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Major stimulus measures

Topics Covered: Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

Major stimulus measures

What to study?

For Prelims and Mains: Key components and significance.

Context: Economic stimulus measures announced by Finance Minister in the wake of series of lockdowns.

The 15 measures announced include many sops for MSMEs, real estate, non-banking finance companies (NBFCs) and power distribution companies.

Background:

This is the first tranche of the Atmanirbhar Bharat Abhiyan announced by Prime Minister Narendra Modi as a ₹20 lakh crore economic package.

That package includes the ongoing Pradhan Mantri Garib Kalyan Yojana, meant to support the poorest and most vulnerable communities during the pandemic, as well as several measures taken by the Reserve Bank of India to improve liquidity.

More tranches are expected in the next few days.

Measures announced:

  1. Changed Definition of MSME:
  • Previously, an enterprise with investment up to Rs 25 lakh was called a micro unit. Under the new definition, a firm upto investment of Rs 1 crore is to be called Micro unit, of Rs 10 crore is to be called as small unit and investment greater than Rs 20 crore will be called as medium unit.
  • With the changed definition both investment and turn over is used to define MSMEs. Under the new definition a firm with turn over of Rs 5 crore is to be called a micro unit, of Rs 50 crore will be called as small unit and turn over greater than Rs 100 core is to be called as Medium unit.
  • It is to be noted that for an enterprise to come under the category of MSME it has to fulfill both investment and turn over conditions.
  • Also, under the new definition, the differentiation between the manufacturing and service based MSMEs are being removed.
  1. Collateral free loans to MSMEs:

In a major boost to the MSME sector, collateral free loan of 3 lakh crore rupees has been announced with a moratorium of 12 months. These loans will benefit 45 lakh small and medium units.

  1. For NBFCs:

₹30,000-crore special liquidity scheme for NBFCs. Investment would be made in primary and secondary market transactions in investment grade debt paper of NBFCs, HFCs and MFIs.

Other measures:

  • It also proposes Mandatory sourcing — up to ₹200 crore.
  • Relaxation in project under RERA Act.
  • Power distribution companies will receive a ₹90,000 crore liquidity injection.
  • Contractors will get a six-month extension from all Central agencies, and also get partial bank guarantees to ease their cash flows.
  • Employee Provident Fund (EPF) support, provided to low-income organised workers in small units under the PMGKY is being extended for another three months.
  • Mandatory EPF contributions are also being reduced from 12% to 10%.
  • For salaried workers and taxpayers, some relief was provided in the form of an extended deadline for income tax returns for financial year 2019-20, with the due date now pushed to November 30, 2020.
  • The rates of tax deduction at source (TDS) and tax collection at source (TCS) have been cut by 25% for the next year, while statutory provident fund (PF) payments have been reduced from 12% to 10% for both employers and employees for the next three months.

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Significance of these measures:

  • Measures for MSMEs through guarantees, equity infusion and debt support will incentivise bank lending to MSMEs as well as provide critical support to stresses entities in the current situation.
  • Credit guarantee will mean that banks do not have to make any provision for the loans, that is, they do not have to set aside capital in case the account turns non-performing.
  • The special liquidity support to lower-rated NBFCs will mean banks do not have to take credit risk and NBFC papers are likely to be lapped up.
  • Mandatory sourcing — up to ₹200 crore — would insulate local companies from external competition.

Why these measures were necessary?

Banks have been reluctant to lend, which is evident from over ₹8 lakh crore being parked by these lenders with the RBI’s reverse repo window. Besides, a lot of borrowers were not fully drawing up to the sanctioned loan limits due to the lockdown. As a result, banks have no other option but to keep the funds with the RBI.

Is it sufficient?

The package of ₹20-lakh crore announced by PM includes already allocated money of ₹6-lakh crore and monetary policy directives to banks and non-banking financial companies. And the latest announcements by the Finance Minister involve no additional public spending, even though this is urgently required to revive the economy and prevent further contraction.

Besides, the package has nothing for migrants, who are the worst hit and no effort has been done to stimulate the demand in economy.

So, what the government should do immediately in fiscal terms for reviving the economy and supporting livelihoods?

  1. Provide free food and cash transfers to those rendered incomeless.
  2. Employment has to be provided to workers where they are, for which the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) must be expanded greatly and revamped with wage arrears paid immediately.
  3. In urban areas, it is absolutely essential to revive the Micro, Small and Medium Enterprises (MSMEs). Simultaneously, the vast numbers of workers who have stayed on in towns have to be provided with employment and income after the proposed cash transfers run out.
  4. The post-pandemic period must see significant increases in public expenditure on education and health, especially primary and secondary health including for the urban and rural poor.

InstaThink:

Prelims Link:

  1. New definition of MSMEs?
  2. What are NBFCs?
  3. What is credit guarantee?
  4. Share of MSMEs in India’s GDP.
  5. What is EPF?
  6. Direct vs Indirect taxes?
  7. Overview PM Garib Kalyan Yojana.

Mains Link:

Discuss the need for and significance of Atmanirbhar Bharat Abhiyan announced by PM Modi in the wake COVID 19 Pandemic induces lockdowns.

Sources: the Hindu.