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Businesses, banks and government need to move in harmony

The fiscal and monetary policy should be so devised that it is fair to all the three players – businesses, bank and the government.

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Last Updated: Apr 01, 2020, 09.57 AM IST
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In a statesman like fashion, we need to carefully balance the needs of businesses with that of the financial system.
By Rajesh Narain Gupta & Sanjay Khanna

As a boy my father shared an idea which I didn’t quite understand at that time. I thought about it over the years, as it left an indelible impression on me. He suggested, “… never stop spending, as someone’s expense is someone else’s income. The wheel of the economy runs only when there is spending and there is corresponding income.”

At a macro level, the business community borrows money from banks and runs its businesses. Likewise, banks are in the business of lending money on interest. The business community, trading/manufacturing/services, etc, as well as banks incur expenses and part of their income is paid to the government as taxes. The rest is profit and good for the overall economy.

The implied partnership is clear. The business community generates income, incurs expenses, including payment of interest to banks and then pays taxes. Likewise, banks earn net interest income on the money they lend. And the government receives taxes to run the country’s fiscal and (in a way) monetary policy managed by the RBI.

The fiscal and monetary policy should be so devised that it is fair to all the three players – businesses, bank and the government. This three-legged stool needs to stay balanced. When businesses are facing lockdown due to an act of god (force majeure), banks and the government should try to keep the stool ‘balanced’ at all times, to avoid the collapse of the economy as a whole. In essence, if the business community is required to pay interest during a force majeure lockdown (such as Covid-19), and is not given forbearance of a few months to ensure their revival, it will result in a lot of litigation.

Businesses and tax payers are a small percentage of the total population of the country. What we perhaps need to underscore is the need to address the concern of the small and medium business/trading/manufacturing/service community whose cash flow cannot really function beyond a three-month period with no revenue/income, and they are perhaps the backbone of the economy and generate much needed employment and livelihoods for many. In a statesman like fashion, we need to carefully balance the needs of businesses with that of the financial system and sound monetary and fiscal policy by the banks and government to keep the golden goose from losing its fertility.

(Rajesh Narain Gupta, managing partner, and Sanjay Khanna, advisor, SNG & Partners)

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