₹20 lakh crore Economic Stimulus: What will Fund India’s Covid19 Recovery Package?

On Tuesday, May 12, 2020, the Prime Minister of India, Mr. Narendra Modi announced the much-awaited COVID stimulus package of ₹20 lakh crore, which is 10% of the country’s GDP. The question that everyone’s been asking since then – what will be the source of these funds?

We are hazarding some assumptions here: 

  • Reallocation of government spending
  • Tapping domestic private savings
  • Bond purchases
  • Foreign borrowings

The good news is that though the announcements made are worth ₹20 lakh crore, the actual cash outlay by the government and its effect on the fiscal deficit will be far less, at least in the immediate term. That is because, most of the proposals of the government are credit-focused, and others are aimed at easing liquidity concerns for the sectors impacted due to the pandemic. Any costs incurred will initially be covered by financial institutions and will not result in actual cash outflow by the Centre.

Reallocation of government subsidies

Most of the existing government spending goes towards the subsidies, for food, fertiliser and fuel. ₹70,000 crore of these subsidies can be released for increased fiscal spending.

Privatisation of PSUs

Government decided to use equity to raise private funds via large-scale privatisation of PSUs. Not only will this help in raising required funds but will also improve the efficiency ofpublic firms when run jointly by private investors.

The number of PSUs in strategic sectors will be maximum four, remaining will either be privatised or merged. As per the new public sector enterprise policy, all sectors will be open to private sectors and PSUs will play a significant role in defined areas.

Bond markets

In the near-term, the funding burden will fall on bond markets and for it to stabilise markets, RBI’s participation is of prime importance. Market borrowing is likely to rise by at least ₹7-10 lakh crore via domestic means and bond issuances. RBI will play a key role in stepping up bond purchases since absorptive capacity of domestic investors and foreign portfolio investors is limited.

Tax-free bonds

These may turn out to be a preferred investment option for retail investors who are seeking debt mutual fund schemes. These bonds will open a new avenue of participating in a government instrument free of tax.

Foreign borrowings

  • FCNR account deposits

In 2013, at the time of taper tantrum, RBI permitted foreign currency non-residents (FCNR) account deposits, which fetched an inflow of $30 billion in FCNR bank deposits and attracted huge funds from abroad. This strategy may be reimplemented. Moreover, given the fact international borrowing costs are likely to be low, we can be open to foreign currency debt.

  • FDI

Being open to equity investment by foreigners is a smart way to fund our current and urgent needs.

With this in mind; in the fourth tranche of government’s ₹20 lakh crore special economic stimulus package, Finance Minister Nirmala Sitharaman raised the Foreign Direct Investment (FDI) in defence manufacturing to 74% from 49% via automatic route and announced several measures to make defence production self-reliant in the country under Make in India.

Increase in Direct Taxes

Depending on increased taxes is not a great idea as it will only deplete private spending and lead to huge inefficiencies in implementation. Besides that, there is a need of not just the government expenditure but also private consumption and investment for the economy to recover.

India’s ₹20 lakh crore COVID-19 economic stimulus package: Impact on MSME sector

As a part of the ₹20 lakh crore stimulus package announced by the Prime Minister Narendra Modi to spur growth and help build a self-reliant India, Finance Minister Nirmala Sitharaman on Wednesday, 13 May 2020 announced a economic relief package. This package will act as a helping hand for businesses, including micro, small and medium enterprises (MSMEs) to recover from the impact of the Coronavirus (COVID-19) pandemic.

The finance minister reiterated the thoughts of the Prime Minister and said that self-reliant India / a Aatmanirbhar Bharat rests on five pillars: Economy, Infrastructure, Technology-driven systems, Demography, and Demand. Thus, factors of production, such as land, labour, liquidity, and laws will be focussed upon with an intention is to make local brands global.

Here are the key takeaways from the press meet.

For the revival of the MSME sector:

1. Unsecured loan of ₹3 lakh crores for MSMEs to be given. Though this, 45 lakh units can resume work and retain jobs.

2. Subordinate debt provision of ₹20,000 crore has been announced for 2 lakh MSMEs to help the stressed MSMEs.

3. Infusion of ₹50,000 crore equity via Mother-Daughter fund for MSMEs that require handholding. An additional fund with ₹10,000 crore will be set up to aid these units in expansion or list themselves on markets.

4. Definition of MSMEs has been revised to help MSMEs expand and avail benefits. Moreover, no distinction between manufacturing and services sector MSMEs will be there.

As per the new definition:
– Micro units with investment up to ₹1 crore and turnover up to ₹5 crore
– Small units with investment up to ₹10 crore and turnover up to ₹50 crore
– Medium units with investment up to ₹20 crore and turnover up to ₹100 crore

5. For government contracts, global tenders will be disallowed up to ₹200 crore.

6. E-market linkages to be provided across the board to make for the absence of non-participation in trade fairs due to the COVID-19 pandemic. The receivables will be cleared by the Government of India and PSUs in the next 45 days.

For the benefit of Employees:

7. A liquidity relief of ₹2,500 crore EPF support is being given to all EPF establishments. For the next 3 months, EPF contribution will be paid by the government till August. This will benefit over 72 lakh employees from both small and big enterprises.

8. Statutory EPF contribution for all organisations and their employees has been reduced to 10% from 12%, except for government organisations. The intent is to infuse ₹6,750 crore liquidity into these organisations.

Detailed information about FM’s press meet

Infusing money via collateral-free automatic loans, subordinate debt for MSMEs and equity infusion through MSME mother-daughter fund will amount to 76% the credit disbursed to MSMEs during FY20.

Regarding the credit and finance for the Indian MSMEs, the Finance Minister Nirmal Sitharaman announced the mega ₹20 lakh crore stimulus to bring the COVID-battered economy back to life. She stated that this financial package is roughly 10% the Indian GDP and offered measures to boost liquidity in MSMEs and assured the much-needed help for them to avail the benefits of the government schemes. On the lines of PM’s local to global mantra, she mentioned that this package will enable them to compete with foreign companies and help strengthen their network.

Banks and NBFCs will offer up to 20% of their entire outstanding credit as on February 29, 2020 as collateral-free loans. Under this, those units with outstanding credit of up to ₹25 crore and turnover of ₹100 crore can avail the loans, which will have four-year tenor and a moratorium period of 12 months beginning on principal payment. The scheme can be availed till October 31, 2020.

₹20,000 crore subordinate debt as equity support for MSMEs declared NPAs or stressed enterprises. The government will also provide ₹4,000 crore to CGTMSE for offering partial credit guarantee support to the banks lending to MSMEs.

₹50,000 crore equity infusion by government in MSME sector. This will be done through a Mother fund and a few daughter funds. This Fund of Funds will be set-up to offer equity based funding to growing and viable MSMEs. It will have a corpus of ₹10,000 crore.

Global tenders disallowed

Addressing the issue of unfair competition from foreign companies against MSMEs, the government said it will not allow global tenders in schemes up to ₹200 crore. The government is entrusting India’s backbone – the MSME ecosystem by facilitating procurement tendering.

Implications on the stock market

As per analysts, the relief package will be helpful in fixing supply-side rather than the demand issues.

The market on Wednesday, 13 May rallied in anticipation of a full ₹20 lakh crore stimulus, however, the FM said the announcements will be made in tranches over the next few days. This led to disappointment in the market because the immediate spend out of the big fiscal stimulus is relatively small, and there remains scepticism if the economy will revive soon.

Moreover, the FM refused to reveal entire funding details until all the announcements were made.

Impact on GDP

India has higher sovereign debt-to-GDP ratio than other emerging markets. And with hardly any GDP growth this year, the debt-to-GDP is likely to rise substantially in India.

MSME Speak

The MSME sector is unconvinced of the finance minister’s announcement regarding collateral-free loans as there is still a lot to be read in the fine print. Also, it is yet to be seen how banks roll out the loans, since implementation of announcement can have several gaps.

The collateral-free loans are expected to infuse liquidity in the sector and help stressed units address their cash crunch issues. This happens to be a critical move to help MSMEs kickstart business activities and provide job protection to employees.

Regarding the 2% rebate on Provident Fund, MSMEs feel, it is a small sum and will not help small companies but the big players. As MSMEs mostly have employee strength between 10 and 15 which are covered by PF, a mere 2% will not do any good.

Change in the definition of MSMEs is a welcome move as the upward revision in the investment limit of MSMEs will give an increased number of MSME units the access to institutional working capital.

Moreover, removal of global tenders is being taken positively as this would offer the sector better opportunities for growth without straining the government finances.

SOLV Dictionary #4: 5 hospitality industry terms you need to know

The hospitality industry is a broad category of fields within the service industry that includes lodging, food and drink service, event planning, amusement parks, transportation, and additional fields within the tourism industry.

If you are looking to understand the HORECA (hotels, restaurants, cafes) terminology, we will get you up to speed. Here we share a list of few main terms related to the hospitality field and their definitions. Read on!

  1. Channel Management: Controlling the allocation of hotel inventory and rates across various distribution channels, such as website, third parties, global distribution system, online travel agencies, etc to improve efficiency.
  2. Ghost Restaurant: A food service business, also referred to as a cloud kitchen, that serves customers exclusively by delivery on the basis of orders placed via phone or website/app. This concept helps restaurants economise by occupying cheaper real estate and not invest in a storefront and a dining room.
  3. Rack Rate: The full, undiscounted published room rate in a hotel.
  4. Franchise: It is a technique to scale up the business and expand its units. Herein, the concept owner is the franchisor, and the entity that invests in the brand is the franchisee. The franchisor gets a one-time fee from the franchisee to use his brand name and have guidance on the business. The franchisor also gets an ongoing percentage of profit for giving constant training and support to the franchisee.
  5. Ingress/Egress: The right to enter a restaurant property is referred to as ingress and the right to leave it is called egress. Any guest who has created an issue in the past may be denied ingress to the restaurant, and a guest who is creating an issue in the present may be denied egress.

SOLV Dictionary #3: 5 Business loan terms you need to know

There is no definite period for a business loan. It depends on the value of the loan and the term length that you have agreed upon with lender. Your repayment also depends upon the type of loan you have taken out.

Understand various loan categories without being a financial expert through definitions mentioned below.

1. Term Loans: Short, medium or long term – these loans can be of any length. While short term loans are meant to be repaid in 3-18 months, medium term loans must be paid back in 1-5 years. Long term loans normally extend from 7 to 10 years. You can avail short term loans via alternative lenders; however, the long term loans are mostly availed through banks.

2. SBA Loans: Small business administration loans are supposed to be the most affordable and accessible business loans, as they offer competitive interest rates and are government-backed. These loans are available through lenders partnering with the Small Business Administration, including banks and alternative lenders.

3. Business Lines of Credit: The repayment terms for this vary by the lender. It usually is between 6 months to 2 years for a business loan via alternative online lenders. However, longer terms can go up to 5 years through a conventional bank.

4. Equipment Financing: These loans do not exceed the life of the equipment, and thus, equipment loans have a repayment period between 1 to 5 years. Equipment financing is available through conventional as well as alternative lenders.

5. Microloans: Also referred to as micro credit, these are small loans that are issued by individuals rather than banks or credit unions. These microfinance institutions are financially empowered by banks to support low-income earners and MSMEs.

5 Key Highlights of SOLV-FICCI Webinar on Meeting Financial Needs of MSMEs

The nation-wide lockdown due to the COVID-19 has badly hit business sustainability for over 100 micro, small and medium sized businesses out there which are dealing with their own set of challenges. These MSMEs provide employment, manufacture and trade goods, help the produce from farmers reach consumers, thereby playing an important role in keeping the larger corporations running and the wheels of economy moving.

While this pandemic is hitting all aspects of life and economy, the impact has been extremely harsh on MSMEs. They are encountering lack of cash-flows to meet their fixed cost. Since MSMEs operate on very less margins, this unforeseen adversity is leading them towards closure. Managing salaries, utility costs, rents and EMIs is coming across as a challenge, which most MSMEs and SMEs seem to have succumbed to.

The govt of India has taken various steps for the protection of MSMEs. Read about those here.

However, there is still a need to have a stimulus to rehabilitate all entrepreneurial sects of the economy. Thus, to share the views and advice MSMEs on how to cope in this tough time, SOLV and FICCI jointly organised a webinar and brought together various key stakeholders from the financial ecosystem.

Moderator: Mr. Pawan Bindal, Member FICCI-CMSME Expert Group & Co-Founder of TimePay

Panellists:

Mr. Nitin Mittal – CEO, SOLV (a Standard Chartered Group Company)

Ms. Rachna Bhusari – Vice President, National Stock Exchange of India Limited

Mr. Ketan Gaikwad – Managing Director & CEO, Receivables Exchange of India Ltd (RXIL)

Dr SS Acharya – General Manager, SIDBI(Small Industries Development Bank of India)

Mr. Saikat Roy – Director, CARE Ratings Ltd.

Mr. Ravindra Mishra- AGM, MSME, State Bank of India

Mr. Hemant Seth – Director, FICCI and Treasurer MSME

These industry leaders talked about the programs various govt organisations are running for the upliftment of MSMEs in this time of crisis.

Here are the top highlights of SOLV-FICCI Webinar on Meeting Financial Needs of MSMEs:

SOLV, a B2B platform for SMEs, in these difficult times of the coronavirus spread, is helping source and deliver essential supplies like food products, hygiene products and protective gear to NGOs, so that they can continue to serve their beneficiaries. SOLV’s wide network of suppliers and warehouses help ensure on time deliveries. SOLV is sourcing food products including groceries, fruits & vegetables; hygiene products like hand wash, sanitizers; and protective gear such as gloves, masks etc. NGOs can place bulk orders or ready-to-go packs for individual use and get delivery within 48-72 hours.

Additionally, SOLV has recently launched a COVID-19 Emergency Credit Line Program, wherein MSMEs can avail collateral-free short term working capital loans of up to ₹10 lakhs to help stabilise their business. MSMEs can apply here: https://bil.solvezy.com/registration/register.

Furthermore, if an MSME is involved in producing products to manage the current COVID scenario or are involved in distribution of products, SOLV will offer them the financing help. In addition to this, tax and compliance services can be availed via SOLV, wherein large consultants will digitally resolve compliance issues. SOLV will also assist MSMEs in digital marketing and packaging/branding.

b. Registering on the TReDS platform has been made mandatory for all traders. Any supplier that sells products to larger corporates can register and get his invoices financed from RXIL.

c. NSEIL is a SEBI regulated platform for growing companies that offers a banking funding mechanism – IPO. Companies can list on stock exchange, boost capital and grow company in a sustainable model. This platform is built specifically to help small business listed for IPO, and supports a company with a minimum turnover of ₹8 crore.

d. SIDBI is focussed on capacity building and development of MSMEs by creating an ecosystem for MSME funding. To help MSMEs dealing with the COVID situation, it is extending finance through its products – SIDBI assistance for emergency response to COVID (SAFE) and SAFE plus. Herein, MSMEs manufacturing PPE, producing medicines, healthcare supplies are given financial assistance of ₹50 lakhs under SAFE and up to ₹1 crore under SAFE plus within 48 hrs at an interest rate of 5% per annum. There is no processing fee, no collateral involved. It is covered under credit guarantee mechanism and SIDBI will bear credit guarantee charges. Additionally, for its own customers, SIDBI has introduced to meet immediate liquidity support requirement at 7.4% for 1 year, beyond which there will be a different interest rate.

RBI has also given assistance of ₹15000 crore to SIDBI to refinance the micro finance institutions so that they can meet the immediate finance requirements of MSMEs.

e. SBI has introduced an emergency credit line for its MSME customers. Those who have taken loans from SBI, 10% of their limit will be taken care of by SBI, so that MSMEs can use that amount to meet their expenses. All this will involve no further paperwork or security. Additionally, overdraft facility has been offered to avail money for rent, expenses or salaries, and the period for payment of dues has been extended.

You can watch the full webinar here:

ADB’s support of $1.5 billion for Indian MSMEs

To aid Indian MSMEs fight COVID, Asian Development Bank (ADB) is likely to provide $1.5 billion for India’s economic recovery and industrial support particularly to MSMEs.

As per a statement issued by the Ministry of Finance, this relief fund will be a part of the ADB’s existing COVID-19 Active Response and Expenditure Support (CARES) programme that is being offered to India. The support will be facilitated through credit guarantee schemes, MSME integration into global and national value chains through enterprise development centres, and a credit enhancement facility for infrastructure projects.

Though the government has taken several relief measures to make this lockdown easy on small businesses and help them sustain the current period in liquidity and access to credit, this additional help will help revive the faltering MSME sector.

  • SIDBI recently announced 90-day term loans to NBFCs, MFIs, scheduled commercial banks, and small finance banks for offering loans to small businesses.
  • The government is also looking at enhancing the credit guarantee limit to MSMEs to ₹5 lakh crore from around ₹1 lakh crore currently.

ALSO READ: Relief measures by govt in view of COVID-19

The Corona impact would most certainly leave the MSME sector bruised. According to a survey done by Local Circles, over 74% small businesses and start-ups are expected to either shut down or scale down their operations in the next six months. Another survey conducted by them states that 47% of Indian start-ups and SMEs have less than 1 month of cash left, many are out of funds already.

ADB had earlier approved the loan to provide budget support to the government to tackle the adverse health and socio-economic impact of the pandemic. This additional boost of funds will help government strengthen the implementation framework and capacities of the MSME sector.

SOLV Launches COVID-19 Emergency Credit Line Program for MSMEs in Association with FICCI-CMSME

Collateral-free loans for growth and working capital available to support MSMEs helping to fight COVID-19 maintain their cash flow and grow their business

Bangalore, May 06, 2020:  SOLV, a B2B digital platform for MSMEs backed by the Standard Chartered Group, in association with FICCI-CMSME, announced the launch of its COVID-19 Emergency Credit Line Program for MSMEs that are helping the nation fight the COVID-19 pandemic. The nation-wide lockdown has badly hit business sustainability for the MSME segment due to the lack of cash-flows to meet their fixed cost. In this scenario, the COVID-19 Emergency Credit Line is aimed at easing the financial pain being faced by the MSME sector, ensuring their growth is not hampered.

Using technology and an extensive partner network, SOLV’s COVID-19 Emergency Credit Line is set to rapidly address the urgent financing needs of MSMEs who are exploring ways of maintaining their cash flow and staying relevant in the new market conditions. Currently, there exists a gap in the market related to the supply of goods and services essential to fight and manage the pandemic, and the requirements are likely to continue over the mid-term horizon. MSMEs are increasingly aware of this opportunity and are gearing up to fulfil the new demands of the market. SOLV’s COVID-19 Emergency Credit Line will act as a catalyst in helping them get started and grow.

This new offering was launched at a webinar jointly organized by FICCI-CMSME and SOLV, which brought together various key stakeholders from the financial ecosystem to share their views and advice for MSMEs during these unprecedented times of crisis. Apart from members of FICCI-CMSME, the webinar included speakers from National Stock Exchange of India Ltd., Receivables Exchange of India Ltd., SIDBI, SBI and Care Ratings Ltd. and was part of SOLV’s on-going efforts to provide MSMEs with integrated, holistic solutions for all their business needs.

SOLV’s Founder and CEO, Mr. Nitin Mittal, observed, “This offering is in response to the acute need of financing that the MSME sector faces today. It is open to anyone in any industry who is either already providing or is willing to repurpose their business to provide goods and services that help in containing COVID-19; for eg. All types of PPEs, public space and food-grade sanitization solutions, ventilators & other medical equipment. These unsecured loans will provide MSMEs with the much-needed working capital they are looking for and ensure their wheels keep moving. With this basic requirement met, MSMEs can focus on capacity-building and growth over the medium-to-long term.”

Speaking about the COVID-19 Emergency Credit Line, Mr. Sanjay Bhatia, President, FICCI-CMSME and Managing Director Hindustan Tin Works Ltd, said, “FICCI-CMSME is happy extend this much needed and unique credit line to our members & allied bodies through SOLV. We believe initiatives like this are the need of the hour for this belaboured sector – both to provide an impetus to India’s fight against COVID-19 and to ensure that the MSME sector, which is India’s growth engine, is able to overcome the challenges posed by the economic fallout of the pandemic.”

SOLV conducts charity drive "Fight Hunger, Fight COVID-19" on International Labour Day, distributes ration kits to migrant laborers and construction workers

SOLV, an e-commerce growth platform for MSMEs, conducted a charity drive called “Fight Hunger, Fight COVID-19”, on Friday, 1st May on the occasion of International Labour Day. As part of the drive, 200 kits with ration and PPEs were distributed to migrant laborers and BPL construction workers residing in and around HSR layout.  The entire exercise was conducted in consultation with BBMP and with the help of HSR layout police station, in order to maintain social distancing norms as well as law & order. The drive was led by Mr. Nitin Mittal, Founder and CEO of SOLV. Bengaluru South MP Shri Tejasvi Surya attended the event.

SOLV is India’s 1st B2B conversational commerce platform for SMEs with a mission to build India’s largest, fully digital, growth platform for the 60 million+ small and medium enterprises of India. It is a fully-owned entity of the Standard Chartered Group.

Loan schemes for MSMEs & farmers by Central Bank of India

Central Bank of India on Apr 29, 2020 launched loan schemes to offer liquidity support to micro, small and medium enterprises (MSMEs), agriculture and self-help group borrowers that have been hit by the COVID-19 lockdown.

  • For MSME borrowers, the bank is offering an emergency credit line of up to 10% of their existing fund based working capital limits, with a maximum limit of ₹50 crore.
  • The duration of these loans is 18 months and the first six months as moratorium.

This scheme will be available till June 30, 2020.

  • Liquidity support to existing Kisan credit card holders or term loan borrowers for crop/fisheries/poultry/dairy/animal husbandry between ₹10,000 to ₹50,000.
  • For Self-help group borrowers, the bank is providing finance of ₹5,000 per member and up to ₹1 lakh per SHGs.

The schemes for agricultural and SHG borrowers will be available till 30 September 2020.