Loose monetary policy is worsening wealth inequality
The MSME loan guarantee is aimed at relatively better off firms that had a good credit standing in March
The size of the Atmanirbhar Bharat package announced by Prime Minister Narendra Modi in May was estimated to be about ₹20 trillion, or nearly 10% of gross domestic product (GDP). This was a relief package to combat the economic crisis caused by the covid pandemic. On closer inspection of its components, it emerged that nearly 90% was in the form of liquidity or loan support. For instance, it included collateral free loans to micro, small and medium enterprises (MSMEs) worth ₹3 trillion, which would be guaranteed by the central government. The loans themselves would be given by commercial banks based on liquidity support from the Reserve Bank of India (RBI). Thus, the actual payout from the Centre’s treasury, or the fiscal resources that would flow out, would only occur in cases of delinquency on these loans, which were presumably at least four years away. Only about a fifth of those advances are expected to have their guarantees invoked, notwithstanding the worrying delinquency data on Mudra loans. Even with such a generous offer, the actual offtake five months after the announcement is not even 60%. It should have been gobbled up immediately. Contrast this with the furlough scheme announced by the UK government, which was snapped up by nearly 70% of British firms soon after its debut in March. That scheme involved an actual fiscal outflow from the treasury, unlike India’s credit guarantee scheme. The MSME loan guarantee is aimed at relatively better off firms that had a good credit standing in March.