Modi’s India is hurting. It needs a Roosevelt

Small Indian companies getting decimated by the world’s harshest coronavirus lockdown finally see a ray of hope.
Details are still sketchy, but the Indian government plans to backstop banks if they increase overdraft limits by 20%, providing $39 billion of new working capital to smaller enterprises, Bloomberg News has reported. A state-sponsored fund will absorb losses.
Seeing how the US Small Business Administration’s paycheck protection programme has been overwhelmed by demand, India needs to match urgency with careful design. My colleague Shuli Ren has noted how Chinese business owners have diverted anti-virus funding to property or wealth management products. This could happen in India, too. Yet it would be a bigger mistake to dither indefinitely because some fiscal assistance may be misused.
Three out of four Indian employees work casually for others or at family firms and farms. It’s perfectly normal for even white-collar workers to get paid in cash with no social security. Migrant blue-collar workers are either walking hundreds of kilometres back to their villages or have already returned, scared and scarred, from the cities. If broad-based help isn’t offered to small businesses, the strides the country has taken in lifting hundreds of millions out of poverty over the last 30 years might be at risk.
Since the goal is to protect workers by giving employers an incentive to pay them, hitting that objective in a highly informal economy is the first challenge. The second is channeling credit when banks, nonbank financiers and debt mutual funds — like the six local Franklin Templeton entities put into suspended animation last week — are gripped by a mistrust of borrowers that predates the pandemic. Fiscal fear-mongering is the third obstacle.
I’m assuming the state-backed advances would be offered at a concessional rate, with the interest subsidy borne in the federal budget. Banks would make loans for a fee, and turn them over to the guarantee fund, which would issue bonds to fund the purchase. Since non-payments will be made good by New Delhi, the bonds can be sovereign-backed. Who will buy them? Even if foreign investors don’t bite because of nervousness about the rupee, local banks are flush with liquidity. State Bank of India will still make money even if a customer defaults, if it sells its exposure to the fund in exchange for special sovereign bonds.
Every nudge by the Reserve Bank of India to make lenders take credit risk has fallen flat because they want the sovereign to lead. That’s where the guarantee comes in. At 1.4% of GDP, taxpayers’ exposure isn’t minor. Yet the backstop won’t meet pent-up demand. Amplifying its effect, and ensuring that banks don’t just throw money at connected borrowers, will require lenders to keep some skin in the game.

—Bloomberg