The Union Cabinet is likely to give its nod to the Rs 2.5-lakh-crore credit guarantee scheme soon, to protect small businesses from the adverse impact of the war in West Asia.

The scheme is expected to help businesses stay afloat, meet fixed expenses such as rent and utilities, and avoid layoffs by ensuring continued access to credit. The conflict, now in its eighth week, is creating headwinds for fiscal parameters and the economic growth rate in FY27, with many agencies trimming their growth forecasts by 0.5 to 1 percentage point.

“The credit guarantee scheme is coming shortly,” an official said, adding that the government is taking steps one by one after carefully assessing the impact of the war on various sectors of the economy.

Several employment-intensive sectors are facing pressure. Micro, small and medium enterprises (MSMEs), especially, are expected to be at the centre of this support package, which is being drawn up on the lines of the Covid-period Emergency Credit Line Guarantee Scheme (ECLGS). The proposed credit scheme could guarantee up to 90% of loans of as much as Rs 100 crore, providing lenders with the confidence to extend fresh credit, sources said.

The scheme will likely be managed by the state-run National Credit Guarantee Trustee Company (NCGTC), with the government expected to set aside around Rs 18,000 crore based on past experience. The guarantee cover may run for four years and span a wider set of sectors than before.

The earlier ECLGS, launched in 2020, provides a useful template. It was extended until March 2023 and facilitated 11.9 million guarantees worth Rs 3.68 lakh crore, largely benefiting MSMEs. The scheme offered a full government guarantee on loans, helping firms manage operational liabilities during the pandemic. Preliminary estimates suggest the Centre’s eventual cost could be around `25,000 crore, well below initial projections.

Higher fertiliser and fuel subsidies, along with excise duty cuts on petrol and diesel, would weigh on the Centre’s finances. However, there is unlikely to be any significant threat to the fiscal deficit target of 4.3% of the GDP due to the government’s Rs 1 lakh crore buffer fund (economic stabilisation fund) and expenditure rationalisation, sources said.

The government has announced several steps to cushion the impact of the war on the economy. The latest was the Cabinet’s nod last week to the $1.4-billion (`12,980 crore) sovereign guarantee fund to back a new industry-led pool that will cover maritime risks, including hull and machinery, cargo, protection and indemnity, and war risk. The move is aimed at ensuring shipments, both exports and imports, are not adversely impacted due to a lack of affordable shipping insurance.