Economists doubt India’s new loan guarantees will spur growth

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NEW DELHI (Reuters). India will provide federal guarantees for bank loans to small businesses and the health and tourism sectors to help them overcome the COVID-19 pandemic, Finance Minister Nirmala Sitharaman said Monday.

Indian Finance Minister Nirmala Sitharaman and Governor of the Reserve Bank of India (RBI) Shaktikanta Das attend the RBI Central Council meeting in New Delhi, India on July 8, 2019. REUTERS / Anushree Fadnavis

Industry leaders and economists said the new $ 35 billion loan guarantees could provide some temporary relief, but not enough to boost economic growth.

Sitharaman said the government will waive visa fees for 500,000 foreign tourists and provide loan guarantees for healthcare, tourism and small businesses in the amount of Rs 1.1 trillion ($ 14.8 billion).

The government will expand federal corporate loan guarantees to Rs 4.5 trillion from the previously set limit of Rs 3 trillion, she said.

The government also plans to spend an additional $ 12.6 billion to provide free food grains to the poor through November and $ 5.78 billion this fiscal year to expand health services and digital networks.

Unlike advanced economies, which offered huge stimulus packages to households, India relied on injecting additional government funds into infrastructure, government guarantees on bank loans to businesses hit by the pandemic, and free grain for the poor.

“Most of the budget support is still below the norm and in the form of loan guarantees rather than outright stimulus,” said Madhavi Arora, lead economist at Emkay Global Financial Services.

She said that, given the limited effectiveness of monetary easing, continuing countercyclical support for fiscal policy – and avoiding premature consolidation – remains critical.

LIMITED INCENTIVE

Aditi Nayar, chief economist at ICRA, India’s arm of rating agency Moody’s, said the new measures will have an impact of about Rs 0.6 trillion ($ 8.08 billion) on public finances, and their success will depend on sales or actual spending.

Economists cut their growth forecast for the current fiscal year starting in April to 7.5-8% from an earlier estimate of 10-11% amid growing concerns over the slow pace of COVID-19 vaccinations and the spread of the highly infectious Delta variant.

Industry and opposition leaders are pushing for tax cuts on gasoline and diesel and remittances to the poor to boost consumer demand.

India’s economic growth rose to 1.6% in January-March from a year earlier, but economists are increasingly pessimistic about this quarter after the second wave of COVID-19 infections in April-May.

India’s central bank kept interest rates at an all-time low while taking liquidity measures to support growth despite rising retail inflation.

“Trust needs to be restored among the people for consumer demand to continue to grow,” said Sanjeev Mehta, senior vice president of the Federation of Indian Chambers of Commerce.

(1 US dollar = 74.2960 Indian rupees)

Report by Aftab Ahmed and Manoj Kumar; Editing by Toby Chopra, Jacqueline Wong and Timothy Heritage

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