On Tuesday Prime Minister Narendra Modi during his address to the nation declared an Rs.20 Lakh crore package. The massive stimulus accounts for nearly 10% of the GDP. This huge economic stimulus thrilled the people as it was way bigger than expected. The nifty future traded on Singapore exchange rose as much as 5.5 percent. SGX nifty is usually seen as a precursor to the Indian stock market’s reaction, on the following day the market opened at gap up by 5% but by the end of the day due to strong consolidation managed to close just 2% up. Investors were still waiting for the details for the package which were announced by FM Nirmala Sitharaman.
The package does not include only the fiscal expenditure but also loan guarantees, policy changes, and some other commitments by the government and RBI. The first installment of the package focused on MSME and NBFCs to ensure liquidity.
The provision collateral-free loan worth Rs.3,00,000 Cr which would be funded by the banks and NBFCs could help MSME to raise funds at a low cost. This will enable the MSME to avail loans even if they do not have collateral. The scheme provides 12 months moratorium for a loan of 4 years. This definitely eases the MSME for the short-run. It will help many to start the business again. However, the challenge is its disbursal. It also gives Rs.20,000 crore for subordinate debt to relieve the stressed MSME which would give some relief to the bank’s NPA in the future. In this scheme, the promoters of the MSME will be given debt by the banks, which will then be infused by the promoter as equity in the unit. Out of this Rs.20,000, the government will give only Rs.4,000 as a credit guarantee to the banks. Then, Rs50,000 Cr equity infusion for MSME through funds of funds. This would be funded by the government and other investors. Out of which a fund of Rs.10,000Cr would be set up by the government. This encourages the MSME to expand size as well as the capacity. The Fund structure of Rs.10,000 would help in leveraging up to Rs.50,000 Cr. Thus, if we look at the overall spending by the government which would affect the budget is Rs.14,000Cr only. Other expenditures are in the form of loan guarantees and equity infusion. So, the rest of the amount has to be funded by banks and NBFCs which would be in trouble if the MSME default. The MSME business would not be up and running unless demand is created. The figures quoted by the government are big as compared to the actual inflow.
Apart from the loan provisions, the government made some policy changes to support the MSME. The definition of MSME is revised so that more businesses fall in this group and thus van be benefited by the provisions given to this category. Disallowing global tenders up to Rs.200 crore would bring more opportunities on the table for the MSME. These policy changes are indeed promoting the MSME business and its expansion.
For NBFCs, a special fund of Rs.30,000 crore is very welcoming as NBFCs find it difficult to raise money from debt markets. The entire 30,000 crores would be directly funded by the government. This provides liquidity support for NBFCs/HCFs/MFIs which would create confidence in the market.
The partial guarantee scheme provides up to 20% guarantee by the government. This infuses liquidity of around Rs.45,000 which are funded by banks, not the government. The government will bear only 20% of the support in case of defaults. So, if the government outflows are considered out of Rs.75,000 announced for NBFCs only Rs30,000 is the net outflow. Even though the government will carry the partial credit up to Rs.45,000Crore, most of the risk is with the banks.
The stimulus package for fighting and supporting the economy against COVID-19 is more like a delusive figure. The big number is not that exciting as it looks. Most of the funds are not directly raised by the government and are in the form of guarantee and support and rate cuts. According to the MSME Ministry’s FY19 annual report, the MSME sector is dominated by micro-enterprises. India has 6.33 crore MSME out of which 6.30 crore - 99.4 percent are micro-enterprises. MSME not only needs capital to resume the business but it is also important to channelize these loans in such a way that most of them are benefited. A huge number of micro-enterprises are there and they much are identified and supported. Unless the demand is created it would not be possible for the MSME to sustain. Some policy changes are encouraging for the MSME but the numbers are too pretty to believe. This provision of debts can be a backfire affecting the entire financial system in case of default. Asking NBFCs to provide moratorium is putting them in again in stress as they do not have deposits like a bank to keep the business running. Unless there is an assurance of timely payments the NBFCs will continue to face liquidity problems. If the second wave of coronavirus hits the MSME will not be able to repay and in turn, the NBFCs and banks will face severe difficulties. It was a big trade-off to choose among lives and livelihoods. Injecting the stimulus may solve liquidity crunch for the short term but may not resolve the problem as now the way of living and dealing may change drastically. The biggest driver of the economy: demand has to be created.
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