Necessary steps, but doubts over implementation, effectiveness: Economists

May 13, 2020
New Delhi: As Finance Minister Nirmala Sitharaman on Wednesday announced the first phase of the economic package with liquidity measures for MSMEs and NBFCs, economists, although describing the measures as necessary, have cast doubt over their eventual implementation and effectiveness.

Speaking to IANS, former Chief Statistician Pronab Sen agreed that the announcements are “sensible” and the government is trying to ensure that MSMEs do not run into financial trouble and survive the lockdown period.

Among several other measures, the minister announced Rs 3 lakh crore “collateral-free automatic loans” for businesses, including MSMEs. She further announced another scheme worth Rs 20,000 crore for “subordinate debt for stressed MSMEs”.

Further, she has also announced Rs 45,000 crore partial credit guarantee scheme for NBFCs, among other liquidity measures for stressed NBFCs.

Sen, however, noted that the announcements should have been made much over a month ago. “I just wished it had happened a month and a half ago. Already some damage has already happened,” he said.

“At the end of the day, how it gets implemented that will eventually matter,” Sen added.

N.R. Bhanumurthy, Professor at the National Institute of Public Finance and Policy, noted that it is a welcome step but is “slightly delayed”.

He said that it depends upon how the whole scheme is going to be implemented and the success of that depends on to what extent the banks will respond to the measures.

“I am not sure whether private sector banks will be part of this in very big way… ultimately it will fall on the public sector banks, where they may be forced to provide loans, with no collateral,” Bhanumurthy told IANS.

Abheek Barua, Chief Economist with HDFC Bank, was of the view that although similar measures for NBFCs were announced last year without much movement on the ground, this time around, the measures may bear fruit as the crisis is much bigger.

“The fact that the government will provide guarantee of loans or bonds for both MSMEs and NBFCs will induce banks to lend to these segments. So these segments were obviously suffering from liquidity problems which would have morphed into solvency problems… that problem might be taken care of through this mechanism,” he said.

“Banks have been asking for guarantees in order to lend to these segments,” Barua added.

He also pointed out that the Rs 45,000 crore partial credit guarantee scheme for MSMEs was the one announced previously in the budget, but did not take off.

He noted that some measure will be “quite effective” while others such as the Rs 50,000 crore “Fund of Funds” for MSMEs may not yield the intended results.

Terming the Rs 90,000 crore liquidity injection plan a “big positive” for stressed power discoms, Barua told IANS that there should be fundamental changes in the operations of power distribution companies or they would be stuck in a vicious cycle of debt and eventual support from the government and banks.

Sen, who is a noted economist, was of the view that the announcements made on Tuesday were only short-term measures and the government will have to come up with further measures to boost demand in the economy.

“More will have to come and that more will have to be pretty large… Already had seven weeks of nationwide lockdown, and many states have done various degrees of lockdown before that. Over this period of time we have already suffered production loss of Rs 18-19 lakh crore, thereby an income loss of the same amount. Even after opening up, the demand will be muted. So, for that, there will have to be a demand stimulus,” Sen said.

Bhanumurthy said: “It is not really a fiscal stimulus for the overall economy so that it would boost the economy. Now this is basically being supplied by the PSBs, without much impact on the overall economy.” IANS