The Finance Minister Nirmala Sitharaman and Union Minister Piyush Goyal have recently voiced their concerns regarding the high cost of borrowing in India. This comes at a time when retail inflation is accelerating and there is a noticeable moderation in both economic activity and corporate earnings. India’s interest rates, as indicated by the 10-year government bond yields, are currently among the highest when compared to other major global economies. Within Asia, only Pakistan and Indonesia have similar or higher borrowing costs.

From the government’s perspective, these elevated borrowing costs might appear unjust, particularly as they are actively encouraging rapid capacity expansion within the domestic economy. However, whether the central bank will heed these ministerial demands remains to be seen. The recent uptick in retail inflation has, in fact, pushed market expectations for any interest rate cuts into the next calendar year, 2025.

MSME Sector Gets a Lending Hand

In related news, the government is actively working to boost the Micro, Small and Medium Enterprises (MSME) sector with ambitious lending targets. Finance Minister Sitharaman announced a target of ₹1.54 lakh crore in additional MSME lending for FY25, over and above the estimated ₹4.21 lakh crore under a business-as-usual scenario. This initiative includes a credit guarantee scheme for MSMEs, facilitating term loans without the need for collateral. Banks are also being encouraged to adopt new digital assessment models, focusing on digital footprints and cash flows of MSMEs, which will be a departure from traditional asset or turnover-based evaluations.

This push for enhanced MSME credit is crucial, as these enterprises are considered the backbone of the Indian economy. Companies like Vayana are already playing a significant role in bridging the finance gap for MSMEs by providing affordable trade credit. Their supply chain financing model ensures that even small businesses like ‘kirana’ stores can access necessary funds at reasonable rates.

Can India successfully navigate this complex economic landscape? Balancing the need to control inflation with the imperative to foster growth, particularly in the crucial MSME sector, will be a tightrope walk for policymakers. A calibrated approach that supports domestic demand while maintaining financial stability will be key in the coming months.

Image Courtesy: X (Ministry of MSME)