Stimulus package: A tricky tangle

Given the anticipation that had built up for a fresh set of stimulus measures after the latest GDP growth print of 4.5 per cent for July-September 2019, the Finance Minister’s press conference on Friday came as a disappointment.

The presentation mainly dealt with a recounting of the many incremental measures that the Centre has announced over the last six months to revive animal spirits in the economy.

On the consumption side, these include measures such as the support to banks to buy out the pooled asset portfolios of NBFCs, a partial credit guarantee scheme for such buyouts, repo-linking of bank loans and recent efforts by Public Sector Undertakings (PSUs) to expeditiously clear their dues to MSMEs.

The investment-side measures are the realty fund to provide last-mile funding to stuck projects, public sector bank recapitalisation and internal advisory committees to protect honest decision-making in PSBs.

'Recent capital market reforms such as relaxed ECB norms, rationalisation of stamp duty and strategic disinvestment of PSUs also received a mention. But while each of these measures helps on its own, the package in its entirety fails to convey the impression that the Centre is working on the basis of a clear diagnosis of the problems that sparked off the current slowdown and has a coherent strategy to address them.

So far, its stimulus measures have leaned more towards addressing the stalling investment cycle than dealing with dwindling demand. But that’s putting the cart before the horse, as without perceptible demand revival, the private sector may continue to dither on expansion projects that can set off a virtuous cycle of job and income growth.

Apart from the rural income collapse, a proximate cause for the marked deceleration in consumption is the drying up of credit flow to the commercial sector. Banks, despite being in receipt of reasonable deposit flows, have withdrawn into a shell of high risk-aversion, starving all but the top-rated borrowers in the market of the credit that they badly need to grow.

Sluggish credit to industry and the outsized bank investments in SLR securities are both symptoms of this problem. Given that banks’ recent bout of risk version has been accompanied by a manifold spike in bank frauds, the Centre has a delicate balancing act to manage.

It needs to encourage PSB managers to take lending decisions without fear of undue reprisal for judgement errors. But it can no longer put off governance reforms at PSBs that can stem the rot on frauds.

The Government distancing itself from PSB appointments and allowing bank Boards to make sound commercial decisions would be a good first step.

The recent NBFC defaults that have caused many lenders to the sector to step back has also been a proximate trigger for the spending slowdown. On this count, while direct measures such as opening up a liquidity window for NBFCs may be called for, the RBI has been strangely reluctant to acknowledge the magnitude of the NBFC problem.

The Centre’s solution has been to provide banks with ample liquidity and use moral suasion to nudge them to on-lend to the stressed NBFCs. But given that banks are just recovering from their previous bout of NPAs, they’re unlikely to take such risks.

Tweaks like this week’s, to the partial credit guarantee scheme for NBFCs, allowing banks to buy BBB-rated loan pools may not open up credit taps to stressed NBFCs for this reason. After the DHFL debacle, lenders are understandably wary of the quality of securitised pools of debt, even if AAA-rated.

Clearly identifying and segregating the bad apples from the good may now be necessary for lenders to regain confidence in the sector. Only the RBI has sufficient date on NBFC finances to bell this cat.

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