Post the Modi government announcement of the mother of all Stimulus there has been a lot of debate on its impact. Critics broadly are questioning the demand side of the stimulus, they want the government to out money in the hands of the consumer to increase demand in the market. They believe the liquidity measure only will be triggering the supply side. However the government is looking for a more sustainable recovery where the economic cycle kicks off, employment generation kicks up and both supply and demand stabilize in the medium term ( may be 2 quarters). Obviously comparisons are being made with developed countries like in the US, Canada, France etc where the government is doing cash transfers to tax payers accounts ( one or two months salaries). It is comparing apples and oranges given population size, wealth of the nation, its economy etc. I think the Modi government has a chosen a more sustainable method to kick start the economy taking into consideration fiscal deficit, inflation etc.
Some of the measures announced are transformative in nature and I am sure they will soon be made into laws ( APMC, Labor, Privatization across sectors, Commercial coal mining etc).
What it means -
1. For MSMEs ( micro, small, medium enterprises) - 3 lakh crores - MSMEs employ 11 crore people and have a GDP share of approximately 29 per cent – This sector is the economic back bone of the country – Ex: Fabrication units/shops, Small food manufacturing units, etc . 45 Lakh MSME units will benefit from this move. (for comparison IT sector employs only about 50+ Lakhs directly and another 1 crore indirectly) – If Medium, Micro sectors are impacted India will be in trouble.
INR 3 lakh Crore Collateral free loans ( that means no need of any pledging to get the loan), only condition it should be a running company. Also 50k crore equity infusion through fund of funds Much needed intervention and bold step by the govt in giving collateral free loans. (Political opposition will not talk about these collateral free loans)
2.NBFCS, HFC’s, MFIs - Rs 30,000 crore.
Means - The government will buy debt papers issued by NBFCs, MFIs and HFCs. These papers will be fully guaranteed by the government of India. This will give market confidence.
30K Crore - To all NBFCs, Housing finance and Micro finance - Relief for this stressed sector in the form of liquidity. They can start lending again and market cycle will start
3. Power companies ( DISCOMS) Revenues have dropped for DISCOMS due to drop in demand for these companies. 90K crore will be made available to DISCOMS against their receivables ( means the bills you have to pay, industries and commercial establishments have to pay to DISCOMS). 90 k Crore Excellent move to ensure cash flow to the DISCOMS. Else they will be bankrupt. DISCOMS already owe 1 Lakh crore to generation companies. Power sector is screwed up because of low tariffs, leakages and operational inefficiencies
4.Global tenders of up to 200 crores will not be allowed. To all Indian companies – They will not face competition from MNCs for up to USD 30 Mil dollars tenders by Govt of India – Make in India drive Policy intervention. Great move for Indian companies - no international competition
5.MNREGA Additional amount of 40k Crore to boost rural employment. This is in addition to the 60k crore announced in the budget. Great move. This is almost cash in the hands of the rural population. About 200 Rs/ Day is the wage
6. Agriculture, Animal husbandry, Fisheries, Dairy- For setting up Cold storage/ chains to preserve harvested food 1 Lakh Crore. India has very poor post-harvest infrastructure leading to wastage of food and farmers selling their produce dirt cheap. Cold storages will help in storage for longer periods
7.NBFCs, HFCs, MFIs Rs 45,000 liquidity infusion – Partial guarantee scheme which will cover commercial papers and borrowings.
Partial guarantee means - The first 20 percent loss will be borne by the government 45 K Crore NBFCs can lend to businesses and market cycle will start
8. TDS/TCS Rs 50,000 cr relief on TDS/TCS – more cash in tax payers hands. Payment for contract, professional fees, interest, rent, dividend, commission, brokerage, etc. will be eligible for reduced rate of TDS. Benefit - More money in the hands of tax payers
9. Kisan Credit Additional 2 lakh crore vis kisan credit cards to enable credit for farmers. Benefits farmers
10. APMC reform very important – farmers can now sell their produce wherever they want – they are now victims of traders who lower the prices when they buy from farmers. Higher price realization for farmers
Over and above all the above the Government has brought several long-term reform measures such as Commercial coal mining ( India imports coal despite having large coal deposits), labour reforms ( already initiated by BJP ruled states MP, Karnatak, Gujarat), and opening up of many other sectors for private players ( space etc). FDI in defence manufacturing increased from 49% to 74%.
While some analysts were not happy with the stimulus and the approach taken by the government others were having a favorable opinion - “The package largely meets our expectations. However, we believe the government will need to step in again to revive growth through demand stimulus, as well as measures to support the financial sector “ – Nomura - https://www.financialexpress.com/opinion/how-potent-is-indias-economic-vaccine-explained/1963246/.
The package is announced the execution of the reforms will bear the results, for that we will have to wait.
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