Fiscal package complements liquidity measures. Long-term reforms remain the key
Finance minister Nirmala Sitharaman yesterday unveiled the first tranche of Prime Minister Narendra Modi’s promise of a Rs 20 lakh crore fiscal stimulus. Her announcement was preceded by RBI’s liquidity enhancing measures since February, which work out to around 4% of India’s GDP. However, their impact has been muted as banks are paralysed by risk aversion (disinclination). The government’s package yesterday aims primarily at encouraging banks to begin lending to small enterprises, NBFCs, housing finance companies, among others. It represents an excellent start.
The lockdown occasioned by Covid-19 has singed every segment of the economy. A shock of this scale can be offset only if there is a sovereign backstop to monetary measures. That is precisely what the government has done by using a conventional channel of credit guarantees to loans and investments made by banks. The efficacy of the package in unlocking credit depends on the detailing of the guarantee and liquidity schemes. It’s important now for government and RBI to ensure there are no last mile hitches. What is praiseworthy is the emphasis on MSMEs and second tier financial intermediaries (mediator). They are interconnected through credit channels and a package which supports both holds most potential.
The credit guarantee and liquidity measures should potentially influence over Rs 4 lakh crore of lending. But the actual cost to the government will be much lower as the underlying aim is to get the banks to do most of the lending. Separately, there’s some relief in the form of liquidity infusion for the perpetually troubled electricity distribution companies. Given the dislocation experienced, there are some concessions proposed for real estate projects in terms of timelines, and also for taxes.
A significant part of Modi’s speech was devoted to his vision of Atma Nirbhar Bharat, or self-reliant India, promising a “quantum jump” in the economy premised on big reforms which implicitly go beyond the incremental (relating to or denoting an increase or addition, especially one of a series on a fixed scale) ones seen so far. While the monetary and fiscal packages are meant to mitigate the immediate hardship, the global pivot away from China is an unexpected opportunity to reboot India’s stagnating economy. Unless the vision outlined by Modi is backed by a concrete plan of action, this chance may slip away. Even as the government unveils more tranches of the fiscal package, it must focus on long-term reforms which encompass the factor markets as well as India’s antiquated legal architecture. That will be the real game changer.