Central Government’s Economic Stimulus - Part 1

18 May 2020

The Prime Minister yesterday announced a Rs.20 lakh crores special economic package in relation to the Covid 19 crisis. This package is a combination of monetary and fiscal measures and includes some of the measures already announced by the RBI and the central government in the last two months.

The details of the first tranche of the special economic package was provided by the Finance Minister earlier today. More tranches of the stimulus package are to be announced in the coming days

The focus area of today’s announcement was on providing liquidity support to MSMEs, NBFCs, DISCOMS and salaried workforce. It also included relaxation in compliance for the construction and real estate segments as well as extension in tax related proposals

Total liquidity infusion announced by the government today amounts to Rs 5.94 lakh crs (details in table below)

Together with the RBI liquidity infusion measures of Rs.5.24 lakh crores and the earlier fiscal package of Rs 1.7 lkh crore, the total liquidity support announced under the fiscal and monetary measures so far totals Rs. 12.88 lakh crores

The funding the liquidity infusion by the government or the impact on the fiscal deficit has not yet been detailed. This will become clearer after the entire economic package has been announced over the course of the next few days.

Key measures announced

Of the 15 measures announced today 6 measures pertained to the MSME, 2 each for and NBFCs, HFCs and MFIs,1 each for DISCOMS, contractors and the real estate sector. It also included 3 direct tax measures

1. Support for MSMEs

1.Collateral free automatic loans of Rs. 3 lakh croresfor standard MSMEs- These loans to have a tenure of 4 years, 12 month moratorium on principal repayment and do not require any fresh collateral or guarantee fee. The banks and NBFC extending this credit are to be provided 100% credit guarantee cover by the government on interest and principal. These loans can be availed till 31 Oct’20. This measures is estimated to benefit 45 lakh units. This will be contingent liability of government

2.Rs.20,000 crores subordinate debt provision for stressed MSMEs - 2 lakh MSME which are NPA or are stressed can avail of this facility. 2 lakh MSMEs are estimate to from this measure. Rs. 4 000 crores to be provided to Credit Guarantee Fund Trust for Micro and Small Enterprises who will in turn provide partial credit guarantee support to banks. The debt given by the banks will be used to in fuse equity in the unit by the promoter. Still not clear if it will be from budget or some other agency.

3.Rs.50,000 crs equity infusion into MSMEs that have potential and viability through fund of funds-Fund of funds with a corpus of Rs.10,000 crores to be set up. Only Rs 10,000 cr will be from the Budget presumably.

4.Change in definition of MSME- The definition of has been revised with the investment limit revised upward, introduction of additional criteria of turnover and elimination of the distinction between manufacturing and services sector.

5.Tenders for government procurement upto Rs.200 crs only for domestic MSME - Global tenders to be disallowed

6.Other interventions – (i) e-market linkages provided across the board as MSMEs may not be able to participate in trade fares, (ii) receivable of MSME from government and CPSEs and to be cleared within the next 45 days, (iii) continuous monitoring system for settlement of dues from government and CPSE undertakings.

2. EPF relief

1.Rs. 2500 crores liquidity relief for business and workers- By way of liquidity support, the government would pay the employer and employee contribution of 12% each for another 3 months (till Aug’20), thereby providing for additional liquidity.

2.Statutory PF employee contributions reduced from 12% to 10% for next 3 months – This is estimated to provide liquidity of Rs. 6750 crores.

3. Liquidity Support for NBFC, HFC, MFI

1.Special liquidity schemes of Rs.30,000 crores – Under this scheme investments are to be made in primary and secondary market transactions in investment grade instruments of NBFCs/HFCs/MFIs . These securities are to be fully guaranteed by the Government of India. This will be contingent liability of the government and will help NBFCs and bond market to an extent as deals in lower rated investment grade paper will be facilitated.

2.Rs.45,000 crores liquidity infusion to NBFCs by way of by partial credit guarantee scheme – An extension of the existing scheme wherein the first 20% of loss to be borne by GoI. AA rated and below including unrated papers to be included. A contingent liability for the government which will help NBFCs nevertheless. It needs to be seen how it works as PCE has not been too successful in past.

4. Liquidity infusion to DISCOMS

One time emergency liquidity injection of Rs.90,000 crs to DISCOMS – PFC and REC to infuse this liquidity against receivables of DISCOMs. These loans to carry state government guarantee. The contribution of PSUs important here and is budget neutral and will mean more corporate bond papers being floated by them.

5. Relief for Contractors

Upto 6 months extension without cost to contractors of all central agencies (railways, road transport, PWD etc) - for compliance of obligations towards completion of work, implementation of milestones etc and extension of conscession period of PPP contracts. Covers construction work and good and services contracts. Government agencies to partially release bank guarantee to partial completed projects to improve cash flows

6. Real Estate

Extension for registration and completion date of real estate projects under RERA by 6 months

7. Taxation related proposals

1.Rs.50,000 crores liquidity through TDS/TCS reduction till 31 March’21 – rates reduced by 25% from existing rates. Payments for contracts, professional fees, interest, rent, brokerage etc eligible for reduced rates of TDS. This is not a waiver and gives only temporary relief as it has to be paid at the end of the year.

2.Pending refunds of charitable trust and non-corporate businesses and professions to be issued immediately

3.Due date for IT returns for FY20 extended from 31 July’20 and 31 October’20 to 30 November’20.Tax audits dates extended b y 1 month to 31 October’20

4.Date of assessments getting barred on 30 Sepetember’20 extended to 31 December 2020.3 months extension for those getting debarred 31 March 21.

5.Vivaad se Vishwaas scheme for making payment without additional amount extended to 31 December’20

CARE’s views

1.For SMEs this is a positive measure and while the Rs 3 lakh crore would have flowed in the normal course from banks, the advantage here is in terms of the cost being capped, term being fixed with moratorium and more importantly guaranteed by the Government.

2.. For NBFCs there is additional Rs 75,000 being provided in the form of guarantee and partial credit enhancement for the lower rated firms. This will enable them to borrow more from the market. As this is a guarantee, there will not be a major impact on the fiscal deficit and go as contingent liability.

3.For the DISCOMS, the amount may be small but useful for them as they can use the funds to pay the generators and transmission companies. The Rs 90,000 cr will be paid from reserves or alternatively borrowed from the market.

4.The other measures help at the micro level for contractors, real estate companies and tax payers. Reduction in TDS/TCS and in employees’ PF contribution could provide an impetus for consumption.

Should the markets be happy? Probably yes, as the budgetary numbers are not to get distorted though the expectation may have been higher given the Rs 20 lakh crore amount spoken of yesterday. But there is something for SMEs, NBFCs and DISCOMS for sure which will help to alleviate their situation to an extent. It however needs to be seen if such flows of credit takes place soon as time matters in these situation.

Author:

Kavita Chacko, Senior Economist

Dr. Rucha Ranadive, Economist

Sushant Hede, Associate Economist

Contact:

Rachna Gupta, Manager – Training

Mail: rachna.gupta@care-cart.com

Tel: +91-22-67543674