Stimulating thrust to build a self-sustaining India

The measures announced by the Govt. need to be implemented to restore economic growth and help build a self-reliant India...

The Hon'ble Prime Minister Shri Narendra Modi on 12^th May 2020 announced a Special economic and comprehensive package of Rs 20 lakh crores - equivalent to 10% of India's GDP. While this isarguably amongstthe biggest bailout, considered the fiscal, liquidity and health related challenges, it attempts toaddress, concentrating on the size of the stimulus would be like missing the forest for the trees. Its underlying impetus requires a crucial elaboration. He gave a clarion call for a Self-Reliant India Movement and outlined five pillars of Aatmanirbhar Bharat – Economy, Infrastructure, System, Vibrant Demography and Demand. The detailed mechanics were sequentially unveiled by the Union Finance Minister, over the next three days,each measure being crucially linked to incentivizing economic revival.

The entire stimulus has been broken up into segments to be incrementally announced. It may be a wise step considering the length and breadth of economic activities that are affected and thus a segmented announcement would not allow specific aspects to be lost in the detail. Thus, the requirement to address these announcements in trends.

A. Focus of May 13 announcement

In the first series of announcements, made on 13^th May, the Union Finance Minister announced measures focused on 'Getting back to work' i.e., enabling employees and employers, businesses, particularly Micro Small and Medium Enterprises, to commence production and workers back to gainful employment. Efforts to strengthen Non-Banking Finance Institutions (NBFCs), Housing Finance Companies (HFCs), Micro Finance Sector and Power Sector were also unfolded. Other than this, the tax compliance relief to business, relief from contractual commitments to contractors in public procurement and compliance relief to real estate sector were also covered.Measure under the Direct tax law include on reduction of withholding tax rate by 25% on certain payments and extension of compliance due dates.

B. Focus of May 14 announcement

Nine action points focusing on alleviating difficulties of the marginalised class were announced which include three for migrant workers, one each for a moratorium period of Loan to poor, street vendors, housing, employment generation for tribal and two for small farmers. It was also announced that the "one nation, one ration card" scheme will use Aadhaar (Unique identification) to allow those entitled to access the public distribution system to draw their quota of food grains from any location in the country, due to displacement challenges.

C. Focus of May 15 announcement

The third tranche dealt with framers, food processing and allied activities. Eleven measures have been announced which include eight related to strengthening infrastructure, and the rest three dealing with governance and administrative reforms.

D. Focus of May 16 announcement

Measures announced targeted broadly eight sectors which are coal, minerals, defence production, airspace management, airports, space, atomic energy, and power distribution companies. Emphasis was on the Public-Private Partnership Model and investment in India with a fast track clearance.

E. Mathematical count of the Package

Of the Rs 20 lakh crores package, a large part of it, or as much as Rs 8.04 lakh crore, is towards additional liquidity injected into the system either by the Reserve Bank of India or Government departments through various measures in February, March and April.Add to thisaRs 1.7 lakh crore fiscal package announced by the FM on March 27. The balance of the economic package stands at Rs 10.26 lakh crore, of which approximately Rs. 6 lakh crore was announced on May 13 and the balance on May 14, 15 and 16.

The details of the packageare analysed herein below:

F. Focus on Revival and Sustenance of MSMEs

Over the past five years, the Government has actively taken measures for the MSME sector. To provide relief to the business, additional working capital finance of 20% of the outstanding credit in the form of a Term Loan at a concessional rate of interest forms a major portion of the package;this will be available to units upto Rs 25 crore loanoutstanding and turnover of up to Rs 100 crore. The units will not have to provide any guarantee or collateral for such loanas it will be guaranteed by the Government of India providing a total liquidity of Rs. 3lakh crores to more than 45 lakh MSMEs.

A further provision for Rs. 20,000 crores subordinate debt for two lakh MSMEs which are falling in the banking system's NPA class and for those which are stressed. The Government will support with Rs. 4,000 crores through a Credit Guarantee Trust for Micro and Small enterprises (CGTMSE) and banks are expected to provide subordinate-debt to promoters of such MSMEs equal to 15% of his existing ownership in the unit subject to a maximum of Rs 75 lakhs.

The Government will set up a Fund of Funds (originally announced in Finance Bill 2020) with a corpus of Rs 10,000 crore which will provide equity funding support for MSME's which shall be operated through a Mother and a few Daughter funds. It is expected that with leverage of 1:4 at the level of daughter funds, the Fund of Funds will be able to mobilise equity of about Rs 50,000 crores.

Definition of MSME has been revised by raising the Investment limit and taking away the distinction between manufacturing & services segment. An additional criterion of turnoverhasbeen introduced to expand the reach of various liquidity induced schemes.

Other measures for MSMEs include e-market linkage to act as a replacement for trade fairs and exhibitions and receivables from Government to be liquidated in 45 days

G. Employees' Provident Fund Support for business and organised workers

Statutory PF contribution of both employer and employee has been reduced to 10% each from existing 12% each for all establishments for the next 3 months. This will provideliquidity of about Rs.2250 Crore per month.

H. Liquidity for NBFCs and Microfinance Companies

Government will launch Rs a 30,000 crore Special Liquidity Scheme through the RBI. Investment will be made in primary and secondary market transactions in investment grade debt paper of NBFCs, HFCs and MFIs. This is over and above the Rs 50,000 crore additional liquidity announced last fortnight to ease the pressure on redemptions.Further, the Government will launch a Rs 45,000 crores partial credit guarantee scheme forliabilities of NBFCs/MFIs;existing partial credit guarantee scheme shall be revamped and will be extended to cover the borrowings of lower rated NBFCs, HFCs and other Micro Finance Institutions.

I. Stimulus for the Power Distribution Companies (DISCOMS)

The Power Sector has been ailing due to a sharp decline in the revenues during the crisis. In a bid to lend a liquidity boost, Power Finance Corporation and Rural Electrification Corporation will infuse liquidity in the Electricity distribution companies (DISCOMS) to the extent of Rs 90,000 crores in two equal instalments in the form of loans ranging from 7-10 years with a moratorium of two years from repayment. This will be used by DISCOMS to pay their dues to power transmission and generation companies. Further, a rebate will be given to DISCOMS on the condition that the same is passed on to the final consumers as a relief towards their fixed charges. It was announced that the power distribution companies in Union Territories shall be privatised.

J. Real Estate Projects

State Governments are being advised to invoke the Force Majeure clause underthe States' regulatory regime RERA. The registration and completion date for all registered projects will be extended up to 6 months and may be further extended by another 3 months based on the State's situation. Various statutory compliances under RERA will also be extended concurrently.

K. Tax Relief and related measures

Outstanding income-tax refunds to charitable trusts and non-corporate businesses and professions including proprietorship, partnership and LLPs and cooperatives shall be issued immediately. This measure is in addition to last month's announcement where refunds up to 5 lakhs were to be released, irrespective of the type of the taxpayer.

The TDS / withholding tax rates for all non-salaried payment to residentsand tax collected at source rate will be reduced by 25 percent of the specified rates for the remaining period of FY 20-21.This will provide a liquidity to the tune of Rs 50,000 Crore. Returns (dividends and interest) on Investments via AIFs, REITs and InvITs are also eligible on the reduced rate of withholding taxes. However, the reduced rate of TDS is not applicable for FPIs and NRIs.

The due date of all tax filings for Assessment Year 2020-21 will be extended to 30 November 2020.  Similarly, tax audit due date will be extended to 31 October 2020.The date for disclosure and making payment without additional amount under the "Vivad Se Vishwas" scheme will be extended to 31 December 2020.

L. Second Announcement focusing on alleviating pain of marginal class

The government announced a special relief to almost eight crore migrant workers who do not have either Central or State Public Distribution System (PDS) cards by giving them free food grain supply for next two months. Under this relief measure, five kilograms per person of wheat or rice and one-kilogrampulse per family will be given to the migrants at the Centre's expense amounting to Rs 3,500 crores. The FM also announced an affordable rental housing scheme for migrant workers besides Rs 5,000 crore special credit facility for nearly 50 lakh street vendors. Referring to the National Portability Cards under the One Nation, One Ration Card Scheme, the FM explained that these will be beneficial for all migrant workers in the country. Benefitting over 67 crore people, this scheme will enable a PDS beneficiary to use the Ration Card to procure food grains from any ration shop across the country.

M. Agricultural Reforms

It was announced to bring in a facilitative legal framework to oversee contract farming, which would provide farmers with assured sale prices and quantities even before the crop is sown and also allow private players to invest in inputs and technology in the agricultural sector.

The recent state level changes to APMC mechanism in certain BJP run states which provides big retailers and companies to purchase from farmers without going through the state mandated network of intermediaries has been viewed as a success, benefitting farmers, efficiency in procurement, distribution and possibly better price for consumers. This certainly shall now big seen a case study and implemented in all the other states.

N. Conclusion

Most announcements are targeted to improve liquidity in the hands of middle class individuals, support financing, alter borrowing schedules, refinancing, loan repayments by small & medium enterprises and release of payments & proportionate guarantees towards contractors. It's premature to assess the impact of today's announcement on the fiscal situation, though, it seems that only limited measures have a direct impact on the fiscal deficit, as it entails more liquidity measures and banking sanctions, than 'fiscal giveaway". The impact of measures shall also depend on how the economy performs on Direct tax & GST collections, in the course of the year and to what extent the Government shall pull back on expenditure it had budgeted for in its annual Finance Act, which was passed days after the nationwide lock down was announced. Lastly, other measures, particularly on land, labour & law reforms will be awaited. Though land & labour are state subjects, it is anticipated that a framework for land leasing laws will be laid down by the Centre and immediate anticipated changes in law include amendments to Insolvency & Bankruptcy code, Essential Commodities Act & Agricultural Produce Market regulations to ease immediate pressure faced by small & medium business enterprises facing threat of bankruptcy and ensuring smooth procurement of essential commodities & agriculture produce. It is well appreciated that the Government has announced a big bonanza for the resurgence of the economy. However, the measures so announced need to be implemented to restore economic growth and help build a self-reliant India. Overall, measures announced will certainly soften the devastating impact of coronavirus driven lockdown on the economy. No doubt, this is the start of announcement and measures expected in the coming weeks & months shall lay foundation for revival of the economy. In substance, the Government has advocated the PPP Model in various sectors in a bid to make AatmNirbhar Economy. Celibately deployed, the changes currently being made by the Government have the potential to invigorate the economic foundations. It is now upto the Indian citizens to live up to the expectations and make this another 1991 moment.