As per some media report, the government of India is considering
a proposal to revive the struggling MSME sector. It is reported that the
government is considering building a contingency fund of Rs400bn that will be
used to provide guarantee to Rs3trn of fresh loans to MSME sector. Earlier, the
RBI had proposed a moratorium of 3 months on the repayment of principal and
interest on the terms loans. Presently, banks have an outstanding credit of
Rs15trn to MSME sector. Now it is indicated that each MSME will be extended
additional credit equivalent to 20% of the outstanding credit for 6 months
period to kick start their locked down businesses. This additional credit
facility shall be fully guaranteed by the central government.
"If" "implemented" "simply",
without too many conditions and restrictions, it would be a meaningful measure
to mitigate the collateral damage caused by coronavirus COVID-19.
I would like to share the following thoughts with readers in
this context:
(a) The present crisis is
once in a century kind of event. In fact this shall qualify to be the most
impactful global event since the WWII. The government must handle this event
likewise. Considering and implementing some incremental solutions for
mitigating the impact of this event will not help in any manner.
The government therefore must not pay any heed to the fiscal
hawks cautioning it about fiscal slippages. The government must constitute a
special fund, by issuing 30-50yr maturity bonds in the global markets (given the
near zero interest rates) and utilize that money for reconstruction and growth
of the economy. This fund could be excluded from the regular annual budget.
Repayment could be funded by Rs1/ltr cess on transportation fuel for next
30years.
(b) One of the primary
obstacles in revival of the Indian economy is poor risk appetite of bankers.
For a variety of reasons, bankers are not willing to assume any further risk.
The government needs to provide an effective backstop to banks to encourage
them for assuming risk. This will only put the wheels of the economy in motion.
(c) RBI needs to become
proactive. It would need to lead the way to the economic recovery. The mandate
of RBI needs to be changed from a regulator of Banks to the agent of growth
with stability. During the crisis period, ensuring market stability through
direct action must be a core principle of RBI policy framework.
For example, in the current circumstances, instead of expecting
banks to bail or mutual funds and NBFCs might not be an effective strategy.
Instead, RBI should have done a direct action by buying securities from mutual
funds and NBFCs with appropriate haircuts and other commercial terms.
(d) The steps taken by the
government must be wholehearted and well thought off. Bureaucracy must be given
three clear instructions:
(i) The buck stops
at the PMO.
(ii) The approach of
the implementing agencies must be "how it can be implemented" rather
than "how to avoid implementation". The agencies must be given
adequate flexibility for taking on the spot decisions about relaxing the set
rules.
The argument that it will be misused is invalid. If the
government does not trust its own officers' integrity, either the officer or
the government itself must go.
(iii) Failure to
achieve the defined outcome shall attract stringent possible punishment.
