Why India Needs More than Liquidity Dreams

Context: Governments weak fiscal stimulus package with more emphasis on liquidity is not sufficient to increase demand and purchasing power of the individuals.

Why emphasis liquidity?

• People and businesses borrow more and then spend. Eventually consumer demand will get revived, and businesses and the overall economy will benefit.
• Methodology: Pump in money into the economy and drive down interest rates, and persuade public sector banks (PSBs) to give out loans quickly.

Liquidity Measures

• Reduction in Cash reserve ratio by 100 basis points to 3% for releasing money into the financial system.

• When this ratio is cut, money is released into the financial system.

• RBI launched different schemes and lent money to banks at the repo rate in order to encourage them to lend further, under certain conditions.

• Extension of Credit Linked Subsidy Scheme (CLSS) for the middle-income group.

• Under CLSS, the government pays a part of the interest paid by the borrower on a home loan.

• Automatic and collateral free loans for businesses including micro, small and medium enterprises, with a government guarantee.

Governments Fiscal Stimulus

• Direct fund transfer into female Jan Dhan accounts.
•  Food distribution under Pradhan Mantri Garib Kalyan Ann Yojana,.
•  Increase in allocation towards the Mahatma Gandhi National Rural Employment Guarantee Scheme, 

Inefficiencies of Fiscal Stimulus Package

• Reserve Bank of India’s liquidity measures (cut in repo rate, CRR) failed to create liquidity in absence of banks lending capacity and individuals lower demand amid lockdown.
• Lower Fiscal stimulus (1% of the GDP) than the stimulus announced by developed countries across the world.
• Fall in governments tax revenue and rising government borrowing  (along with the cost of the fiscal stimulus) is likely to push the fiscal deficit of the central government to 7-8% of the GDP, (against the budgeted 3.5%).

Way Forward

• Fund transfer under Jan Dhan accounts (?1,000 per month )for a period of three months and Lowering income tax rates could revive demand,  increase purchasing power and can revive economic growth of the country.