Role Of Government In Facilitating Firm Investments
With the present economic stimulus package in India, funds are being pumped back into the economy. This has been done to help small and medium firms with access to finance. If you take a close look at the current scenario in the economy, you will find that majority of the industrialists have been forced out of business. The only option available to them now is to go in for huge investments in technology and new processes.
But, is there enough financial leverage to support these ventures? To know the answer to this question, let us first understand how firms can make use of financial leverage. By this I mean that they can adopt a variety of measures which provide them with access to ready cash. Let us see how this can be possible in the Indian context.
The financial crisis sweeping the economy is a major reason behind the presence of this phenomenon. In fact, it is one of the most important reasons which have compelled the government to go in for an economic stimulus package. This was implemented as a part of the fiscal stimulus plan. As a result of this, banks and other financial institutions were provided with stimulus money. This money enabled them to offer credit facilities which are highly beneficial to small and medium scale manufacturing firms.
These firms are able to secure credit lines at a very low interest rate as long as they are able to convince the bank management that their investment will yield substantial profits. However, this cannot work in the long run if they are unable to convince the bank management that the benefits of such facility will far outweigh the costs involved in such a venture. That is why the government intervention is necessary. By ensuring that the bank funds are invested in productive and cost effective projects, the government is providing a very crucial boost to the economy.
However, in this regard, there is one important concept which is not understood very well by many of us. That concept is that, irrespective of the beneficial nature of the projects undertaken by these banks, no bank can make any type of investment unless and until it receives adequate amount of loan in its hand. In other words, the government’s intervention is not at all aimed at improving the profitability of these banks’ investments. Rather, what the government is trying to do is to ensure that their investment efficiency is enhanced so that firm investments are made as per the trends which can be seen in the economy.
This means that the current boom in the economy is not going to last for long. There are two factors which are major contributing factors for this enhancement of the investment activity. One is the inflow of information asymmetry, which is due to the huge amount of investment opportunities and another is the improvement in the market price. To facilitate the flow of information, the government regularly releases Economic Research Papers in which the latest information about the current market conditions is shared.