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Loan Melas, Slashed Repo Rates and More: How India Tries to Revitalize its Economy

By Finserv MARKETS - Dec 19,2019
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Loan Melas, Slashed Repo Rates and More: How India Tries to Revitalize its Economy

The International Monetary Fund (IMF) recently lowered its GDP growth estimate for India to 6.1% from its earlier projection of 7% (1). It’s not just the IMF; the World Bank too pegged India’s GDP growth rate at 6% for 2019-20, according to its South Asia Economic Focus report(2). In the April-June period, growth dropped to 5%, the slowest pace in the last six years. India’s central bank, the Reserve Bank of India also lowered the growth rate projection to 6.1% for 2019-20. (3)

The IMF has, however, noted that while there was a lowering of growth rate projection, the rate is expected to rebound the next fiscal year to 7%, following government measures such as corporate tax cuts and monetary policy stimulus.

Loan Melas, Slashed Repo Rates and More: How India Tries to Revitalize its Economy

(Source: Business Standard)

In September, the government slashed the corporate tax rate to 22% from the previous 30 % for existing companies, and to 15% from 25% for new manufacturing companies. The effective tax rate for existing companies would now be 25.17% from the earlier 35%, if one were to include a cess and surcharge. This was one of the moves aimed to revitalise the economy, by way of more investments.

September proved to be a busy month for Finance Minister Nirmala Sitharaman; days before the announcement of corporate tax rate cuts came yet another shot at boosting the economy. On September 19, the minister announced that loan ‘melas’ would be held in 400 districts across the country, in a bid to alter perceptions that only banks had liquidity and it was not translating to either customers or non-banking finance companies (NBFCs). The move was aimed at giving a credit thrust to MSME, rural and retail customers. The ‘mela’ would act as a one-stop shop for those interested in a home loan or personal loan. Small business owners could opt for MSME loans during the programme.

During a nine-day outreach programme, public sector banks have disbursed loans worth Rs 81,781 crore, according to the Finance Ministry. Yet another outreach programme is underway, ahead of Diwali festivities.

Thrust on MSME sector

Also, in a bid to boost the MSME sector, banks have been directed to put a hold on declaration of any stressed MSMe loans as non-performing assets (NPAs) till March, 2020. According to a 2018 Omidyar Network and Boston Consulting Group survey report(4), India is home to anywhere between 55 and 60 million MSMEs, and they contribute approximately one-third of India’s GDP. The survey lists gaining access to affordable credit as one of the principal challenges for borrowers of MSME loans. The pain points listed by those surveyed include “long processing times, lack of transparency in timelines, and insufficient loan sizes.” The loan outreach programme announced by the Finance Ministry is a move aimed to resolving these pain points, and infusing liquidity, and consequently boosting the economy.

Repo rate cuts

Yet another move to revive the economy has come in the way of repo rate cuts. In early October, the RBI Monetary Policy Committee announced a repo rate cut by 25 basis points (bps) to 5.15%. This was the fifth such move that the RBI has made this year, aimed at boosting private consumption. Repo rate is the rate of interest at which RBI lends money to banks.

The rate cut will bring cheer to new borrowers, as banks are directed to link new floating rate loans to any of the RBI specified benchmarks. Thanks to this link, the repo rate cut is transmitted to the home loan, auto loan or personal loan borrower quicker. Further cuts are expected in the future, considering that the GDP growth rate for FY20 has been lowered to 6.1% from 6.9%.

Loan Melas, Slashed Repo Rates and More: How India Tries to Revitalize its Economy

(Source: Times of India)

Slow private consumption

Private final consumption expenditure has slowed down to an 18-quarter low, according to the RBI’s Monetary Policy Report released this month. Private consumption constitutes over 55% of the GDP and is crucial to the health of the economy. It is expected that the earlier mentioned measures by the government, including disbursal of personal loan and home loan schemes via a massive outreach programme for customers of banks, and business loans for small entrepreneurs will boost liquidity and consumption.

In conclusion

While all these moves are welcome, more structural interventions such as agri and labour market reforms, apart from more efficient governance of public sector banks will also help boost the economy.

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