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Is boosting liquidity enough or should govt put money in people’s hands to spur demand?

Finance Minister Nirmala Sitharaman has announced collateral-free loans, credit guarantees, capital infusion and various other liquidity-boosting measures for MSMEs, NBFCs & DISCOMs.

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Finance Minister Nirmala Sitharaman has announced collateral-free loans, credit guarantees, capital infusion and various other liquidity-boosting measures for MSMEs, NBFCs & DISCOMs. This is part of the Narendra Modi government’s Rs 20 lakh crore economic package. Experts say the stimulus has overlooked the lack of demand and have suggested direct cash transfers.

ThePrint asks: Is boosting liquidity enough or should govt put money in people’s hands to spur demand?


PM-KISAN payments, income support to migrant workers will increase demand for industrial products

Ajit Ranade
Economist

It’s important to distinguish between illiquidity and insolvency. The former is a situation where cash shortage produces mismatch between revenue and expense. The Narendra Modi government’s liquidity injection to Medium, Small and Micro Enterprises — MSMEs — is welcome because it will help the sector tide over its cash needs as it waits for pending payments.

The partially guaranteed loans will also help the MSMEs with working capital needs. Similarly, the RBI’s additional liquidity of Rs 6 lakh crore will help banks lend to corporates, Non-Banking Financial Companies (NBFCs) and SMEs. The package has also provided relief to mutual funds that were facing some panic redemption pressure.

However, since aggregate demand has collapsed, we need measures that will not just address liquidity needs but solvency too. We need to increase people’s purchasing power and create demand for industrial products and services. For that, we need cash injection into the household budget, like enhancing PM-KISAN payments. We need to provide income support to migrant workers as well as urban poor. We need large transfers of food grain from the warehouses of Food Corporation of India (FCI) to ration shops (under PDS) at zero cost so that they can cater to ration cardholders and non-cardholders too. That is also an injection in kind, if not cash. Most importantly, states need direct fiscal support since they will be at the frontline during the Covid recovery period.

Aggregate demand stimulus also needs scaling up infrastructure spending on highways, railways and metros. It will additionally create demand for construction material, labour and other inputs, and in turn have a multiplier effect on economic growth.


Modi govt needs to give cash to the poor, lower GST rates to boost demand

Arvind Singhal
Chairman, Technopak Advisors

In view of the importance of private consumption for the national economy and the impact it has on direct and indirect employment, the Government must now urgently take the following steps to strengthen the demand side of the economy.

First, it should provide succor to the informal economy by directly transferring Rs 10,000 per household to 150 million of poorest households across India. This stimulus would almost immediately flow back into the informal economy through immediate spending by the lowest economic strata.

Second, a demand stimulus should be given to the large manufacturing units and MSMEs.

Government should lower the GST rate on all categories (other than CBUs) of the automobile sector to a flat rate of 12 per cent for all vehicles sold and registered until 30 September 2020.

A short term, sharp reduction in the GST rate to 12 per cent may not really cause a revenue loss to the government and may actually improve its collections from the auto sector if it leads to a revival of demand.

For the MSME sector as well, the Modi government should reduce the GST rate on consumer durables and appliances to a flat 12 per cent. Remember, this segment of consumer spending has a very large number of local and regional manufacturers of components and final products. Here again, like in the case of the automobile sector, the government could actually collect more GST by lowering the rate as compared to what it may collect if the demand collapses.


Liquidity injection is a more sustainable way to boost demand

Rama Bijapurkar
Management consultant and author

Both cash transfer and liquidity injection spur demand. While one is a glucose shot to a weak body the other one aims at a more holistic healing, even if it takes longer time. The second has a greater chance of being sustainable.

The liquidity bet is that greasing the gears of economic activity will spur businesses to go into higher gear and run at higher speeds, creating more work for more people, and thus more income. In India, earned income will be spent, consumption is the newest God in our pantheon.

The idea of ‘get spending up first’ seems more like a Hail Mary pass. It doesn’t take away income uncertainty and also does not boost confidence to spend. Besides, the richest 20 per cent account for most of the discretionary spending and they have savings. About half of them get salaries. If laid off, even they would not spend.

People near subsistence levels who have no savings need direct bank transfers. Weak small-businesses say they want transfers but have no confidence to borrow. We should let weak capacity die and save the good capacity.


Liquidity measures are necessary but not enough to address various problems faced by Indian economy

Ajay Bodke
CEO (PMS), Prabhudas Lilladher Pvt Ltd

The measures taken by the Narendra Modi government are necessary but not sufficient to address myriad problems that the Indian economy is facing. Acute liquidity problems being faced by corporates, if not addressed through immediate provision of ample liquidity, could morph into a solvency issue. For example, if a corporate cannot honour a payment that is due and it defaults, then the lenders start curtailing lines of credit. That essentially chokes businesses and forces them to declare bankruptcy. Even if lines of credit aren’t withdrawn, a company’s credit rating will be downgraded, adversely impacting its cost of borrowing.

This issue was recognised by the US Federal Reserve System, which first provided open-ended monetary stimulus followed by the government’s fiscal stimulus. It demonstrates the importance of sequencing liquidity measures.

These liquidity measures need to be followed up quickly with steps that address the three engines of growth: consumption, investment and export. All eyes are on the measures to be announced by Finance Minister Nirmala Sitharaman to resuscitate moribund aggregate demand.


Govt has addressed the problem of liquidity shortage, but lacks resources to directly put money in people’s hands

Radhika Pandey
Fellow, National Institute of Public Finance and Policy (NIPFP)

The Narendra Modi government has done well to address the problem of liquidity shortage. The measures announced for Medium, Small and Micro Enterprises (MSMEs) will help kick-start their business operations and those for non-banking financial companies (NBFCs) will help them access funds and resume lending activity. The cut in PF contributions is also aimed at putting more money in the hands of people.

The measures do not create immediate material fiscal implications for the government. Most of them require the government to invoke guarantees in certain conditions. As it is, the government’s fiscal position was already weak. Shutdown, necessitated by the Covid-19 pandemic, has led to a near collapse of its revenues.

While the Modi government has revised its borrowings for the current fiscal, it does not have enough resources to announce a big fiscal package that directly puts money in the hands of people. With competing demands on fiscal resources, the need of the hour is to use them rationally. There can only be small-scale targeted relief measures.

Having said that, the hardships faced by the migrant workers need immediate attention. The government has announced that Rs 1,000 crore from the PM CARES Fund would be allocated to the migrant workers. The real challenge, however, is to ensure that this money reaches the intended beneficiaries. This is difficult in the absence of a sound identification strategy for migrant and informal workers.

(Views are personal.)


Also read: Vocal for local: Can India afford self-reliance or is it a slogan to please swadeshi lobby?


By Pia Krishnankutty, journalist at ThePrint

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4 COMMENTS

  1. THIS TV SPEAKER GOVT . ALREADY MAKE POOR TO INDIA , ALL THE ANNOUNCEMENT IS FALSE PROMISE . IT WILL NOT IMPLEMENT PROPERLY. THIS ANNOUNCEMENT ONLY FOR TV SHOWS , CHANNELS SO THAT THEY WILL MAKE FOOL 24 HOURS ? INDIA WAS VERY HAPPY AND WELL ESTABLISHED COUNTRY UPTO 2014 ? WHEN MODI GOVT. CAME EVERYTHING RUINED ? FM WILL MAKE MORE POOR TO US ? …IN NEAR FEATURE COUNTRY WILL FACE MORE PROBLEMS BECAUSE OF MODI.GOVT ? THEY DO NOT KNOW HOW TO HANDLE THE COUNTRY DURING THE CRISIS OR DANGER TIME ? BJP WILL SPEAK MORE IN TV CHANNELS …VERY WEAK GOVT. AND FALSE PROMISE.

  2. If one may modify the question a little. A classical fiscal stimulus, putting more money into the hands of people – through transfers and, in more prosperous societies, tax cuts – as a means of boosting demand and thereby reviving the economy is not possible, given the state of public finances in India. In fact, increased borrowing by the government to finance such an effort would draw resources away from households and businesses. The only rationale for cash transfers on a modest scale and a limited duration is to prevent people from starving. That is how grim the situation has become.

  3. The government is in a bind. It would obviously like to do more, but is constrained by the fiscal position. See how swiftly America has run through a $ 3 trillion stimulus and the Democrats want another of equal size. Within what is available, the priorities should be to fund the medical response ( of the states ) to the pandemic and some very rudimentary food / monetary support to the poorest 100 million households. A swift lifting of the lockdown – keeping the railways shut upto 30th June is a troubling sign – and then a reform programme worthy of its mandate.

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