1. Nirmala Sitharaman announces major stimulus package for MSMEs

Relevant for GS Prelims & Mains Paper III; Economics

Components of Rs. 20-lakh-crore economic stimulus package

  1. Union Finance Minister Nirmala Sitharaman announced a Rs. 3 lakh crore collateral free loan scheme for businesses, especially micro, small and medium enterprises (MSMEs). 
  2. 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. 
  3. 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. 
  4. Apart from MSMEs, other stressed business sectors which got attention were non-banking finance companies (NBFCs), power distribution companies, contractors and the real estate industry.

Atmanirbhar Bharat Abhiyan

This is the first tranche of the Atmanirbhar Bharat Abhiyan announced by Prime Minister Narendra Modi on Tuesday as a Rs. 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.

Focus is on MSMEs

MSMEs will get the bulk of the funding. The Rs. 3 lakh crore emergency credit line will ensure that 45 lakh units will have access to working capital to resume business activity and safeguard jobs. For two lakh MSMEs which are stressed or considered non-performing assets, the Centre will facilitate provision of Rs. 20,000 crore as subordinate debt. A Rs. 50,000 crore equity infusion is also planned, through an MSME fund of funds with a corpus of Rs. 10,000 crore.

New definition of MSMEs

The definition of an MSME is being expanded to allow for higher investment limits and the introduction of turnover-based criteria. In a bid to fulfil the Prime Minister’s vision of a self-reliant or “atmanirbhar” India, global tenders will not be allowed for government procurement up to Rs. 200 crore.

Indirect funding to MSMEs

NBFCs, housing finance companies and microfinance institutions — many of which serve the MSME sector — will be supported through a Rs. 30,000 crore investment scheme fully guaranteed by the Centre, and an expanded partial credit guarantee scheme worth Rs. 45,000 crore, of which the first 20% of losses will be borne by the Centre.

Power distribution companies

Power distribution companies, which are facing an unprecedented cash flow crisis, will receive a Rs. 90,000 crore liquidity injection.

Contractors and Real Estate

Contractors will get a six-month extension from all Central agencies, and also get partial bank guarantees to ease their cash flows. Registered real estate projects will get a six-month extension, with COVID-19 to be treated as a “force majeure” event.

‘Supply side measures’

“A clear feature of today’s announcement is that most of these are basically supply side measures, aimed at activating businesses in the MSME, real estate, NBFC sectors,” said Dr. Srivastava, who is also a member of the Advisory Council to the 15th Finance Commission. “Generally, stimulus measures are aimed at boosting demand either by government spending on its own account or increasing disposable incomes of households through cash transfers or tax concessions.” However, he noted that both demand and supply are in need of revival in the Indian economy today.

Concerns on the package

  1. He expressed concern that risk-averse bankers may not extend the loan benefits to all MSMEs despite the government’s 100% credit guarantee. 
  2. How much is government actually spending?

Ernst and Young’s chief policy advisor D.K. Srivastava estimated that the measures announced on Wednesday amounted to Rs. 5.94 lakh crore, which include both liquidity financing measures and credit guarantees, although the direct fiscal cost to the government in the current financial year may only be Rs. 16,500 crore.

  1. EPF support

Employee Provident Fund (EPF) support, provided to low-income organised workers in small units under the PMGKY is being extended for another three months and is expected to provide liquidity relief of Rs. 2,500 crore. Mandatory EPF contributions are also being reduced from 12% to 10% for both employees and employers in all other establishments.

Source: The Hindu

2. Labour short, can direct seeding be alternative to paddy transplanting?

Relevant for GS Prelims & Mains Paper III; Economics

The two granary states of Punjab and Haryana could face a shortage of an estimated 10 lakh labourers, mainly seasonal migrants from Bihar and Uttar Pradesh, to undertake transplantation of paddy in the upcoming kharif season. With lockdown relaxations not extending to trains to ferry these labourers who usually arrive by early June, farmers are now being encouraged to adopt ‘direct seeding of rice’ (DSR) in place of conventional transplanting.

How is DSR different from normal transplanting of paddy?

In transplanting, farmers prepare nurseries where the paddy seeds are first sown and raised into young plants. These seedlings are then uprooted and replanted 25-35 days later in the main field. The nursery seed bed is 5-10% of the area to be transplanted.

In DSR, there is no nursery preparation or transplantation. The seeds are instead directly drilled into the field by a tractor-powered machine. The Punjab Agricultural University (PAU) in Ludhiana has developed a ‘Lucky Seed Drill’ that can both sow seeds and simultaneously spray herbicides to control weeds. This machine is different from the more popular ‘Happy Seeder’, used to directly sow wheat on combine-harvested paddy fields containing leftover stubble and loose straw.

But why spray herbicides along with sowing seeds?

Paddy seedlings are transplanted on fields that are “puddled” or tilled in standing water using tractor-drawn disc harrows. For the first three weeks or so after transplanting, the plants have to be irrigated almost daily (if there are no rains) to maintain a water depth of 4-5 cm. Farmers continue irrigating every 2-3 days even for the next 4-5 weeks, when the crop is in the tillering (stem development) stage.

The underlying principle here is simple: Paddy growth is compromised by weeds that compete for nutrition, sunlight and water. Water prevents growth of weeds by denying them oxygen in the submerged stage, whereas the soft ‘aerenchyma tissues’ in paddy plants allow air to penetrate through their roots. Water, thus, acts as a herbicide for paddy. The threat from weeds recedes once tillering is over; so does the need to flood the fields.

In DSR, water is replaced by real chemical herbicides. Farmers have to only level their land and give one pre-sowing irrigation or rauni. Once the field has good soil moisture, they need to do two rounds of ploughing and planking (smoothening of soil surface), which is followed by sowing of the seeds and spraying of herbicides.

What are these herbicides?

There are two kinds. The first is called pre-emergent, i.e. applied before germination. In this case, the pre-emergent herbicide used is Pendimethalin. The Lucky Seed Drill that sows paddy can also spray the chemical, which costs Rs 450-500 at one litre per acre. Alternatively, farmers can use an ordinary seed drill and apply the herbicide immediately after sowing. The second set of herbicides is post-emergent, sprayed 20-25 days after sowing, depending upon the type of weeds appearing. They include Bispyribac-sodium (Rs 600-700 at 100 ml/acre) and Fenoxaprop-p-ethyl (Rs 700-800 at 400 ml/acre).

What is the main advantage with DSR?

The most obvious one is water savings. According to PAU’s director of research Navtej Singh Bains and principal agronomist Makhan Singh Bhullar, the first irrigation (apart from the pre-sowing rauni) under DSR is necessary only 21 days after sowing. This is unlike in transplanted paddy, where watering has to be done practically daily to ensure submerged/flooded conditions in the first three weeks. The second savings, relevant in the present context, is that of labour. About three labourers are required to transplant one acre of paddy in a single day. Pritam Singh Hanjra, a farmer from Urlana Khurd village in Haryana’s Panipat district, says that the transplanting labour costs last year were around Rs 2,400 per acre, “which may double this time”. As against this, the cost of herbicides under DSR will not exceed Rs 2,000 per acre.

Are there drawbacks?

The main issue is availability of the herbicides. Pendimethalin is sold by companies such as BASF (under ‘Stomp’ brand) and PI Industries (‘Bunker’). Bispyribac-sodium and Fenoxaprop-p-ethyl are marketed, among others, by PI Industries and Bayer under ‘Nominee Gold’ and ‘Ricestar’ brands, respectively. “If every farmer does DSR, will the demand for these chemicals be met? The seed requirement for DSR is also higher, at 8-10 kg/acre, compared to 4-5 kg in transplanting. Further, laser land levelling, which costs Rs 1,000/acre, is compulsory in DSR. This is not so in transplanting,” Hanjra said.

Surjit Singh, a 60-acre farmer from Gakhlan village in Punjab’s Jalandhar district, tried out DSR for the first time on two acres in 2017. This he increased to 6 acres and 10 acres in the next two years. “I am planning to do 15 acres in the coming season. The yields are as good as from normal transplanting, but you need to sow by the first fortnight of June. The plants have to come out properly before the monsoon rains arrive. There is no such problem in transplanting, where the saplings have already been raised in the nursery,” explained Singh, whose spring maize crop on the balance 45 acres will be harvested only towards June-end.

How much area is likely to come under direct seeding of rice?

The adoption of any new technology, be it Happy Seeder or Lucky Seed Drill, is ultimately dependent upon farmers feeling the need. The maximum area covered by DSR in Punjab was roughly 1.60 lakh hectares (lh) in 2015 — which dropped to 19,600 hectares, 1,100 hectares, 5,000 hectares and 23,300 hectares in the subsequent years. Sutantar Kumar Airi, director of Punjab’s Agriculture Department, expects it to rise to 2-2.5 lh this time on the back of labour shortages. Even that would be hardly a tenth of the state’s total 29-30 lh paddy area.

Source: The Indian Express

3. Credit guarantees to MSMEs: What are they and how will they help

Relevant for GS Prelims & Mains Paper III; Economics

Finance Minister Nirmala Sitharaman announced some details of the Atmanirbhar Bharat Abhiyan economic package on Wednesday. This is the second tranche of the package that includes past actions by the Reserve Bank of India as well as the first Covid-19 relief package announced during March and April.

The main thrust of Wednesday’s announcements was a relief to Medium, Small and Micro Enterprises (MSMEs) in the form of a massive increase in credit guarantees to them. There was, however, very little actual fiscal outgo that was announced.

Source: International Finance Corporation

In other words, instead of directly infusing money into the economy or giving it directly to MSMEs in terms of a bailout package, the government has resorted to taking over the credit risk of MSMEs should they want to remain in business. These credit guarantees should help the formal banking system meet the credit demand of the MSME sector (see Chart 2).

Source: Credit Guarantee Fund Trust for Micro and Small Enterprises

What are credit guarantees?

Loans to MSMEs are mostly given against property (as collateral) because often there isn’t a robust cash flow analysis available. But in times of crisis, like the one currently playing out, property prices fall and this inhibits the ability of MSMEs to seek loans. It also means that banks are less willing to extend loans.

A credit guarantee by the government helps as it assures the bank that its loan will be repaid by the government in case the MSME falters. For instance, if the government provides say a 100% credit guarantee up to an amount of Rs 1 crore to a firm, it means that a bank can lend Rs 1 crore to that firm; in case the firm fails to pay back, the government will make good all of Rs 1 crore. If this guarantee was for the first 20% of the loan, then the government would guarantee to pay back only Rs 20 lakh.

Why credit guarantees?

Even before the Covid-19 crisis, Indian government finances were in poor health. This pandemic has meant that government revenues will come under further pressure. For instance, experts are already talking of a GDP contraction of 5% to 10% in the current financial year. That will result in a revenue loss of anywhere between Rs 5 to 7 lakh crore. And yet, this is also the year when employees and firms want the government to help them out financially.

Efforts to pump liquidity via the banks have been a non-starter because banks simply do not want to lend any new money. Banks, quite justifiably, suspect that any new loans will only add to their growing mountain of non-performing assets (NPAs).

So the government was facing an odd problem: Banks had the money but were not willing to lend to the credit-starved sections of the economy, while the government itself did not have enough money to directly help the economy.

The solution — credit guarantees — finally chosen by the government is not a new one, because this fiscal conundrum is not a new one either (Chart 3).

Source: Credit Guarentee Fund Trust for Micro and Small Enterprises

So, what is the quantum of credit guarantee provided to MSMEs?

There are three proposals but the main one is for standard MSMEs — that is, those MSMEs which were running fine until the Covid-19-induced lockdown disrupted their work.

For these, the government has provided a credit guarantee of Rs 3 lakh crore. This is like an emergency credit line, said the Finance Minister, and it is for MSMEs that have an already outstanding loan of Rs 25 crore or those with a turnover less than Rs 100 crore. The loans will have a tenure of 4 years and they will have a moratorium of 12 months (that is, the payback starts only after 12 months). The loan should be taken before October 31, 2020.

According to Hetal Gandhi, Director, CRISIL, “if there is an MSME which had a loan (up to Rs 25 crore) with any bank or NBFC and if, as a result of the Covid-19 crisis, this MSME needs more funds then it can take more loans, without the need for any collateral, because the government will guarantee such loans fully.”

Source: Annual Report, Ministry of MSMEs

Why Rs 3 lakh crore?

Gandhi said the total outstanding loan to MSMEs by the banking and NBFC sector would be around Rs 16 to 18 lakh crore. Assuming that 80% of these loans are working capital loans where there would be a 20% incremental funding needs, that gives an amount of approximately Rs 3 lakh crore. So the government is hoping that this credit guarantee will help those MSMEs take out another loan and recover: The hope is that since these MSMEs were able to pay back before the crisis, there is no reason why they cannot after the crisis, provided they are given some extra money to survive this period.

What are the other measures?

There is a subordinate debt scheme, worth Rs 20,000 crore, which will allow loans to MSMEs that were already categorised as “stressed”, or struggling to pay back. In this case, the government’s guarantee is not full, but partial.

The third measure is the creation of a fund with a corpus of Rs 50,000 crore to infuse equity into “viable” MSMEs, thus helping them to expand and grow. The government intends to put in Rs 10,000 crore and get others, possibly institutions like LIC and SBI, to fund the remaining amount.

Then there is a change in the definition of an MSME that was pending for long. Now MSMEs will be judged on turnover and there will be no difference between a manufacturing MSME and a services MSME.

Source: Annual Report, Ministry of MSMEs

How far will these measures help?

The Rs 3 lakh crore credit guarantee is the most substantive announcement as it will most likely have a significant impact in helping MSMEs pay salaries and keep their heads above the water even as the economy slows down.

According to the Finance Minister, this measure will help as many as 45 lakh MSMEs. While this is a minuscule proportion of the overall number of MSMEs, these are likely to be the medium and small enterprises, which employ almost 40% of all employees — although these enterprises themselves are very few in number (just about 0.5% of all MSMEs).

The change in definition of MSMEs will also help because “turnover” is the more efficient way to identify an MSME and it also allows a lot of firms, especially in the services sector like mid-sized hospitals, hotels and diagnostic centres to be eligible for benefits as an MSME.

The other two steps are unlikely to make a huge dent in the overall scheme of things.

Are there any downsides to resorting to credit guarantees?

There are, especially if it is a 100% credit guarantee. That’s because such a guarantee leaves no incentive for either borrower to pay back — he has nothing to lose — or for the lender — the banker is assured of payback from the government so why should he bother to check if the borrower is deserving or not.

A more prudent option would have been a split (say an 80%-20%) wherein the government assures to pay back only 80% of the new loan. This circumvents the problem of a moral hazard.

As a result, it is quite likely that the government will have to start shelling out money in the next financial year when MSME NPAs rise once the moratorium is over.

Source: The Indian Express

4. Govt again bats for ‘Swadeshi,’ orders Central Armed Police Forces canteens to sell only ‘Made in India’ products

Relevant for GS Prelims & Mains Paper III; Economics

As a part of its efforts to tackle the major economic challenges posed by the Covid-19 pandemic, the govt. has taken a significant policy decision. It has ordered that the canteens of Central Armed Police Forces (CAPFs) will sell only indigenous (locally made) products from June 1.

The CAPFs comprise of CRPF, BSF, CISF, ITBP, SSB, NSG and Assam Rifles. Their canteens cater to 50 lakh family members of about 10 lakh personnel.  Each year, such canteens sell products worth about Rs. 2,800 crores.

The reason behind this move

This decision is a part of the govt’s strategy to encourage the use of local products and to boost domestic manufacturing. As per the govt, if Indians start buying only indigenous products, the country can become self-sufficient in next five years.

Notably, this decision has come just a day after the Prime Minister announced a Rs. 20 lakh crore economic package to battle the coronavirus crisis.

A lifeline for ‘Make in India‘!

This call by the govt. to prefer locally made products is its renewed effort to revive the ‘Make in India’ campaign. It was launched in 2014 with an aim to turn India into a global design and manufacturing hub.

It was also intended to encourage foreign companies to invest in the country by improving the country’s ‘Ease of Doing Business’ index.  Even though the campaign brought success in some sectors, but overall it has so far struggled to meet the desired expectations.

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