New economic package for reviving the economy

Introduction

On 12/05/2020 amid the nationwide lockdown because of spread of corona virus disease, the prime minister announced a economic package of Rs. 20,000,000,000,000 (Rs. 20 lakh crore) with utmost emphasis on “self –reliant India “ with the motive of reviving the economy that has been broadly affected by COVID I9.

The combined package works out to roughly 10 per cent of the GDP, making it among the most substantial in the world after the financial packages announced by the United States, which is 13 per cent of its GDP, and by Japan, which is over 21 per cent of its GDP.

The package, he said, will focus on land, labour, liquidity and laws. It will cater to various sections, including cottage industry, MSMEs, labourers, middle class, and industries.

The Highlights of the first phase of the package were unveiled in detail by the Finance Minister, Nirmala Sitharaman on 13/05/2020 are as follows and the second phase would be announced shortly:-

MSME sector

1. Collateral free loan of Rs 3 lakh crores for MSMEs. This will benefit 45 lakh units so that they can resume work and save jobs.
2. For stressed MSMEs, Subordinate debt provision of Rs 20,000 cr has been announced for 2 lakh MSMEs. It will benefit those which are NPAs or stressed MSMEs.
3. Rs 50,000 crore equity infusion through Mother fund-Daughter fund for MSMEs that are viable but need handholding. A fund of funds with corpus of Rs 10,000 crore will be set up to help these units expand capacity and help them list on Markets if they choose.
4. Definition of MSMEs has been revised to allow MSMEs to aim for expansion and not lose benefits. Also, there’ll be no distinction between manufacturing & services sector MSMEs.         
   New definition: Micro units with investment till Rs 1 cr, turnover up to Rs 5 crore. Small units with investment till Rs 10 cr, turnover up to Rs 50 cr. Medium units with investment till Rs 20 cr, turnover up to Rs 100 crore.
5. Global tenders will be disallowed up to Rs 200 crore for government contracts.
6. Will ensure e-market linkages are provided across the board in the absence of non-participation in trade fairs due to Covid. Govt of India and PSUs will clear all the receivables in next 45 days. 
   
   

For Employees

1. A liquidity relief of ₹2,500 crore EPF support is being given to all EPF establishments, EPF contribution will be paid by Govt. of India for another 3 months till August and will benefit more than 72 lakh employees.
2. Statutory EPF contribution for all organisations and their employees covered by EPFO has been reduced to 10% from 12% earlier. This doesn’t apply to govt organisations. This will infuse Rs 6,750 cr liquidity into these organisations.
   
   

For NBFCs/HFCs/MFIs

1. Rs 30,000 crore special liquidity scheme for investing in investment grade debt paper of NBFCs, HFCs and MFIs. These NBFCs are those that are also funding MSMEs. These will be fully guaranteed by government of India.
2. Rs 45,000 crore partial credit guarantee scheme 2.0 for NBFCs. The first 20% loss will be borne by the guarantor that is government of India. 

For Discoms, a one-time emergency liquidity injection of Rs 90,000 crore against all their receivables. The states will guarantee it.        

Essential Public Utilities

An extension of up to 6 months (without costs to contractor) to be provided by all Central Government Agencies like Railways, Ministry of Road Transport & Highways, Central Public Works Dept. 
Real Estate 
On real estate, urban development ministry will issue advisory to states/UTs so that the regulators can invoke force majeure. The regulators can suo moto extend completion/registration dates for six months for projects expiring on or after March 25, 2020.     

Food grains to the vulnerable section of the society

As part of the Rs 1.70 lakh crore Pradhan Mantri Garib Kalyan Package (PMGKP), the government announced free wheat or rice plus pulses to poor as well as a cash payment to women and poor senior citizens and farmers over a period of three months till June.     

Under the Pradhan Mantri Garib Kalyan Ann Yojana 67.65 lakh MT of foodgrains have been lifted by 36 states/UTs for April 2020. Around 16 LMT of foodgrains have been distributed, covering 60.33 crore beneficiaries by 36 states/UTs for April 2020.          

About 6 LMT of foodgrains have been distributed, covering 12.39 crore beneficiaries by 22 states/UTs for May 2020. 2.42 LMT of pulses have also been dispatched to various states/UTs. Pulses have been distributed so far to 5.21 crore household beneficiaries out of 19.4 crore such beneficiaries.

Where will the 20 lakh crore come from ?

If the RBI’s efforts, possible credit guarantees and previous package are removed, what is left for the Centre to deliver is anywhere between Rs 10 lakh crore to Rs 12 lakh crore.

Prima facie, the magnitude of the package seems to reflect a desire to compensate for things that have gone horribly wrong these past few weeks – especially the terrible plight of migrant workers and their families, who have been all but abandoned by the Indian state. The details of the package will show how much has really been provided for the impoverished and unorganized working class.

So the most important element of the package is the immediate cash support to this lot. The support can be either direct cash transfer to the very poor among the unemployed and in the form of incentives to small and micro enterprises to bring many others back to work. This will be critical to generate short term demand in the economy, which will help scale up supply – is down by over 70% across the board in most sectors except healthcare.

What is left for the Centre to deliver is a little over Rs 13 lakh crore.  Of this, MSME minister Nitin Gadkari has said a large amount is already owed by the government – both Centre and state – to small companies in India. Gadkari told that there was such a large amount in outstanding dues from government to the MSME sector .

One suspects it runs into a few lakh crores, including GST refund dues to exporters. Gadkari said the MSMEs may get guaranteed bank loans against such outstandings. It will be unfair if the government adds this to its relief package because this is money already owed to small businesses.

if the fresh cash infusion via fresh borrowings by the government will exceed 3% to 4% of GDP, which works out to Rs 6 Rs 8 lakh crore. So, the Rs 20 lakh crore fiscal package may look huge but in terms of real additional cash flow, the package may turn out to be more modest.

 

Key take aways of the economic package

1.  For the next three months, the statutory provident fund contribution made by both the employee and the employer will be reduced to 10 percent of the salary (basic salary + dearness allowance) from the mandated 12 percent. The government expects this move will add liquidity support of Rs 6,750 crore.
2.  The government has also announced that all pending refunds to charitable trusts and non corporate businesses and professions including proprietorship, partnership, LLP and Co-operatives shall be issued immediately. Again, this is money owed to different firms and institutions by the government and is being returned to themwill increase the monthly take-home pay of the salaried class for the next three months. 
3. The rates of tax deducted at source/tax collected at source have been deducted. These are basically ways through which the government collects a part of the tax in advance and establishes some sort of an audit trail. This does not mean that overall tax rates have been lowered. This has been lowered to 7.5 percent instead of 10 %.
4. The biggest announcement made as a part of this package has been the Rs 3 lakh crore collateral-free loans for small businesses with a turnover of up to Rs 100 crore and loans of up to Rs 25 crore, to be giving by banks and non-banking finance companies (NBFCs).
5. The government has given a credit guarantee of 100 percent on these loans (both principal and interest). What that means is that in case of a default, the bank or the NBFC facing the default can cash-in the guarantee from the central government and get paid instead of incurring losses.Again, a good move to get the credit in the economy going at this point of time, when banks and NBFCs are reluctant to lend.
6. The Power Finance Corporation (PFC) and the REC Ltd will infuse Rs 90,000 crore into power distribution companies, which are currently struggling. This money will be a loan given against the receivables or the money that is owed to the power distribution companies. This money will have to be used by power distribution companies to pay what they owe to power generating companies. The loans will have to be guaranteed by the respective state governments.

 

Conclusion

Considering the situation from an economic view point the package is an injection into the economy in order to ensure liquidity into the market and ensuring flow of cash in the hands of the masses and legally the government is all under it’s rights to do. The policy will be strictly monitored under the Banking Regulation Act, The Finance Act of India , The Goods and Service Tax Act

The problems are bound to arise legally when the benefits of the scheme does not reach out to the intended sections of the society and if the detailed financial records of the economic package are not properly audited and are kept outside the scrutiny and ambit of the RTI Act.

If this happens then the role of judiciary will come into the picture.

You may contact me for consultation or advice by visiting Contact Us