India’s new loan guarantees may have limited impact on coronavirus-hit economy

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Indians line up at a COVID screening center at Ram Manohar Lohia Hospital (RML) after a Delhi panic case triggered a panic situation in Delhi, India on March 4, 2020.

Imtiaz Khan | Anadolu Agency | Getty Images

India has taken a number of measures Rs 6.3 trillion ($ 84.9 billion) to boost the coronavirus-hit economy, but economists are skeptical that this will have a major impact on short-term growth.

The impact of this policy – which is about 2.8% of GDP – on the country’s fiscal deficit target is expected to be relatively small.

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

For the current fiscal year, which ends in March 2022, India’s budget deficit target is around 6.8% of GDP. BUT budget deficit represents the gap between government revenues and expenditures and implies that the country spends more than its revenues.

“Despite significant headlines, most of these were loan guarantees, which diminished the net impact on fiscal mathematics,” Radika Rao, an economist at Singapore-based DBS Group, said Tuesday.

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 may be “some room for maneuver” due to higher nominal GDP and the likely re-prioritization of existing spending to minimize the risk of exceeding the budget deficit target.

What was announced?

This was announced by Finance Minister Nirmala Sitharaman on Monday. a range of support measures, including the provision of about $ 35 billion in loan guarantees to help small businesses and sectors affected by the pandemic.

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

The government will also expand the emergency credit line guarantee scheme by an additional Rs 1.5 trillion ($ 20.2 billion) from the previous Rs 3 trillion limit to Rs 4.5 trillion.

The scheme allows banks and non-bank lenders to provide emergency loans to eligible borrowers to run their business, and these loans are government guaranteed to cover the default risks for lenders.

When first introduced, the scheme was seen as a relief for India’s micro, small and medium-sized enterprises, which are under pressure from the pandemic crisis.

India also announced a loan guarantee scheme for microfinance institutions, which typically provide loans to the smallest borrowers in the country, 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.

Growth stimulating

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

“The fiscal push is more about supply rather than outright boosting demand, limiting the extent to which growth can be accelerated immediately,” she said. The continued opening up of the economy and improvements in the vaccination process are likely to be “more significant catalysts for recovery in the near future,” she added.

India’s economy grew 1.6% over last year from January to March this year.

Economists warned that GDP data for April-June – the first quarter of this fiscal year – may not provide a full picture of the crisis in South Asia’s largest economy as a result of the devastating second wave of the coronavirus outbreak.

Aditi Nayar, chief economist at ICRA, India’s subsidiary of Moody’s, also noted that the success of loan guarantees will depend on how many new loans are issued by lenders.

Budget Deficit Target

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