The Hindu Business Line : Stimulus Version 2.0

The central focus of the two stimulus packages should have been to break the self-perpetuating perception of risk among lenders but they tip-toe around the issue.

On the surface, the second stimulus package announced on Friday appears to have all the ingredients of similar efforts by western governments to boost their economies. But a closer look reveals similarities with the first package and RBI’s initiatives whose principal emphasis was on increasing supply of funds. In the main, Friday’s initiatives are par for the course with a few novelties that could have become lynchpins for a meaningful stimulus; as it turns out, they are peripheral to the central concern of institutional liquidity for some sectors.

The stimulus package is impressive even though some measures were long overdue. The RBI’s repo rate cut to 5.5 per cent will reduce borrowing costs just as the combined effect of the reduction in CRR and reverse repo rate to 4 per cent increases liquidity with banks. This package is equally generous to key sectors that are permitted access to global funds. Housing companies can tap ECBs for integrated townships; NBFCs dealing in infrastructure finance will be able to approach bilateral and multilateral funding after RBI approval. This is a novel and belated move not only because such agencies will look at long-term projects but because they will monitor them closely. Alongside, the India Infrastructure Finance Company Limited (IIFCL) can raise an additional Rs 30,000 crore through tax free bonds for core project refinancing. NBFCs have also been made crucial to the expansion of demand for commercial vehicles and banks have been asked to extend lines of credit to them. Mindful of their demand, States can now borrow Rs 30,000 crore from the market to fill the deficits in revenues. Will these liquidity-enhancing and capex stimulating measures work? As yet banks are unwilling to lend to even profitable firms; will they refinance NBFCs? That question underlines the weakness of the two stimulus packages. Both tip-toe around the issue of market incentives to lend. Reducing the price of credit may whet the appetite of borrowers — though even that is debatable today — but it does little to encourage banks to lend given a self-perpetuating perception of risk. The central focus of the stimulus package should have been to break that risk perception.

To this end, the IIFCL’s role is critical in getting core projects off the ground in this barren environment. There is mention of a high-level North Block committee to look into procedural issues for exporters; why not a panel of State finance ministers and North Block to fast-track public investments and push for completion? That would assure a fresh cycle of investments and alter risk perceptions. Only then would lending appear a sound business proposition.

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