Center relies heavily on credit guarantees to help the economy. Direct support on the demand side remains minimal.


On Monday, Union Finance Minister Nirmala Sitharaman unveiled a package of relief measures designed to alleviate economic stress resulting from the second wave of the pandemic. They consist largely of credit guarantees designed to stimulate cash flow to the most vulnerable sectors of the economy – micro, small and medium enterprises, small household borrowers, tourism and health sectors. The actual budgetary outlays resulting from these relief measures are likely to be minimal. In fact, similar to the approach taken in the first wave, this time too direct support for central government demand has been limited.

Among the important announcements, the government increased the limit of the Emergency Line of Credit Guarantee Program (ECLGS) announced last year by Rs 1.5 lakh crore in the hope of further facilitating the flow of credit to MSME. On the existing limit of Rs 3 lakh crore, so far around Rs 2.7 lakh crore has been sanctioned, while Rs 2.1 lakh crore has been disbursed. Improving this program could help provide MSMEs with access to the funds they need to survive and meet their obligations, as well as the working capital needed to start their activities. In the same vein, another credit guarantee program targets microfinance institutions to lend 1.25 lakh rupees to around 25 lakh of small borrowers in order to alleviate the strain on the household balance sheet. low income and provide funds for entrepreneurial activities. Another such program has been announced for the ravaged tourism sector, encompassing various stakeholders. Considering that a large part of the activities of this sector is part of the informal economy and that tourism demand is not expected to increase sharply in the short term, however, it is questionable to what extent this program can help those who are engaged in this segment. For the health sector, the government has announced two devices. One, a Rs 50,000 crore loan guarantee program aimed at developing medical infrastructure in parts of the country where it is currently woefully inadequate or lacking (in cities beyond the eight metropolitan centers). And second, a stipend of Rs 23,220 crore to speed up short-term emergency preparedness, with particular emphasis on pediatric care. These are welcome first steps to address the gaps in public health infrastructure exposed by the pandemic. The other announcements relate to administrative and regulatory measures, including the expansion of the employment support program, the production-related incentive scheme for electronics manufacturing and the streamlining of approvals for PPP projects and the monetization of assets. .

The use of credit guarantees to support the economy are unlikely to have a significant impact on government budget numbers. According to some estimates, actual budgetary outlays as a result of the announcements made on Monday are expected to be in the order of 0.6% of GDP. While these measures may bring relief to some suffering from financial difficulties, they are unlikely to significantly change the economy’s short-term outlook. Much will depend on the pace of the vaccination campaign.


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