Right solutions?

The announcements made by Nirmala Sitharaman on Monday seem timely as they will provide some degree of relief to the sectors that are worst hit by the pandemic. At the same time, the announcements are not likely to have any positive bearing on the cyclical fiscal strain the economy is going through. The reason, as it is evident, is that there has been hardly any direct fiscal support announcement. The key highlights of the announcement mostly comprise credit guarantee measures, effectively meaning that the government will stand as a guarantor to the loans given by financial institutions to the specific sectors that have suffered the most from the pandemic. The size of the Emergency Credit Guarantee Scheme is to be increased from Rs three lakh crore to Rs 4.5 lakh crore. This could indeed prove out to be an effective measure as the ECLGS scheme has so far been quite effective — benefitting more than one crore units through credit disbursements amounting to more than two lakh crore rupees. Also, there is a Rs 1.1 lakh crore credit guarantee scheme for Covid-hit sectors. While these guarantees seem promising in helping out the needy and boosting infrastructure indirectly, much will depend on how much the banks are willing to lend. The precedents are not so good in this respect. The issue is further compounded by the low-interest rate of 8.9 per cent. The loan guarantee, along with the low interest rate, will boost the demand for loans in an unusual manner. This might also serve as an inertial factor for the banks against lending. The number of measures announced by the finance minister are impressive but it remains to be seen how much of the intended sum trickles down to the required areas. Apart from the MSMEs and small businesses, there is no doubt that the tourism sector was also badly affected by the pandemic. One of the announced measures seeks to provide free visas to the first five lakh foreign visitors after the opening of the borders. Much of the fate of the tourism industry will depend on the state of the pandemic worldwide and within India. The announced measure may, however, provide secondary support in the process and serve as an incentive for those willing to explore beyond the boundaries of their nations. The government has also announced loan guarantees to the sector within ECGS. The emphasis mostly seems on providing monetary stimulus by persuading banks to take a risk and lend the money to the above-mentioned sectors, and the government is willing to offset the possible losses incurred, on account of non-repayment, by the financial institutions in future. The effective support from the government will come in only over the coming years. This might not be useful in raising the confidence level of consumers, which is essential for leading towards increased investment and consumption. Beyond credit guarantee, there have also been some other impressive measures from the finance minister. The additional earmarking of Rs 23,220 crore for FY 22 over Rs 15,000 crore allocated under the budget for short-term emergency preparedness with an emphasis on pediatric care is quite an obvious measure. The two other provisions that need to be mentioned here include — the extension of Atmanirbhar Bharat Rozgar Yojana till March 31 next year and the extension of the performance-linked incentive scheme for electronic manufacturing by a year. As we build back post-pandemic, consumer confidence will play a crucial role. This will come only through a certain level of financial leverage provided by the government. It will enhance both the tangible capacity and spirit of the consumers. Certainly, the government is faced with significant revenue shortfalls on account of the pandemic and the resultant lockdowns. Perhaps it is time to explore some alternative revenue sources. Maybe tweaking the tax structure could help a bit. But, the need for direct fiscal support at this juncture cannot be downplayed. It has to be done with the optimum utilisation of the money that the government has in its coffers and the incremental amount that it could garner through its innovative approach. The challenge is to walk the tightrope. How better you could do!