Assocham seeks immediate fiscal stimulus; advises government to dismiss downgrade fears
MANGALURU: One day before Prime Minister Narendra Modi's speech to the nation with his guidance and direction to address, the Assocham It has reached out to the government for an immediate and impactful package without being weighed down by any possible rating downgrades by global rating agencies.
In a letter to the finance minister, the Assocham, having assessed the ground impact of the three-week lockdown on the industry, trade and the broader economy, has stressed that the fiscal stimulus is a must for saving both 'Jaan' and 'Jahan ', as has been so rightly emphasized by the Prime Minister.
The chamber also lobbied for a direct purchase of government debt by Reserve Bank of India (RBI) to allow the urgent availability of funds for the stimulus together with a greater monetary transmission by the banks at reduced costs. He affirmed that any option of not providing an adequate stimulus package together with greater flexibility in bank rates, to protect against any possible downgrade by global rating agencies, is fraught with risks of economic contraction and job loss. Furthermore, such a scenario would lead to a downgrade in any case, with more severe consequences.
“The downgrade (one due to a severe economic downturn) will hurt debt and equity inflows. Therefore, not doing what is best for the economy, that is, protecting jaan and jahan through an economic stimulus, will also result in a downgrade. This downgrade, where we have an economic contraction and therefore an insolvency crisis will result in long-term damage to the economy and, as the ILO says, it risks sending between 250 and 400 million people below the poverty line, the chamber declared in its letter to the finance minister.
Commenting on the impact of lockdown on the economy, Assocham president Niranjan Hiranandani said, “Having braved a near-freeze for three weeks, the life does not seem to be returning to normalcy in the near future. The pain would be felt more in the coming weeks and months, making it imperative for the government and the RBI to immediately announce a major package for saving the industry, trade and millions of jobs by fiscal measures and liberal infusion of liquidity as banks are sitting on idle funds in excess of Rs 4.50 lakh crore or even more. ”
In a separate letter on seeking liberal infusion of liquidity by the banks, the Assocham has suggested 40 per cent government or RBI guarantee on fresh loans while the balance risk premium can be made up by a huge spread available to the banks between their cost of funds and the yields. Banks are borrowing at 4.4 per cent (Repo) and lending at rates between 9-12 per cent. The RBI must directly buy debt of the Central and State Governments as well as provide repo facilities to NBFCs. That is also essential to ensure that liquidity in the banking system is given to all borrowers, not just from banks to Governments and vice-versa.
The chamber said that because the world's leading central banks have released a multi-trillion-dollar stimulus, some of this money would eventually enter the equity and debt markets of India. But for that to happen, the Indian economy must stay in good shape.