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)
 
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    COMMENTS

    bpugazhendhi

    7 months 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.

    REPLY

    rameshsa2009

    In Reply to bpugazhendhi 7 months 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

    7 months ago

    all were impatient earlier. were not ready to wait.
    now it has started well... it seems not exactly doomsday now !

    i_sakarwala

    7 months ago

    What a remarkable pakage..... Announcements are made now for the real deal please......

    Power Discoms to get Rs90,000 crore liquidity support to clear dues
    In a bid to save the financially stressed discoms from further crisis, the central government on Wednesday announced a Rs 90,000 crore liquidity injection plan that would allow these entities to clear their dues towards power generation companies.
     
    Finance minister Nirmala Sitharaman said that the liquidity window for discoms was essential as its revenue has plummeted and they are in the midst of unprecedented cash flow problem accentuated by demand reduction during the current lockdown.
     
    Under the plan unveiled by the Finance Minister, power sector financiers -- PFC and REC will infuse liquidity of Rs 90,000 crore to DISCOMs against receivables. Loans will be extended against State guarantees for exclusive purpose of discharging liabilities of Discoms to Gencos.
     
    Discoms dues towards gencos have risen to Rs 94,000 crore and this was making operations unsustainable as unpaid power producers were looking to stop power supplies to states.
     
    As with earlier power sector reform initiatives, the loans will be given to discoms against specific activities and reforms: digital payments facility by Discoms for consumers, liquidation of outstanding dues of State Governments, Plan to reduce financial and operational losses.
     
    To make the exercise beneficial even to power consumers, it has been decided that Central Public Sector Generation Companies shall give rebate to Discoms on clearance of their dues, which shall be passed on to the final consumers (industries) by way of rebate of power tariff.
     
    The Covid-19 outbreak and subsequent lockdown has squeezed power demand sharply in months of March and April and the fall has been such sharp that demand for full year 2020-21 is set to report 1 per cent decline, first time in almost 36 years.
     
    Not only this, with expectation that the lockdown may continue in large parts of the country for some more time, the discoms are set to return of yesteryears of adding losses after losses every year making their operations unviable. Extension would also impact demand further.
     
    According to an analysis done by rating agency Moody's unit ICRA, expected losses at state-run electricity distribution utilities (DISCOMs) would rise two-thirds to Rs 50,000 crore in FY21 with an addition of Rs 20,000 crore in book level losses in current year itself.
     
    Discoms have already been reeling under low demand conditions for some time and this has impacted their revenue and ability to service payment dues to generators. Accordingly, the debt-laden DISCOMs' overdue payment to electricity generators had risen to Rs 94,000 crore now, more than 50 per cent higher compared with the same period last year.
     
    What has added to problems of discoms is that the lockdown has resulted in consumption decline from the high tariff paying industrial and commercial consumers (tariff almost twice that for households) and the likely delays in cash collections from other consumer segments.
     
    Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.
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    India Allows Force Majeure Notification for Realty Projects Under RERA
    In a major relief for the real estate developers, the union ministry for housing and urban affairs (MHUA) will issue advisory to states and union territories to declare the Covid-19 situation as a 'force majeure' under the Real Estate (Regulation and Development) Act.
     
    Addressing the media on Wednesday, finance minister (FM) Nirmala Sitharaman said that the MHUA would issue advisory to the states and Union Territories to the effect in a bid to provide relief to developers.
     
    With the move, the government has allowed suo-moto extension of the registration and completion date by six months for all registered project expiring on or after 25 March 2020 without individual applications.
     
    She said that regulatory authorities may extend this for another period of up to three months, if needed.
     
    Further, the fresh project registration certificates will be issued automatically with revised timelines. The Centre has also directed the extension of timelines for various statutory compliances under RERA concurrently.
     
    As per the government, these measures will de-stress real estate developers and ensure completion of projects so that home-buyers are able to get delivery of their booked houses with new timelines.
     
    The announcement is part of the Rs20 lakh crore economic package announced by prime minister Narendra Modi on Tuesday evening.
     
    Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.
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