Some credit support, but little stimulus

One appreciates the government’s concerns on fiscal slippages in the current year following an anticipated revenue shortfall. Reversing the cut in corporation tax rates could help drive up revenues.

There is very little fresh stimulus in the package that the finance minister Nirmala Sitharaman announced on Monday even if the measures for Covid-hit sectors, as also MSMEs and MFIs, will bring them some relief. The headline number of Rs 6.3 lakh crore might appear impressive but the direct impulse is a small fraction of this amount. Economists estimate the additional spend in FY22 would be less than a tenth of this—between Rs 55,000-60,000 crore.

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That’s around 0.3% of GDP. Most of the financial support is being provided by way of guarantees for loans; consequently, these are more in the nature of contingent liabilities with no immediate budgetary impact. The funds will need to be paid to banks in subsequent years depending on the level of delinquencies. The relief measures for the pandemic-hit sectors comprises mainly the extension of guarantees—of around `2.6 lakh crore. Not all schemes relate to the current year; some are spread over a longer period.

How impactful these measures turn out to be depends on the willingness of banks to lend. As we have seen over the past year, although RBI provided them with several lines of cheap credit, not too much was drawn. The little that was used was given mainly to well-rated customers. In a good move, the allocation for the ECLGS has been upped from Rs 3 lakh crore to Rs 4.5 lakh crore, and the scheme has been tweaked to make more borrowers eligible. This scheme has been fairly successful with some Rs 2.1 lakh crore of credit having been disbursed so far across 11 million units.

There is a new Rs 1.1 lakh crore loan guarantee scheme for Covid-hit sectors, with a Rs 50,000 crore carve out for the health. Businesses can use the credit to scale up infrastructure in underserved areas and build new facilities in other than the top eight cities. While there could be demand for loans since the interest is capped at 8.9% compared with 10-11% in the normal course, it seems unlikely banks will be inclined to lend. Those in the tourism sector can also access affordable working capital or personal loans.

The highlight of Monday’s announcements was the credit-guarantee scheme to facilitate loans for small households through the MFIs. Banks can lend to new or existing NBFC-MFIs or MFIs that, in turn, can lend to small borrowers, up to Rs 1.25 lakh each. It is welcome the loans have been made affordable—MCLR plus 2%—but, for the funds to filter through to micro-customers, banks must lend. The guarantee amount of Rs 7,500 crore is modest as is the expected coverage of 25 lakh households. The good news is that even stressed borrowers—those whose accounts are not NPAs—are eligible to borrow.

It is welcome that the Atmanirbhar Bharat Rozgar Yojana—that incentivises businessmen to create more jobs—will be extended till March next year; so far, some Rs 902 crore worth of benefits have been provided under the scheme. The insurance covers for the export sector—Rs 88,000 crore over four years—are also welcome. The re-launch of the PMGKAY from May-November, already announced earlier, is needed to help weaker sections. Both the free food grains and the enhanced fertiliser subsidy, for an aggregate of Rs 1.1 lakh crore, will largely get financed by the pre-payment of the FCI’s loan in FY21, without pressuring the fisc. One appreciates the government’s concerns on fiscal slippages in the current year following an anticipated revenue shortfall. Reversing the cut in corporation tax rates could help drive up revenues.