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Ability to borrow at sustainable costs is essential to corporate financial health, and major central banks have spent the past decade greasing the gears of global capital markets with plentiful liquidity. One example being ECB’s corporate bond buying program (QE) credited for pushing many firms’ effective borrowing cost below zero (i.e. investor lends $500 million to a firm and gets $495 million back upon bond maturity).However, such “greasing” hinges on an important assumption: functional markets with willing bond investors on the standby - low interest rates are only useful if they affect lending. At times of heightened market volatility, such assumption would fall apart as lenders charge exorbitant costs to take risk. In other words, central bank policies become decoupled from effective cost of lending when fear permeate markets.This is behind major central banks’ focus on equity and corporate bond markets (“risk assets”): too much fear and uncertainty clogs the funding pipeline between creditors and borrowers. In a worst case scenario, the capital market would grind to a halt (the Federal Reserve System was initially created specifically to suppress volatility and ensure a functioning market).Recent weakness in global equities and corporate bonds have started to impair central bank policy transmission into the real economy; as debt reliant “zombie firms” face liquidity squeeze, pundits and economists are emerging to demand stimulus by central banks. However, officials initially appeared reluctant to provide stimulus.Central banks in a bindCoronavirus’ transmission is a force of nature, and few could project the extent of its global reach with sufficient confidence. These uncertainties put central banks in a bind on whether to ease preemptively or “carefully monitor” and continuously assess. During early phase of the outbreak, the People’s Bank of China (PBOC) became the lone central bank at providing stimulus using its myriad of specialized policy tools to directly influence lending costs:Unlike the PBOC’s motto of directly influencing lending rates across the financial system (“supremacy over markets”), Federal Reserve and the ECB rely on markets as an intermediary to change the cost of money, with investors and banks at the center of this “pipeline.” Former Fed Governor Stein aptly referred to investors as “recruits” of the central bank to influence the economy.If investors and market makers retreat, the pipeline would cease to function, and the Fed as well as ECB would be forced to respond to impairments to funding markets.Corporate funding channels impaired amid volatilityAs the coronavirus outbreak threatened to spread within U.S. communities, corporate borrowers saw dwindling interest from lenders. Both investment grade and high-yield bonds have lagged Treasuries in performance - the government progressively paid less to borrow, yet corporate issuers did not benefit from the same decline in yield.Johnson & Johnson (JNJ) is one of the long-standing AAA issuers, and even its (old) 10-year issue failed to keep up with the 10-year Treasury note (dotted line showing spread widening 2 bps / JNJ yield lagged declining Treasury yield by 2 bps):High-yield issuers fared much worse. The BB+ rated SoftBank saw its spread widen 46 bps; this left Masayoshi Son facing higher debt servicing costs (although some attributed the spike in yield to the WSJ exposé on vicious corporate “dark arts” at the Vision Fund to exacerbate pessimism):These bonds are under-performing because investors, like the central banks, are standing on the sidelines. As fears mount, liquidity evaporates, and this made buyers even more reluctant to step in to catch the falling knives. These aversions clog the corporate funding pipeline and disrupts central banks’ monetary policy transmission to the business community and consumers.The Goldman Sachs Financial Conditions Index (FCI) is a helpful measure on the efficacy of policy transmission via financial intermediaries:A recent spike (tightening) in FCI suggests markets are transmitting a more restrictive policy to the real economy (companies facing higher funding costs).Therefore, as the coronavirus upends financial market sentiments, the funding mechanism for the capital market would become progressively impaired, although current levels remain benign.Central banks inaction amid still-benign FCI and uncertaintiesConsistent with still-benign FCI readings, central banks (ex-PBOC) are not yet ready to act:ECB President Lagarde and Governing Council members argued the outbreaks do not warrant a monetary response, yetFed Vice Chair Clarida remarked that “it is still too soon” to speculate on virus impactDallas Fed President Kaplan echoed his colleagues that it is “too soon” to decide on any changes to Fed policy stanceWhat comes next will be a battle of willpower, data, and coronavirus transmissions - markets will continue to test central banks’ patience by throwing tantrums (risk-off). Since major central banks (ex-PBOC) need markets as an intermediary, there will be a breaking point when officials will relent.At present pace, it would take several sessions of triple-digit S&P 500 losses to tighten FCI to levels seen during the September 2019 “repo-panic.” Since more economic data are on the horizon, investors hoping for a bailout would prefer weaker ISM, softer Payrolls, as well as below-consensus China PMI readings.The aforementioned interactions between risk sentiment, funding costs, and central bank policy highlight the irony of modern “free market capitalism.” If there exists a channel for the central bank to influence markets and vice versa, then the market is only as “free” as the length of time since the last intervention.

I think let's move systematically:a) What were the objectives of PDS?To the best of my knowledge, there were two objectives of PDS:1) The main objective of PDS, at least when it started and was universal, was to ensure that the poor in our country, who lack purchasing power to buy enough food to quench their hunger, are able to purchase at least rice and wheat through ration shops at cheap prices. It was also meant to protect the public at large from higher prices of rice, wheat and coarse cereals or pulses (in some states) by supplying these at lower-than-market prices to any consumer having a ration card. The scheme was universal when it started, but was then targeted in 1993 because of our fiscal situation in 1991 and the promises we made to World Bank in return for obtaining funds from it, and because of the idea that the system should only be meant for the poor and not for the rich who have the capacity to pay higher prices.2) The second objective was something which came up as the outcome of the Green Revolution: increased productivity of food crops (rice and wheat). Such increased productivity meant that while demand had not increased greatly, supply had increased sharply thanks to introduction of fertilizers, high-yielding varieties of seeds and other scientific practices within our rural hinterland, particularly in North and West India. Increase in production would have led to a fall in prices of crops with not much increase in demand, which would have been catastrophic for our farmers. Hence, the government had also introduced the policy of Minimum Support Price at which rice and wheat would be procured from our farmers by the Food Corporation of India (FCI), which started in 1965. The idea behind all this was that grains procured through FCI would be distributed through ration shops for the general public at subsidized rates, while buffer stocks would be maintained for ensuring enough availability at times of drought and floods for the affected populations. And thus, national food security would be ensured. Also, the food could be used for Mid-Day Meal Schemes and Integrated Child Development Scheme (ICDS).Thus a combination of food security and security of incomes for farmers would be ensured through PDS.b) Were the objectives successful?No surprises. The first objective was not much successful in several states (at best one can call it partial success), thanks to poor implementation, inefficiency and corruption at various levels. The second was somewhat more successful than the first but not as much as it should have. Let us understand why.The mechanism worked as follows: once FCI procured grains, states would be informed of the quota (amount) of grains they could take and once they did so, the grain would be distributed within ration shops across the state. Now there were many issues with this. Here are some of these:1) First, there were numerous cases of corruption in FCI procurement. Many farmers across the country along the years alleged that while FCI was supposed to procure legally through MSP, they either refused to purchase grains from farmers totally, or purchased it at rates lower than MSP. This meant two issues came up:When FCI did not procure grains at all from farmers, they were forced to sell it to traders at substantially low prices (lower in comparison to MSP), sometimes even close to cultivation costs, which only meant subsistence agriculture in a way with not much to earn for farmers. This would generally happen with collusion of FCI officials and traders against which the farmer would not be able to do much, unless the farmers involved were large farmers with strong economic and political clout. So middle income farmers did suffer badly in this. This in turn would also affect their ability to undertake farming for the coming year, and also put them under pressure in case they had loans to pay to bank authorities or money lenders, both of which would cause mental anguish for the farmers.And when FCI did procure grains but at prices lower than MSP, again farmers were not able to get their deserved profits and sometimes ran into losses as they were forced to sell their produce at lower prices, sometimes lower than cultivation cost. In such situations of selling at lower than cultivation cost, the only other choice was to burn their produce, which would only mean higher losses, so they had no choice.Thankfully, procurement still takes place and so we have procurement of over 50-55 million tonnes each year as our agricultural productivity is over 200 million tonnes, even in drought years. That is something to be applauded, but that is not enough even then.It is not that FCI was always to blame for not procuring grains though, and this will be explained by the second issue explained below.2) The second thing was that once FCI procured, grains were stored in godowns or open spaces (covered with polythene) for states to off take, based on the quotas declared for them.This was a major problem. In many situations, both when PDS was universal and also when it was targeted, states adopted a very lackadaisical approach in taking their quota of grains and distributing it to poor. They would either be very late in doing so as per the financial year, or sometimes would not take their share of grain at all. This would mean two issues again.First, the poor would not be able to get what they deserve, since the grain would not even reach the ration shops in the first place.Second, since grain has not been lifted from the godowns, there would not be enough capacity left to store additional grain procured by FCI in the coming season (remember that agriculture has two seasons: kharif and rabi). Since FCI is a centralized procurement system, grains procured from various states are brought together and stored in few locations, with no great capacity additions during both UPA and NDA governments or even before them under earlier governments.So when states do not take grain say for this financial year, with not much space left for rabi crops, the grains have to be stored in the open, and they are available for rats to eat. In other words, instead of ensuring nutritional security for human beings, we manage to ensure nutritional security for rats. This has happened on a large scale where grains are found to rot in the open, even as our poor continue to remain hungry and starve for days. And the situation continues, we keep hearing more and more stories on this.Third, because of a lack of storing space, there is no use of procuring grains for them to rot as they bring financial losses for FCI, as they can get some commission for the grain off taken by states, but virtually nothing for that which gets rotten. Hence, it's not in their interest to procure excess grains and then because of states' wrongdoings, suffer financially. They would certainly not want to be shown up by CAG reports in today's times where every entity's reality is being exposed. And when they don't procure from farmers, the farmers suffer by selling his or her produce at substantially lower prices to the middlemen/traders, as explained in the first point.3) Assuming the states do off take the grains, the grains have to be distributed to the ration shops and from there to the people.Except that this is found to happen more in theory rather than in practice.When states off take grains and state officials ensure grains are loaded in trucks for distribution, many a times with collusion of local officials and sometimes private agencies running truck services, the grain is diverted to open market to be sold to people. This used to happen quite a lot and still happens particularly since trucks are not tracked using GPS, which is possible quite easily today.Even if trucks do supply to ration shops, many a times because the grains arrive late and ration shops are not functioning on time, ration shops collude with officials and truck drivers to divert this grain and supply it in open market. Even if not the entire quota of grains meant for a particular shop, they sell a part of it in the open market while the rest is distributed in ration shops to people. The quota (like say 25 kg or 35 kg per household) meant for poor is not measured properly as there are not proper instruments available to measure this grain, so at many places some cup or bowl may be used, or even some box which may be termed as 35 kg weight but may be giving actually 30 kg while the rest 5 kg per person is available to the dealer for diverting to open market.In places like Uttar Pradesh and Bihar and even Jharkhand, there are cases where the ration shops are found to never function (as per local people) while the grain is simply diverted. The dealers running the ration shops complain that they don't get any grain. Ironically though, with collusion of elected officials and dealers, the ration cards show forged entries of grain having been supplied to people, and thus in official terms, grain has been supplied.The elected officials and dealers also use their political clout and ensure that they can collude with MLAs and MPs in India to sell this and everybody has a share in this illegal profiteering maze. The result is a total loss for the poor.A major problem also is that people do not know about their entitlements, they also do not know whether they are eligible for such public services or not, and if yes, then how much do they deserve (35 kg or 25 kg and is it per household or per person), so they can be easily cheated. Also many rural establishments do not function properly thanks to collusion and corruption as well as inefficiency, so it's not a surprise that PDS has not functioned well in most states and in some it has performed disastrously while in most it has been poor or average at best.But has the PDS failed? I do not think so completely.Kerala has been performing exceptionally well in PDS system right from 1960s thanks to good rule of the Left regime, exceptional education of people which meant that people knew very well what their entitlements were, and a political link between food and their votes which meant it was mandatory on the part of political parties and governments to ensure that the ration shops worked well and people got their due. Thanks to this, PDS functioned well.After 2005, I would say three states have done quite well in PDS: Tamil Nadu, Chhattisgarh and Orissa. Tamil Nadu had been doing reasonably well in Mid Day Meal Scheme and Integrated Child Development Scheme, but under the AIADMK regime of 2001-2006 the ration shop system had gone for a toss. But DMK had promised to revive it on coming to power and once they did, they changed the dealer business and gave ration shops to women-led Self-Help Groups (SHGs) and other groups which were answerable to Panchayats and local people. They also ran awareness campaigns and gave two kinds of cards: rice card (which gave 20 kg rice at Re 1/- per kg to all) and sugar card (which gave 20 kg sugar at cheaper than market prices with 2-3 kg rice at Re. 1/- per kg). The result was that with good education of entitlements and a universal PDS, the system ran exceptionally well and everything is good.Chhattisgarh universalized its PDS in 2007 when Raman Singh tried it just before a bye-election which he wanted to win, by introducing rice for 95% of population at Re. 1/- per kg. Once he won with a bigger margin than in the assembly elections, he extended the scheme to the entire state, and was rewarded with a second term in 2008 Assembly elections in spite of massive allegations of scams as the Mines Minister. There were his hoardings depicting him as "Chaval wale baba" (Literally meaning: "The messiah who provides rice") To understand his performance, in 2007 as per government figures, the leakage was around 44% or so, but in 2011 four years later, the leakage is less than 10%. And they ensured that it worked well by universalizing the scheme, by putting GPS systems on trucks to ensure grain was not diverted, and by ensuring that SHGs were running the scheme and people were educated about their entitlements through government awareness programmes. Raman Singh is confident that on the back of this scheme he can win back again in 2013 Assembly elections.Orissa did the same under Naveen Patnaik, providing rice at the same rate, and Naveen Patnaik has reaped the benefits very well as this scheme has been working very well. He too universalized the PDS and only ensured that those paying income taxes and those who are govt. officials are exempted from availing of this facility. He has been governing Orissa I think since 1999, winning 3 terms of governance, and I guess he will continue after 2014 also.I want to say one final thing: all major success stories of PDS have been those where it has been universal, where attempts have been made to ensure that grain is not diverted, and where local people and Self-Help groups based in those areas have been involved in distribution of grains with ensuring their accountability to local elected bodies (Panchayats/Municipalities). The targeted system of PDS as per Manmohan Singh school of reforms (backed by paper-based economists who never visit ration shops to figure out what works and why) doesn't work well. What are the comparisons?a) In targeted PDS, one has to target the beneficiaries which requires involvement of local authorities like Panchayats and Municipalities. This entitlement depends upon whether you are below poverty line (BPL) or not. But most of the time these authorities collude with the rich and ensure that while those who don't deserve Below Poverty Line cards (BPL cards) get ration, those who deserve to be declared BPL don't get such cards. Aadhaar will also not solve this problem. So this is a problem of collusion.In universal PDS, everyone has a ration card, and the rich like Mukesh Ambani has no incentive to waste his time standing in a line for his ration, so he will go and purchase in Reliance Fresh while the poor who is ready to wait and can rest, he will surely be in the line in front of ration shops to get ration.Hence, it reduces corruption and discretionary power of these authorities to be corrupt by colluding.b) In targeted PDS, many a times one poor family gets the card for ration while the other doesn't. This happens because of two reasons. One, because of collusion with local authorities, one poor family may get this card while the other may not have done so and thus may not get the card.The other reason is that in India, the Planning Commission arbitrarily decides the number of poor families and does not accept the figure given by State governments, so the number of BPL cards is correspondingly issued on Planning Commission figures rather than on figures given by state governments. Hence, many a times even if two families are poor as per state governments, one is not as per Planning Commission, and we have two groups: poor households having BPL cards and poor households not having BPL cards.In universal system where your entitlement is not fixed to whether you are BPL or not, you are eligible for it. Hence, you do not have to wonder why you get ration card while others don't or vice versa.c) In India, a large section of the population is very close to poverty line and thus can go below and above poverty line in a matter of months. It is very difficult for such families to all be covered since if their luck is that they are just above this poverty line at the time of NSSO Survey (which decides poverty line) then they may not be classified as BPL and may not get a ration card. Targeted PDS therefore has this issue.In universal system, this is not a problem, since all are eligible.d) A large section of population in our country is also consisting of migrants, so their BPL card may work somewhere but may not work somewhere else and they may be poor in urban areas but not in rural areas. That issue will be sorted out if the card is universal and all are eligible, as in that case they can get their rations at the place of their choice.e) A targeted PDS requires lots of checks and balances to ensure that corruption is not happening and the right beneficiaries are selected, and we have discussed issues on it. Another issue with it is bogus cards, of people who actually do not exist, and they are having BPL cards while someone else in their name gets the grain. And if bogus cards didn't exist, at least one beneficiary may get this grain instead. So someone gets more grain at the expense of a deserving person.In universal PDS, since everyone can get grain, there is not much issue with bogus card, the person who has bogus card and gets more will not get grain at the expense of others, so while somebody is gaining more grain, it is not at the expense of a deserving person.f) A targeted PDS will have fewer beneficiaries who will be poorest of the poor and these people will not have much political clout to ensure that the system works, both in terms of them being poor and them being fewer in number. But when PDS is universal, there are large number of beneficiaries in comparison to targeted PDS and so, they are much better economically than poorest of the poor and being more in number, have a greater political clout. They can thus ensure that ration shops function properly. And it's in interest of political parties to listen to them or they will be finished.Of course, we need to incorporate GPS as a major improvement, computerization of PDS records as done in Chhattisgarh and also awareness campaigns and public display of entitlements for people so that they come to know what they deserve, but all this requires deep backing with universalization so that people can get what they deserve. Yes there will be costs attached, but there is enough grain and we procure more than we require for running a universal PDS. So we can run it, if we want. And it can run well, as recent examples put above have been shown.In short, PDS has done okayish at best, it has to do better, but if we run it and run it well, it can help both our farmers, as well as our population in truly achieving its objectives. And universalization is required to serve the cause of both these sections of society.