Source: Tavaga Research

While normal life has been redefined, perhaps, forever by the novel Coronavirus, governments are scrambling to restore their economies back to health amid the changes. India came up with its own announcement on May 12.

The zoonotic pathogen started affecting the human population from November-December, 2019. Spreading fast, it turned the ensuing Covid-19 illness into a pandemic by March, this year, and sent the world, including India, tumbling into a health and economic crisis.

India declared a gross fiscal package of Rs 20 lakh-crore, which is 10 percent of our GDP. Of course, this includes a package Rs 1.7 lakh-crore already infused and the Rs 5.6 lakh-crore liquidity measure by RBI. 

So, the incremental financial aid declared yesterday is an additional 5 percent of the GDP, part of which could be a restatement of existing schemes, according to observers. 

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Key takeaways of financial aid (May 12):

1. Prime Minister Narendra Modi declared a Rs 20 lakh crore package for various beneficiaries. 
2. But it includes measures by the finance minister worth Rs1.7 lakh-crore and by RBI Rs 5.6 lakh-crore announced earlier. 
3. The government has raised its borrowing programme by 2 percent of the GDP and has taken the key revenue measure of hiking auto-fuel duties (~80 bps of GDP), both of which are expected to help fund the financial aid package.
4. It was also mentioned that the lockdown practice would be further stretched to a ‘’Lockdown 4.0′ from May 18, with substantial modifications. In the wake of limited resumption of passenger train services from May 12, further opening up is expected on May 18. 
5. The government will also focus on financially supporting MSMEs (micro, small and medium enterprises) and the agricultural sector.
6. The decision to relax labor laws in three states — UP, MP and Gujarat — has already raised a furor. On one hand, the move is being justified as aiding industry with flexibility in managing human resource and wages, with drastically reduced liabilities towards employee benefits, while on the other, it has drawn flak because of the rampant workforce misuse and abuse it may lead to.

Measures to move the MSME sector

Data from a private survey (IHS Markit India) shows India’s manufacturing purchasing managers’ index (PMI) fell to 27.4 in April 2020 from 51.8 in March 2020whereas for April 2019 it was 51.7, pointing to a drastic drop in the manufacturing industry’s business confidence.

The unprecedented contraction may be attributed to the nationwide lockdown imposed by the government to combat Covid-19. 

The latest reading depicts the sharpest deterioration in business conditions across the manufacturing sector since data collection began over 15 years ago. 

A reading above 50 indicates expansion while one below 50 indicates contraction. PMI is computed based on data from the industry on its business sentiments.

Public sector banks have sanctioned loans worth Rs 42,000 crore to the MSME sector and corporates since the start of the lockdown under the Covid-19 Emergency Credit Facility to provide liquidity for survival. 

On May 13, the finance minister detailed the aid lined up for MSMEs, many of which were in dire need of a stimulus package be it in the form of credit guarantee or tax relaxations.

Here they are:-

• A total of Rs 3 lakh-crore collateral-free automatic loans would be available to businesses, including MSMEs. Operational MSMEs which have NPAs (non-performing assets) or are stressed will be eligible.

• The scheme of collateral-free loans can be availed till October 31, 2020. There would be no need for a guarantee fee or fresh collateral. Nearly 200,000 MSMEs are expected to benefit from this. 

• The Emergency Credit Line/Facility will be extended to stressed businesses/MSMEs by banks and NBFCs, and will be worth up to 20 percent of their total outstanding credit as on February 29, 2020. 

• Those borrowers with up to Rs 25-crore outstanding and Rs 100-crore turnover are eligible for the emergency credit line facility.

• Loans under the credit line facility will have a four-year tenure, with a moratorium of 12 months on principal repayment and the interest will be capped.  

• Organised lenders have been given 100 percent credit guarantee on both principal and interest of loans they disburse to MSMEs.
• The government will provide a support of Rs. 4,000 crore to Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE), which in turn is expected to provide partial credit guarantee to banks.

• The central government will facilitate a provision of Rs 20,000 crore as subordinate debt for stressed MSMEs.

• Around 4.5 million MSME units are expected to resume business activity and safeguard jobs through such measures.
• A fund of funds (FoF) would be set up to infuse MSMEs with equity as they may face an acute shortage.
• The FoF will have a corpus of Rs 10,000 crore and provide equity funding to MSMEs with viability and growth potential.
• FoF will be operated through a mother Fund and a few daughter funds. Fund structure will help leverage Rs 50,000 crore of funds at the daughter funds level.

Apart from immediate financial aid, measures were unveiled to improve the lot of MSMEs in general. MSMEs are usually caught in the dilemma of whether to grow or not grow.

A low threshold definition of MSMEs has meant most of them are wont to expand quickly and end up graduating out of the MSME-specific benefits. The government aims to address that while helping them to even get listed on mainstream stock exchanges.

The new features are:-

• The definition of MSMEs has been revised

• The investment limit will be revised upwards.

• The additional criteria of turnover also being introduced

• The distinction between manufacturing and service sectors to be eliminated.

• Necessary amendments to the law will be brought about.

The new definition of MSMEs:-

Tax Reforms

The date for filing IT returns for FY 2019-20 has been further extended from July 31, 2020 to November 30, 2020 and tax audit from September 30, 2020 to October 31, 2020.

To revive the economy, demand needs a significant push. Tax cuts could play a valuable role in boosting the consumption.

In order to provide more funds at the disposal of the taxpayers, the rates of tax deduction at source (TDS) for non-salaried, specified payments made to residents and rates of tax collection at source (TCS) for specified receipts shall be reduced by 25 percent. This reduction shall be applicable for the remainder of FY 2020-21, i.e. from May 14, 2020 to March 31, 2021. This measure is expected to release liquidity of Rs 50,000 crore into the economy.

EPF Reforms

Support worth Rs 2,500 crore for employees of various sectors was laid down, that would be rendered via EPF:-

• Under the Pradhan Mantri Garib Kalyan Package, payment of 12 percent of employer and 12 percent employee contributions was made in EPF accounts of eligible establishments. This was provided earlier for the salary months of March, April and May, 2020. This support will be extended by another three months, for salary months of June, July and August, 2020. The move is expected to provide liquidity relief of Rs 2,500 crore to 367,000 establishments and for 7.2 million employees.

Also, recognising the need for more take-home salary for employees, the statutory PF contribution of both employer and employee will be reduced to 10 percent each from the existing 12 percent each for all establishments covered by EPFO for the next three months. This scheme will be applicable for workers who are not eligible for 24 percent EPF support under the PM Garib Kalyan Package.

For NBFCs/HFCs/MFIs

Since non-banking financial companies (NBFCs), housing finance companies (HFCs) and micro-finance institutions (MFIs) are finding it difficult to raise money in debt markets, the government plans to launch a Rs 30,000-crore Special Liquidity Scheme, under which investments will be made in both primary and secondary market transactions in investment-grade debt paper of NBFCs/HFCs/MFIs.

The salient features are:-

 • The move plans to supplement RBI and other government measures to augment liquidity. The securities will be fully guaranteed by the central government.

 • It will provide liquidity support for NBFCs/HFC/MFIs and mutual funds and create confidence in the market.