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PUSHING THE ECONOMY

Who benefits, and by how much, from India’s $266 billion economic stimulus

Prathamesh Mulye
By Prathamesh Mulye

Writer, banking and economy

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India has begun unveiling, tranche by tranche, a Rs20 lakh crore ($266 billion) stimulus package to help its coronavirus-hit economy get back on its feet.

The first instalment of the Aatmanirbhar Bharat Abhiyan (self-reliant India) package, announced yesterday (May 13) by finance minister Nirmala Sitharaman, included credit lines to small businesses, shadow banks, and beleaguered power distribution companies (discoms). There were also doles for taxpayers and the salaried class, besides regulatory relief for the real estate and construction sectors.

“Essentially, this is to spur growth and to build a self-reliant India,” said Sitharaman.

These measures reinforce steps taken by the government and central bank in the last two months. On March 27, the government had announced a Rs1.7 lakh crore stimulus aimed at the poor. The central bank, too, has announced steps to make funds available to shadow banks and mutual funds. The Atmanirbhar Bharat package, equivalent to 10% of India’s GDP, includes the cost of these measures as well.

Here are the salient features of what has been done so far to kickstart the Indian economy:

Big boost for small business

  • A Rs3 lakh crore credit line has been opened up for micro, small and medium enterprises (MSMEs) to meet their operational expenses.
  • This includes collateral-free automatic loans to MSMEs and credit guarantees to lenders (ie the government has promised to repay the debt in case of default.)
  • Loans will be granted for a four-year period and principal repayment will start only after a 12-month moratorium.
  • Around 4.5 million small businesses are expected to benefit.

Stressed MSMEs

  • MSMEs under financial stress can avail fresh funds.
  • The government will provide unsecured loans of Rs20,000 crore to such units, estimated to be around 200,000.
  • The government will allot Rs4,000 crore for partial credit guarantee support to banks.

New MSME definition

  • The investment limit and maximum turnover to be considered as an MSMEs have been revised upwards. This will help firms increase their capacity without losing the benefits of being a small unit.

Other benefits

  • Global tenders will be disallowed in government procurement tenders worth up to Rs200 crore, which will help the MSMEs to grow their business.
  • E-market linkage will be provided, which will act as a replacement for trade fairs and exhibitions.
  • All receivables from the central government and state entities will be cleared in 45 days.

Liquidity for shadow banks

  • With small- or mid-sized non-banking financial companies (NBFCs) struggling to raise debt, the government has launched a Rs30,000-crore special liquidity scheme.
  • The aim is to get investors to buy low- to medium-risk debt paper issued by NBFCs, housing finance companies, and microfinance companies.
  • The securities will be fully guaranteed by the government.
  • An additional Rs45,000 crore partial credit guarantee scheme was announced for NBFCs with a low credit rating. Here, the first 20% of loss will be borne by the government in case of a default.

Lighting up discoms

State-owned Power Finance Company and Rural Electrification Corporation will infuse Rs90,000 crore into discoms.

  • The loans will be given against state governments’ guarantees.
  • The government believes this can create liquidity in the power sector as discom payables to power generation and transmission companies currently stand at Rs94,000 crore.

Relief for contractors

  • Deadline extension up to six months, without any costs, will be provided to contractors by all central government establishments.
  • The extension includes construction, works and goods, and services contracts.

Breather for real estate

  • The ministry of housing and urban affairs will advise states, union territories and their real estate regulatory authorities to treat Covid-19 as an event of “force majeure.” 
  • Consequently, registration and completion deadlines can be extended by six months for all RERA projects expiring on or after March 25. Regulatory authorities are allowed to extend this for another three months, if needed.
  • Timelines for various statuary compliances under RERA can also be extended.

Salaried class

  • The Employees’ Provident Fund (EPF) contribution for June, July, and August will be made by the government. This will provide liquidity relief of Rs2,500 crore to 367,000 establishments and 7.2 million employees for eligible establishments.
  • At the same time, the statutory PF contribution of both employer and employee will be reduced to 10% from the existing 12% for the next three months. This will increase the take-home salary of employees.
  • The due date of all income-tax return for the financial year 2020 has been extended to Nov. 30 from June 30.

The poor

On March 27, the Indian government announced a Rs1.7 lakh crore package, which included:.

  • Five kilograms of wheat or rice per person in April, May, and June to benefit 800 million people.
  • 1 kg pulses for each household for three months.
  • 200 million women Jan Dhan account holders to receive Rs500 per month for three months.
  • Free gas cylinders to 80 million poor families for three months.
  • MNREGA wages increased to Rs202 a day from Rs182.
  • Rs2,000 were paid to 87 million farmers under PM-KISAN scheme.
  • Ex-gratia (payment) of Rs1,000 was announced for 30 million poor senior citizens, widows and the differently abled.
  • Sanctioned Rs15,000 crore for Emergency Health Response Package
  • Insurance cover of Rs50 lakh per health care worker

Central bank steps in

The Reserve Bank of India (RBI) is trying to push cheap money into the system as well.

  • Cash Reserve Ratio, the share of customers’ deposits that banks keep with RBI, was cut by one percentage point to 3% on March 27. This, according to the government, has resulted in liquidity enhancement of Rs1.37 lakh crores.
  • The RBI has provided banks the option of availing Rs1 lakh crore at a fixed rate (4.4%) for fresh deployments in investment grade (low risk) assets like corporate bonds, commercial paper (short-term debt), and non-convertible debentures (long-term loans).
  • A similar special liquidity facility of Rs50,000 crore each was announced for NBFCs and mutual funds.
  • Borrowers were given a three-month moratorium (March 1 to May 31) on installments due on loans and credit card debt.
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