FPJ Edit: Headline-hogging stimulus package hides small, actual 
step-up in govt spending, repackages measures announced earlier

The latest set of measures unveiled on June 28 by Finance Minister Nirmala Sitharaman, aimed at helping those sectors which have been hit particularly hard by the second wave of the Covid-19 pandemic and to ensure that the nascent recovery in growth does not falter, relies on a by now familiar playbook. Just like previous ‘stimulus packages’ announced by the Narendra Modi government earlier, this time around too, the package is dominated by an eye-popping headline number, which is largely dependent on the banking system stepping up lending further, while concealing a small actual step-up in actual spending by the government itself, while also repackaging measures already Budgeted or announced earlier as fresh stimulus measures.

In fact, a significant chunk of the Rs 6.28 lakh crore package actually consists of measures - like the proposed additional equity infusion into the Export Credit Guarantee Corporation (ECGC) to be spread out over five years. This will eventually boost export insurance cover by Rs 88,000 crore, but to count the Rs 88,000 crore as part of a stimulus package for the immediate present is stretching things a bit. Similar is the proposed Rs 33,000 crore boost for project exports through the National Export Insurance Account, which, while being a positive measure, will take some time to start showing results.

The big bang number in the package is, of course, the additional Rs 1.5 lakh crore under Emergency Credit Line Guarantee Scheme (ECLGS) that will help trade and businesses, especially in the MSME sector, to tide over the liquidity crunch. This forms the bulk of the Rs 2.67 lakh crore package aimed at stepping up credit flow to the MSME sector. The other big-ticket number is the additional Rs 1.1 lakh crore worth of loan guarantees for sectors impacted by Covid-19, including a Rs 55,000 crore chunk reserved for healthcare infrastructure.

While this will be in the form of loans from banks, the finance minister also announced Rs 23,220 crore of actual additional spending this year for the government health sector, aimed at emergency preparedness for the predicted third wave, particularly for improving facilities for child and paediatric care. For the first time, there is recognition that Covid warriors, in the form of doctors and nurses, are as important as buildings and oxygen plants, and additional funding is being provided to augment medical staff by hiring more doctors and nurses in the public healthcare space.

In a welcome measure, a new credit guarantee scheme for microfinance institutions (MFIs) has been proposed, aimed at reaching borrowers at the bottom of the financial pyramid, who are largely catered to by informal credit and MFIs at best. The new measure offers commercial banks credit guarantees of ₹7,500 crore to further lend to microfinance institutions, who are expected to disburse small-ticket loans of up to Rs 1.25 lakh to an estimated 25 lakh beneficiaries. This is also premised on banks willing to step up lending with the government providing guarantee support.

Another welcome recognition of an often overlooked group is the announcement of financial support to registered tourist guides, travel and tourism service providers etc. They have been particularly hit hard by the collapse of both domestic and foreign tourism. Other measures, like the government waiving fees for five lakh tourist visas, are more symbolic, dependent as they are on a revival in international leisure travel, which still looks far away.

Overall, this round of stimulus measures suffers from the same handicap that the earlier sets of measures faced. The measures are almost entirely dependent on the banking sector stepping up lending. The actual additional spending by the government, in the form of actual government expenditure, is barely 7-8 per cent of the Rs 6.28 lakh core highlighted by the government. As past experience has shown, banks are unwilling to risk further exposure in an uncertain climate. This has resulted in a bulk of the relief measures being snapped up by large businesses with a good record, leaving stressed small businesses in the lurch. In fact, surveys by industry bodies have shown that as much as 88 per cent of stressed small businesses were unable to avail themselves of any of the benefits announced earlier, due to conditionalities imposed by banks.

As the response to previous stimulus packages has shown, an over-reliance on credit and the banking system to do the job is misplaced. Loans at best provide temporary amelioration, since they have to be repaid and additional indebtedness of already stressed businesses is not good. Further, a revival in growth is dependent on a revival in consumption demand, which can only happen if people get more money in their hands. To that extent, more direct spending by the government, particularly on infrastructure, and an extension of relief schemes like the MNREGS to urban areas, may have helped more than the promise of additional loans. Besides, as the sluggish growth in credit offtake has shown, businesses will only borrow more when they are reasonably sure of demand reviving.

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