The recent announcement of a massive relief package of Rs. 6.3 trillion is aimed at giving a boost to the Indian economy which has been hit hard by the second wave of the covid19 pandemic. The idea is to enhance credit flows to the pandemic affected sectors extending loan guarantees and concessional credit. The package also includes direct stimulus initiatives such as the provision of food grains to the poor till November, higher fertilizer subsidies. incremental health projects’ spending, and rural connectivity.
It may be noted that the nationwide lockdown and other measures implemented to restrict the spread of Covid 19 pandemic from the end of March 2020, had led to a majority of the establishments not operating in April 2020 and consequently, there were many units which reported ‘Nil’ production. Economic activity, however, had started picking up. And so, when early signs of the second Covid-19 wave emerged in India a few months ago, it was largely believed that the economic damage may not be as severe as the first wave of the pandemic in 2020 partly because one, India had vaccines against the virus and two, no nationwide lockdown was imposed. However, more recent data presents a dismal scenario for the Indian economy.
Indian economy severely hit by the second wave of covid19 pandemic
Although, the jobless rate is reported to have come down to 8.72 percent for the week ended June 27, 2021 in comparison to 9.35 percent in the preceding week, yet, it is still higher than 8.16 percent that prevailed in the beginning of the second wave of the covid19 pandemic.
The consumer confidence in India has further weakened in May amid the severe Covid crisis and the resultant lockdowns across states. Recently, the World Bank slashed its FY22 growth forecast for India to 8.3% from the 10.1% percent it estimated in April, as it observed that an economic rebound in the early part of this year collapsed amid a devastating resurgence of coronavirus infections in India. In its latest Global Economic Prospects report, the World Bank opines that an enormous second covid-19 wave is undermining the sharper-than-expected rebound in activity seen during the second half of FY2020-21, especially in services.
The government estimates India’s gross domestic product shrank 8% in the year ended March, 2021, which is seen as its biggest contraction since 1952. Many economists have been cutting their forecasts for the current fiscal year as rising unemployment and dwindling savings dim the chances of a double-digit growth.
Economic stimulus is a timely step taken
As the data on critical economic indicators such as employment, national income, household income, consumer sentiment and demand clearly indicated that the second wave has had a devastating impact on India’s economy in general and its poorer citizens and smaller businesses, in particular, the announcement of a bundle of carefully crafted economic relief package by the finance minister is a timely step taken to give support to the sectors and individuals most severely affected by the fresh onslaught of the pandemic.
The economic stimulus comprises of the following major measures:
1. Extra measures under ECLGS
- Extra Rs. 1.5 lakh crore, fully guaranteed loans to be provided
- Rs. 2.69 lakh crore sanctioned already and Rs. 2.1 lakh crore disbursed already
- Rs. 4000 crore loans already given to contact-intensive sectors
- Amount of each loan to be raised from 20 percent of outstanding
The Emergency Credit Line Guarantee Scheme (ECLGS) was launched by Finance Ministry of India in May 2020 to help the pandemic hit economy. This scheme aimed to provide Rs. 3 lakh crore of unsecured loans to MSMEs and business enterprises to mitigate the distress caused by the coronavirus-induced lockdown. The add on package is likely to benefit these small and medium enterprises at a time when they need the critical support the most.
2. Credit for Setting up Hospitals
- Rs. 50,000 crore credit for hospitals to expand or setup new units in Non-metros
- Upto 75 percent guarantee to be given by the government
- Maximum loan up to Rs. 100 crore per investor at an interest rate capped at 7.5 percent
This is going to boost the health infrastructure in the non-metros and thus improve the access to medical facilities in smaller cities, towns and even rural areas.
3. Credit Support for MFIs
- Rs. 7,500 guarantee for Micro Finance Institutions to facilitate loans to 2.5 million small borrowers
- Interest rate capped at MCLR plus 2 percent for borrowers including defaulters upto 89 days
- Maximum loan tenure is 3 years and
- MFIs can use 80% for incremental lending
This is likely to facilitate concessional loans to around 25 lakh small borrowers via micro finance institutions (MFIs)
4. Loans to travel agencies/guides
- Fully Guaranteed Loans up to Rs. 10 lakhs to travel agencies
- Fully Guaranteed Loans up to Rs. 1 lakhs to tourist guides
Tourism business has been adversely affected due to covid19 due to mass lockdown in the first phase and selective lockdown in the second phase of the pandemic.
5. Credit support to covid19 hit sectors
- ₹60,000 crore relief for covid-hit sectors at an interest rate capped at 8.25 p.a.
6. Measures to boost exports
- More funds to NEIA Trust to underwrite extra Rs. 33,000 crore project exports
- Fresh Equity infusion into ECGC to boost export cover by Rs, 88,000 crore
National Export Insurance Account (NEIA) has been set up by the Government of India to facilitate medium and long-term exports, which are commercially viable, considering the limitations of the ECGC Limited in providing adequate cover on its own and non-availability of reinsurance cover to such exporters.
The idea is to ensure the availability of credit risk cover for projects and other high-value exports, which are desirable from the point of view of national interest, but which ECGC is unable to underwrite at terms which will not affect the competitiveness of the exports
A Trust by the name of National Export Insurance Account Trust has been set up for maintaining and operating NEIA. The interest derived from the investments, premium received and the recoveries in respect of claims paid out of NEIA is credited to the NEIA account.
ECGC Limited is a government enterprise under the ownership of Ministry of Commerce and Industry, Government of India. It provides export credit insurance support to Indian exporters.