This is Why Modi’s 20 lakh crores Stimulus Package Failed to tackle Economic Imbalance

The recent stimulus package of Rs.20 lakh crore announced by the Central government to tackle the economic imbalance caused by the spread of COVID- 19 hardly puts any money in the pockets of common people, as pointed out by the critics.

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This is why Modi’s 20 lakh crores stimulus package failed to tackle economic imbalance_The_Policy_Times

The recent stimulus package of Rs.20 lakh crore announced by the Central government to tackle the economic imbalance caused by the spread of COVID- 19 hardly puts any money in the pockets of common people, as pointed out by the critics. The budgetary impact of the recent measures announced by the Finance Minister in five press conferences is only about Rs.2 lakh crore or about 1% of the GDP. The remaining 90% of the package is directed largely towards making it easier for industries, MSMEs and even street vendors have to borrow from banks.

The government says it has its own justification for this kind of strategy. Even before the present condition broke out the finances of the centre and state governments were badly stretched, the actual monetary deficit for the Indian economy stood at about 8% of the GDP. The Centre wanted to avoid the repetition of the crisis of 1991 and 2013, both of which were caused by unacceptably high monetary deficits and inflation. Currently when growth has crashed and inflation is by and large liberal, the government felt it had to provide only large monetary rather than providing monetary stimulus. Besides, it wants to keep some ammunition for the rest of the year.

Public Sector Banks (PSB) are expected to play an important role in the execution of this strategy and there lies the rub. Although the banking system has been going with the liquidity for some time now, public sector banks are hardly lending. Over the past 20 years, they have been oscillating between reckless lending borne out of irrational exuberance and extreme caution borne out of fear psychosis of four C’s- courts, CVC, CAG, and CBI. At this moment they are in the later phase. The start of these kinds of problems can be traced in the ’90s. CVC was at that time flooded with cases relating to Harshad Mehta scam. While this epic was taking place, all banks refused to finance a small coterie of brokers who carried out speculation in shares, in violation of banking norms.



The common people of the country often overrule banks and infer ulterior motives that force the managers to follow market prices rather than the banking manuals. As a result, it destroyed many promising careers of bankers leading them to severe punishments, cresting a scenario very similar to what exists today. Bank managers often complained that vigilance regulations for government departments were not suited for commercial organizations. In 1998, they succeeded in persuading CVC to formulate a special law on vigilance management in PSBs. When the bankers wrote this to the CVC, they tried providing some succour to bankers. The Commission decided that, as laid down by the Supreme Court, it would limit the jurisdiction of vigilance officials to only those cases where malafides could be inferred from the facts of a case, where the manager is found guilty or he has done wrongful loss to the organization or wrongful gain to a private party. In 2004 the Commission relaxed standards and left it to the internal committees of the bank to decide whether a vigilance case existed or not.

All these failed when in 2008 the global crisis broke out, the FM again ordered the PSBs to lend liberally. As a result, they took on huge exposures in mega projects in power, coal, and steel sectors of the economy. Both the entrepreneurs and PSBs failed to anticipate the environmental and other regulatory hurdles which paralyzed these projects, and due to which costs soared.

By FY18, NPAs in the Indian banking system stood at Rs.10.35 lakh crore or 9.3% of all advances and loans. 85% of these are related to PSBs. In between FY09 and FY19 the government has infused Rs.3.15 lakh crore of taxpayer funds into these entities, but without much success. In FM’s press conferences, she should have discussed how she intends to make them more effective.

Banks cannot run on political or bureaucratic directives. A suggested by JP Naik Committee, the government must transfer ownership of PSBs to a holding company and allow them to be run by fully empowered professional boards. While the Public sector banks still have some market value, the government should consider reducing its monetary deficit by privatizing these banks as soon as possible. Sooner or later they either have to sink or swim on their own.

Summary
Article Name
This is why Modi’s 20 lakh crores stimulus package failed to tackle economic imbalance
Description
The recent stimulus package of Rs.20 lakh crore announced by the Central government to tackle the economic imbalance caused by the spread of COVID- 19 hardly puts any money in the pockets of common people, as pointed out by the critics.
Publisher Name
The Policy Times