Introduction
- The first instalment of the Rs. 20 Trillion (Lakh Crores) package of measures announced by the finance minister on 13th May 2020 is an important major step towards keeping the economy afloat (instead of revive).
- Not all of the Rs. 20 Lakh Crores constitute extra fiscal expenditure.
- They include extra expenditures, loans, loan guarantees and other forms of commitments by the government and the Reserve Bank of India (RBI).
What is promised in the First Tranche? (Already given in Current Affairs)
Part I of the overall package, focuses on the availability of credit to enterprises, especially in the micro, small and medium enterprise (MSME) category, so that they remain afloat till the economy gets into genuine revival mode.
MSMEs
- For MSMEs, the package allocates ₹3 trillion for collateral-free loans.
- The loans have a four-year tenure with no payments due for one year.
- It also allocates ₹20,000 crore for subordinate debt aimed at helping currently stressed MSMEs.
- The announcements are Part I of the overall package and focus largely on MSMEs principally because this is where employment is concentrated.
NBFCs and similar institutions
- Another major component of the package focuses on non-banking financial companies (NBFCs), housing finance companies (HFCs) and microfinance institutions (MFIs).
- The government proposes to launch a ₹30,000 crore special liquidity scheme for these companies.
- The measure will supplement the actions by RBI to enhance liquidity.
- The government intends to give partial credit guarantee on loans worth ₹45,000 crore to NBFCs and HFCs that, in turn, offer credit to MSMEs.
- Under the scheme, GoI will bear the first 20% of loss incurred on such loans.
Power Distribution Companies
- The package infuses some ₹90,000 crore in liquidity into Power Distribution Companies.
- These funds come in the form of loans to be guaranteed by state governments.
Reducing taxes: Demand side measures
- The rates of tax deduction at source (TDS) and tax collection at source (TCS) are to be cut by 25% for the remainder of the current fiscal year.
- The due date for the collection of income-tax for FY2020 has been extended to November 30, 2020.
Changing Definition of MSMEs
- GoI proposes to change the definitions of MSMEs. The revision will allow larger enterprises in each category.
- This may encourage enterprise in each category to grow larger without fear of losing the benefits provided in its category.
- The government has also decided to exclude foreign companies from bidding for government contracts of ₹200 crore or less. This, too, is meant to give MSMEs more room.
Sell Localism, but Globalise
- The PM’s address emphasised self-sufficiency and localisation, yet it implied this was linked to global prosperity.
- Global prosperity in the last century was created by a huge expansion of global trade and investment.
- Economist Paul Krugman, in The Age of Diminished Expectations, wrote, ‘Productivity isn’t everything, but, in the long run, it is almost everything.’
- Competitive markets create a relentless search for improved productivity that spurs economic growth and prosperity.
- It means specialising in, and exporting, what you can do best, while importing the rest.
- Aiming for self-sufficiency regardless of competitiveness, will lead to productivity falling behind others who globalise — the story of Jawaharlal Nehru vs Lee Kuan Yew.
- Some analysts estimate that Indian GDP will be –5% or worse in 2020-21. The consequent revenue collapse will take the combined Centre-state deficit to 11-12% of GDP.
- Some Economists have argued that a public health splurge of ₹75,000 crore a year in testing, tracing and isolating the 1-3% of infected cases is the right path.
Labour Law Reforms: Way Forward
- While India needs reforms for labour flexibility, it also needs International Labour Organisation (ILO)-compatible laws safeguarding workers’ health and grievance mechanisms.
- A hire-and-fire approach must be accompanied by unemployment insurance and retraining.
- Suspending labour laws for 3-4 years will not attract sceptical foreign investors. They will seek a permanent change in laws.
Land Reforms: Way Forward
- India needs land reforms for quick acquisition, for making tenancy simple and popular so that leasing can be used to consolidate small uneconomic plots into large viable farms.
- The current racket of extorting large sums for converting agricultural into non-agricultural land must be stopped by declaring large areas permission-free.
