The 20 Lakh Crore Relief Package – Overview of “First Tranche”
A detailed study on the 20 Lakh Crore Relief Package in India (First Tranche): Prime Minister Narendra Modi’s address to the nation on Tuesday will be remembered by many for a right smart spell due to two reasons. Firstly because the number we couldn’t fathom – 20 Lac Crore (20000000000000- 10% of our GDP) is now our relief package. Secondly for the word ‘Aatma Nirbhar’ (Self Reliance).
However, if observed the address holds much more gravity, especially in our preparation for the post lockdown economy. The direction chosen to move in is towards an Aatma Nirbhar Bharat. To achieve this the Abhiyan has focused on the five important pillars- the economy, infrastructure, system, vibrant demography, and demand. It seems like a throwback to the 20th century Swadeshi movement with national leaders calling for local purchases. It is however evident that the economy can be saved from being plundered by COVID-19 by robust demand for Indian products.
Finance Minister (FinMin) Nirmala Sitharaman announced on Wednesday the First Tranche of measures that would be taken to attempt at reviving the economy. The focus would be on the factors of production. However, the traditional factors have been recast to suit the purpose of this Abhiyan. They are:
- Ease of doing business
- Compliance and Regulation
- Due Diligence Observed
The FinMin also clarified that becoming ‘Aatma Nirbhar’ would not mean turning into an isolationist state that only looks inward. But instead, it talks about a country that can rest on its strengths and at the same time contribute to the globe. Today we have a closer look at the measures of the first tranche, the reasons for their implementation, and the path intended.
Measures to revive the economy -Tranche1
Nirmala Sitharaman announced the fifteen measures to revive the economy. They are directed towards the following sectors/measures:
MSME (Micro Small Medium Enterprises)
The FinMin has focussed a considerable portion of the relief towards Micro Small and Medium Enterprises( MSME). Of the 15 key decisions, 6 are directed towards the MSME. MSMEs are our nation’s dominant job creator by employing 11 crore people.
MSMEs contribute to 45% of the country’s manufacturing output, 40% of exports, and to 30% of the GDP. Considering the figures a relief package not directed towards the MSMEs survival would result in their closure and eventually mass unemployment accelerating the GDP decline. From the numbers above it becomes evident that ensuring their survival would mean saving the economy.
It can be noticed from above that there is a huge gap between credit requirements and credit available to MSMEs. Such a huge lending ability to bridge the gap is only possessed by financial corporations in the country. The government would not be able to fulfill the requirements simply because it does not have that much money to be directed towards MSMEs during an ongoing pandemic.
What are the means adopted to achieve this?
The government has two options here. Either directly give loans to the MSMEs or to take over the credit risk of the loans received by MSMEs from other sources. It becomes evident that the government has chosen the latter as the measures in Tranch 1 focus on this.
If in a normal situation if an MSME would approach banks he would be required to place a collateral of a value higher than the loan in exchange. The property available with MSMEs will be affected too as the outbreak has caused a fall in their prices as well. The Government of India(GOI) has rolled out measures where instead of collateral it acts as the guarantor for the loan. This means that in a case where the MSMEs fail to repay, the banks would still be able to recover the loan from the government. With the government acting as a guarantor the banks are encouraged to give out more loans to the MSME’s
The reforms that enabled this are:
1. Three Lakh Crore collateral-free automatic loans for MSMEs
Here MSMEs that have no more than 25 crores outstanding in loans and a turnover of at least Rs. 100 crores are eligible. An emergency credit line to businesses and MSMEs has been set up from NBFCs and banks for up to 20% of the outstanding credit as of 29/02/20.
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The loans will be provided with a 4-year tenure with no requirement for the principal to be paid for the next 12 months. They will be required to pay interest however but at a capped limit set by the GOI. Here the GOI will act as 100% guarantor for both loans and interest. This scheme can be availed till 31st October 2020.
The Finance Ministry has estimated that this will help 45 Lakh business units to resume business utility and safeguard jobs.
2. Rs 20,000 crores subordinated debt for stressed MSMEs
Here the GOI will facilitate a provision for Rs. 20,000 crore as subordinate debt. This is aimed at MSMEs that are stressed and would be considered NPA (Non-Performing Assets) but still have managed to keep functioning. These MSMEs classified as NPAs would not be provided credit by NBFCs or banks. Here the promoter of the MSME will be given debt by the banks which will then be infused by promoters as equity in the firm. This will increase his respective ownership but will be liable for the debt received.
3. Rs. 50,000 crore, equity infusion for MSMEs through FOF.
The GOI here will set up a Fund of Fund which in turn will invest in its daughter funds. These daughter funds will provide equity funding to MSMEs that show growth potential. The GOI will invest 10,000 crores into the FOF. The remaining amount will be funded from institutions like LIC and SBI.
The MSME, however, will be encouraged to get listed on the main board of the stock exchange.
4. New Definition of MSMEs.
The FinMin pointed out before the announcement that this change of definition will be in favor of MSMEs. The new definition will revise investment slabs for those companies to be considered as Micro Small and Medium. In addition to the investment, it will also consider the turnover before classifying an MSME.
The new definition will also have no distinction between the MSME involved in manufacturing and service.
- Micro will be those with investment up to 1 crore whose turnover is LESS than 5 crores.
- Small will be with investment up to 10 crores whose turnover is LESS than 50 crores.
- Medium will be those with investment up to 20 crores and a turnover of LESS than 100 crores
5. For government procurement tenders up to 200 crores will no longer be on the global tender route.
According to this global tenders that are worth up to 200 crores will no longer be available to global players.
This reform would encourage and provide MSMEs with the opportunity to procure these tenders without facing global competition.
6. Other incentives for MSMEs
MSMEs in the post lockdown environment will face problems of marketing and liquidity due to social distancing requirements. For these reasons, the GOI will launch an e-market linkage for MSMEs which will be promoted as a replacement for trade fairs and exhibitions. Fintech also will be applied to enhance transaction-based lending using data generated by e-market linkage.
In addition to this, all dues from the GOI and Central Public Sector Enterprises (CPSE) will be released in 45 days.
This reform focusses on ensuring that the MSMEs are able to restart their business with ease after the lockdown as well. At the same time, their liquidity position would be improved to meet their immediate needs from the dues received.
Provident Fund Contribution
7. Reduction in rates for those covered in the first relief package.
Under the Pradhan Mantri Garib Kalyan package of Rs 1.7 lakh crores announced in the first phase of the lockdown, the GOI announced that it would contribute the employer’s portion to the PF. The companies eligible for this relief were those who had 100 employees earning less than 15000 per month. This relief was announced for a period of 3 months.
Moreover, this relief currently helps a total of 6 Lakh establishments during the months of March, April, and May. The FinMin announced that these establishments that are currently eligible would have these benefits extended to both the employees and the employer’s contributions respectively. The GOI will now pay 24% to the PF for a period of 3 months.
8. Reduction in rates for those not covered in the first relief package.
The FinMin also announced that those who were not covered earlier would now only be required to contribute 10% instead of the earlier 12% rate. This 10% contribution will be for both the employers and the employees for the next 3 months.
However, for state PSU and CPSE, the employer’s contribution will remain at 12% but the employees will be required to contribute only 10%.
The main aim of the PF contribution from the govt or rate reduction is to transfer more money into the hands of the employers and employees. The employers would have greater liquidity and hence would be able to use this to better survive. The employees, on the other hand, would have more cash in their hand which would cause a spurt in the demand in the economy. This will create liquidity of 6750 crores available to the employers and employees for the next 3 months.
NBFC( Non- Banking Finance Corporations) / HFC(Housing Finance Corporation)/ MFI(Micro Finance Institutions
9. 30,000 crore special liquidity scheme for NBFC/ HFC/ MFI
The scheme is available to those NBFC’s that are finding it difficult to raise debt in the COVID-19 environment. The special liquidity scheme of 30,000 crores was launched for this. Under the scheme, investment was made by buying investment-grade debt papers of NBFC HFC and MFIs. It is not necessary for the companies to be graded highly and be of high quality.
Purchasers of these debt papers will receive a guarantee from the GOI.
10. Rs. 45,000 crore Partial-Credit Guarantee Scheme(PCGS) 2.0 for NBFC’s.
With the PCGS already in place, the PCGS scheme is said to supplement it. This scheme will enable finance corporations that have low credit ratings to raise finances. In PCGS 2.0 the existing PCGS scheme will now be extended to cover borrowings such as primary issuance of bonds and commercial papers of these entities. Here ‘AA’ papers and below including unrated papers will also be eligible for investment. This will particularly benefit MFI that do not have ratings high enough to attract investments.
In this scheme, the first 20% of the loss will be borne by the guarantor i.e. GOI.
The main aim of both schemes is to provide liquidity to NBFC’s, MFI, and HFC. If they are provided with the liquidity it will lead to increased lending to MSMEs. So it can be said that even these 2 schemes are aimed at the MSMEs.
11. 90,000 crore liquidity injections of Discoms.
The working of the electricity sector requires Power Generation Companies(Gencos) to transfer electricity to Distribution Companie(Discoms) in respective states which is then transferred to the consumers and respectively paid for. The payments then trickle down to the Gencos. The Discoms currently owe Rs 94,000 crores to the Gencos. The lockdown unfortunately only alleviated the problems and troubles of the electricity sector as many industries were shut causing a fall in the demand. In the electricity sector, the units produced cannot be stored. Hence a fall in the demand causes a loss.
The FinMin unveiled that both PFC and REC will together infuse a total of 90,000 crores into all the Discoms against all the receivables they have. These 90,000 crores in loans will be extended against the state government guarantees with the exclusive purpose of discharging liabilities of Discoms and Gencos.
The loans, however, will be given to the Discoms for specific activities and reforms which include
- Introducing digital payment facility by Discoms where necessary.
- Liquidation of outstanding dues to state govt.
- Plan to reduce financial and operational losses.
The benefits of this have also been aimed at being passed onto the consumers in the form of rebates for the power tariffs paid.
12. Relief to contractors
Central Agencies ( like Railways, Ministry of Road Transport and Highway, Central Public Works Department) have been directed to extend all contracts for up to 6 months. This covers both construction works and goods and service contracts. It covers obligations like completion of work, intermediate milestones, and extension of the concession period in PPP(Public-Private Partnerships) contracts.
To ease cash flows the GOI will partially release bank guarantees, to the extent contracts are partially completed. This move will also improve the cash flows for the contractors as they will be provided with liquidity which will help them meet immediate business needs when the lockdown is lifted.
TCS Chief Strategist Himanshu Chaturvedi said ‘ The Governments Aatma Nirbhar Bharat Initiative has recognized infrastructure as one of the 5 pillars. This is an acknowledgment of the sector’s role in India’s development and large scale employment generation.
13. Relief to Real Estate
According to this measure, the real estate is to treat COVID-19 as a ‘force majeure'(unforeseeable circumstances that prevent someone from fulfilling a contract) and extend registration and completion date by 6 months. The regulatory authorities may extend this for another period of 3 months if necessary. This was done so that the home buyers may get new timelines for delivery.
The GOI has also decided to provide projects that have been stalled due to a lack of funds with financial support. Projects that are NPA’s or undergoing NCLT will also be eligible for the proceedings. The maximum finance for a single project has been capped at 400 crores.
This scheme is said to benefit 1509 housing projects comprising of 4.58 Lac housing units.
TDS and TCS
14. Reduction of rates
In order to provide more funds at the disposal of the taxpayer the rates of TDS for non-salaried specified payments made to residents and rates of the tax collected at source for the specified receipts shall be reduced by 25% of the existing rates.
This will be applicable for the rest of the year starting from 14/05/2020 to 31/03/21. These measures are estimated to release liquidity of Rs. 50,000 crore.
It has to be noted that this doesn’t bring down the tax liability of taxpayers, it leaves more money with them during the course of the FY. Individuals will still have to pay their tax liability every quarter or annually.
15. Other Measures
All pending refunds to charitable trusts, non-corporate business, from the GOI shall be issued immediately.
Income tax returns extended from 31st July 2020 and 31st October to 30th November 2020. The tax audit has been postponed from 30th September 2020 to 31st October 2020.
Ernst and Young Chief policy advisor D.K. Srivastava estimated that the measures announced on Wednesday amounted to Rs 5.94 lac crore, which includes both the liquidity financing measures and credit guarantees, although the direct fiscal cost to the govt. In the current financial year may only be Rs 16500 crore. As mentioned earlier the government has taken over the credit risk that the MSMEs and various financial institutions.
Hence the amount that the government would invest will depend on how much of the loans taken by the MSMEs and various financial institutions will default on. Furthermore, the real trajectory of the relief package can only be understood after it is viewed together with the measures in the Second and Third Tranch. Even more so on how many of these are successfully implemented. It still goes without saying that tranch 1 is nothing short of impressive.
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Aron, Bachelors in Commerce from Mangalore University, entered the world of Equity research to explore his interests in financial markets. Outside of work, you can catch him binging on a show, supporting RCB, and dreaming of visiting Kasol soon. He also believes that eating kid’s ice-cream is the best way to teach them taxes.