A stimulus for ‘Survival’ and not ‘Revival’!

Surpassing expectations, the Prime Minister announced a Rs. 20 lakh crore stimulus package this week. Then came the details. 

While the package (two tranches so far) has offered relief to certain segments, there are others left asking for more. The coming days will reveal whether these expectations are met or belied. 

Until then, we take a look at some of the key initiatives announced so far. 

The first tranche (worth Rs. 6 lakh crore) covered largely MSMEs, NBFCs, employees, power distribution utilities and real estate contractors.

The second tranche (worth Rs. 2.5 lakh crore) focused on migrant workers, farmers, street vendors and the urban poor.

Tranche 1 – Rs 6 lakh crore – Key initiatives and their likely impact 

Lending a helping hand to MSMEs (Micro, Small and Medium Enterprises)

1. Rs. 3 lakh crore of collateral-free loans for creditworthy MSMEs backed by 100% government guarantee in case of default. Loan repayments to start after 1 year.
2. Rs. 20,000 crore for loans to promoters of stressed MSMEs to be infused as equity by them into their business. Partial government guarantee on these.
3. Rs. 50,000 crore equity infusion into MSMEs with potential for growth via a Fund of Funds. Government to contribute Rs 10,000 crore, rest to be raised.
4. Definition of MSMEs revised to include more businesses for benefit under this category.   
5.  Release of government and central PSU pending payments to MSMEs. 

Impact –  (1) Creditworthy MSMEs to get the much needed liquidity. Full government guarantee to encourage banks to lend. (2) But, partial guarantee on loans to stressed MSMEs may not attract lenders. 

EPF-related changes present a mixed bag 

1. Government to continue contributing 24% (of basic salary and DA) to the Employee Provident Fund for those earning less than Rs 15,000 a month in businesses with less than 100 workers, until August.
2. For others, EPF contribution of both the employer and the employee to be reduced to 10% each from the current 12% for the next 3 months.

Impact – (1) To benefit 3.7 lakh establishments and 72 lakh employees. (2) To benefit employers; employees to get higher take-home pay but with an impact on their EPF corpus

Liquidity for NBFCs, Housing Finance Companies and Microfinance Institutions

1. Rs. 30,000 crore Special Liquidity Scheme – banks can use this for investing in investment grade debt papers of NBFCs/HFCs/MFIs. Investment in such papers to be backed by 100% government guarantee. 
2. Rs. 45,000 crore Partial Credit Guarantee Scheme 2.0 for NBFCs, HFCs and MFIs with low credit rating. Banks to subscribe to bonds and CPs (rated AA and below) of such entities. First 20% loss to be borne by the government.

Impact – (1) To help liquidity-tight NBFCs, HFCs and MFIs with money to lend. Full government guarantee to encourage bank participation which the earlier announced TLTRO 2.0 could not garner. A positive for mutual funds with exposure to debt papers of such entities. (2) Intended to help liquidity-crunched low-credit financial institutions. But, banks may not want to risk lending given the partial guarantee. 

Other measures

1. Rs. 90,000 crore worth of loans to power DISCOMs to pay off power generating companies and pass on some benefit to consumers (industries) too.
2. 6-month extension to construction contractors by all central government agencies. Partial release of bank guarantees to ease their cash flows.
3. Due date for income tax return filing for 2019-20 extended to 30 Nov-20.

Tranche 2 – Rs 2.46 lakh crore – Key initiatives and their likely impact

Food for migrant workers 

1. Rs. 3,500 crore to be spent on providing food to eight crore migrants (with no ration card) for two months. 
2. ‘One Nation, One Ration Card’ by Mar-21 to enable migrant workers with ration cards to use them across the country.

Loans for street vendors

1. Rs. 5,000 crore allocated for working capital loans of up to Rs. 10,000 to street vendors. This is expected to benefit 50 lakh vendors. 

Credit for small and marginal farmers

1. Rs. 2 lakh crore worth of concessional credit to 2.5 crore farmers through Kisan Credit Cards. 
2. 25 lakh new Kisan Credit Cards sanctioned with a Rs. 25,000 crore loan limit. 

Affordable housing 

1. Scheme for affordable rental housing for migrant labourers and urban poor (details to be announced). 
2. Credit Linked Subsidy Scheme for those earning between Rs 6-18 lakh extended until Mar-21. The interest subsidy is expected to benefit 2.5 lakh families.

What it means for markets

Equity Market

The government’s stimulus package failed to enthuse the market. The Sensex is down 1% since Tuesday, when the stimulus package was first unveiled. The absence of big-bang measures for an immediate demand boost, and for the corporate sector seems to have disappointed the market. 

The measures aimed at helping MSMEs, though should provide the much needed relief not just to these business units but also indirectly to those employed by them.  

One significant move has been the provision of liquidity facilities for NBFCs, HFCs and MFIs backed by government guarantees. This is important given the risk averseness in the banking system and reluctance to lend in the absence of a guarantee.

The 2% reduction in employee contribution to EPF for three months and the 25% cut in TDS on non-salary incomes may not, however be a big contributor to liquidity (cash in hand for individuals). 

The measures (especially the ones on easing liquidity) are long-term positives for the market but may not trigger a significant near-term recovery.

Debt Market

The government’s liquidity scheme for NBFCs, HFCs and MFIs backed by sovereign guarantee is expected to ease bond yields and enable these entities to raise funds. 

Also, the measures announced so far are expected to have a far lower-than-expected impact on the government’s fiscal deficit. These are positive for the debt market. 

The government may however, land up taking a fiscal hit in later years, in case of defaults on loans guaranteed by it.