Budget 2021-22 also emphasized monetization of assets as one of the three pillars for enhanced and sustainable infrastructure financing in the country. Based on the mandate for Asset Monetisation under Union Budget 2021-22, the National Monetisation Pipeline (NMP) has been developed by NITI Aayog in consultation with infrastructure line ministries. It is envisaged to serve as an essential roadmap for the asset monetisation of various brownfield infrastructure assets across roads, railways, shipping, aviation, power, telecom, oil & gas, and warehousing sectors. The NMP will also form a baseline for the asset owning ministries for monitoring and tracking performance of the potential assets. The NMP estimates aggregate monetisation potential of Rs 6.0 lakh crores through core assets of the Central Government, over a four-year period, from FY 2022 to FY 2025. The top 5 sectors which capture around 83 per cent of the aggregate pipeline value include: Roads (27 per cent) followed by Railways (25 per cent), Power (15 per cent), oil & gas pipelines (8 per cent) and Telecom (6 per cent). Around 15 per cent of assets with an indicative value of ` 0.88 lakh crore are envisaged to be rolled out in the current financial year (FY 2021-22). The assets and transactions identified under the NMP are expected to be rolled out through a range of instruments. These include direct contractual instruments such as public private partnership concessions and capital market instruments such as Infrastructure Investment Trusts (InvIT) among others. The choice of instrument will be determined by the sector, nature of asset, timing of transactions (including market considerations), target investor profile and the level of operational/ investment control envisaged to be retained by the asset owner etc. While the monetization of core assets is steered by NITI Aayog, the initiative for monetization of non-core assets has been hitherto steered by the Department of Investment and Public Asset Management (DIPAM). Monetization of non-core assets envisages unlocking of value of these thus far unutilized or underutilized assets and generate returns on the equity that the Government has invested in them. So far, CPSEs have referred ~3400 acres of land and other non-core assets to DIPAM/MoF for monetization. Monetization of non-core assets of different CPSEs i.e., MTNL, BSNL, BPCL, B&R, BEML, HMT Ltd, Instrumentation Ltd etc. is at present under various stages of the transaction. Since, at present, the desired skill set to take on the responsibility of management and monetization of non-core assets in Government is limited. Hon’ble Finance Minister in her Budget speech 2021-22 announced setting up of a Special Purpose Vehicle (SPV), with capacity and expertise, to carry out the monetization of the land and other non-core assets in an efficient and prudent manner, in line with international best practices. In pursuance of the Budget announcement, ‘National Land Monetisation Corporation’ (NLMC) is being incorporated as a 100 per cent Govt of India owned entity with an initial authorized share capital of Rs 5000 crores and subscribed share capital of Rs 150 crores.  Privatization of Airports: In order to improve efficiency and performance, service quality, encourage greater investment and to reduce government influence, Airports Authority of India (AAI) has awarded six airports namely, Ahmedabad, Jaipur, Lucknow, Guwahati, Thiruvananthapuram and Mangaluru for Operations, Management and Development to the highest bidder i.e., M/s Adani Enterprises Limited (AEL) under Public Private Partnership (PPP) mode for a lease period of 50 years. Besides, AAI had leased out Delhi and Mumbai Airports in 2006 to M/s Delhi International Airport Limited and M/s Mumbai International Airport Limited respectively for Operations, Management and Development under PPP mode for a period of 30 years. As per National Monetization Pipeline (NMP), 25 AAI airports have been earmarked for asset monetization over the years 2022 to 2025 namely Bhubaneshwar, Varanasi, Amritsar, Trichy, Indore, Raipur, Calicut, Coimbatore, Nagpur, Patna, Madurai, Surat, Ranchi, Jodhpur, Chennai, Vijayawada, Vadodara, Bhopal, Tirupati, Hubli, Imphal, Agartala, Udaipur, Dehradun and Rajahmundry. The criteria adopted for Monetization of airport assets under NMP is as following: (i) Airports having annual traffic above the threshold of 0.4 million passengers (in 2019 and2020); (ii) Airports with a sizeable ongoing/proposed capex plan as per the National Infrastructure Pipeline (NIP).