India’s new debt guarantees could have a limited impact on the economy hit by Covid

People of India line up at a COVID screening center at Ram Manohar Lohia Hospital, (RML) after a case emerged in Delhi caused by a panic situation in Delhi India, March 4, 2020.

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India has launched many measures amounting to 6.3 trillion rupees ($ 84.9 billion) aimed at boosting the economy plagued by Covid – but economists are skeptical it will have a big impact on short -term growth.

The impact of those policies – amounting to almost 2.8% of GDP – on the country’s fiscal deficit target is expected to be small.

Economists point out that most support is in the form of loan guarantees – rather than direct incentives like checks paid directly to households. Besides, some of the steps were previously announced and factored into the calculations.

For the current fiscal year ending March 2022, India’s fiscal deficit target is around 6.8% of GDP. A fiscal deficit is the gap between a government’s revenue and expenditure, and indicates that the country spends more than its revenue.

“Although the headline impact of the announcements was large, for the most part it was credit guarantees, making the net impact on fiscal math smaller,” Radhika Rao, an economist with DBS Group of Singapore, said in a note on Tuesday.

He explained that certain measures – such as subsidies, free grain food and support towards child health – could have a possible impact on the financial deficit. But, there may be “some falgle room” from a higher nominal GDP and a possible reprioritization to existing spending to reduce the risk of exceeding the fiscal deficit target.

What was announced?

Finance Minister Nirmala Sitharaman announced on Monday there are many support measures, including providing loan guarantees of approximately $ 35 billion to help small businesses and sectors affected by the pandemic.

Sitharaman said the government will provide additional credit of 1.1 trillion rupees ($ 14.8 billion) to businesses in sectors such as healthcare, tourism and others.

The government will also expand the scheme’s emergency credit line guarantee by another 1.5 trillion rupees ($ 20.2 billion), from the previous limit of 3 trillion to 4.5 trillion rupees.

The scheme allows banks and non-bank lenders to provide emergency loans to eligible borrowers to run their businesses and those loans are guaranteed by the government, which covers default risks for lenders.

When first introduced, the scheme was seen as a relief for India’s micro, small and medium businesses that were under pressure due to the crisis hit by the pandemic.

India has also announced a credit guarantee scheme for micro financial institutions that typically lend to the country’s smallest borrowers, such as small business owners. The government will spend another $ 12.6 billion to provide free grain food to millions of people by November.

Encourages growth

The latest support measures are similar to how the government responded to India’s first wave of coronavirus outbreaks last year, Rao told CNBC via email. The announcement on Monday aims to improve credit flow to the hardest -affected sectors and vulnerable households, he said.

“The financial push is largely on the supply side rather than a direct boost in demand, which contains the extent of the immediate boost in growth,” he said. The continued reopening of the economy and improving vaccination development is likely to be “a bigger catalyst of imminent recovery,” he added.

India’s economy grew 1.6% from a year ago from January to March of this year.

Economists warn that the GDP printout for April to June – the first quarter for the current financial year – may not paint the full picture of the crisis in South Asia’s largest economy as a result of a devastating second wave of coronavirus outbreak.

Aditi Nayar, chief economist at credit ratings agency ICRA, India’s affiliate of Moody’s, also indicated that the success of loan guarantees depends on how many new loans lenders have given.

Target fiscal deficit

Economists have pointed out that debt guarantees have limited initial costs for the government.

Nomura’s Sonal Varma and Aurodeep Nandi said in a note that financial strengthening was announced in the second wave of the outbreak, including Monday’s measures, which accounted for approximately 0.59% of GDP. Along with additional government spending on free Covid-19 vaccines, the overall fiscal impact for the current year is expected to be at 0.65% of GDP, they said.

However, Nomura expects India to overhoot the fiscal deficit target of 6.8% on the back of additional spending and potentially lower disinvestment numbers. The Japanese investment bank has revised its fiscal deficit estimate to 7.1% of GDP for the current year.

Some of the economic measures from Monday, worth 2.4 trillion rupees, will spread over the next two to four years, according to ICRA’s Nayar. “Some of it has already been announced on Budget time, and therefore, a portion of their cost has already been recorded, ”he said in a note.

Rao estimated from DBS that there is a risk that the deficit could exceed the target of 0.3% to 0.5% of GDP.

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