Sitharaman’s announcements on day one peddled liquidity as fiscal stimulus to dupe people
The first briefing on Prime Minister Narendra Modi’s “Atmanirbhar Bharat” (self-reliant India) by Finance Minister Nirmala Sitharaman that was held at 4pm on May 13th, remained mundane and followed the pattern that she has been following since May 2019. Sitharaman’s announcements dealt with 15 points – six for medium, small and micro enterprises (MSMEs), two for Employees’ Provident Fund (EPF), two for non-banking financial corporations (NBFCs), housing finance corporations (HFCs), microfinance institutions (MFIs), etc, one for electricity distribution companies (discoms), one for contractors, one for the real estate sector and three for taxes. The finance minister focused mostly on the MSMEs during the entire press meet.
MSME proposals in Sitharaman’s announcement are half-hearted
In her first meet on the Rs 20 trillion announced by Prime Minister Modi on May 12th to build a self-reliant India, Sitharaman’s announcements regarding the crucial MSME sector skipped the crucial demands that the crisis-ridden sector has been raising since years.
- Collateral-free loans: Sitharaman announced that the government will infuse Rs 3 trillion as liquidity in form of collateral-free loans for the MSMEs for those with turnover from Rs 250m to Rs 1 billion with a moratorium on paying the principal amount for 12 months. The MSMEs can apply for such loans within October 31st 2020, and they can pay back the amount in a period of four years. At a time when the MSMEs are worried about the supply chain disruption, lack of labour and lack of demand in the market, how much interested they will be in taking loans without collaterals?
- Subordinate debts: A subordinate debt of Rs 200 billion will be available for the MSMEs that are stressed or considered non-performing assets (NPAs). The promoters have to take the loans from the banks and that will involve them in these debts. But the government will provide Rs 40 billion to the banking sector as a credit guarantee for this purpose. But how would the banks, who are parking their money with the Reserve Bank of India (RBI), fill the gap of Rs 160 billion? Why the NPA risk of the public sector banks (PSBs) is increased? The private sector banks don’t lend to the MSMEs is a known fact, so the loans to stressed and NPA accounts will actually push the PSBs to an extreme crisis.
- Loan for viable PSBs looking for expansion: Rs 500 billion credit to those MSMEs that are viable and look forward to expanding their business. It’s not comprehendible how such MSMEs will expand their business when the market is in a gloomy situation and the demand is at nadir.
- The definition of MSMEs: In Sitharaman’s announcement, the MSMEs’ criteria is changed by clubbing together manufacturing and service providers and by considering their turnover, along with their investment, for consideration. Though this will expand the scope of the MSMEs, which employ around 20% of the country’s workforce, it’s going to be problematic as both investment and turnover are now considered for categorisation, which should ideally be the turnover only because then the MSMEs can get leeway in overhauling their technology with adequate capital expenditures.
- Government procurement tenders: Sitharaman announced that the Indian government tenders up to Rs 2 billion will not be open to global tenders and only Indian companies will be able to bid for them. However, there is no barring of non-MSMEs from participating in the bids. Also, how many projects of the government up to Rs 2 billion are floated and are profitable for the Indian MSMEs need a close analysis to gauge the real benefits for the MSMEs.
- E-market linking: As trade fairs are not feasible at this point in time, Sitharaman said the government will provide e-market linkage to the MSMEs. Also, all receivables from the government and central public sector enterprises (CPSEs) will be cleared within a time period of 45 days.
Sitharaman’s announcements regarding the MSMEs show no new ray of hope but clubs together all old demands of the sector that the government remained indifferent to and emphasised more on liquidity and credit availability with a supply-side focus, without telling how the demand-side development can be done so that their business operations can run.
Two crucial demands of the MSME sector, a Goods and Services Tax amnesty scheme, and the payment of wages to their employees for the lockdown period through the Employee State Insurance fund, were blatantly ignored by the Modi regime, as Sitharaman’s announcements didn’t touch these two crucial issues.
EPF proposals are discriminatory towards the private sector employees
Sitharaman’s announcements regarding the EPF scheme can be considered quite discriminatory towards the private sector employees.
- Extension of previously announced EPF scheme: Earlier in March, Sitharaman announced that the government will be paying the EPF contribution for those enterprises whose 90% employees earn less than Rs 15,000 per month, for a period of three months. According to Sitharaman, there are 650,000 beneficiary organisations with 7.22m beneficiary employees and Rs 25 billion is injected by the government in this scheme. She announced the extension of another three months, ie, now the government will pay the employers’ and employees’ contributions till September 30th 2020. This announcement leaves many stressed organisations that don’t meet the criteria and, hence, their employees remain deprived of their wages.
- Statutory PF contribution for private sector reduced: One of Sitharaman’s announcements was quite shocking. She declared the employers and employees of the private sector will not have to shell out 12% of the basic salary for EPF contribution, but only 10% respectively. Though the reduction of payment by two percentage points can be beneficial for the employers, as they will save more, and though the employees will see a bit less reduction in their salaries, it will severely affect their future savings. The government has repeatedly reduced interest rates on the EPF fund and has done away with pensions for employees, it’s a big blow to those who have only EPF as a sole saving instrument. At the same time, the government employees will also enjoy a two percentage point reduction in their EPF contribution, but as an employer, the government and the CPSEs will pay 12% from their part and the leftover two percentage points on behalf of the employees.
A huge pay gap has always existed between the government sector and the private sector. Now as the private sector employees will see a reduction in their savings, while the government and CPSE employees will remain unaffected.
NBFC – HFC – MFI sectors
Sitharaman’s announcements on the fiscal package worth Rs 20 trillion also took into account the cases of NBFCs, HFCs and MFIs. She claimed that they are inter-linked with the MSMEs and greater liquidity in their hands will end up helping the MSMEs.
- Debt papers: Sitharaman’s primary concern is the debt papers of NBFCs, HFCs and MFIs. She said Rs 300 billion will be pumped as liquidity for these sectors. The Government of India will give a full guarantee as well.
- Expansion of existing scheme: The government already has a scheme for the NBFCs, HFCs and MFIs. Sitharaman announced that there will be an infusion of Rs 450 billion-worth liquidity to the existing scheme to expand its scope and to cover liabilities, the government will be bearing the first 20% losses. She also mentioned that the double-A papers and unrated papers will be eligible under this.
These measures won’t deal with the issue of the NPAs and the lack of demand in the market will definitely impact the business of NBFCs, HFCs and MFIs. They have been suffering for a long time and the government conveniently ignored their plight during the pre-COVID-19 period. Now under the garb of providing a stimulus, the Modi regime is announcing long-pending measures that the sectors have been demanding.
According to Sitharaman, the discoms are in a bad position as they can’t collect money from the customers and, also, they can’t pay the power generation companies. A Rs 900 billion-worth package was announced during Sitharaman’s announcements for the discoms. This amount will be paid to the discoms in return of their receivables. Under this, the discoms will be able to clear the dues of the power generation companies and there will be rebates to the discoms if they pass on the benefits to the end customers.
There is no information on what will happen if a discom doesn’t pass on the benefit to the customers. There is no announcement on whether the marginalised electricity users, especially the poor, the farmers, the labourers and MSMEs will get any amnesty on their existing electricity bills. Everything is left on the unscrupulous discoms.
Sitharaman’s announcements also dealt with the issues of government contractors. As part of the bigger MSME narrative, she said that the contractors working on any project of either the government or CPSEs will get an extension of six months to finish their projects without any penalty. The government agencies and the CPSEs will, as per Sitharaman, also release bank guarantees of the contractors vis-à-vis the portion of the project they have completed to ensure they have cash in their hands.
Now, this is a security deposit that the contractors pay the government agencies or CPSEs while taking up a project. This money is always refundable when the project is completed. Returning their money back to them isn’t helping them. This money won’t go back as capital expenditure. Still, this is packed within the Rs 20 trillion-worth package to fool the people.
Sitharaman announced that the real estate companies can use the force majeure clause in the contract during the COVID-19 for a period of six months. No other details were announced for them. It’s just a mere extension of their project dates by six months under the “act of God” clause. It’s not clarified how this can come under a fiscal stimulus package.
Under the taxes part, Sitharaman’s announcements dealt with three points and they didn’t provide any relief measure to the people.
- 25% reduction on TDS and TCS for non-salaried class: The government decided to give a 25% reduction on non-salaried TDS for a period from May 14th 2020 until March 31st 2021. This, according to Sitharaman, will give Rs 500 billion back to the people, ie, the middle class and the upper classes. There was no announcement on tax rebates for the salaried employees.
- Pending refunds to be released: The pending tax refunds of all charitable trusts, non-profit companies, sole proprietorship entities and partnership firms will be released immediately.
- Date of assessment extension: Sitharaman declared that the tax assessment dates will be extended. The new Income Tax returns filing date will be November 30th 2020, and the new tax auditing date will be October 31st 2020.
All rhetoric and no real solutions visible in Sitharaman’s announcements
The entire speech of Sitharaman and her minister of state, Anurag Thakur, centred on eulogising Modi. These incessant praises heaped on Modi were subterfuge used to conceal the hollowness of his Rs 20 trillion-worth package for a “self-reliant India”. Out of Rs 20 trillion, Sitharaman declared nearly Rs 6 trillion-worth proposals. None of them can be counted as a fiscal stimulus but merely liquidity pumping initiatives. The Rs 1.73 trillion earlier allocated by her in March 2020, which consisted of the pre-existing schemes, free ration provisions and meagre cash transfer proposals, along with the Rs 6.5 trillion liquidity infused by the RBI, are considered part of the Rs 20 trillion-worth package.
The first of Sitharaman’s announcements focused on providing liquidity worth Rs 6 trillion, which means, altogether the COVID-19 package – all liquidity and no stimulus – that the Modi regime has announced so far, has a total of Rs 14.23 trillion. It leaves around Rs 5.77 trillion-worth packages to be announced. Passing of liquidity infusion as fiscal stimulus is a new way to dupe the country and the people. Unless a fiscal stimulus is announced in the next meets, worth 10% of the GDP, there can be no respite in the economic sphere.
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