Tuesday, Nov 29, 2022

The first tranche

FM’s announcements address credit constraints. Greater clarity on government spending, its financing, is needed.

Bundesliga, european football leagues, saloman Kalou, soccer, indian express The finance minister has sidestepped questions over the quantum of additional spending being undertaken, how it will be financed.

A day after Prime Minister Narendra Modi announced a Rs 20 lakh crore package to help an already struggling economy get back on its feet after the setback of the pandemic, Finance Minister Nirmala Sitharaman unveiled the first tranche of relief measures. The measures, which are designed for the government to take on the credit risk in the economy, and boost liquidity to various segments, follow a three-pronged approach: First, ensuring flow of credit to the micro, small and medium enterprises. Second, easing liquidity constraints of financial intermediaries, and third, addressing cash flow woes of other parts of the economy. So far, the announcements have comprised largely of contingent liabilities like loan guarantees, with some direct fiscal support.

The government has announced collateral-free loans for MSMEs to the tune of Rs 3 lakh crore, where both principal and interest risk will be borne by it. This measure, while limiting the immediate outgo for the government, should encourage risk averse banks to lend to MSMEs. Though it does raise the spectre of moral hazard, as only a fraction of loans extended are likely to turn bad, actual credit flow to MSMEs could be much higher.

This will help cash-starved MSMEs access funds to meet their obligations such as paying salaries. Further, relaxing the definition of MSMEs addresses the perverse incentives of wanting to remain small. This will incentivise MSMEs to scale up as and when the economy picks up, without worrying about not being able to take advantage of existing incentives. Clearing all pending due of MSMEs, though not a reform, will help ease their liquidity woes further.

To encourage flow of funds to parts of the financial system, the government has announced special liquidity schemes — Rs 30,000 crore to buy investment grade debt of NBFCs, HFCs, and MFIs, and Rs 45,000 crore for investment in lower rated papers. But the question is: Will risk averse banks lend to lower rated NBFCs? Other administrative and regulatory measures which include lowering the rate of tax deducted at source, extending relief to contractors, and relaxations for provident fund contributions will help ease liquidity constraints in the broader economy. However, injecting Rs 90,000 crore to financially stressed state electricity distribution companies, through PFC/REC, while restricting the government’s outgo, is at best a stop-gap arrangement as it does not address the core of the problem. Rather, the government should be pushing through contentious reforms in the power distribution segment, as the draft amendments to the electricity law seek to do.

Subscriber Only Stories
UPSC Key- November 29, 2022: Why you should read ‘Executive Vs Judiciary’...Premium
Delhi Confidential: Ahead of Gujarat polls, BJP worries about NOTA votesPremium
Agrarian Punjab diesel-driven; Delhi opts for cleaner optionsPremium
The shadow of 1979: Iran and Saudi Arabia are fighting Islamism; Pakistan...Premium

The finance minister has sidestepped questions over the quantum of additional spending being undertaken, how it will be financed. While the government has announced a revised borrowing calendar, it is likely to be only enough to plug its revenue shortfall. This lack of clarity will keep bond markets on tenterhooks. Not much was also shared on the anticipated land and labour reforms. Hopefully, the next set of measures will focus on how the government plans to stimulate the economy, and the structural reforms it intends to implement.

First published on: 14-05-2020 at 12:55:44 am
Next Story

As countries look to reopen, signs of rare, Covid-linked disease in kids

Latest Comment
Post Comment
Read Comments