In a bid to mitigate the economic impact of COVID-19 pandemic and to make India self-reliant, the government has announced a slew of measures to help businesses in these difficult times.
The pain points
- The economy has already taken a massive hit due to the lockdowns with some estimates projecting a loss of $230 billion.
- Companies are still not back on their feet with areas under Red zone constituting 43% of India's GDP and Orange Zone 38%.
- MSME's contribute over 30% of the country's GDP and provide massive employment both formal and informal sector
- These companies typically have a short runway of cashflow to sustain. Further, the lockdown has drained resources.
- Unemployment has surged to over 26% from 8% a few months ago
- Existing measures announced by RBI to help businesses get liquidity are not helping as banks are unwilling to take the credit risk of lending
The big bang measures
- ₹3 Lakh crore ($40 bn) Automatic, collateral free loans to Businesses and MSME's: Companies with up to ₹ 25 crore debt outstanding and up to ₹ 100 crore turnover will be eligible. This provides an immediate lifeline to small and mid-sized companies to help manage working capital and revive business post lock down. There will be a 100% credit guarantee cover and to Banks and on principal and interest and the scheme can be availed till October 31
MSME specific measures
- The definition of MSMEs has been widened. This will ensure that these businesses will continue to get relief even if they grow bigger (view chart below)
- ₹20,000 crore subordinated debt to MSMEs: Government will facilitate provision of ₹20,000 crore worth subordinated debt for MSMEs. This is expected to benefit 2 lakh MSMEs
- ₹50,000 crore worth equity infusion through MSME fund of funds: This will encourage MSMEs to get listed on main board Stock Exchanges
- Global tenders will be disallowed in government procurement tenders for up to ₹200 crore. This is being done to safeguard domestic MSMEs from unfair global competition
- All MSME Receivables From Government And CPSEs To Be Cleared In 45 Days
This brings more companies under the umbrella for various benefits that aim to provide liquidity for MSMEs, bring more business opportunities and support growth. While the clear focus of the government on MSMEs is great, the question still remains on how these schemes will reach MSMEs as registrations and regulatory framework is still a pain point.
EPF related announcements
- Extension of support for 3 more months for businesses and workers worth ₹2,500 crore
- EPF contribution reduced for Businesses and workers for 3 months worth ₹6,750 crore. This will provide liquidity relief to 3.67 lakh establishments and for 72.22 lakh employees
Together, these measures should put more money in the hands of the employees and businesses, thus in-turn boost consumption.
For Non-Banking Finance Companies, Housing Finance Companies and Micro-Finance Institutions
- Rs 30,000 crore Special Liquidity Scheme for NBFCs/HFCs/MFIs: Under this scheme investment will be made in both primary and secondary market transactions in investment grade debt paper of NBFCs/HFCs/MFIs. These securities will be fully guaranteed by GoI. This will provide liquidity support for NBFCs/HFC/MFIs and mutual funds and create confidence in the market
- Rs 45,000 crore Partial Credit Guarantee Scheme 2.0 for NBFCs
This seems especially targeted to help liquidity in debt markets and NBFCs which in turn lend downstream to businesses. The partial credit guarantee (while more information is awaited) covers even companies with lower rated papers who would otherwise find it extremely difficult to get liquidity.
- Revenues of Power Distribution Companies (DISCOMs) have plummeted. Further, they are facing unprecedented cash flow problems accentuated by demand reduction. The government has proposed a ₹90,000 crore worth liquidity Injection for DISCOMs. PFC/REC to infuse liquidity of Rs 90,000 crore to DISCOMs against receivables
Discoms are already severely debt-ridden and are one of the worst affected sectors in this lock-down. With almost ₹94,000 crore already owed to power generation companies, this seems to be a measure that will diffuse the logjam that was about to hit the power sector.
Extension of up to 6 months (without costs to contractor) to be provided by all Central Agencies (like Railways, Ministry of Road Transport & Highways, Central Public Works Dept, etc). Further, the government agencies will partially release bank guarantees, to the extent contracts are partially completed, to ease cash flows.
The government has announced the Extension of Registration and Completion Date of Real Estate Projects under RERA. Extend the registration and completion date by 6 months for all registered projects expiring on or after 25th March, 2020 without individual applications.
According to a recent KPMG report, the overall impact of the COVID-19 on the construction sector in India has been estimated at ₹30,000 crore per day. The pandemic is also likely to reduce investment in construction-related projects by 13 to 30 percent, which is likely to impact the Gross Value Added and employment. The measure announced, hence, comes as a welcome relief to these sectors reeling under distress.
- Rs 50,000 crores liquidity through TDS/TCS rate reduction: The government has looked to provide more funds at the disposal of the taxpayers. Therefore, the rates of Tax Deduction at Source (TDS) for non-salaried specified payments made to residents and rates of Tax Collection at Source (TCS) for the specified receipts shall be reduced by 25% of the existing rates.
- • Due date of all income-tax return for FY 2019-20 will be extended from 31st July, 2020 & 31st October, 2020 to 30th November, 2020 and Tax audit from 30th September, 2020 to 31st October, 2020.
- Date of assessments getting barred on 30th September, 2020 extended to 31st December, 2020 and those getting barred on 31st March, 2021 will be extended to 30th September, 2021
These tax measures will help to reduce the compliance burden of the taxpayers.