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In the run-up to the general election next year, the has announced an important credit stimulus package for micro, small, and medium enterprises . Among the many sops doled out under the new scheme, Prime Minister has promised the sanction of . Further, in the aftermath of the crisis, which has affected the amount of lending done by non-banking financial companies to the sector, the government would be looking at the scheme as a tool to improve credit flow and the pace of job creation in the economy. A study by officials of the Reserve Bank of India in August 2018, however, showed that growth in credit flow to had recovered to pre-levels by the April-June quarter, just before the liquidity crisis.
The scheme has signs of state-led economic planning written all over it. The biggest risk of a credit stimulus is the of productive economic resources. Pumping extra credit into now may well lead to a temporary boom and enable a feel-good atmosphere in the run-up to elections, but it can lead to a painful bust when the stimulus ends some day. Another unintended consequence is the likely deterioration in credit standards as financial institutions are pushed to lend aggressively to Efforts to expedite business loan approvals may be welcome from the point of view of growth and job creation, but they rarely end well when motivated by political reasons. Conceptually, the Prime Minister’s latest credit scheme is no different from the loan scheme, which has been troubled by soaring bad loans. In September, former RBI Governor had warned that loans extended under the scheme could turn out to be the source of the next financial crisis. Care needs to be taken to see that the loan scheme does not pose a similar risk in the future.