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Economy: Stimulating Measures

The big-bang stimulus announced by PM Modi on May 12 and subsequently substantiated by the FM to pump-prime the Covid-stricken economy is quite comprehensive in scope and aimed at lifting the key sectors but its efficacy will depend a lot on speedy implementation

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As they say, the devil is in the detail. After back-to-back announcements over five days by Union Finance Minister Nirmala Sitharaman in a bid to fill in the details of the Rs 20 lakh crore stimulus announced by Prime Minister Narendra Modi on May 12, one wondered if there was more to the package than what had been listed out by the FM, as the numbers just did not add up. Would there be more announcements? 

No, the government had announced all that it had planned to. This became clear with a slide that Sitharaman produced at the end of Day 5, which showed the total stimulus exceeded Rs 20 lakh crore, or Rs 20,97,053 crore to be precise. Apparently, the relief measures and liquidity infusion announced by the government and the Reserve Bank of India since the Covid-19 outbreak had been subsumed under the Rs 20 lakh crore stimulus package. These included Rs 1,92,800 crore of relief announced under the PM Gareeb Kalyan Yojna (PMGKY) for workers and farmers that did entail direct cash transfers. Plus, infusion of Rs 8,01,603 crore into the economy by the RBI. 

The slide also showed that the Rs 11,02,650 crore worth of stimulus announced by the FM over five days includes money that would come by reworking the Provident Fund interest calculation, interest subventions, money guaranteed by the government (as and when it is borrowed from banks), among others. “We are not splurging. We are doing it wisely,” said the FM when asked on how the government is raising the capital. 

But the manner in which things have been thrown into the stimulus package has raised the hackles of experts who track the economy and finance. Should deferring and discounting the tax deducted at source (TDS) be counted as part of a government package? Should a reduction in the mandatory Provident Fund contribution rate be counted as government spending? The government apparently sees no problem is adding these numbers to the overall tally. 

But let us recount the significant announcements made by the FM beginning May 13. On Day 1, the FM announced Rs 3 lakh crore collateral free loan scheme for businesses, especially micro, small and medium enterprises (MSME), as part of the overall stimulus package to deal with the impact of the Covid-19 pandemic. Apart from MSMEs, other stressed business sectors which got attention were non-banking finance companies (NBFCs), power distribution companies, contractors and the real estate industry.

For salaried workers and taxpayers, relief was provided in the form of an extended deadline for income tax returns for financial year 2019-20, with the due date now pushed to November 30, 2020. The rates of TDS and tax collection at source (TCS) have been cut by 25 per cent for the next year, while statutory Provident Fund (PF) payments have been reduced from 12 per cent to 10 per cent for both employers and employees for the next three months. 

According to D.K. Srivastava, Chief Policy Advisor for EY, the measures announced on May 13 amounted to ₹5.94 lakh crore, which includes both liquidity financing measures and credit guarantees, although the direct fiscal cost to the government in the current financial year may only be Rs 16,500 crore. And his calculations were on the mark. 

In the second tranche of announcements on May 14, the FM declared an additional emergency fund of Rs 30,000 crore for farmers hit by the coronavirus crisis. The additional emergency fund will benefit around 3 crore farmers. The second focused exclusively on migrant workers, street vendors and small farmers. This included extra ration, a universal ration card that would work across the country and affordable rental housing scheme.

Even for those without any valid card, the FM said that they will get free food grains including 5 kg of rice and wheat each and 1 kg of horse gram per family. She said she was allocating Rs 3,500 crore towards this scheme which will benefit nearly 8 crore people over the next three months and will be implemented by the state governments. 

Reviving an earlier scheme announced towards the end of 2019, the FM said going forward the country as a whole shall have one ration card. “Anyone, irrespective of where they are -- whichever state or UT they are in -- can avail ration. The One Nation One Ration Card scheme has been rolled out in 83 per cent of the areas so far, and will be 100 per cent by March 2021,” she said.

Affordable Rental Housing

Under the PM Awas Yojana, a scheme will be started for rental housing scheme, where institution and associations will be asked to make affordable rental housing accommodation on their premises, the FM said. Also, the government will construct affordable housing for urban poor, labourers and migrants in all states and UTs using the public-private partnership model, Sithraman said. She also announced Sishu loans under the MUDRA scheme for smallest loan takers where the government will give loans of up to Rs 50,000 and all borrowers will have a 2 per cent interest subvention rate. This will benefit roughly 3 crore people.

Other key announcements included Rs 5,000 crore special credit facility benefit for an estimated 50 lakh street vendors, one-year extension of the Rs 70,000 crore housing scheme for the middle-income group whose annual income is between Rs 6 lakh and Rs 18 lakh. Already, 3.3 lakh families have benefitted under this scheme and another 2.5 lakh middle income families shall be able to benefit as a result of the extension of the scheme, which is expected to generate a sudden demand in the housing sector.

Referring to the emergency fund for farmers, Sitharaman said it will provide help to marginal and small farmers for cultivation of rabi crops. This emergency fund, she said, is in addition to Rs 90,000 crore support by NABARD, which provides credit for agricultural activities. Under the scheme, front-loaded on-top facility will be provided to 33 state cooperative banks, 351 district cooperative banks and 43 regional rural banks based on their lending capacity. Besides, the government will provide Rs 2 lakh crore concessional credit boost to 2.5 crore farmers through Kisan Credit Cards. Fishermen and animal husbandry farmers will also be included in the Kisan Credit Card scheme, which will enable them to gain access to institutional credit at concessional interest rates.

In the third round of the stimulus package announcements, the government unveiled a slew of measures for the agriculture sector, including a Rs 1.63 lakh crore outlay, and amendment to the Essential Commodities Act to remove cereals, edible oil, oilseeds, pulses, onions and potato from its purview.

The key measures included a barrier-free all-India market for agricultural produce, Rs 1 lakh crore for strengthening infrastructure including cold storage, supply chain; startups wanting to procure directly from the farmers, Rs 10,000 crore for micro food enterprises, Rs 20,000 crore for marine activities and fisheries, Rs 13,000 crore for 100 per cent vaccination of all cattle to treat foot and mouth disease, Rs 15,000 crore for dairy infrastructure, Rs 4,000 crore for promotion of herbal plants and Rs 500 crore for bee-keeping initiatives.

Along with these measures, the government said it will also bring in a central law so that farmers will have a choice to sell their products at a fair price. Besides, there won’t be any inter-state barriers for the farmers and e-trading will also be allowed. Also, a legal framework will be enforced in order to put in place a standard mechanism to find a predictable price for the farmers even at the time of sowing.

Day 4 & Day 5 Declarations

Continuing with her announcements, on May 16 Sitharaman signaled major structural reforms in coal, minerals, defence production, civil aviation, power distribution, space and atomic energy. These included raising the FDI limit in defence from 49 per cent to 74 per cent, opening up coal mining sector for private sector participation, privatisation of power distribution in the Union Territories, easing up of restrictions on the utilisation of Indian air space so that civilian flying becomes more efficient, among other things. 

“This will bring a total benefit of Rs 1,000 crore per year for the aviation sector,” the FM said referring to the move on the utilization of the air apace. She also announced auction of six more airports, in addition to the 12 airports that came up for auction in the first and second round, for private participation. This way the government hopes to attract an additional investment of Rs 13,000 crore. The Airport Authority of India (AAI) would get a down payment of Rs 2,300 crore from the auction. “This will bring in optimal utilisation of airspace and reduce fuel costs and flying time,” the FM said.

The final round of announcements on May 17 ranged from suspension of fresh initiation of insolvency proceedings up to one year and exclusion of Covid-19 related debt from the definition of “default” under Indian Bankruptcy Code (IBC) on the one hand to allocation of an additional Rs 40,000 crore under MGNREGS to help generate nearly 300 crore person days and Rs 15,000 crore being committed for health related measures including Rs 50 lakh insurance cover for health professionals under PMGKY, on the other. 

Who Said What?

The MSME sector, considered the backbone of the economy and contributing as much as 30 per cent of all exports from India, had all the reasons to be upbeat this time. President of the Automotive Component Manufacturers Association or ACMA, Deepak Jain, said, “The change in the definition of MSME has been a long-standing recommendation of ACMA. With this new classification, a significant number of ACMA members stand to benefit.”

Lauding the measures aimed at providing relief to small businesses and non-banking financial firms as a “great step”, Ravish Naresh, CEO, Khatabook said, “The announcement of Rs 50,000 crore equity infusion for MSMEs through ‘fund of funds’ will surely help small businesses resume their pace.” Khatabook is a mobile application that enables small and medium businesses to record and track business transactions safely and securely.

Kishan Jain, Director at Goldmedal Electricals, makers of electrical switches and accessories said, “The Rs 20,000 crore subordinate debt for stressed MSMEs will provide a much needed shot in the arm and will help these companies get back on their feet.”

Measures directed at MSMEs came in for praise from Amar Ambani, Senior President and Head of Research – Institutional Equities, YES Securities, who said the ‘fund-of-fund’ concept for MSMEs was “a step in the right direction”. “It will take a few months to be implemented. Hence, we believe it will have more of medium-term implications,” he added.

“Rs 75,000 crore liquidity for the NBFCs / HFCs and MFIs would be a huge boost and create some confidence in the markets — particularly the Rs 45,000 crore credit guarantee scheme. However, there is only 20 per cent loss guarantee for the segment where the need may be the highest,” said Sanjeev Krishan Partner and Leader, Deals, PwC India.

Anshuman Magazine, Chairman and CEO - India, South East Asia, Middle East & Africa at CBRE said the FM introduced progressive provisions for the MSMEs, NBFCs, contractors and real estate project registrations. “The announcement to treat Covid-19 as an event of ‘force majeure’ and as an ‘act of God’, and permission to extend project completion timelines and other statuary compliances under RERA by six months is a positive step for the developer community.”

Sanjoy Dutta, Partner, Deloitte India said: “The 30,000 crore special liquidity scheme for investing in investment grade paper of NBFCs / HFCs / MFIs is very positive as it directs liquidity where it is most required and will enable these institutions support their borrowing customers through this period of cash flow stress.” Dutta added that the detailing and execution of the scheme will be key to ensure there was equitable distribution of the funds across the eligible borrower set.

Sharad Mittal, CEO, Motilal Oswal Real Estate Fund felt that some measures would surely help the developers but “it did not address the larger liquidity and cash-flow related challenges faced by the developers.”

Vishesh C. Chandiok, CEO, Grant Thornton India termed the increase in FDI in defence and private sector participation in coal mining as “path-breaking reforms”, which, he said would have the potential to act as a multiplier for several sectors. “We need to see more details oF the tax simplification, which will help in making India an MRO hub. I would have also liked to hear more relief measures for the civil aviation sector to keep it alive post-Covid-19,” Chandiok said.  

Rajesh Ivaturi, Partner – Power & Utilities, EY India said: “Privatisation of distribution sector would bring in significant efficiency gains, the state governments too must take a cue and extend this to all key metros so that the quality of power supply goes up significantly.”

As declared by the Prime Minister, the stimulus is not just aimed at reviving the Covid-19 stricken economy but also designed specifically to make India self-reliant in a post-Covid world economic order.  

Thus, the measures announced by Sitharaman, although pretty comprehensive in scope, are not spread too thin across the economic landscape, and instead seek to focus on key sectors of the economy such as agriculture and small businesses where the pain on account of the lockdown has been most severe and  where the fulcrum of the economy is situated. The measures are also intended to boost sectors such as textiles which have been world beaters in the past and have the potential to become the mascots of a self-reliant India yet again. The return to health by these sectors has the potential to buoy the larger economy.   

The government unveiled a slew of measures for the agriculture sector, including a Rs 1.63 lakh crore outlay, and amendment to

the Essential Commodities Act to remove cereals, edible oil, oilseeds, pulses, onions and potato from its purview

s they say, the devil is in the detail. After back-to-back announcements over five days by Union Finance Minister Nirmala Sitharaman in a bid to fill in the details of the Rs 20 lakh crore stimulus announced by Prime Minister Narendra Modi on May 12, one wondered if there was more to the package than what had been listed out by the FM, as the numbers just did not add up. Would there be more announcements? 

No, the government had announced all that it had planned to. This became clear with a slide that Sitharaman produced at the end of Day 5, which showed the total stimulus exceeded Rs 20 lakh crore, or Rs 20,97,053 crore to be precise. Apparently, the relief measures and liquidity infusion announced by the government and the Reserve Bank of India since the Covid-19 outbreak had been subsumed under the Rs 20 lakh crore stimulus package. These included Rs 1,92,800 crore of relief announced under the PM Gareeb Kalyan Yojna (PMGKY) for workers and farmers that did entail direct cash transfers. Plus, infusion of Rs 8,01,603 crore into the economy by the RBI. 

The slide also showed that the Rs 11,02,650 crore worth of stimulus announced by the FM over five days includes money that would come by reworking the Provident Fund interest calculation, interest subventions, money guaranteed by the government (as and when it is borrowed from banks), among others. “We are not splurging. We are doing it wisely,” said the FM when asked on how the government is raising the capital. 

But the manner in which things have been thrown into the stimulus package has raised the hackles of experts who track the economy and finance. Should deferring and discounting the tax deducted at source (TDS) be counted as part of a government package? Should a reduction in the mandatory Provident Fund contribution rate be counted as government spending? The government apparently sees no problem is adding these numbers to the overall tally. 

But let us recount the significant announcements made by the FM beginning May 13. On Day 1, the FM announced Rs 3 lakh crore collateral free loan scheme for businesses, especially micro, small and medium enterprises (MSME), as part of the overall stimulus package to deal with the impact of the Covid-19 pandemic. Apart from MSMEs, other stressed business sectors which got attention were non-banking finance companies (NBFCs), power distribution companies, contractors and the real estate industry.

For salaried workers and taxpayers, relief was provided in the form of an extended deadline for income tax returns for financial year 2019-20, with the due date now pushed to November 30, 2020. The rates of TDS and tax collection at source (TCS) have been cut by 25 per cent for the next year, while statutory Provident Fund (PF) payments have been reduced from 12 per cent to 10 per cent for both employers and employees for the next three months. 

According to D.K. Srivastava, Chief Policy Advisor for EY, the measures announced on May 13 amounted to ₹5.94 lakh crore, which includes both liquidity financing measures and credit guarantees, although the direct fiscal cost to the government in the current financial year may only be Rs 16,500 crore. And his calculations were on the mark. 

In the second tranche of announcements on May 14, the FM declared an additional emergency fund of Rs 30,000 crore for farmers hit by the coronavirus crisis. The additional emergency fund will benefit around 3 crore farmers. The second focused exclusively on migrant workers, street vendors and small farmers. This included extra ration, a universal ration card that would work across the country and affordable rental housing scheme.

Even for those without any valid card, the FM said that they will get free food grains including 5 kg of rice and wheat each and 1 kg of horse gram per family. She said she was allocating Rs 3,500 crore towards this scheme which will benefit nearly 8 crore people over the next three months and will be implemented by the state governments. 

Reviving an earlier scheme announced towards the end of 2019, the FM said going forward the country as a whole shall have one ration card. “Anyone, irrespective of where they are -- whichever state or UT they are in -- can avail ration. The One Nation One Ration Card scheme has been rolled out in 83 per cent of the areas so far, and will be 100 per cent by March 2021,” she said.

Affordable Rental Housing

Under the PM Awas Yojana, a scheme will be started for rental housing scheme, where institution and associations will be asked to make affordable rental housing accommodation on their premises, the FM said. Also, the government will construct affordable housing for urban poor, labourers and migrants in all states and UTs using the public-private partnership model, Sithraman said. She also announced Sishu loans under the MUDRA scheme for smallest loan takers where the government will give loans of up to Rs 50,000 and all borrowers will have a 2 per cent interest subvention rate. This will benefit roughly 3 crore people.

Other key announcements included Rs 5,000 crore special credit facility benefit for an estimated 50 lakh street vendors, one-year extension of the Rs 70,000 crore housing scheme for the middle-income group whose annual income is between Rs 6 lakh and Rs 18 lakh. Already, 3.3 lakh families have benefitted under this scheme and another 2.5 lakh middle income families shall be able to benefit as a result of the extension of the scheme, which is expected to generate a sudden demand in the housing sector.

Referring to the emergency fund for farmers, Sitharaman said it will provide help to marginal and small farmers for cultivation of rabi crops. This emergency fund, she said, is in addition to Rs 90,000 crore support by NABARD, which provides credit for agricultural activities. Under the scheme, front-loaded on-top facility will be provided to 33 state cooperative banks, 351 district cooperative banks and 43 regional rural banks based on their lending capacity. Besides, the government will provide Rs 2 lakh crore concessional credit boost to 2.5 crore farmers through Kisan Credit Cards. Fishermen and animal husbandry farmers will also be included in the Kisan Credit Card scheme, which will enable them to gain access to institutional credit at concessional interest rates.

In the third round of the stimulus package announcements, the government unveiled a slew of measures for the agriculture sector, including a Rs 1.63 lakh crore outlay, and amendment to the Essential Commodities Act to remove cereals, edible oil, oilseeds, pulses, onions and potato from its purview.

The key measures included a barrier-free all-India market for agricultural produce, Rs 1 lakh crore for strengthening infrastructure including cold storage, supply chain; startups wanting to procure directly from the farmers, Rs 10,000 crore for micro food enterprises, Rs 20,000 crore for marine activities and fisheries, Rs 13,000 crore for 100 per cent vaccination of all cattle to treat foot and mouth disease, Rs 15,000 crore for dairy infrastructure, Rs 4,000 crore for promotion of herbal plants and Rs 500 crore for bee-keeping initiatives.

Along with these measures, the government said it will also bring in a central law so that farmers will have a choice to sell their products at a fair price. Besides, there won’t be any inter-state barriers for the farmers and e-trading will also be allowed. Also, a legal framework will be enforced in order to put in place a standard mechanism to find a predictable price for the farmers even at the time of sowing.

Day 4 & Day 5 Declarations

Continuing with her announcements, on May 16 Sitharaman signaled major structural reforms in coal, minerals, defence production, civil aviation, power distribution, space and atomic energy. These included raising the FDI limit in defence from 49 per cent to 74 per cent, opening up coal mining sector for private sector participation, privatisation of power distribution in the Union Territories, easing up of restrictions on the utilisation of Indian air space so that civilian flying becomes more efficient, among other things. 

“This will bring a total benefit of Rs 1,000 crore per year for the aviation sector,” the FM said referring to the move on the utilization of the air apace. She also announced auction of six more airports, in addition to the 12 airports that came up for auction in the first and second round, for private participation. This way the government hopes to attract an additional investment of Rs 13,000 crore. The Airport Authority of India (AAI) would get a down payment of Rs 2,300 crore from the auction. “This will bring in optimal utilisation of airspace and reduce fuel costs and flying time,” the FM said.

The final round of announcements on May 17 ranged from suspension of fresh initiation of insolvency proceedings up to one year and exclusion of Covid-19 related debt from the definition of “default” under Indian Bankruptcy Code (IBC) on the one hand to allocation of an additional Rs 40,000 crore under MGNREGS to help generate nearly 300 crore person days and Rs 15,000 crore being committed for health related measures including Rs 50 lakh insurance cover for health professionals under PMGKY, on the other. 

Who Said What?

The MSME sector, considered the backbone of the economy and contributing as much as 30 per cent of all exports from India, had all the reasons to be upbeat this time. President of the Automotive Component Manufacturers Association or ACMA, Deepak Jain, said, “The change in the definition of MSME has been a long-standing recommendation of ACMA. With this new classification, a significant number of ACMA members stand to benefit.”

Lauding the measures aimed at providing relief to small businesses and non-banking financial firms as a “great step”, Ravish Naresh, CEO, Khatabook said, “The announcement of Rs 50,000 crore equity infusion for MSMEs through ‘fund of funds’ will surely help small businesses resume their pace.” Khatabook is a mobile application that enables small and medium businesses to record and track business transactions safely and securely.

Kishan Jain, Director at Goldmedal Electricals, makers of electrical switches and accessories said, “The Rs 20,000 crore subordinate debt for stressed MSMEs will provide a much needed shot in the arm and will help these companies get back on their feet.”

Measures directed at MSMEs came in for praise from Amar Ambani, Senior President and Head of Research – Institutional Equities, YES Securities, who said the ‘fund-of-fund’ concept for MSMEs was “a step in the right direction”. “It will take a few months to be implemented. Hence, we believe it will have more of medium-term implications,” he added.

“Rs 75,000 crore liquidity for the NBFCs / HFCs and MFIs would be a huge boost and create some confidence in the markets — particularly the Rs 45,000 crore credit guarantee scheme. However, there is only 20 per cent loss guarantee for the segment where the need may be the highest,” said Sanjeev Krishan Partner and Leader, Deals, PwC India.

Anshuman Magazine, Chairman and CEO - India, South East Asia, Middle East & Africa at CBRE said the FM introduced progressive provisions for the MSMEs, NBFCs, contractors and real estate project registrations. “The announcement to treat Covid-19 as an event of ‘force majeure’ and as an ‘act of God’, and permission to extend project completion timelines and other statuary compliances under RERA by six months is a positive step for the developer community.”

Sanjoy Dutta, Partner, Deloitte India said: “The 30,000 crore special liquidity scheme for investing in investment grade paper of NBFCs / HFCs / MFIs is very positive as it directs liquidity where it is most required and will enable these institutions support their borrowing customers through this period of cash flow stress.” Dutta added that the detailing and execution of the scheme will be key to ensure there was equitable distribution of the funds across the eligible borrower set.

Sharad Mittal, CEO, Motilal Oswal Real Estate Fund felt that some measures would surely help the developers but “it did not address the larger liquidity and cash-flow related challenges faced by the developers.”

Vishesh C. Chandiok, CEO, Grant Thornton India termed the increase in FDI in defence and private sector participation in coal mining as “path-breaking reforms”, which, he said would have the potential to act as a multiplier for several sectors. “We need to see more details oF the tax simplification, which will help in making India an MRO hub. I would have also liked to hear more relief measures for the civil aviation sector to keep it alive post-Covid-19,” Chandiok said.  

Rajesh Ivaturi, Partner – Power & Utilities, EY India said: “Privatisation of distribution sector would bring in significant efficiency gains, the state governments too must take a cue and extend this to all key metros so that the quality of power supply goes up significantly.”

As declared by the Prime Minister, the stimulus is not just aimed at reviving the Covid-19 stricken economy but also designed specifically to make India self-reliant in a post-Covid world economic order.  

Thus, the measures announced by Sitharaman, although pretty comprehensive in scope, are not spread too thin across the economic landscape, and instead seek to focus on key sectors of the economy such as agriculture and small businesses where the pain on account of the lockdown has been most severe and  where the fulcrum of the economy is situated. The measures are also intended to boost sectors such as textiles which have been world beaters in the past and have the potential to become the mascots of a self-reliant India yet again. The return to health by these sectors has the potential to buoy the larger economy.