One day after Prime Minister Narendra Modi announced an economic package or Rs 20 lakh crores, Finance Minister Nirmala Sitharaman came out with the first tranche of Rs 20 lakh crores. She introduced measures that are meant to take on the credit risk in the economy, and boost liquidity to various segments. These measures follow a three-pronged approach: First, ensuring the flow of credit to MSMEs. Second, easing liquidity constraints of financial intermediaries, and third, addressing cash flow woes of other parts of the economy.
The government has announced collateral-free loans for Micro, Small and Medium Enterprises worth Rs 3 lakh crore, where both, the principal and interest risk, will be borne by it. This measure has been taken with the hope that it encourages risk-averse banks to lend to MSMEs. Only a fraction of loans extended are likely to turn bad and the actual credit flow to MSMEs could be much higher than expected.
This move ensures that cash-starved MSMEs have access to funds to meet their obligations such as paying salaries. The FM added that the government has decided to clear all pending dues of MSMEs to aid in their liquidity crisis. Furthermore, the definition of MSMEs has been relaxed to incentivise MSMEs in scaling up when the economy picks up, without worrying about not being able to take advantage of existing incentives.
To revive the flow of funds to different parts of the financial system, the government has announced special liquidity schemes — Rs 30,000 crore to buy the investment-grade debt of NBFCs, HFCs, and MFIs, and Rs 45,000 crore for investment in lower-rated papers. Lowering the rate of tax deducted at source, extending relief to contractors, and relaxations for provident fund contributions are some other administrative measures from the government in order to ease the liquidity constraints in the broader economy. Experts say that the government should be pushing through contentious reforms in the power distribution segment, as the draft amendments to the electricity law seek to do instead of injecting Rs 90,000 crore to financially stressed state electricity distribution companies, through PFC/REC, while restricting the government’s outgo.
With the first tranche of Rs 20,000 lakh crores out, the industrial and commercial sector are hoping for better structural reforms and a solid point plan on how the government plans to revive an economy that was already sluggish before the country was hit with the coronavirus pandemic.
