The Narendra Modi government on Wednesday kicked off the first round of announcements of what it promises will be a Rs 20 trillion ($266 billion) stimulus package to restart the economy hit hard by the nationwide lockdown.
Round one focussed mainly on four key but vulnerable sectors of the economy—micro, small and medium enterprises (MSMEs), power distribution companies, non-banking financial companies (NBFCs) and housing finance companies, and real estate developers.
These companies were offered credit guarantee schemes and collateral-free debt, a special liquidity scheme to absorb risky commercial paper, equity infusions and generous extension of deadlines—all totalling almost Rs 6 trillion ($80 billion). But the government actually shied away from injecting any direct cash into the system.
Finance minister Nirmala Sitharaman announced a slew of sops for MSMEs, which employ 110 million people in the country, and typically work as ancillary arms to bigger companies. The announcement came a day after Prime Minister Modi first unveiled the stimulus package to reboot the economy hurt by the coronavirus pandemic.
The government, she said, will extend Rs 3 trillion worth of collateral-free loans to MSMEs as an emergency credit line. These loans will have a four-year tenor. Borrowers will get a 12-month moratorium on principal repayment and interest will be capped, Sitharaman said. As many as 45 lakh units will benefit from this credit guarantee scheme.
In another bid to rev up MSMEs, the government will set up a Rs 10,000 crore fund-of-funds to infuse equity capital into such companies that have been facing a severe shortage of capital because of the seven-week-long lockdown.
The fund of funds will be operated at two levels—a mother fund and several daughter funds. The government hopes that this will be able to infuse total equity capital of Rs 50,000 crore into beleaguered MSMEs. Eventually, the government hopes that these enterprises will list on the stock markets.
Apart from this, the government announced a Rs 20,000-crore subordinate debt scheme for stressed MSMEs that need equity support. This will see the government infusing this money into as many as 200,000 small companies that are stressed or have already gone under. Promoters of such companies will be given debt by the government, which will then be infused as equity into their respective units.
Sitharaman also said the government will revise the definition of MSMEs by increasing the turnover and investment rules. Additionally, the government will bar foreign companies and allow only local firms to bid for government procurement orders worth up to Rs 200 crore.
On top of this, the government said it will absorb risky but investment-grade commercial paper held by NBFCs, mutual funds and housing finance companies (HFCs) as part of a special liquidity scheme intended to bail out holders of debt that is rated AA or below, but not yet default grade. Sitharaman said this special liquidity dispensation is being offered to NBFCs, HFCs and mutual funds since they typically take on additional risk by lending to MSMEs.
Apart from the MSME sector, real estate developers have been offered some relief by allowing them more time for registration and an extension of the completion dates of their projects that have been stuck because of the lockdown. The finance minister said that the coronavirus pandemic will be treated as an ‘act of god’ and states will be allowed to extend ‘force majeure’ provisions to real estate projects.
All such projects that are registered under the Real Estate Regulatory Authorities of various states will be allowed to extend their completion and registration dates by six months. This will be applicable to projects whose registration and completion dates were expiring on or after March 25, the day the lockdown began. States have also been empowered to allow another three-month extension if needed.
Besides, the government will infuse Rs 90,000 into state-owned power distribution companies that have not been able to realise payments form their customers and have, in turn, not managed to pay power producers.
The finance minister also announced a 25% relief in taxes deducted at source for all non-salary payments. This, she said, will put an additional Rs 50,000 crore in the system, till the end of the financial year. Companies were also given an additional Rs 6,750 crore relief, as the government promised to pay their share of the payment towards the employee provident fund contributions for the next three months.
Suvodeep Rakshit, senior economist at Kotak Institutional Equities, said the fiscal measures aim to provide liquidity and ease the functioning of key sectors. “While the fiscal cost is muted, it provides essential liquidity to MSMEs, NBFCs, MFIs and HFCs,” Rakshit said.
