Covid legacy: A trinity of divergences?

September 20, 2021 6:15 AM

More formalisation of incomes & balance-sheets for households & businesses can help fight this

Equity markets and HNI portfolios saw good returns. The Indian Nifty-50 index yearly returned 70.9%.

By Shilpa Kumar

As countries prepare for Covid recovery, it is self-evident that the only insurance against such shocks is building a collective global immunity and staying prepared to respond swiftly. And yet, a trinity of divergences—divergences between the developed world & the global South, between larger corporates & smaller MSMEs, and between HNIs & the aspiring masses—pushing the world towards a riskier Covid legacy is a distinct possibility. 73.7% of humankind resides in emerging economies, almost 50% of the world population belongs to low & lower-middle income groups and 95% of India’s estimated 65 million MSMEs belong to the struggling small and micro category.

Covid struck these constituencies the most. The growth rate of developing countries was higher than developed ones by 4% between 2001-10. This had fallen to around 2% pre-Covid and is expected to be less than 1% in FY22. Larger fiscal stimulus and cheaper borrowing was the reason that more developed countries coped better. The bulk of response & recovery mechanisms within a country seem to have gone towards the smaller set of relatively stronger businesses & individuals. India was not an exception. In preparing for the future, it is essential to understand what worked to bridge these gaps:

  • Central bank action to ensure that financial conditions stayed benign, and liquidity was abundant and cheap, helped ease volatility in financial markets and protected against a devastating systemic collapse.
  • Technology played enabled access to information, access to much-needed products and services and enabled governments to deliver swift relief to the most-affected. India, for instance, could deliver cash relief at a time when physical access was difficult. Dalberg data shows that even a country as large and spatially diverse as India could transfer some form of cash support to nearly 80% of the needy population by May 2020.

A few things accentuated the divide. Relief provision was driven by “formal structures”. Individuals who had a digital identity and a bank account could get a cash payout from the government. Businesses in the formal ecosystem could benefit from relief announced. For instance, RBI mandate on loan payment moratorium was only available to any person or business in the formal credit system. Unfortunately, the bulk of individuals & small entrepreneurs in most developing countries remain rooted in informal structures of livelihoods and business. This complicates their ability to access available relief measures in times of crisis.

Abundant & cheap liquidity provided by central banks did not transmit to MFIs and smaller NBFCs, the last-mile providers of credit. Tightening credit norms and risk aversion in banks meant that smaller MFIs and NBFCs were unable to access funds for on-lending. In fact, their costs of borrowing went up by 120-150 bp over 2018 to 2020 despite significant RBI rate reductions post-Covid, vulnerable households’ balance-sheets.

Another negative trajectory played out on the asset side. Rate cuts meant a double hit to lower income households: what they earned on their savings declined even as access to formal credit became harder.

On the other hand, this easy monetary policy had a very positive effect on risk assets. Equity markets and HNI portfolios saw good returns. The Indian Nifty-50 index yearly returned 70.9%.

In the same way, larger corporates were able to access the abundant liquidity in large measure and cheaply. For instance, there was a 58% growth in credit to medium enterprises in FY21 and a tepid 2.5% growth in credit to micro and small enterprises; much of the benefits of the Emergency Credit Line Guarantee Scheme (ECLGS) has accrued to larger enterprises within the MSME spectrum.

A stronger and more resilient global economy will need to focus on three axes:

  • More formalisation of incomes & balance-sheets for households & businesses, through a combination of incentives as well as more rigorous compliance for businesses.
  • More access to both relief as well as credit by extending digital rails like digital identity & bank linkages to those still not covered.
  • More affordable credit by better transmission of central bank easing & more bespoke policies targeting last-mile credit & savings providers, and leveraging of technology and harnessing databases to move towards cash-flow based lending.

A chain is only as strong as the weakest link. Let’s strengthen those links.

The author is Partner, Omidyar Network India

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