Budget 2022: Will Nirmala Sitharaman’s present a popular budget in election year?

The run-up to the Budget is usually an exciting time, both in terms of expectations and wracked nerves. The latter more so in the past two years, with the pandemic bringing economic activity to a screeching halt in 2020. But if numbers give comfort, India’s GDP growth is set to be world-beating and estimates for tax collection predict a four-year bump.

All thanks to the government and the Reserve Bank of India (RBI) firing on all cylinders to keep the economy from tanking. From reining in borrowing costs at 4 percent for the past nine quarters to sanctioning Rs 2.9 trillion via the Emergency Credit Line Guarantee Scheme (ECLGS) till November 2021 – the singular focus on India’s growth engines, namely the micro, medium and small enterprises (MSMEs) – has come to bear fruits.

The ECLGS – a 100 percent government-guaranteed scheme with no processing fee – has helped stressed MSMEs tide over working capital crunch during the lockdown. A study by TransUnion CIBIL (ECLGS Insights Report, December 2021) shows that 45 percent of the ECLGS loans were used to clear vendors, 13 percent for paying salaries and 29 percent to restart operations.

More so, the ECLGS becomes a departure point for credit to MSME story. It has improved credit penetration in the sector that accounts for 30 percent of India’s GDP, helping banks revisit the entire creditworthiness narrative. Data shows the scheme was specifically beneficial to medium and high-risk borrowers, where bank credit had been negligible since time immemorial.

This also bears testimony to the role fintech have played in bringing risk assessment models of age. Although, the MSME credit gap is far from being addressed, the scheme has catalysed the flow of formal credit to the small, medium business sector – ushering in better NPA management (only 2 percent of ECLGS loans are reported as NPA), improved credit health of borrowers (indicating a movement from higher risk bucket to lower), and improved economic prospects with 68 percent of MSMEs surveyed in the TransUnion CIBIL report anticipating a positive future outlook.

Credit where it’s due

This should also, in part explain, the bank credit offtake for the past year, in spite of overall credit growth moderating at eight percent. As per Center for Monitoring Indian Economy, the average monthly outstanding scheduled bank credit to medium-sized industrial enterprises during April-November 2021 is 43 percent higher than it was in 2020-21. See it for yourself:

But the other part of the story – apart from the ease of financing access – is the genuine growth in the MSME sector and a true demand for credit fueled by upward-looking business prospects. The opening of bank credit may have spurred the slow-turning wheels here, and this sector may be gearing up for growth in an environment where industrial and corporate spending remains muted.

But while growth is on the agenda, so is inflation. Keeping the economy flushed with liquidity – pegged at Rs. 8 trillion per day – for protracted periods goes against the grain for the inflation-targeting RBI. But for all that, State Bank of India and HDFC – the behemoths for public and private sector respectively – have increased rates across products, effective 12 January, 2022. And now with rumours gaining fervour for the US Federal Reserve tapering due in March, the chorus to increase rates will grow louder.

And once that happens, maybe the sheen of easy to come by credit will wane, a little, which could be a lot for the kirana store that availed loans under the ECLGS.

Staggered rollback could be key

The ECLGS was rolled out in March 2020 with limited availability. It was extended in 2021, and now with a third wave underway, speculations are ripe for another extension. That’s the Budget expectations across NBFCs and fintech players serving the MSME sector.

There have been calls for tax rebates and further concessions in use to technology to enhance underwriting and risk assessment models. These sops will help streamline the credit flow to MSMEs, but nothing as stellar could be delivered in such a short-term as seen this year.

Given this is an election-year budget, it could border on a populist skew – lowering taxes, easing credit options and stoking consumption. But the government will have to balance these expectations with fiscal targets, as has been voiced by cautionary voices across expert panels.

A granular look at liquidity flow will help the government deliver sustained policy benefits to those in need. As for the ECLGS, if continuing seems improbable, maybe a staggered rollback should cushion the free-fall.

For now, all eyes are on 1 February.

The author is Co-Founder, and CEO of FinBox, a leading embedded finance platform. Views are personal

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