Covid relief: Targeted, not lavish, credit works better, says CEA KV Subramanian

In contrast, capital expenditure that creates assets has a high multiplier of 4.5 and is, therefore, more desirable, Subramanian said. Reining in revenue expenditure frees up space for higher budgetary capex.

Lavish cash transfers that are not well-targetted might not be an appropriate tool to mitigate the blow of a crisis such as the Covid-19 pandemic, chief economic advisor (CEA) Krishnamurthy V Subramanian said on Friday, amid a widespread perception that undue fiscal wariness is being shown by the government while sections of the people, industry and trade are in acute distress and in need of prompt help. Well-directed credit to vulnerable businesses and individuals, backed by sovereign guarantee, amounted to quasi cash transfers and could serve the really needy better and prop up consumption, he said at the Idea Exchange programme hosted by The Indian Express.

As was the series of stimulus packages announced in the last financial year, a sizeable chunk of its latest relief measures (Rs 2.68 lakh crore of the Rs 6.29-lakh-crore package) announced on Monday also comprised mostly credit guarantees.

The net fiscal impact of the package stood at just Rs 1.3 lakh crore in FY22, according to Nomura.

Subramanian highlighted the government’s stepped-up focus on capital spending and asserted that even when revenue expenditures are directed relatively well, the multiplier effect is still less than 1. For instance, most of the profligate farm loan waivers of around Rs 80,000 crore (during the UPA regime) was cornered by relatively rich farmers at the cost of the intended beneficiaries, he said.

In contrast, capital expenditure that creates assets has a high multiplier of 4.5 and is, therefore, more desirable, Subramanian said. Reining in revenue expenditure frees up space for higher budgetary capex.

The Centre has budgetted a 30% rise, year on year, in capex to Rs 5.54 lakh crore for FY22, while its revenue expenditure is targeted to drop by 5% to Rs 29.29 lakh crore. In the first two months of this fiscal, budget capex has grown by 14% from a year before, and large CPSEs have also acquitted themselves well in sticking to their investment targets, thanks partly to constant prodding by the government.

The spending cuts effected by most departments in Q1FY22 coupled with the expenditure control measures imposed on many ministries and departments for Q2FY22 could lead to savings that could balance the additional spending commitments arising from Monday’s relief measures during the whole fiscal year.

Commenting on the government’s credit push to spur growth through various schemes with official guarantee, Subramanian said there are three categories of people: those who don’t need credit (they won’t access the loans being offered under key schemes); people in temporary distress (who may take the credit and repay later); and people in real distress (who will benefit from a quasi-cash transfer via such loans).

The guarantee on loans to microfinance institutions to facilitate on-lending to millions of small borrowers and that on schemes like ECGLS to help aggrieved individuals as well as businesses raise contingent liabilities, rather than immediate direct liabilities.

Before initiating any step, the primary question that arises is who the target beneficiaries are and how can the resources be directed better towards them. Ultimately, taxpayers’ money needs to be spent well, he explained.

For instance, in the absence of solid, granular data on urban poor and the migrant workers, it would be very difficult to help them through direct cash transfers, he added. Even if the government were to transfer Rs 30,000 each to 25 crore people, it would cost a whopping Rs 6 lakh crore, and even this amount might not suffice to giving meaningful succour to the really needy. Against this backdrop, the government’s move to roll out a Rs 7,500-crore credit guarantee facility for MFIs to lend up to Rs 1.25 lakh to small borrowers goes a long way as it’s better targetted, without being fiscally wasteful.

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