Economic Stimulus Part I: Excellent Measures for MSMEs but Strong Need for Implementation Safeguards
Following up on Prime Minister (PM) Narendra Modi’s speech where he talked of a total economic stimulus of about Rs20 lakh crore (i.e., 10% of the gross domestic product-GDP), finance minister (FM), Nirmala Sitharaman on Wednesday unveiled the first part of the economic stimulus package (summarised in Box below).
 
The remaining pieces of the economic stimulus are to come in the following days. 
 
Economic Package: Part I, 13/05/2020

1. Rs3 lakh crore collateral free automatic loans for standard micro, small and medium enterprises (MSMEs) under Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTSME)
2. Rs20,000 crore subordinate debt for MSMEs
3. Rs50,000 crore equity infusion through MSME fund of funds
4. New definition of MSMEs to include both investment and turnover as criteria
5. Global tender to be disallowed (especially for government procurement) up to Rs200 crore
6. Market access through e-linkages for MSMEs
7. Rs2,500 crore employees’ provident fund (EPF) support for businesses and workers for three months
8. EPF contribution reduced for business and workers for three months, approximately yielding Rs6,750 crore
9. Rs30,000 crore liquidity facility for non-banking finance companies (NBFC), housing finance companies (HFCs) and micro-finance institutions (MFIs) through a variety of mechanisms
10. Rs45,000 crore Partial Credit Guarantee Scheme 2.0 for NBFCs
11. Rs90,000 crore liquidity injection for power distribution companies (DISCOMs)
12. Specific relief to contractors
13. Extension of registration and completion date of real estate projects under RERA
14. Infusion of Rs50,000 crore liquidity through 25% rate reduction (of existing rate) for tax deducted at source (TDS) and tax collected at source (TCS) deductions
15. Immediate issue of all pending refunds for direct taxes (even for those > Rs5 lakh)
16. Extension dates for e-filing
 
When queried on how the Rs20 lakh crore economic stimulus would be financed, the FM requested for holding off on that question until all parts of the economic stimulus are made known. She gave the same answer for a query on the likely cash outflow outlay for the government from the economic stimulus as well as the overall impact of the economic stimulus on the fiscal deficit. I guess her reply was fair and correct given that just the first part of the economic stimulus package has been delivered. 
 
That said, it would be imperative for the government to clearly specify the cash outlays for the government as well as source of funds for the entire economic stimulus package and its overall impact on the fiscal deficit when all parts of the economic stimulus package have been delivered.
 
Getting back to the economic stimulus, I deal with the proposed measures in a couple of articles and this first one focuses on those outlined for the MSMEs as these are large in number. 
 
All of the proposals for MSMEs are well-conceived and the FM and her team must be congratulated—especially for the collateral-free four-year term, one-year principal moratorium, Rs3 lakh crore automatic loan for standard MSMEs guaranteed under CGTSME. This is a very useful product, if it is implemented as conceived. 
 
 
Likewise, the Rs20,000 crore liquidity scheme (through subordinated debt) for stressed MSMEs and the Rs50,000 crore fund of funds for equity infusion into MSMEs are again excellent ideas; but much will depend on how they are operationalised and the time frame for that.  
 
 
However, as they say, the devil lies in the details and the key to the success of all these useful schemes will depend on how they are implemented in real time. Even now, there is a huge gap between 'intended policies' and 'implemented strategies' as espoused by the huge reverse repo deposits that banks have made with the Reserve Bank of India (RBI) in the recent fortnight—this shows the reluctance of bankers to lend to MSMEs, despite clear directions from RBI and government of India. 
 
The fact of the matter is that many of the existing measures taken by RBI have not been fully implemented as bankers are still-risk averse. However, I am confident that the complete and partial guarantees (through CGTSME and other mechanisms) proposed by the FM are indeed very timely and should help in ensuring the implementation of the economic stimulus for MSMEs. 
 
That said, clearly, the government needs a proper implementation and review mechanism comprising of independent stakeholders (with no conflicts of interest) to ensure that these well thought out schemes are well and truly implemented on the ground—the suggestion here is the creation of a “special national MSME economic package implementation task force” comprising (eminent) independent professionals with good exposure to banking, industry, finance, MSMEs but not having a direct conflict of  interest in terms on an ongoing working relationship with MSMEs (either directly or indirectly) or banks or MSME and/or related industry associations. 
 
When I talk of conflicts of interest, I am also referring to MSMEs as well as stakeholders who have directly worked with MSMEs and banks in the past three years—they cannot be a part of this taskforce. The taskforce has to be truly independent in the real senses of the word.
 
This apart, expanding the definition of MSMEs to include both investment and turnover criteria, the proposed procurement guidelines (of no global tenders for government procurement of less than Rs200 crore) created exclusively for MSMEs and the proposed e market linkages for MSMEs are all steps in the right direction. 
 
That said, the implementation of all of these must also be brought under the aforementioned taskforce that will (e) meet at least once every week (from its inception) to ensure that the intended policy measures translate to real-time implementation on the ground. COVID-19 is a huge emergency and we can leave nothing to chance. Hence, the urgent need for the immediate creation of a “special national MSME economic package implementation task force” with executive powers, reporting directly to the Finance Minister and the Prime Minister. That alone can ensure that these well meaning and excellent policy measures get translated into action in real time on the ground and serve to alleviate the problems of MSMEs. 
 
 
(Ramesh S Arunachalam is author of 12 critically acclaimed books. His latest release in January 2020 is titled, “Powering India to Double Digit Growth: Five Key Steps To A Robust Economy”. Apart from being an author, Ramesh provides strategic advice on a wide variety of financial sector/economic development issues. He has worked on over 311 assignments with multi-laterals, governments, private sector, banks, NBFCs, regulators, supervisors, MFIs and other stakeholders in 31 countries globally in five continents and 640 districts of India during the last 31)
 
Comments
bpugazhendhi
1 year ago
Except the "Rs50,000 crore equity infusion through MSME fund of funds" the other measures announced for the MSMEs are meagre loans only. This will only push them further into the debt trap in which they are already in.
Secondly, the suggestion regarding formation of a special task-force seems to be unimplementable. How can the task force be given executive powers and even if such power is given, how far it will be effective? Even the power of the FM is not nudging the banks to come out of their risk-averse policies (this is not entirely a criticism of their stance, for they are only taking care of their funds)! A task force will be a further burden on the exchequer.
rameshsa2009
Replied to bpugazhendhi comment 1 year ago
Without the task force as an accountability mechanism, nothing will happen. No serious implementation of RBI's measures so far. Task force is very necessary. No task force, no accountability for this guaranteed lending and implementation of other measures. Kindly wait and watch. The situation will explain itself in one month. Let us agree to disagree and reevaluate positions after a month. Thanks
Ramesh Popat
1 year ago
all were impatient earlier. were not ready to wait.
now it has started well... it seems not exactly doomsday now !
i_sakarwala
1 year ago
What a remarkable pakage..... Announcements are made now for the real deal please......
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