Self-confident India moves ahead with its version of Fiscal stimulus for Economic revival

My first reaction:

Yesterday, Prime Minister Modi announced ‘Atmanirbhar Bharat Abhiyan’ (Self-reliant India Mission) “Self-reliance will be based on five pillars — economy, infrastructure, technology driven system, vibrant demography and demand… translating into 4 L’s – land, labor, Liquidity & Laws reforms… added to that was a clarion call to be vocal for ’local’, a message to support local manufacturing ..with a caveat, keeping in mind an eye to attract higher dosages of FDI. India is not advocating for a self-centered system… Instead, the PM echoed concern for world’s happiness, cooperation and peace..”. With that as an over-arching vision, he signaled a series of announcement culminating into INR 20 Trillion stimulus package for greasing the nation’s economic engine.

Union Finance Minister Nirmala Sitharaman today announced the first tranche of economic package to help businesses, including micro, small and medium enterprises (MSMEs), recover from adverse impact of the COVID-19 pandemic. The measures announced today add up to almost INR 6 Trillion on the back of 4 Reserve Bank & Ministry of Finance announcements : 1. Liquidity injection of 3.74 Trillion on March 27 by way of CRR cut of 100 bp, targeted long-term repo operations ( TLTRO), 2. TLTRO 2.0 on April 17 including refinancing of SIDBI, NABARD & NHB 3. Special liquidity window of Rs. half trillion for Mutual funds on April 27 as reaction to Franklin Templeton suspension of redemption's and 4. March 27 announcement of 1.7 trillion crore fiscal package.

Most significant measures announced today are targeted to delivering sustenance to the plagued MSME sector by way of collateral-free automatic loan facility up to Rs 3 trillion, 0.9 liquidity injection to propel cash flow of Electricity distribution companies, partial credit guarantee scheme of 0.45 trillion to assist microfinancing, liquidity push of Rs. 0.3 Trillion for NDFC’s, HFC’s & Mutual funds. A game changer to the outlook of MSMEs has been announced by revising upwards the investment limit and bringing in an additional criteria of turnover size of the company, without discriminating between manufacturing & services segments, though, it’s unclear if this will necessitate an amendment to the MSME Act.

To increase take-home salaries of non-government employees, the Employee fund contribution has been also reduced to 10 % from the present 12 %.

On the direct tax front, there is a breather for taxpayers by way of cash flow, in the form of reduction in the rates of Tax Deduction at Source (TDS) and Tax Collection at Source (TCS) by 25 per cent, with effect from May 14, 2020 up to March 21, 2021. This shall not apply to withholding tax on payments to non-resident tax payers. The deadlines for filing individual & corporate tax returns has been extended to October 31 & November 30, 2020, respectively and for tax audit to October 31, 2020. All outstanding refunds for non-corporate tax payers, irrespective of quantum’s shall be issued immediately. The Government has inferred to shift its focus for tax collection by extending the deadline for dispute settlement scheme, Vivad se Vishwas till December 31, 2020 without any additional amount.

Most announcements are targeted to improve liquidity in hands of middle class individuals, support financing, alter borrowing schedules, refinancing, loan repayments by small & medium enterprises and release of payments & proportionate guarantees towards contractors. It’s premature to assess the impact of today’s announcement on the fiscal situation, though, it seems that

only limited measures have a direct impact on the fiscal deficit, as it entails more liquidity measures and banking sanctions, than ‘fiscal giveaway”. The impact of measures shall also depend on how the economy performs on Direct tax & GST collections, in the course of the year and to what extent the Government shall pull back on expenditure it had budgeted for in its annual Finance Act, which was passed days after the nationwide lock down was announced. Lastly, other measures, particularly on land, labor & law reforms will be awaited. Though land & labor are state subjects, it is anticipated that a framework for land leasing laws will be laid down by the Center and immediate anticipated changes in law include amendments to Insolvency & Bankruptcy code, Essential Commodities Act & Agricultural Produce Market regulations to ease immediate pressure faced by small & medium business enterprises facing threat of bankruptcy and ensuring smooth procurement of essential commodities & agriculture produce.

Overall, measures announced today will soften the devastating impact of corona-virus driven lock-down on the economy. No doubt, this is the start of announcement and measures expected in the coming weeks & months shall lay foundation for revival of the economy