Realising that DeMo pulverised MSMEs, an anxious Centre wants to hurriedly make amends. But loan disbursals may not help
The spat between the government and the RBI is primarily in the realm of macroeconomic issues like the size of the reserves the central bank should hold and the methods of monitoring loans that could go bad. Yet, the political intensity of the government’s moves cannot be missed.
Apart from bringing the never-before-used provision of Section 7 into play, it has also loaded the RBI board with its loyalists. This has allowed the Congress to promptly claim that the ruling party is seeking to tap RBI reserves for an election year spending strategy. And given the credibility of the political class this is a contention that cannot be lightly brushed aside.
The story, though, goes a little deeper than the political rhetoric would suggest. The government’s focus on loans to small business could be a long delayed official recognition that the two major economic initiatives of the Modi government — demonetisation and GST — have had a debilitating effect on small business. The party apparently now believes that if it does not do something to ease the pain on this class, there will be a price to pay in urban constituencies in 2019.
As with all Indian governments since Indira Gandhi’s loan mela days, the instinctive official response is to lend their way out of political trouble. Increasing the access to loans is expected to help small businesses step up their investment on the path to recovery. The trouble is the government may have, once again, got the wrong end of the economic stick. The problems small businesses face are not so much the availability of funds, as the collapse of demand.
When 86 per cent of the currency is withdrawn it is inevitably a major blow to spending. This may well have been one of the short-term pains that Prime Minister Modi spoke of when he announced demonetisation. What the government has not been prepared for is its longer-term effect.
Please click here to read more.