Economy

Need to ensure that liquidity issues don’t turn into insolvency crisis, says DK Joshi

Our Bureau New Delhi | Updated on May 22, 2020 Published on May 22, 2020

Government needs to scale up its fiscal policy; preserve people’s income: DK Joshi

India will have to watch out and ensure that liquidity issues plaguing the businesses do not turn into an insolvency crisis amidst the Covid-19 induced economic slump.

Addressing a webinar on ‘Decoding the Stimulus’, as part of the BusinessLine Knowledge Series, Crisil’s Chief Economist, DK Joshi, said: “No amount of money you pump in can stimulate the economy at this juncture. Not Immediately. You have to preserve people’s income so that they are able to meet basic needs,” he said.

He added, “You have to ensure that the liquidity problem that businesses are facing does not become an insolvency problem and they completely disappear from the scene.” The webinar, moderated by Raghavan Srinivasan, Editor, BusinessLine, was presented by Union Bank of India.

Joshi accepted that the government was constrained in terms of fiscal space. “India doesn’t have the fiscal space that rich countries have, who can spend their way out of the hardship. We need use our resources more judiciously,” he said. But he asserted that more needs to be done. “We would need more support than what is fiscally committed. The monetary policy will continue to play its role, but heavy lifting will have to be done through the fiscal policy and I think the government will have to scale it up,” Joshi added.

‘Supply chain disrupted’

He also highlighted the pitfalls of excessively front-loading welfare spends. “A massive stimulus package would lead to inflation because the supply chain will not open immediately as the disease has to be contained. We gave it in 2008-2009 and we saw what happened in the form of high inflation and high deficit and that kept plaguing us for a long time,” he said.

“So, I think you have to give more than what is given but not go overboard with it immediately because it is a supply and demand issue,” he added. Commenting on the alarming downward trend of GST collections and the impact on government spending patterns, Joshi said, “The GST situation will become clearer by June and it doesn’t look like a very healthy picture right now. There will be a massive revenue crunch so the result of this is that capital expenditure is axed and focus will be on revenue side. One fallout of this will be a massive hit to investment activity which largely comes from the State governments. Public investment in infrastructure will get hit.”

Decrease in lending

He also highlighted the change in lending patterns. “Banks will be reluctant to part with their money because of risk aversion. They would be willing to give money to those who do not require it,” he said. Joshi welcomed the credit guarantee measure. “The guarantees that the government has introduced for Small and Medium Enterprises (SMEs) brings risk appetite back to the lender. Otherwise monetary policy will not be able to lubricate the economy,” he said.

While welcoming the thrust given to Mahatma Gandhi National Rural Employment Guarantee scheme, Joshi also agreed with Srinivasan for the need for a similar scheme for the urban poor.

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Published on May 22, 2020
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