Updated: May 16, 2020
Atmanirbhar Bharat Abhiyan, in my humble opinion, is a great thought aired by our Prime Minister to boost the confidence level of the people of India during the dark times of Covid-19. During his highly articulative and emotional speech he had highlighted the importance of holding the hands of poor and weaker section of the society and announced a whopping stimulus package of Rs. 20 Lakh Crore. Mr. Modi had mooted the idea of being a self-reliant and self-sufficient Bharat and highlighted the importance of empowering the local business to achieve the said objectives. Many of us had got confused by his statement on “localization” and misinterpreted it as a call to reject the products of foreign companies. Being a devote apostle of Make in India and evangelist of FDI, he had meant to encourage local productivity by enhancing the investment into India. Though he had made a curtain raiser with an astronomical figure, the actual picture is yet to be fully revealed. Mrs. Nirmala Sitharaman, Finance Minister was destined to announce the details, nuances and intricacies of the Atmanirbhar Bharat Abhiyan in several tranches.
It is a proven fact that finance is the life blood of commerce and backbone of all nations, economies, entities and individuals. The Banks and financial institutions are the flagship holders of the financial stream of India and empowering them will strengthen the financial parameters and enhance the liquidity level in the market. I would like to see the stimulus package announced by Mrs. Nirmala Sitaraman as a continuation to the financial stimulus packages of Rs.3.7 trillion announced by Reserve Bank of India during last month. The said package is not directly burdening the Government with an additional fund requirement as most of the burden is falling on the shoulders of the Banks who got the huge influx of money which had flooded to their coffers due to ease of Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) and the said fund is proposed to be pumped to MSMEs in the form of loans and credits. NBFC/MFI/HFCs are also empowered with guarantee of Central Government for their instruments to raise funds from market and encouraged to use those funds to lend to MSMEs and individuals.
Social media and economics
But Immediately after the announcement of the stimulus scheme, discussions about the pros and cons spurred up in all social media platforms, airing numerous queries, most of those in following lines.
a. How tax refund can be considered as a stimulus package?
b. How extending loan can be considered stimulus package?
c. How reclassification of MSME can be considered as a part of stimulus package?
In my opinion, Yes, all the above are strong, thoughtful and bold moves to stimulate the growth potential of the economy as it enhances the liquidity in the market and liquidity is God as far as all financial activities are concerned. Following are the reasons for an affirmative answer to those queries.
How tax refund can be considered as a stimulus package?
Tax refunds in a swifter manner ensures immediate and adequate money in the hands of needy and that will enable a citizen to spend more in the market. More spending in the market is nothing but a push to move the wheels of mud laden economy. Due to tax refunds Rs. 18000 Crores got flushed to the markets and that was indeed a timely step to protect economy. Yes, it is indeed a great move as Liquidity is nothing but a living God of commerce.
How extending loan can be considered stimulus package?
If finance is the life blood, the banks are the blood banks which can pump blood into the veins of economy when it goes weaker. Strengthening the banking system will help the economy to bounce back easily from its hard times. By reducing the CRR and SLR ratio, approximately Rs 3.7 Tn cash flew into the coffers of the bank and the said money is now available for distribution to its stakeholders. With very relaxed norms and guarantee by Central Government, the stakeholders(MSME/Individuals) will be able to avail adequate funds as loans to support their business and further move the wheels of the economy. As per the announced schemes the loans are collateral free (No security is needed) and repayment is fully guaranteed by Government of India. Similarly NBFC/MFI/HFCs are empowered to raise more money from market with Government guarantee are encouraged to spend that money to lend to MSME/Individuals. So this is a bold and intelligent step to ensure more funds in the market and thereby enable liquidity. Yes, Liquidity is the real God.
How reclassification of MSME can be considered as a part of stimulus package?
MSMEs (Micro , Small and Medium) are largest contributors to employment, GDP and exports of our country. By expanding the scope of the definition of MSME, more entities are now covered under the benefits extended by the Government and thereby will be able to come out of the liquidity crunch. So in my opinion, the expansion of the definition will benefit so many units and thereby further oil the nuts and bolts of economic system of our country. So , yes it is nothing but breathing life to the God of Liquidity.
Subsidies and freebies , though very appeasing to its beneficiary, are highly notorious to shatter the backbone of an economy, as the same will prevent the Government from spending into much needed infrastructure and other core developmental activities as those monies are channelised for counter productive activities . Instead of giving, free money and benefits, the Government of India had devised a scheme, under Atmanirbhar Bharat Abhiyan, to ensure adequate money flow in the market and ensure more liquidity.
Benefits for MSME segment
MSME sector is the backbone of Indian economy and contributes 29 per cent to the GDP and 48 per cent to exports. According to government data, the unemployment rate in India reached a 45-year high of 6.1 percent in 2018-19 and rejuvenation of the MSME sector will help to create more employment opportunities. The impact of Covid-19 had adversely affected the economy and the new financial stimulus package is destined to rejuvenate the MSME and Banking Sector in particular. The Banks are empowered with more funds and they are encouraged to utilise the available funds to revamping the MSME sector. It was decided to avoid global tender for all government procurement upto 200 Cr and the MSME in India will get benefited as there will be less competition from global competitors. The existing definition of the MSME Sector is proposed to be revised upwards to cover more entities within its ambit. The present lower threshold was preventing the MSME to outgrow to next level due to fear of losing benefits given to MSME segment. In order to expand the horizon an additional criterion of “turnover” is also being introduced and the distinction between Manufacturing and Service sector is being eliminated.
The above definition is coming with an “AND” condition and the same is again restrictive in nature. There are many entities which are engaged in trading activities. Though their investment will be very low, the turnover may be very high due to peculiarity of the business model. The margin of such entities will be much lesser when comparing to their turnover. Under the new definition such companies/entities will fall outside the purview of the MSME and thereby lose the benefits given to those segments. The definition may be revamped by replacing “AND” with “OR”, for specific type of industries.
Rs 3 Lakh Cr collateral free automatic loan to businesses/MSME’s
Banks and Non-Banking Financial Companies (NBFC) are allowed to give collateral free automatic loan Rs 3 Lakh Cr to businesses/MSME’s which is having Rs 25 Cr outstanding and 100 Cr turnover. Emergency line of credit will be given to such institutions upto 20% of the outstanding credit as on 29-02-2020. The scheme is expected to directly benefit 45 lakhs units in the country. Though this will enable the MSME units to enjoy immediate liquidity, it will surely strain the spine of the banks due to the given criteria. Though the Central Government shall provide guarantee to the banks for such loans, most of the MSMEs with Rs. 25 Crore outstanding will finally end up in non-repayment of the availed loan and the banks may get pulled over to sidelines with humungous Non-Performing Assets.
Rs. 20000 Cr sub ordinated Debt Meant for Stressed MSME’s
Subordinate debt means a debt owed to an unsecured creditor that in the event of a liquidation can only be paid after the claims of secured creditors have been met. Under this proposal, banks will extend loans to the promoters of stressed(NPA) MSMEs and the promoters shall have to use the said funds to infuse into the equity of the unit. The loan is guaranteed by Central Government . Though it is a very bold move to revive the liquidity in the market, the same will burden the banking sector and stagnate its growth.
Rs. 50000 Crore to MSME having viability and growth potential
MSME’s with growth potential and viability shall be funded through Fund of Funds and Rs 50000 Cr shall be routed to them. The MSMEs will be encouraged to list in stock exchanges to provide exit route to Fund of Funds.
Schemes for NBFC/HFC/MFI
Non-Banking Finance Companies/Housing Finance Companies/Micro Finance Companies are empowered under Atmanirbhar Bharat Abhiyan to enable them to fund MSMEs and Individuals. Rs.30000 Crore Special Liquidity scheme is devised to help NBFCs and thereby enabling them to raise funds from primary and secondary debt markets. The Rs. 45000 Crore partial credit guarantee schemes are devised to enable low credit rated NBFC/HFC/MFI to raise money from primary and secondary market to provide fresh loans to MSME/Individuals and first 20% of loss shall be borne by Government of India. The outflow from Government exchequer is very minimum under this scheme also as the banks are permitted to use their funds for the benefit of the society.
The timely intervention of the Government will help the economy to trace back to its lost rhythm and the liquidity in the market will spur growth and thereby help to build a self-reliant India. Relying on the strong fundamentals, the Atmanirbhar Bharat will grow further and help the rest of the World to grow.
Bijoy P Pulipra