Reforms take time to pay dividends. The government’s loan guarantees and credit lines will do little to revive demand in the short-term. Indian companies are worried. Justifiably so
The government’s much-awaited economic package appears to have let India Inc. down. It was billed as an exercise that would offer relief worth ₹20 trillion, and an outer count of the money that may potentially be available over time does add up to that sum, or more. But the Centre’s actual fiscal bill would go up by only about a tenth of that figure. No direct compensation was offered to companies forced to suspend operations, not even those hardest hit by the corona disruption. Nor did it place enough cash in people’s hands to stimulate demand for products and services in the short-run, which is crucial to pull the economy out of a recession. The disappointment is reflected in the reactions of business leaders. Biocon Ltd. chairperson Kiran Mazumdar-Shaw, for example, described it as a lost opportunity to create demand. A representative body of the tourism and hospitality sector expressed shock, saying that it was left “numb" by the package’s lack of direction and fiscal support to the industry. An association of retailers stated that it did not address their current challenges of working capital, wage sustainability and debt. Some other responses also suggest that corporate chiefs were left underwhelmed.
The details of finance minister Nirmala Sitharaman’s announcements last week made it clear that apart from a few welfare and development scheme provisions, loan funding was expected to bear the main burden of hauling India’s economy out of its deepest ever slump on record. So we had liquidity windows opened by the central bank and other credit lines offered by the government, with some contingent liabilities taken on by the exchequer. Banks and a few state-owned institutions were drafted to push money into the economy. Some of this will surely happen. However, given the weak balance sheets of lenders, the usual paperwork delays and widespread risk aversion, with or without backstops, its impact on economic outcomes is likely to be muted—and slow. A set of structural reforms were announced, too. These could draw investment and turn various markets more efficient, but may takes years to show results. What India Inc. is most worried about at this juncture is the corona crisis and the financial distress caused by it. To alleviate this, what we needed was large tranches of money to go into circulation without ado.
Under the circumstances, a good way to relieve the economy would have been to provide instant cash to those who saw their flows snapped off by the country’s lockdown. People who lost livelihoods, that is, and businesses whose cash registers got jammed. With demand and supply both gasping to recover, such an approach could yet have a dramatic effect. If not, the reality of shrunken markets would probably deter companies from investing any further money. Instead, they would explore ways to downsize operations and seek to reduce the debt on their books. Crunched demand for loans could render our liquidity measures far less effective than hoped. Worse, we would be at risk of a vicious cycle setting in, with reduced commercial activity resulting in even lower earnings, compounding the crisis. In short, a revival may prove elusive without a return of business confidence. If handouts are not to be carried out, at least some big buying could be done by the only big buyer around, the government. As of now, India’s gross domestic product looks headed for a sharp contraction this year. In a bad-case scenario, it might shrink by 5%, as some estimates say. The uncertainty of coronavirus has already dealt a blow to the prospects of India Inc. Let the business outlook not get any bleaker.
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