In his speech on May 12, Prime Minister Narendra Modi stressed on boosting domestic demand. He spoke at length of making India self-reliant. But on May 13 when finance minister Nirmala Sitharaman lifted the veil on the Rs 20 lakh crore mega stimulus package, there was no mention of a demand revival.
All that Sitharaman announced was the government will pump in money to small firms through various schemes. Government, Sitharaman said, will give credit guarantee to banks and non-banks to lend to micro, small and medium enterprises (MSMEs) and non-banking finance companies (NBFCs).
This includes Rs 3 lakh crore collateral free loans for a period of four years and one year-moratorium fully backed by the government and liquidity measures worth another Rs 75,000 core to NBFCs and MFIs. Rs 20,000 crore subordinated debt and Rs 50,000 crore equity infusion through an MSME fund of funds are also part of the plan.
Liquidity support is essential. But the question is this: With no road map to stimulate demand on the ground, isn’t the government ultimately pumping in about Rs 4 lakh crore to small companies, including unrated ones, in a broken economy to create a bunch of over-indebted companies? Unless people go out to spend on goods and services, there won’t be any improvement in economic activities. This is what is missing so far in the jamboree.
How do governments create demand? In simple words, it needs to put money in the hands of people to spend. This will help consumer spending to revive. The government can do this through direct cash transfers to economically weaker sections in rural India, where demand revival is key. Merely stating that demand revival is key isn’t enough. The government will have to infuse money into the bottom of the pyramid to revive demand. Any such mention was absent in the finance minister press conference on May 13. This will have to be focused before the show gets over.
Secondly, while the government has announced liquidity measures for MSMEs through collateral free loans, backed by government guarantees and special liquidity facilities, very little attention has been paid to the monitoring of the use of this money. There are no conditions attached.
This is an unwise thing to do given the present economic situation. There have been massive job losses in MSME sector, which employees at least 11 crore people in India. Has the government stipulated that companies availing the liquidity boost under the central government package shouldn’t sack their staff? It has not.
One way of protecting the demand on the ground is to make sure there are no mass job losses. The government could have attached a condition to the liquidity package linking it with retention of staff. This was also absent in the May 13 presser. What if companies availing money begin cutting staff?
Third, MSMEs were already in a bad shape even before the COVID-19 outbreak happened in the economy. What has been given now is too little. These companies had faced severe cash flow issues in a slowing economy leading to large defaults and staff lay-offs. Their cash flows have dried up totally due to the prolonged lock-down.
What the government has announced now through liquidity package hardly cushions these companies from the COVID-19 shock. Clearly, this package isn’t enough as a liquidity cushion to cover the economic impact from the coronavirus pandemic. For instance, of the Rs 75,000 crore announced for NBFCs, how much will actually go to small NBFCs and MFIs is doubtful.
Banks always prefer better rated companies. They are likely to use the Rs 30,000 crore for which there is full government guarantee. But Rs 30,000 crore isn’t a big amount, considering that NBFCs have about Rs 7 lakh crore loans outstanding to banking sector.
The interlinkage in the financial system is huge. In the absence of demand on the ground, much of these loans will go bad after a while putting pressure on banks and the guarantor (the government).
To sum up, the Modi-government’s liquidity measures for MSMEs and NBFCs can be termed as meaningful only if there is a roadmap to revive demand on the ground by directly putting money in the hands of people in rural India, which has been impacted most by the COVID-19 lockdown through measures like direct cash transfer and boosting minimum employment guarantee schemes. Else, the liquidity measures alone don’t make sense.
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