THE GIST of Editorial for UPSC Exams : 15 May 2020 (The credit lifeline (Indian Express)) Primary tabs

The credit lifeline (Indian Express)

Mains Paper 3: Economy
Prelims level: Micro, small and medium enterprises
Mains level: Credit support to the MSMEs

Context:

• The battle against the virus is likely to last several more months, implying prolonged curtailment of economic activity to ensure social distancing. The resultant economic pain has been, and is likely to be, broad-based, though it is most acutely felt by the indigent and small-scale enterprises.
• Not only is it necessary to support the worst-affected, but it is also necessary to preserve India’s economic growth potential, so that, once the restrictions are lifted, the economy quickly reverts to a rapid growth trajectory.
• The first package announced by the Union government focused on the poor, and the second rightly focuses on providing credit to smaller enterprises.

Assessing policy measures:

• While assessing policy measures during the lockdown, where stimulating new activity has limited value, we believe there are two over-arching principles one must keep in mind.
• One, the flow of funds slows with economic activity; and two, firms do not go bankrupt because of insolvency, but because of lack of access to funds (also called liquidity).
• Policymakers over the world are pulling out all.................................

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Credit support to the MSMEs:

• The series of measures announced to provide credit support to the micro, small and medium enterprises (MSMEs) attempts to address this gap. We believe the largest of these schemes is likely to be the most effective, particularly as it comes without too many conditions.
• For standard MSMEs (that is, those that have been servicing their loans so far), new loans up to 20 per cent of the current outstanding credit will be fully backstopped by the government. That is, if there is a default, ............................................

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Liquidity to NBFCs:

• The two schemes together, targeting to provide Rs 75,000 crore of liquidity to non-banking finance companies (NBFCs), may be a bit less successful, however, in our view. The special purpose vehicle that is to provide liquidity to NBFCs provides funds for three months at a time, may be enough to prevent accidents (like an NBFC defaulting due to lack of liquidity).
• But it may not suffice to get them to grow. The partial credit guarantee given to banks’ loans to NBFCs may be more effective for a subset of NBFCs, but as it is only available to public sector banks, it would depend on their willingness and ability to extend new loans.

Equity for MSMEs:

• The Rs 50,000 crore fund to provide equity for MSMEs, with a corpus of Rs 10,000 crore being provided by the government, which would then be leveraged is an interesting initiative. Losses incurred in the current lockdown are depleting risk capital, something that the country was short of even before this crisis.
• Replenishing if not growing that is paramount to restoring India’s growth potential. While global as well as local private equity and venture capital funds would continue to explore and invest in smaller firms, such a fund can scale up the funds availability significantly.
• Its efficacy though can be judged only after details emerge on the nature of the fund (like its duration, the investors it raises funds from), as well as how it would operate. A sharp increase in credit to farmers, through Kisan Credit Cards (extended to livestock farmers and fishermen) as well as special loans, should also help funds flow in the economy by increasing the quantum of new bank credit.

Limitations:

• The natural limitation of the policy interventions thus far is that they only affect enterprises in the formal sector and in agriculture. As we are talking about taxpayer funds and formal savings, it may be unfair to allocate them to informal enterprises. Such measures (or say if the government provides GST credits for liquidity support) may be incentives for firms to formalise, but the pain in informal non-agricultural enterprises may stay unaddressed, and remain an overhang on growth.
• While less than 10 per cent of the .......................................................

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Conclusion:

• The road ahead remains unclear, but it is likely that the economic damage is already much larger than the measures undertaken so far. It is best to see this as the beginning of government action.
• The scale of government intervention may have to intensify in the coming months. We believe a continued focus on reforms and on sustaining India’s growth potential will be critical in preventing macroeconomic instability.

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Prelims Questions:

Q1. With reference to the Institute of Nuclear Medicine and Allied Sciences (INMAS), consider the following statements:
1. INMAS is a laboratory of the CSIR.
2. It was established in 1961 and located in Mumbai.

Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

Answer:

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Mains Questions:
Q1. Fund for MSMEs will ................................................