India vs West : How fiscal prudence saved us from a financial catastrophe
As we complete the second month of the current fiscal year, we are witnessing a rare scenario in our lifetime where our inflation rate is comparable (and in some cases lower) than the West. The inflation in India, for example, is 4.7% while in the US it is 5%. The UK, thanks to rising energy prices, has an inflation rate of 8.7%, Germany is 7.2%, and the Eurozone is around 7%. Inflation in Japan, too, has ballooned to 3.5% from zero.?
But we didn’t get here by luck. It takes me back to May 2020, when doubts were raised about India’s financial future. During the early days of the pandemic, businesses shut down and had little visibility over what’s coming. While entrepreneurs and executives were reeling, Prime Minister Narendra Modi announced an Atmanirbhar Package, which included provisions for collateral-free debt and credit guarantees. Back then, I wondered why our government didn’t resort to direct cash transfers like the West to assuage the concerns of millions of their countrymen.?
Now, I understand the rationale.
Minutely calculated policy sops and strict adherence to fiscal prudence have helped India remain resilient to the current financial upheavals witnessed in the US and elsewhere. The philosophy of frugality adopted by enterprising minds in our government made it happen.?
?India is famously known for “jugaad” or the ability to innovate using limited resources. The Indian government followed this very “jugaad” culture to manage the country’s fiscal deficit much better than its peers in the developed world. This is remarkable, especially when the US is veering towards a slowdown.?
The United States, in particular, is battling multiple crises. It is during a banking crisis where, in a matter of two months, Silicon Valley Bank, Signature Bank, and First Republic Bank collapsed. A few more regional lenders are on the brink and the US Fed is caught in the tumultuous cycle of bank runs. The economy is on the edge owing to a potential debt default.?
The Indian economy is, however, unperturbed by this prolonged systemic risk. This is principally because of the farsightedness of our government and the deft handling of the situation by the regulators.?
What did India do differently?
When the pandemic broke out, India was shaken, just like the rest of the world. However, the Indian government and our regulators were agile and prudent in their response to the constantly evolving pandemic situation.?
At the outset, the Modi government imposed the largest-ever lockdown to protect human lives, which naturally sparked anxiety and distress. However, this was soon followed by economic relief for the most affected citizens and sectors.?
Then, the government wanted to assuage the concerns of businesses regarding access to credit and business continuity. Finance minister Nirmala Sitharaman chaired multiple meetings with stakeholders to get a first-hand view of the industry’s apprehensions. This was followed by a slew of in-depth interactions led by the finance secretary, the DFS secretary, the MSME ministry, SIDBI, as well as the RBI. As a representative of industry bodies such as CII and FICCI and trade associations such as FIDC, I was fortunate to witness the government’s steadfast commitment to a quick resolution. They were eager to listen to our suggestions and respond with policy announcements, besides changing the existing policies wherever required.?
Other economies took a quite diverse view of their pandemic subsidies. The developed world was quick to hand out cash subsidies and zero to low-interest loans.?
For instance, the US Fed slashed interest rates to almost zero and started printing dollars. In addition, the US government stepped in to offer a 50% credit on salaries up to $10,000 paid between March and December. Similarly, countries such as Germany, Japan, and the UK offered direct cash grants.?
To be honest, during industry meetings, I wondered why our government and regulators took a different route and saved resources. When would they spend them? The answers came soon after.?
India escaped relatively unscathed because, unlike the West, it wasn’t doling out free money. While the US’s Covid-19 measures accounted for 27% of its GDP and Germany's 20% of its GDP, India’s fiscal impact was under 1% of the GDP.?
The government encouraged banks to lend to ailing businesses without adding undue pressure on their finances. Then came a gush of reforms. Measures such as targeted long-term repo operations, Emergency Credit Line Guarantee Scheme, and Standard Liquidity Facility provided an impetus for banks to offer loans. The government opened a window for up to Rs 3 lakh crore worth of collateral-free loans for small and medium businesses. Meanwhile, the RBI offered loan moratoriums and reduced reserve requirements for banks.?
Simultaneously, the government sprung into action to augment credit flow to SMEs. The Credit Guarantee Fund Trust for Micro and Small Enterprises provided the much-needed cash flows to the unorganised and self-employed section of society.?
It was an all-out frontal attack against the vicious pandemic. This included:?
Thanks to these reforms, by September 2020, the market was flush with liquidity. Slowly but surely, the positive sentiment translated into a boom in the stock market. A year later, in October 2021, the BSE Sensex crossed the 60,000 mark despite worries about a looming second wave of Covid-19. The deft handling of the pandemic soothed the frayed nerves of businesses. By September 2022, the Sensex was ahead of Dow Jones and stayed bullish while the US markets turned bearish.?
The Indian government's conservative slant was criticised, but proved to be beneficial. Indian banks weren’t required to lend on unviable terms and asset quality consequently improved.?In fact, the balance sheets of these institutions strengthened. At present, India’s banking and NBFC sectors are in their prime health, reflected by good CRAR, lowest NPAs, impressive credit growth and expanding NIMs.?
The world, in contrast
The world is facing the consequences of its pandemic-linked spending. The US and parts of Europe are headed towards recession in 2023. Consumer spending has slowed down in the US, a factor that will hit the revenue growth of the economy. On the contrary, the Indian economy is expected to grow at 6.4% in FY24, making it the fastest-growing economy in the world.
India’s figures are starkly different. The 10-year government securities are trending at ~7% at par with multi-year averages. The country’s inflation rate has fallen to an 18-month low to 4.7% in April.?
Meanwhile, the world is on tenterhooks over the debt ceiling breach in the US. The US may default on its debt obligations by June 15 if Congress does not approve an increase in the debt ceiling.?
Amidst the mayhem prevailing in the world’s most developed markets, India offers tranquillity. Our discerning government’s fiscal discipline has pulled us out of the doldrums faster than anywhere else. So much so that even former finance minister P Chidambaram, a staunch critic of the government, lauded the government for maintaining the fiscal deficit targets.?
The suddenness of the pandemic left no room to think. Yet, the Indian government’s foresight saved us from a gigantic financial catastrophe. And now, the world takes notice.?