There is an “Atmnirbharta” about the manner in which the government under PM’s leadership has approached Covid-19 – customised to India and considerate of the need for help to our most under-privileged citizens and sections of society. A “playbook” was established in dealing with the health pandemic – dealing with the affected patients, then controlling the contagion and finally consolidating as infrastructure was built up.
The same approach is being taken with the economic stabilisation measures. Wisely, the government has not got distracted by calls for immediate “packages” and sops. Immediate succour was provided through DBT, moratorium and similar measures. Subsequently, the PM announced the broad-view priorities for the next stage – spurring local businesses, demand build up, the 4Ls etc. that provided a framework.
The FM’s announcements build and expand that framework. Reflecting the PM’s priorities, the first set of announcements have an overarching “theme” – helping the more effected and vulnerable parts of the Indian “corporate” ecosystem get the wherewithal to restart operations.
MSMEs had been suffering given the growth slowdown before Covid-19 – demand had been falling and liquidity was tight. The epidemic left this sector teetering on the edge of a precipice. What did the MSMEs require? –liquidity – to build up inventories, pay salaries and vendors; demand revival and be able to “focus” totally on reviving operations without being distracted with compliance. All three have been addressed. The collateral free loans and the 20% first loss guarantee by the government are revolutionary. These will allow “quick” transmission of liquidity to the MSMEs – one of the major issues thus far had been the mismatch between the liquidity provided by RBI versus the credit concerns of NPA-overhung PSBs.
The fund of funds concept will help bridge the “equity” gap for MSMEs. Debt gets supplemented by the commitment to pay CPSU and GOI dues to the MSME sector immediately. Tax refunds and reduction in TDS, EPF contributions all help. With liquidity, MSMEs can “afford” to restart operations – but they need demand. The twin steps – abolition of global tenders upto 200 crores and provision of technology to make up for lack of “physical” trade fairs – can spur demand. Leeway on some filing deadlines will allow companies to focus on operations for the moment. Expanding MSME definition means the steps help a much larger part of the economy.
The liquidity theme continues with measures for the NBFC-HFCs-MFIs. This group is now the major transmitter of liquidity to our smallest businesses. Providing them liquidity, and “stability” of funding means they can confidently go out and lend.
Contractors and real-estate sector are massively important for employment creation – for the poorest labourers etc. hurt worst by the crisis. Steps taken to help them will reduce pressure in terms of costs, damages due to delays and allow them to immediately focus on resuming projects.
Discoms have been a “problem child” for years – caught between difficulties in collecting against often populist measures and remaining current with generators. The announced measures will help in the immediate, but the overhang risk of “who will finally pay” does not appear to get resolved.
Overall, the measures appear well thought out and balanced. They focused on the parts of the economy that need immediate succour.
Operationalisation will be key – especially transmission of liquidity into the economy. The direct “funding” from the government – payment of refunds, payment of dues to vendors will be the quickest. With the government effectively “transferring risk of loss” to itself in substantial measure – through the fund of funds approach, through the 20% first loss credit and the collateral free loans, banks will have little reason not to lend and must do so as fast as possible.
This is the first in a series of measures that the government will be announcing over the next few days. Today, the FM mainly dealt with the liquidity “L”. To turn this crisis into a means of “reinventing” the economy, we need continued simplification of laws and action on land and labour reforms. We also need specific steps to help Indian manufacturing become more competitive – so that we win on a level playing field and not hide behind protectionism. Most critical though, will be re-creating demand. The RBI governor has constantly stressed structural change – this needs action. Similarly, the government will need to announce its own investment plan – in infrastructure, modernisation of the economy, in technology and research that, at-least initially, needs to ignite demand and lift the economy.
(Saket Misra is an international investment banker. Views are his own)