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CEEW analyses Finance Minister's Economic Recovery Package Announcements

13 May 2020: India's Finance minister Nirmala Sitharaman recently announced the Government of India’s massive Rs 20 lakh crore fiscal stimulus to fight the coronavirus pandemic. CEEW unpacks the booster measures focused on Micro, Small and Medium Enterprises (MSMEs), Non-Banking Financial Companies (NBFCs), power sector, universal minimum wage and liquidity support for farmers.

Micro, Small and Medium Enterprises (MSMEs)

"More than half of the INR 5.8 lakh crore stimulus outlay announced today focused on our mammoth MSME sector. As many as 40% of India’s total 450 million informal workers are employed with MSMEs. The recovery of this sector is central to our economic resurgence and the well-being of the workers. The stimulus today addressed both the demand and supply side constraints for MSMEs. The systemic focus on generating a larger market for this sector through local procurement and virtual market linkages are leaps in the right direction. This is especially critical as public procurement is likely to see a huge boost in the coming months. In order to meet this demand, a suite of financial and regulatory measures have also been offered.

The MSME sector is also the backbone of India’s energy transition, and a key source of industrial emissions. Having access to capital will allow this sector to accelerate manufacturing, but in a manner that could potentially improve energy efficiency and trigger the switch to cleaner fuels. CEEW research across hundreds of MSMEs has found that access to capital and larger markets could help MSMEs move to more efficient machinery and appliances as the unit economics of the energy transition become increasingly compelling from a competitiveness point of view."
- Dr Arunabha Ghosh, CEO, CEEW

"The clearing of government and CPSE dues to MSMEs within 45 days is a critical step announced today by the Finance Minister. The various central and state government departments and public sector units (PSUs) collectively owe approximately INR 10,582 crore to MSMEs. Of this, applications worth only INR 599 crore have been disposed of by the MSE Facilitation Council (MSEFC). This includes INR 91 crore of INR 1,978 crore outstanding with Central Ministries, Departments and PSUs. Speedy clearance of these outstanding dues will give the MSME sector at large a new lease of life. However, the means of processing these dues should be specified soon."
- Tirtha Biswas, Programme Lead, CEEW

"The Finance Minister’s announcements provide significant immediate relief to stressed MSMEs and could enhance self-reliance within the sector in the long-run. Reclassification of MSME definitions and recognising the distinct needs of the stressed, normal, and high growth potential enterprises would allow for a customised approach to address the challenges faced by each group. Further, the INR 3,00,000 crore (USD 39.85 billion) collateral and guarantee free loan package over four years would provide much needed liquidity to the sector. However, clarity is needed on the eligibility criteria for the loans as well as the disbursing entities. Despite the short term gains, this package has the potential to significantly increase non-performing assets in the banking sector in the long run and will require close scrutiny by lenders. Also, while protecting domestic enterprises from external market forces amidst this unprecedented economic crisis is critical, a sunset period should be announced to build global competitiveness of the Indian industry. Finally, these reforms would succeed only with the accurate identification and targeting of MSMEs, which has been the primary challenge thus far."
- Hemant Mallya, Senior Programme Lead, CEEW

Non-Banking Financial Companies (NBFCs)

“The support extended to the NBFCs, combined with the emergency liquidity relief granted to discoms, spells relief for clean energy projects. As much as 50% of all power sector borrowings come through NBFCs. Greater liquidity in the NBFC sector can provide project finance, working capital, and bridge loans to clean energy companies, as required, supporting them to build new projects, service loans, despite cash flow disruptions, and to address other viability concerns. Renewable energy projects, with their rising share in the generation mix despite a decline in overall electricity demand, have a strong pipeline of projects that are in various pre-implementation stages, but have long term PPAs. The credit quality of these projects is going to receive a boost through the discom relief, which will significantly reduce payment risks for power producers. The combination of these two measures will make more capital available for the power sector, and make renewable energy projects more attractive for investment, collectively keeping India’s renewables growth story going.”
- Kanika Chawla, Director, CEEW Centre for Energy Finance

Power Sector

“At INR 90,000 crore, the state-backed bailout for the discoms is rather ominous. The terms are reminiscent of past schemes but are more reliant on technology (like digital payments, pre-paid meters) addressing the malaise that has spread through the sector. Technology does play a role but the fundamental barrier is in getting the states to address the demands of their political constituents in a manner that is not detrimental to the viability of the power sector. Hence, the focus must be on reducing power purchase costs and passing through full costs to consumers. This will require consumer engagement in a better manner and improving trust through transparent metering, billing and enabling seamless collection. Targeted subsidies to those that deserve it is the only support that must be offered. In the immediate term, there is an equal need to clear dues to discoms from public sector consumers. These stack up to 50,000 Crore. In equal measure, we need the political consensus to pass on costs of supply to households who have seen a steady rise in their share of consumption. A progressive taxation on higher end consumers to make up for lost revenue from C&I may also serve discoms well.”
- Karthik Ganesan, Research Fellow, CEEW

Universal Minimum Wage

"Introducing a uniform national floor wage is a much-needed reform that will provide income security to over 180 million informal workers. India's MSME could especially be significantly impacted as labour cost forms almost half of their working capital and this additional financial burden could reduce their competitiveness. Hence, policymakers must focus on rationalisation of energy purchase costs and provide impetus to increase energy efficiency measures in MSMEs to help them retain their competitiveness."
- Hemant Mallya, Senior Programme Lead, CEEW

Liquidity Support for Farmers

"It’s encouraging to see additional liquidity support to farmers in distressing times. Within NABARD's refinancing of INR 29.500 crore, a particular focus should be brought to post-harvest management of perishable commodities. We have already witnessed perishables worth thousands of crores getting wasted due to lockdown. By extending preferential credit to Farmer Producer Organisations (FPOs) to implement post-harvest solutions such as solar drying, small scale food processing, and farm-gate cold storages, we can not only avoid the food wastage but also enhance rural farm and non-farm incomes."
- Abhishek Jain, Senior Programme Lead, CEEW