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Increased awareness and usage of government schemes may be partly responsible for the upswing in credit take among businesses in India.

Growth in non-food credit slowed down to single digits since 2019–20:Q2.  In the NCAER Business Expectations Survey Round 116 conducted in March 2021 we had found t hat demand cost and non-monetary factors were responsible for low credit uptake by firms.

Credit uptake of firms has improved

However our recent explorations suggest that the situation of low credit uptake by firms may be changing. After troughing in March 2021 the NCAER BES Surveys conducted in June and September 2021 indicate that the share of firms taking credit has been going up (Figure 1).

The ‘large’ firms i.e. firms with annual turnover greater than Rs 100 crore are showing a sharper recovery.

Repeated surveys show that 80 per cent of firms take the the loans for working capital. 

                                                    Sources: NCAER BES Rounds 116 117 and 118.

Awareness & Usage of Government Schemes for credit has improved

Increased awareness and usage of government schemes may be partly responsible for the upswing. In December 2020 nearly three-fourth firms were unaware of credit guarantee schemes.

This proportion fell down to only 5.9% in September 2021.  Similarly the uptake of loans from Emergency Credit Line Guarantee Scheme  increased to 13.4% in September 2021 from only 7.8% in March 2021. 

Sources of Credit

The next question is where are firms sourcing their credit.  We find that 80 per cent of firms relied on public sector banks for their credit needs. 

Interestingly 12.5 per cent of firms used digital lenders/fintech companies to avail credit. However we find that digital footprint varies by size and region. Neither firms with annual turnover ≤ Rs 10 crore nor firms in North and East used digital lenders for credit needs.

In contrast the NBFCs played a large role as a source of credit for small firms especially firms with annual turnover ≤ Rs 10 crore. Large firms additionally use commercial paper and external borrowing as other sources.

                                                    Source: NCAER BES Round 118.

Firms are not taking loans due to demand factors

Table 1 compares firms which were not taking credit for March 2021 and September 2021 (we need to be careful about interpreting the results as in March 2021 we had asked firms for not taking credit for the last one year whereas in September 2021 we asked about last three months). 

Broadly the results were similar across rounds that demand cost and structural factors played a role. Small firms were worse off in terms of ‘no new orders’ higher costs structural reasons and others. 

However compared to March 2021 a higher proportion of firms were saying that they were not taking credit due to demand reasons. 

Notably the share of smaller firms who were saying that they did not take credit because of ‘no new orders’ were 23.5 per cent in September 2021 compared to 9.2 per cent in March 2021.  Further 42 per cent of firms viewed that they had adequate capital and so they did not take loan.

Source: NCAER BES Rounds 116 and 118.

Note: In March 2021 we had asked firms about reasons for not taking credit over the last one year. In September 2021 we had asked firms about the reasons for not taking credit over the last three months.

Policy Implications

Despite the improvement in credit uptake by firms the share of firms taking credit remains relatively low. Despite the presence of new players like NBFCs and digital lenders/fintech companies the role of banks especially public sector banks remains important.  Digital lenders/fintech companies are not reaching the micro enterprises yet. 

While the RBI Monetary Policy document in October 2021 recorded higher number of commercial papers being issued this year on a y-o-y basis the share of large firms using that as a source of credit remained low.

The main reason behind firms’ low uptake on credit in September 2021 were demand factors. Small firms were still not getting enough orders to take credit.  This calls for better connecting firms especially small ones to internal and external markets via e-commerce trade routes connecting them to global value chains.  

Bornali Bhandari is Senior Fellow KS Urs Associate Fellow and Ajaya K Sahu is Senior Research Analyst at NCAER.  Samarth Gupta is a former Associate Fellow at NCAER.  Views are personal.

The literature points to the importance of prior financial conditions (capital inflows and real appreciation in the pre-taper period) financial market structure (the size of financial markets) and select macroeconomic variables in explaining the differential impact of the taper announcement. Specifically countries more dependent on external finance prior to Ben Bernanke’s 2013 announcement of the intention to taper were impacted more strongly.

On November 3 the US Federal Open Market Committee (FOMC) announced that it would reduce the scale of its asset purchases by $15 billion a month starting immediately. Do emerging markets such as India need to prepare for a replay of the taper tantrum of 2013?

The literature points to the importance of prior financial conditions (capital in ows and real appreciation in the pre-taper period) financial market structure (the size of financial markets) and select macroeconomic variables in explaining the differential impact of the taper announcement. Specifically countries more dependent on external finance prior to Ben Bernanke’s 2013 announcement of the intention to taper were impacted more strongly.

Also important was the size of countries’ financial markets measured by the stock of portfolio or total external private financing. This is consistent with the idea that investors seeking to adjust their portfolios tend to exit from positions in countries with relatively large financial markets since they can rebalance without significantly moving prices against themselves.

Emerged Economies

In a November 2021 NCAER working paper ‘ The Taper This Time’ focusing on 14 larger emerging markets (EMs) along with Rishabh Choudhary we examine how these determinants have evolved in the eight years since the 2013 taper tantrum.

At one level these economies are in a better position today. In ation has declined. Policy rates are lower providing more scope for stabilising adjustment. Current account balances as a share of GDP are stronger than in 2010-12. Real exchange-rate appreciation has been limited or been avoided more successfully this time while reserve adequacy has improved almost everywhere. Credit growth is more subdued and cumulative portfolio in ows were uniformly smaller in 2019-21 than in 2010-12. 

The debt situation however paints a mixed picture. With EM governments running larger budget deficits in response to Covid general government debt as a share of GDP is higher. Reassuringly an increasing fraction of this debt is denominated in domestic currencies. But a significant fraction in many national cases is still sold to foreign investors who may seek to rebalance away from EMs as interest rates begin to rise in the US and other advanced economies.

India is on the favourable end of the spectrum in terms of most indicators of EM financial vulnerability. The current account deficit (CAD) is small. Real exchange- rate appreciation has been limited. Cumulative portfolio in ows have been smaller relative to GDP than in 2010-12. External debt stocks are low by EM standards. External financing needs are limited and smaller relative to GDP than in 2010-12. Reserve cover is improved.

Where the country stands out is in its fiscal stance. The general government debt and deficit as shares of GDP are high by global standards. India’s debt-to-GDP ratio in the last decade (averaging 68%) and fiscal deficit-to-GDP ratio (averaging at about 7%) are high among comparators. Tax revenues as a share of GDP have been stagnant or have risen only slowly. Tax effort so measured has been below the average of other countries at similar income levels. Direct tax collection has been particularly low. Recurrent expenditure accounts for most general government expenditure while capital spending on infrastructure is only about 3.5% of GDP.

Covid-19 has further widened the budget deficit and elevated the debt. These totalled 12.3% and 89.6% of GDP respectively in 2020-21 and are projected by the International Monetary Fund (IMF) to moderate slightly to 10% and 86.6% as GDP recovers this fiscal year. The general government primary deficit net of interest payments was 7.4% of GDP in 2020 and is estimated by IMF to be 5.7% in 2021.  

The good news is that debt and deficit ratios do not figure prominently in analyses of the 2013 taper tantrum. It is further reassuring that general government debt is held mainly at home and denominated in rupees. RBI estimates that external government debt as of 2021 is just 4% of GDP. More than three-quarters of this is external debt on government account under external assistance – concessional assistance from official creditors who are unlikely to cut and run.

Debt Closing In

The bad news is that a debt-to-GDP ratio of 87% is high by EM standards. It would be risky to let it go higher. Since the turn of the century the real growth rate-real interest rate differential has averaged around 5 percentage points. This means that India can run a primary deficit of 4.5% of GDP without seeing its debt-GDP ratio move higher. Of course there is no guarantee that the growth rate-interest rate differential will remain so favourable. The post-Covid growth environment could be less supportive than in the halcyon days of 2014-16.

Similarly global interest rates could go up. Yields on GoI’s 10-year securities seem to move with US 10-year treasury yields. The elasticity with respect to US rates approaches unity. If US yields are now going up even stronger steps seem to be needed to stabilise the debt-GDP ratio. 

With GDP projected to bounce back post-Covid there is no immediate crisis of debt sustainability. If growth does indeed run at 8% in 2022 as conditions normalise the debt ratio will fall in the short run. But there are reasons to worry about the medium term. The IMF in its Fiscal Monitor and latest Article IV consultation with India imagines that the primary deficit as a share of GDP will fall back to its lower 2012-19 average of 2.4% by 2026. 

The question is how. Tax-to-GDP ratios generally do not increase rapidly or sharply in the short run. Thus IMF projects general government revenue as a share of GDP as rising very slightly from 19.2% this year to 19.8% in 2022-26. It follows that making a dent in the deficit will require spending restraint. The IMF imagines that general government expenditure as a share of GDP will fall from 30.4% this year to 27.9% by 2026 basically to pre-crisis levels.

This is optimistic. The need for health expenditure will rise. More spending will be required to make up for the loss incurred in school closures. There is the ongoing need for public investment in infrastructure. When required to reduce public spending as a share of GDP governments tend to reduce capital expenditure which is counterproductive for economic growth. The IMF projects a fall in GoI’s capital expenditure as a share of GDP between now and 2026. Following this avenue would be a mistake.

This leaves the question of what to cut. Saying ‘Cut food fertiliser and fuel subsidies’ is easy. Doing it is hard. What happens when public debt relative to the resources that GoI is able to mobilise rises even higher? When raising taxes or cutting public spending has been infeasible governments have responded in two ways. When the debt is held externally they restructure. When it is held internally they in ate. You can draw your own conclusions.

(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reßect the views of www.economictimes.com.)

Despite a huge central assistance commitment of ₹1.8 lakh crore PMAY-U has not been able to achieve the desired goal of meeting the affordable housing demand and solve deep rooted issues associated with the housing market in the country.

At a recent event Prime Minister Narendra Modi gave away keys to seventy five thousand beneficiaries of the Pradhan Mantri Awas Yojana — Urban (PMAY-U) in Uttar Pradesh. Though it is a welcome and much needed move the overall pace of delivery under PMAY-U has been rather slow. As of October 11 2021 just around 50% of the 114 lakh sanctioned houses have been completed. In the process ₹97000 crore has already been incurred. 

At this point it is imperative to think about the contribution of this scheme in addressing the intrinsic housing problem in India. It is natural for many to ask — with a huge central assistance commitment of ₹1.8 lakh crore has this scheme achieved the desired goal so far in terms of meeting the affordable housing demand? Is the PMAY-U’s subsidy burden a matter of concern? 

PMAY-U’s Credit Linked subsidy scheme (CLSS) component offers interest rate subvention on housing loans borrowed by the Economically Weaker Section (EWS) low and middle income groups. However the subvention amount is insufficient for private housing in major urban centres of tier-I cities. After all tier-I cities are characterized by high housing prices.

Shifting our focus to government driven EWS projects we see two particular issues around them. Firstly these projects are mainly located in the periphery of cities far away from the city’s key economic centres. Secondly these places are marked by a general lack of transport connectivity and other infrastructure facilities. This combination results in a lack of takers for these housing units. As a result these units usually remain unpurchased for years on a stretch.

The CLSS component has a visible fiscal impact in the form of a subsidy burden. However in typical EWS housing projects especially the ones built by the state governments and city authorities CLSS subvention is not the only cost that the government has to incur. For instance a EWS housing unit in Narela in Delhi is priced at ₹5-6 Lakh. This hides the fact that the construction cost of such a typical unit alone amounts to ₹6 lakh. While scale does reduce cost of works the price ceiling of ₹6 lakh indicates a broader cost factor being ignored as labour and capital costs are not being accounted for. These are what would essentially count as state level subsidies that eventually add up to national debt

While PMAY-U is delivering housing for the poor an emerging economy like India has also to be aware of fiscally viable options for reforming the housing market to address the intrinsic housing problems. The scheme can be avoided from becoming a white elephant provided suitable steps are undertaken to solve these deep rooted issues associated with the housing market in the country.

A prime reason behind the lack of affordable housing supply is high land prices. Appropriate policy changes to address this problem are likely to form the core of the solution. The logical step thus would be conceiving ways whereby land prices can be checked. This can happen with a three pronged approach – ensuring adequate supply of land for residential purposes; ensuring policies to guarantee the efficient use of this land for developing housing units; and reducing transaction costs associated with land/property purchase.

For maintaining adequate supply of land it is imperative that necessary changes in land use change policies are introduced at the state level. In most Indian states multiple levels of No Objection Certificates (NOCs) are necessary for land use conversion. This complex and cost intensive process results in pushing up land prices. Many states like Gujarat and Karnataka have started to make the right moves in this direction through innovations such as the multipurpose NA certification approach or initiating online land use conversion processes. Such efforts can be replicated by other states. Another possible measure towards addressing the issue of land use change is designating specific land parcels for real estate developers in the states’ land banks which will save them the time effort and cost associated with land use change processes.

Floor Space index (FSI) regulations are another elephant in the room. For areas characterized with high land prices and less land availability a high FSI helps fill the void to an extent.

However in most Indian cities FSI is always maintained on a lower side (1 -2) with strict regulations on increases. Mumbai is the sole exception in this regard where the maximum permissible FSI is 4.5. When compared to FSI in other major Asian cities like Shanghai (FSI is 13) and Singapore (FSI is 25) one sees that there is much more that can be done.

Transaction costs associated with land/property purchasing also adds to the hidden costs of affordable housing. These would include different forms of fees like stamp duty registration fee lawyer and real estate agent’s fees. According to Global Property Guide India has one of the highest transaction costs of housing going up to 15 %. Compared to its immediate ASEAN neighbours like Thailand (14%) and Malaysia (8%) we see the room to fix this anomaly.

PMAY-U is certainly filling an important gap in India on the affordable housing front. However given the overall fiscal implications for India measures are certainly needed to ensure prudence and seek permanent solutions.

Prerna Prabhakar is an Associate Fellow at the National Council of Applied Economic Research (NCAER). The views expressed in this article are personal

Opinion: Mythili Bhusnurmath

Sad truth is the only time G20 delivered on its promises was when interests of advanced economies were threatened after GFC — with urgency.

Landmark historic pathbreaking — all these words and more have been used to describe the global agreement on corporate tax rates pioneered by the Paris-based Organisation for Economic Cooperation and Development (OECD) that was endorsed by the G20 in Rome on Saturday. The deal formally approved in Rome on Sunday has been hailed for many reasons — for ensuring a fairer allocation of profit and taxing rights among countries; for marking the beginning of the end of a four-decade-long race to the bottom as countries competed to attract investment by offering progressively lower tax rates (at the cost of bleeding public exchequers).

Once implemented tech giants like Amazon and Meta née Facebook will no longer be able to book profits in low-tax countries but will have to pay taxes in countries where their goods or services are sold even if they have no physical presence there. This will adversely impact long holdouts against the agreement like Ireland which sought to attract investment and jobs by taxing MNCs lightly and benefit countries like India that contribute significantly to the customer base of these tech giants but get very little tax revenue.

But before we sing hosannas to the agreement and G20 a forum covering 60% of world population and 80% of the world GDP a few words of caution. One the agreement only sets a floor. So it will not end tax competition. Two like all multilateral agreements whether on climate change or global trade implementation will be a huge challenge more so given G20’s track record.

G20 says its home page was ‘born in 1999 [in the wake of the 1997 economic crisis] as a consultation forum between finance ministers and central bank governors of the world’s major economies’. But it gathered traction only after the 2008 global financial crisis (GFC) when the US under George W Bush proposed to institutionalise it as the main forum for global economic and financial cooperation and raise the level of participation to the level of heads of state and government. Why? Not because the US suddenly realised the importance of multilateralism but because it needed the world to bail out its economy through a coordinated easing of fiscal and monetary policies globally.

Talking Shop Photo-Op Since the US economy recovered G20 has gone back to being just another talking shop a photo-op for global leaders. Though they’ve met every year since 2010 and each summit has concluded with the issue of lofty communiqués these haven’t meant much in concrete terms.

Take the communiqué issued in 2012 at the conclusion of the meet in Los Cabos Mexico: ‘Despite the challenges we all face domestically we have agreed that multilateralism is of even greater importance in the current climate and remains our best asset to resolve the global economy’s difficulties.’ Really?

If ever there was a case for multilateralism it was in 2020 when the world was struggling against the Covid-19 pandemic. But unlike after GFC when two summits — the first in London and then next in Pittsburgh — were held in 2009 and concrete action plans drawn up in 2020 it was each country for itself. As country after country shut their borders and advanced economies cornered vaccine supplies for its own citizens it was clear that ‘multilateralism’ had been dumped by the wayside.

Lip Service Locked

Never mind the lip service to multilateralism since the first summit in 1999 in Berlin. The Riyadh Summit in November 2020 saw more of the same: ‘We stand united in our conviction that coordinated global action solidarity and multilateral cooperation are more necessary today than ever to overcome current challenges…. We will spare no effort to ensure [distribution of safe and effective Covid-19 diagnostics therapeutics and vaccines] their affordable and equitable access for all people…’

The sad truth is that the only time G20 delivered on its promises was when interests of advanced economies particularly of the US were threatened after GFC — with urgency. But slow-burning crises like climate change inequality tax evasion that affect global rather than US well-being cut little ice.

So for all the cheering that has greeted the global tax agreement the reality is that we are unlikely to get very far. Not until advanced economies also signatories to the agreement suit action to words and crack down on tax havens in their own territories. An unlikely prospect.

Wilmington (home to Joe Biden) in Delaware for instance is widely acknowledged as an onshore tax haven. Asingle building in Wilmington is reportedly home to no less than 300000 businesses. Likewise the British government has consistently turned a blind eye to tax havens in its overseas territories and crown dependencies like the Isle of Man Cayman Islands Guernsey Jersey and Bermuda.

As India gets ready to don the mantle of the G20 presidency in December 2022 it is important to get real. Push for implementation of the tax deal. But remember Rome was not built in a day. Like the city in which the agreement was signed it’s going to be an uphill task. The trick is to keep talking.

(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)