Stimulus Package Highlights: Know about the benefits to MSMEs

When your car stops in the middle of nowhere what will you do? You might fix the problem and give it a push so that it starts running again. While thousands and thousands of elephants may be required to get the falling economy back on track. The government of India on Wednesday introduced an economic stimulus in order to boost up the economic growth in the form of 20 lakh crore stimulus package. In short, the stimulus seems to be sufficient and a lot better than the power of elephants. So we will try and dissect what it has in store for all the stakeholders of MSME in there. 

Pandemic destroyed it all

Covid-19 forced the entire world to its knees giving us no option than to surrender. As of India the Micro, Small and Medium Enterprises were hit hard and are striving to hold onto the life of their business. MSME’s sector employs around 12 crore employees. The COVID-19 and the resultant lockdown caused a series of problems. They had to face the supply chain disruptions, labour migrations and shortage of working capital. 

As the monster is almost back into its cage, various governments around the world are fueling and kick-starting their economies. India is not an exception.  The finance minister Nirmala Sitharaman laid the blueprint for the economic revival.  And the key aspects are as follows. 

A switch in the definition 

The Finance Minister stated that MSME will no longer go by the previous definition. As per the new definition, any company with an investment of 1 crore and a turnover of 5 crores will fall under this category. Fear of forgoing the benefits stop a lot of companies from moving forward. Hence, a change in the investment criteria from 25 lakh will help them to take their company ahead without any fear. They can develop, grow and still acquire those benefits. 

Highlights of the plan 

Find out the important pointers of the plan below, 

• A lot of MSME’s were running perfectly fine until COVID-19 created chaos. Hence, a small credit help will support them to be on track once again. For those, the government will offer collateral-free automatic loan worth of 3 lakh crore rupees hoping that default rate will be less. 2000 crore will be offered to those MSME’s who have already hold an outstanding loan and are damaged due to the pandemic.  However, here the government offers only a partial guarantee. This is estimated to benefit up to 2 lakh MSMEs. 

• Further, these loans are guaranteed and will be for a 4 year period with a 12-month moratorium. That is the person who gets loan need not pay the principal for the first 12 months.

• Global tenders up to 200 crores are to be restricted for global companies. This is a step towards a self-reliant India and promotes “made in India” concept.

•  The government will also assist them with e-market facilities as they cannot go in for trade fairs and the receivables will also to be cleared with 45 days.

•  Apart from that, an EPF relief of nearly 2500 crore has been announced. The government will assist by offering 12% contributions to both employees and employers until August 2020.

•  Another important announcement includes 50,000 crores worth equity infusion. This will be injected in the form "funds of funds" targeting potential MSME’s.  However, the government is intending to introduce only 10,000 crores and the rest is to be raised from institutions LIC and SBI. But, the details regarding the same isn’t clear yet. Deadlines for the PSU’s projects have been extended as well. 

The government’s finances are already running low. Offering bailout funds will only amount further pressure. Banks on the other hand, though they have enough money are unwilling to lend as they are afraid about the increasing bad debts and non-performing assets. With the price of assets going down pledging their assets may not fetch the required cash as well. Hence, credit guarantees seemed to be the best go-to option. Here the government will not pay anything from the cash exchequer, at least not this year. Only when a company fails to repay its loan, it will be required to pay. 

Conclusion 

Despite the push it offers to the sector, the credit guarantee may ruin lending culture among the banks. Taking advantage of the government's guarantee banks may be less cautious in the lending process. Though, initially, the government doesn’t pay anything, in the long run, if defaulters increase the government will have to bear the cost. The entire plan is aimed to benefit about 45 lakh units to restart operations. Moreover, a major portion of the employees are based from this sector. Help to such MSME’s means help all of those salary receiving individuals. On the whole, the plan looks like an ideal revival package but we will have to wait to find out how it is pulled off.