May 31, 2023

The First Tranche Of The Rs 20 Lakh Crore Package: Addressing Liquidity

By Sunil Garodia
First publised on 2020-05-14 17:54:41

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Editor-in-Chief of indiacommentary.com. Current Affairs analyst and political commentator.

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Although the Prime Minister announced a Rs 20 lakh crore stimulus package for the economy, the details are being shared in tranches by the Finance Minister. This is good as the Indian economy is huge and almost all sectors need special attention due to the disruption caused by the pandemic and the subsequent lockdown.

The Prime Minister had, in his speech, said that the economy was the first pillar on which his model of a self-reliant India was to be built. He had also said that land, labour, liquidity and law were to be emphasized in the stimulus package. Hence, the first tranche of the package focused on creating liquidity for the various sectors of the economy with the prime focus on MSMEs.

The government acceded to the long-standing demand of MSMEs and redefined the thresholds for a unit to be considered an MSME. The investment limits were raised substantially and turnover was introduced as an additional qualifying factor. But it needs to be clarified which of the two - investment or turnover - would be the overriding factor. This does away with the incentive to remain small to take advantage of the concessions and the MSMEs can now scale up. The difference between the manufacturing and the services sectors has also been abolished.

The Finance Minister announced a collateral-free loan package of Rs 3 lakh crore for the MSMEs. These loans will come with a moratorium for one year and have to be repaid in four years. This will allow the units to tide over the liquidity crisis they are facing due to the disruption of business because of the lockdown. Since the principal and interest payments are both guaranteed by the Central government, banks should ideally have no problems lending to the MSMEs since they are flush with funds and by reducing the reverse repo rate, the RBI has made it unremunerative for them to park excess funds with the apex bank.

Further, two special, fully guaranteed, funds of Rs 30000 and Rs 45000 crore have been created for investing in bonds issued by MSMEs, along with NBFCs, HFCs and microfinance companies. While the former will invest in the investment-grade debt of these companies, the latter will take up lower-rated papers. This reform has the potential of giving a huge boost to the bond market in India if done well.

Along with these measures, there was a package Rs 90000 crore guarantee-backed loans to discoms if they used it to pay power generating companies. But here the guarantee will have to be provided by the state governments. Further, this is not the solution and the measures in the draft electricity bill must be adopted at the earliest to ease the pressure on power distributing companies. But that is a political call no government is willing to take.

Finally, the package included some measures to enhance liquidity in the hands of companies and taxpayers. The EPF deduction of 12 percent was reduced to 10 percent. The government undertook to pay the EPF contributions for three more months. The rate of TDS was reduced by 25% in the whole of the current financial year. The last dates for submitting all income tax returns, including cases getting barred by time, were also extended.

This tranche, along with the various measures already taken by the RBI, is likely to enhance liquidity in the market and help save jobs while ensuring that MSMEs are able to pay salaries within time and without cuts. But if the lack of demand in the economy does not pick up soon, liquidity will not remain the only concern of companies. Everyone is waiting for the relaxations that will be granted in the fourth phase of the lockdown. All companies will heave a sigh of relief only if demand picks up after that.