With the first tranche of fiscal package the government has tried to maintain a delicate balance between revival of the credit cycle and keeping the fiscal math under control. Major drawback that the market saw was the lack of cash components reaching the hands of the consumers.
If one gives a closer look, only EPF contribution of Rs 10,000 crore is the actual cash outflow for the government out of the total announcements worth Rs 6 lk cr made in the first tranche. By providing sovereign guarantees to the loans, the government has tried to utilize what is already available with the banking system.
Indian banking system is sitting on excess liquidity worth Rs 7 lk cr, lying idle with the Reserve Bank of India. The banks have been completely unwilling to lend to MSMEs and NBFCs without government guarantees. Even the repo rate cuts or disincentivizing money- parking by slashing the reverse repo rates couldn't prompt the banks to lend.
In the first tranche, the government has focused on utilizing this banking liquidity first rather than borrowing or printing the money to boost consumption. Borrowing or printing money would have led to inflation as well as excess fiscal deficit which the government has tried to minimize.
Booster dose for MSMEs:
The FM announced collateral-free loans worth Rs 3 lk cr with 100% credit guarantee for MSMEs. Stressed MSMEs are allotted Rs 20,000 crore with a partial guarantee up to Rs 4,000 crore.
Here, the government has fulfilled a major demand of the financial institutions. The banks, despite having ample liquidity, were unwilling to lend until the government provided the guarantee. With today's announcements, the government has largely managed to address their demands.
The government has also broadened the definition of MSMEs by reclassifying the investment and turnover limits.Investment limit for Micro, Small and Medium businesses has been raised and the distinction between manufacturing and service sectors has also been eliminated.
Under new definition, the units with investment upto Rs 1 crore and turnover upto 5 crore are reclassified as micro businesses; units with investment up to Rs 10 crore and turnover up to Rs 50 crore will now be classified as small units and units with
Investment up to Rs 20 crore and turnover up to Rs 100 crore will be considered as medium units.
To further incentivize the MSME participation and to promote Make in India, foregin companies will be barred from participating in any government tender valued upto Rs 200 crore. These rules will apply to those tenders which could be completed with domestic expertise and doesn’t warrant foregin participation.
NBFCs gets the due attention:
The NBFC sector has been at the forefront of all the RBI actions ever since the IL&FS crisis occurred. With constant rate cuts and other policy measures, RBI has been trying to incentivize the banks to lend to NBFCs. Indian banks are currently sitting on ample liquidity but they are unwilling to lend in the absence of government guarantee. By providing the guarantee for loans to MSMEs, NBFCs, HFCs and MFIs, the government has taken a major step to bridge the shaken trust.
Now, under this package, the government has provided a special Rs 30,000 crore window to buy investment-grade debt papers, again under full guarantee. A partial guarantee window of Rs 45,000 crore is also opened for 'AA' rated and unrated papers of the second rug of NBFCs where the first 20% loss will be borne by the GoI.
By getting their major wish fulfilled, The bankers now need to keep aside their apprehensions and start lending to revive the economic engine
Relief for Power producers :
The government also announced Rs 90,000 crore liquidity injection for electricity distribution companies through PFC and REC. This package is aimed at reducing the burden on electricity generation companies. The entire power sector is currently reeling under the high receivables from the distributing companies.
The problem of payment is exacerbated with the current lockdown where electricity demand is shifted to lower yielding domestic demand while industrial demand came to a standstill.
The loans will be given to discoms exclusive purpose of clearing the dues of the power generators. Loans will be under state-issued guarantee and rebate will be provided to those discoms that pass the benefits to end-customers.
Real estate: Deadline extended for projects:
Real estate developers, reeling under the shortage of labor as well as liquidity are allowed to invoke a ‘Force Majeure’ under the Rera Act. It will allow the developers to extend their registration and completion date by six months for all projects expiring on or after March 25.
Relief for common men:
Apart from easing the credit cycle, the government also tried to put the money in the hands of end users to boost their spending power. For common men, TDS and TCS rates are reduced by 25% till 31st March 2021. This is expected to result in additional liquidity of Rs 50,000 crore in the hands of the people.
The government has also extended employee provident fund support up to Rs 10,000 crore for another three months. It effectively means that employees as well as employers are exempted from 12% provident fund deduction upto June. This support was earlier offered upto May but now, it is extended for another three months.
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