Provide Equity, Not Debt

Marti Subrahmanyam
By Marti Subrahmanyam and Anisha Sharma
Covid-19 has taken an extraordinary toll on businesses around the world. In India, business confidence is at its lowest since the 2009 financial crisis: 72 per cent of firms have reported adverse effects on operations, 90 per cent are facing supply chain disruptions and 53 per cent anticipate a decline in sales over the next two quarters. Industrial output in key sectors could fall by up to 15 per cent and GDP growth by 10-20 per cent during the April-June 2020 quarter, with ripple effects continuing for an uncertain period of time.

The government's immediate policy priority was, rightly, to support low-income households through cash and in-kind transfers worth Rs 1.7 lakh crore, or 0.8 per cent of GDP. This is well below the fiscal packages committed by other national governments, though the amounts are bound to increase in the coming weeks. Support to businesses has been extended through monetary and macro-financial policy - the RBI has directly injected Rs 2 lakh crore through refinancing operations, given firms a three-month moratorium on loan payments and reduced interest rates across the board.

However, as one of us recently proposed in the context of Europe and Singapore, rather than offering debt financing, businesses can be better supported through the direct injection of 'quasi-equity' finance by the government. The government should offer to make direct investments in businesses by taking a 'minority stake', which will be recovered through higher taxes on profits over a number of years. By making payments conditional on profitability, rather than saddling firms with repayable debt, equity finance will be more sustainable in the long term.

Read the full Business Today article.

Marti Subrahmanyam is the Charles E. Merrill Professor of Finance, Economics and International Business