Credit growth is falling despite easy credit being one of the biggest pillars of the government-announced COVID-19 package. Recent data shows that although the government keeps announcing that banks have allotted large shares of money on the lines of packages, this doesn't reflect in the aggregate credit growth numbers. All this builds a case for direct fiscal intervention.
Around mid-May the Government of India announced a stimulus package in response to the COVID-19 pandemic with ‘Aatmanirbhar Bharat’ being the over-arching theme. A large part of the package encompassed various schemes of providing liquidity support to different sections of the market to be able to tide through the short term cash crunch issues faced due to the pandemic, and the consequent lockdown. The aim was to support these enterprises or sectors to stay afloat by providing credit support.
Since the banking or non-banking institutions may be reluctant to lend in these adverse circumstances, the government announced a kind of loss guarantees to these financing institutions. The support of the government was mainly via the liquidity support through financial intermediaries, rather than direct support. The most important among these are the Emergency Credit Line Guarantee Scheme to MSMEs, Partial Credit Guarantee Scheme (PCGS) 2.0 for Non-Banking Financial Corporations (NBFCs) and Housing Finance Corporations, loans for street vendors, etc.
More than Rs 1 lakh-crore had already been disbursed to the MSMEs under the Emergency Credit Line Guarantee Scheme as on August 20th out of Rs 3 lakh-crore announced by the government. Under the PCGS 2.0, public sector banks have approved a purchase of bonds and commercial papers to a total of Rs 21,262 crore . However, these individual efforts have not yet translated into the higher aggregate credit growth numbers.
Credit growth in the economy stands at 5.5 percent as of August 28, which is slightly more than one-third of what is was in beginning of 2019. This single statistic is enough to point towards the gloomy situation of the economy. Credit growth had started to decline much before the COVID-19 crisis, the pandemic seems to have exacerbated it.
Even the Reserve Bank of India (RBI) has undertaken extensive accommodative monetary policy with steep cuts in policy repo rates, slashed the CRR requirements, however, the transmission to credit growth is not yet seen.
In fact, the latest numbers for sectoral credit growth of the RBI available up to July show continued contraction in year-on-year credit growth to the MSMEs. Credit growth to the MSME sector was languishing in late 2019 which started to improve in early 2020. Since March, there has been contraction in credit to even the MSME sector. Also, growth of bank credit to the NBFC sector has been declining consistently.
This lacklustre performance of credit growth could partially be explained by the lack of demand in the economy, and the risk aversion on the part of banks. For a long time now the RBI has maintained excess liquidity in the market and, in fact, the banks have been parking huge amount of money under the reverse repo window with the RBI, even with the reduced reverse repo rates.
These numbers clearly indicate the ineffectiveness of current monetary policy, and builds a case for direct fiscal intervention by the government. With policy interest rates at historical low levels, conventional monetary policy has limited space to stimulate the economy. The first quarter GDP contracted by close to 24 percent, and most of the agencies are forecasting a contraction of 10-12 percent for the full year.
So, the near term scenario doesn’t look good, which makes people pessimistic about the future. In these conditions, the interest rate sensitivity of investment is expected to be low, making the possibility of reviving investment via monetary policy almost impossible. Direct fiscal support is indispensable at the current juncture to sustain demand and mitigate long-term cost of the pandemic. Not only indispensable, in fact fiscal policy is more effective in such times.
Fiscal stimulus mostly triggers the expectation of future tightening of monetary policy but when interest rates are already very low, this fear is also limited. Historical low rates would mean that investors can expect a prolonged period of low interest rates, which makes accommodation of fiscal stimulus easier, making the fiscal policy more effective at lower rates.
If we can’t side-line the fiscal deficit targets and fear of a downgrade from international credit rating agencies, then we have simply mortgaged our fiscal policy to these agencies, and that too in return of nothing. As it is, if we are unable to revive growth, debt will ultimately increase and ratings will fall. It’s like the camel that went to seek horns, and lost his ears.
These are unprecedented times and the economy needs to be supported, now more than ever. In these uncertain times, where the demand is low and the prospects seem to be very uncertain, it is unlikely that banks will be willing to lend and people will be willing to borrow. What is needed is a direct fiscal intervention, not just easy access to credit.
(Aasheerwad Dwivedi is Assistant Professor, Shri Ram College of Commerce, University of Delhi. Views are personal.)
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