India’s New Loan Guarantees May Have Limited Impact on Covid Affected Economy

0

Indians line up at a COVID testing center at Ram Manohar Lohia Hospital (RML) after a case emerged in Delhi causing panic in Delhi, India on March 04, 2020.

Imtiyaz Khan | Anadolu Agency | Getty Images

India has put in place a Rs.6.3 trillion ($ 84.9 billion) package to boost the Covid-stricken economy – but economists are skeptical that this will a major impact on short-term growth.

The impact of these policies – which represent around 2.8% of GDP – on the country’s budget deficit target is expected to be relatively low.

Economists have pointed out that most of the support comes in the form of loan guarantees – instead of direct stimulus such as checks paid directly to households. In addition, some measures were announced previously and have already been taken into account in the calculations.

For the current fiscal year ending in March 2022, India’s budget deficit target is around 6.8% of GDP. A budget deficit is the gap between a government’s income and expenditure, and implies that the country spends more than its revenues.

“While the overall impact of the announcements is large, it was largely credit guarantees, reducing the net impact on budget calculations,” Radhika Rao, an economist at Singapore group DBS, said Tuesday. , in a note.

She explained that some measures – such as subsidies, free food grains and support for pediatric health – could have a likely impact on the budget deficit. But, there could be “some leeway” from higher nominal GDP and a likely reshuffling of existing spending to minimize the risk of exceeding the budget deficit target.

What was announced?

Finance Minister Nirmala Sitharaman on Monday announced several support measures, including providing an emergency loan guarantees of around $ 35 billion to help small businesses and sectors affected by the pandemic.

Sitharaman said the government will provide an additional 1.1 trillion rupees ($ 14.8 billion) in credit to businesses in sectors such as healthcare, tourism and others.

The government will also expand the emergency credit line guarantee program by an additional 1.5 trillion rupees ($ 20.2 billion) from an earlier limit of 3 trillion to 4.5 trillion rupees.

The program allows banks and non-bank lenders to provide emergency loans to eligible borrowers to run their businesses and these loans are guaranteed by the government, which covers the risks of lender default.

When first introduced, the program was seen as a relief for Indian micro, small and medium enterprises who are under pressure due to the pandemic crisis.

India also announced a credit guarantee program for microfinance institutions which typically lend to the country’s smaller borrowers, such as small business owners. The government will spend an additional $ 12.6 billion to provide free food grains to millions of people through November.

Stimulate growth

The latest support measures were similar to how the government responded to the first wave of the coronavirus outbreak in India last year, Rao told CNBC by email. Monday’s announcement was aimed at improving the flow of credit to the most affected sectors and vulnerable households, she said.

“The fiscal push is mostly on the supply side rather than a direct boost to demand, containing the magnitude of the immediate growth push,” she said. The ongoing reopening of the economy and improving immunization progress are likely to be “more important catalysts for short-term recovery,” she added.

The Indian economy grew 1.6% from a year ago, from January to March of this year.

Economists have warned that printing GDP from April to June – the first quarter of the current fiscal year – may not paint a full picture of the crisis in South Asia’s largest economy following the ‘a devastating second wave of the coronavirus epidemic.

Aditi Nayar, senior economist at rating agency ICRA, the Indian subsidiary of Moody’s, also stressed that the success of loan guarantees will depend on the number of new loans disbursed by lenders.

Budget deficit target

Economists have pointed out that loan guarantees will have limited upfront costs to the government.

Nomura’s Sonal Varma and Aurodeep Nandi said in a note that the fiscal stimulus measures announced during the second wave of the epidemic, including Monday’s measures, amounted to around 0.59% of GDP. Besides the additional government spending on free Covid-19 vaccines, the total budgetary impact for the current year is expected to be around 0.65% of GDP, they said.

Nonetheless, Nomura expects India to exceed its budget deficit target of 6.8% thanks to additional spending and potentially lower divestment figures. The Japanese investment bank has revised upward its estimate of the budget deficit to 7.1% of GDP for the current year.

Some of Monday’s economic measures, worth 2.4 trillion rupees, are spread over the next two to four years, according to ICRA’s Nayar. “Some of these had already been announced at budget time, and therefore part of their cost has already been factored in,” she said in a note.

DBS’s Rao estimated that there is a risk that the deficit will exceed the target of 0.3% to 0.5% of GDP.

Leave A Reply

Your email address will not be published.