India extends guarantees on business loans

India has extended a federal guarantee on bank loans to health and tourism services while waiving visa fees for 500,000 foreign tourists, the finance minister said on Monday, stepping up support for the pandemic-hit economy.

The government will expand federal guarantees on loans to businesses to Rs 4.5 trillion ($60.7 billion) from an earlier limit of Rs 3 trillion, finance minister Nirmala Sitharaman told reporters.

The government will provide a guarantee of Rs1.1 trillion on loans to the health sector and medical infrastructure, she said, that will enable them to raise loans at a lower interest rate of 8-8.25% a year.

The Emergency Credit Line Guarantee Scheme (ECLGS), launched last year, has helped cash-starved small businesses raise funds during the COVID-19 lockdown for working capital and to meet their orders.

The government will extend benefits from the free foodgrain programme for poor people, launched last year, till November that will cost 938.7 billion rupees, bringing the total cost of the programme to more than Rs2.27 trillion, she said.

India’s economic growth rate picked up in January-March to 1.6% from a year earlier, but economists are increasingly pessimistic about this quarter after a huge second wave of COVID-19 infections hit the country in April-May.

-Economists doubt India’s new loan guarantees will boost growth.  India will extend federal guarantees on bank loans to small businesses and the health and tourism sectors to help them through the COVID-19 pandemic, Finance Minister Nirmala Sitharaman said on Monday.

Industry leaders and economists said the new loan guarantees, amounting to $35 billion, may provide some temporary relief but would not be sufficient to boost economic growth.

Sitharaman said the government would waive visa fees for 500,000 foreign tourists and extend loan guarantees to health, tourism and small businesses amounting to Rs1.1 trillion ($14.8 billion).

The government also plans to spend an additional $12.6 billion on providing free foodgrain to poor people until November, and $5.78 billion in the current fiscal year on expanding health and digital network services.


Picture used for illustrative purpose.

Unlike advanced economies, which offered huge stimulus packages for households, India has relied on pumping more state funds into infrastructure, state guarantees on bank loans to pandemic-hit businesses and free foodgrain for the poor.

“Most of the fiscal support is still below the line and in the form of loan guarantees, and not direct stimulus,” said Madhavi Arora, lead economist, Emkay Global Financial Services.

She said that given the limited efficacy of monetary easing, continued countercyclical fiscal policy support - and avoiding a premature consolidation - remained crucial.

Aditi Nayar, chief economist at ICRA, the Indian arm of rating agency Moody’s, said the new measures would have an impact of around 0.6 trillion rupees ($8.08 billion) on government finances, and their success would hinge on offtake, or actual spending.

Economists have cut their growth forecast for the current fiscal year starting in April to 7.5-8% from an earlier estimate of 10-11% amid growing concern about the slow pace of COVID-19 vaccinations and the spread of the highly infectious Delta variant.

Industry and opposition leaders have sought tax cuts on petrol and diesel, and cash transfers to the poor to boost consumer demand.

India’s economic growth rate picked up in January-March to 1.6% compared with a year earlier, but economists are increasingly pessimistic about this quarter after a second wave of COVID-19 infections in April-May.

India’s central bank has kept interest rates at record lows while taking liquidity measures to support growth, despite a rise in retail inflation.

“There is a need to rebuild confidence amongst the people so that the consumption demand gains traction on a sustained basis,” said Sanjiv Mehta, senior vice president of Federation of Indian Chambers of Commerce and Industry.

Meanwhile, Sri Lanka’s central bank on Monday called for further import restrictions to address a crippling foreign exchange crisis, following a string of loans from Asian neighbours including impoverished Bangladesh.

The island nation’s foreign exchange reserves were badly hit last year as the Covid-19 pandemic hit and the local currency came under intense pressure and fell to a record low.