Provide direct cash transfers to the vulnerable

International economic observers and credit rating agencies, which held India as one of the few beacons on the growth front until March, have been quick to downgrade the country’s ranking and most of them expect the economy to contract by as much as 5 per cent.

The pandemic struck the economy which was already slowing down. The recent estimate of GDP growth at 4.2 per cent in 2019-20 is the lowest in 11 years. The estimated growth for the fourth quarter of 2019-20 was a mere 3.1 per cent and, in fact, the construction and manufacturing sectors have shown contractions.

The only way to come out of the morass is to inject massive stimulus, but poor revenue and a high existing fiscal imbalance are serious constraints on the government’s capacity to do this.

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High interest, liquidity crunch hit MSMEs

Unfortunately, economic revival cannot be achieved through inspiring speeches and notional stimuli. There was a lot of hope when the Prime Minister announced a stimulus of Rs 20 lakh crore, but the confidence soon evaporated when the details of the ‘Atmanirbhar’ package were announced by the Finance Minister.

Of this, Rs 8.01 lakh crore is accounted for by RBI’s measures.

The package included additional liquidity enhancing measures such as providing loans without collateral with government guarantee, creation of agricultural infrastructure fund by the NABARD, liquidity injection facility through loans to DISCOMs from Power Finance Corporation and Rural Electrification Corporation.

Much of the stimulus measures are supposed to help the businesses reboot through easy availability of liquidity and providing relief through moratorium and regulatory forbearance.

Unfortunately, 99 per cent of the existing 6.3 crore MSMEs are micro enterprises and about 3.3 lakh enterprises are small enterprises. Only a fraction of these operate with formal banking channels.

Prior to lending, the bankers will look at the history of these companies and will only lend when they are satisfied that the loans will be serviced and repaid. In most cases, the problem is one of solvency and not liquidity.

According to the MSME Minister Nitin Gadkari, Central and State governments owe more than Rs 5 lakh crore to MSMEs and clearing this pending bills alone can help them a great deal at this juncture.

Considering these measures, the current package is not likely to provide much help in rebooting the economy. Besides, much needs to be done to boost sagging demand conditions. What is required now is a fiscal package to make direct cash transfers to the vulnerable, including self-employed and small businesses.

Unfortunately, a conservative estimate of aggregate fiscal deficit in the country this year is likely to be 12-13 per cent of GDP and that limits the capacity to provide a large fiscal stimulus. On the contrary, due to a sharp reduction in revenues, both Central and State governments are likely to compress capital expenditures for fear of increasing fiscal deficit and fueling inflation. This will dampen the aggregate demand further and will make the recovery process prolonged and painful.

Exceptional situations require unconventional measures and perhaps, this is the time to take the risk and loosen the purse strings to reboot the economy.

(The writer was member, Fourteenth Finance Commission. The views are personal.)