Finance Minister Ms Nirmala Sitharaman unveiled an economic relief package that helps to implement PM Modi’s Atmanirbhar Bharat Abhiyan; focusing on reviving Indian economy and making India self-reliant.

The package has the size of Rs 20 trillion specially designed to reboot the economy from the Covid crisis. The entire allocaiton is equivalent to 10% of India’s GDP and comes out with a focus on land, labour, liquidity and laws. Monetary easing earlier announced by the RBI is also a part of this package.

The entire package looks like a mini-budget in terms of size – Rs 20 trillion compared to the size of 2020 budget of Rs 30 trillion.

India’s economic package is one of the largest economic stimulus package though smaller than Japan, the US, Sweden, Australia and Germany.

Five Pillars of Atmanirbhar Bharat Abhiyan

  • Economy,
  • Infrastructure
  • Systems
  • Demography and
  • Demand

There will be a focus on land, labour, liquidity and laws based upon the guiding principle of self-reliance.

Atma Nirbhar Bharat a self-reliance angle

With WTO dead, trade disputes unsettled, economies on ventilators and gross mistrust between the two world powers – the US and China, this is an opportunity for India to launch its economic revival on the platform of self-reliance.

Features of the stimulus announced by the FM

The economic stimulus has several components. Still following broad features can be specially identified from the entire package.

  • Stimulus and promotion of MSMEs for reviving the economy,
  • Relief -to taxpayers,
  • Incentives for low salaried people – EPF,
  • Support to NBFCs, HFIs, MFIs,
  • Insertion of a small reform in the form of modification of MSME criteria.
  • Financial support to DISCOMs
  1. Package to the MSME sector -six major steps

For the MSME sector, the package gives extensive coverage, there are six incentives for the sector that is going to be the knight in India’s economic revival.

  1. Collateral free loan -resume work and save jobs – A collateral free loan support of Rs 3 lakh crores for MSMEs. This will benefit 45 lakh MSME units so that they can resume work and save jobs.

Features of the loan:

  • Collateral free
  • Will benefit MSMEs with upto Rs 25 crore outstanding loans and Rs 100 crore sales.
  • The loans will have a 12-month moratorium.
  • The loans are 100% credit guaranteed as a cover to banks and non-banking finance companies on principal and interest.
  • The loans will be available till 31 October
  1. Subordinate debt provision of Rs 20000 core for stressed MSMEs
  • This is going to benefit 2 lakh MSMEs.
  • The step will benefit those which are NPAs or stressed MSMEs.
  • Subordinate debt or Subordinated Debentures are those unsecured bond or loan that ranks lower than senior loans/securities in the context of claims to assets or earnings.
  • These debts are not secured and are to be paid back last when the company faces bankruptcy. Hence, subordinate debt has higher risk.
  1. Equity infusion for MSMEs by creating 50,000 crore Fund of Fund.
  • Fund of Fund is a pooled investment fundthat invests in other types of funds.
  • This Fund of Funds will be set up with a corpus of ₹10,000 crores and will be operated through a Mother Fund and Daughter Fund.
  1. New classification for MSMEs: Get size and get benefits

The modification of MSME classification was a long pending reform. Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 inserted changed in the definition of MSMEs. Government tried new classification by raising the limits, but industry opposed.

New classification for MSMEs

The new MSME definition address MSMEs’ fear of losing benefits due to outgrowing the MSME definition. Now, MSMEs need not worry about growing in size, they can continue to receive MSME benefits.

Table: Classification of MSMEs: the new and existing definitions

New Classification (for both manufacturing and service firms) Current classification – Ceiling on Investment in Plant and Machinery – manufacturing (in Rs)
Category Investment Turnover Investment
Micro Less than 1 crore Less than Rs 5 crore Below 25 lakhs
Small Less than Rs 10 crore Less than Rs 50 crores 25 lakhs to 5 crores
Medium Less than Rs 20 crore Less than Rs 100 crores 5 crores to 10 crores
  1. No Global Tender is needed for government procurement up to Rs 200 crore

The Centre has also decided not to go in for global bidding for government procurement for tenders up to Rs 200 crore, thereby, promoting the participation of MSMEs. (This may get some opposition from trade partners).

  1. CPSEs will pay all receivables to MSMEs within 45 days. There will be e-market linkage for MSMEs.
  2. Stimulus for NBFCs, HFCs, MFIs – 20 trillion package:

For the Non-Banking Finance Companies (NBFCs), housing finance companies (HFCs) and microfinance institutions (MFIs), the Finance Minister announced following measures:

  1. Special liquidity scheme worth ₹30,000 crore and
  2. partial credit guarantee scheme of ₹45,000 crore
  3. Special liquidity scheme
  • Under the liquidity scheme, investments will be made in both primary and secondary market transactions in investment grade debt papers of NBFCs, HFCs and MFIs. These securities will be fully guaranteed by the government.
  • Objective of the scheme is to provide liquidity support to MSMEs impacted due to COVID 19, through NBFCs including Fintech NBFCs.
  • The scheme would provide resource support to NBFCs by way of term loans to ensure operational continuity and promote onward lending to MSME sector.

RBI’s Targeted LTRO announced earlier: Reserve Bank of India’s Targeted Long-Term Repo Operations (TLTRO), announced ₹50,000 crore funds to NBFCs, HFCs and MFIs.

Under the TLTROs, banks get three-year funding from the RBI to invest in investment grade corporate papers of NBFCs.

  1. Partial credit guarantee scheme:

The government will extend the partial credit guarantee and will provide more coverage for losses. The scheme will result in liquidity of ₹45,000 crores as per the stimulus.

Partial Credit Guarantee Scheme -Flashback

  • The Partial Credit Guarantee Scheme was first announced by the FM in 2019 budget.
  • Under the scheme, PSBs can purchase high-rated pooled assets from financially sound Non-Banking Financial Companies (NBFCs)/Housing Finance Companies (HFCs), with the amount of overall guarantee provided by government.
  • As per the today’s economic stimulus announcement, first 20 per cent loss will be borne by Centre, and even unrated papers will be eligible for investment, enabling NBFCs to reach out even to MSMEs in far-flung areas.
  • Purpose of the scheme: the scheme was launched to address temporary liquidity/cash flow mismatch issues of solvent NBFCs/HFCs and thus help to avoid distress sale of their assets for meeting immediate funds.

Finance Minister observed that finance institutions are finding it difficult to raise money in debt markets and many institutions have not been able to take advantage of the recent relaxations given by the government and the Reserve Bank of India.

  1. Support to discoms
  • Electricity distribution companies are facing serious crisis, hence emergency liquidity infusion of ₹90,000 crore in discoms.
  • State-owned Power Finance Corporation (PFC) and Rural Electrification Corporation (REC) will infuse the liquidity by raising an amount of about ₹90,000 crore from the market against the receivables of discoms. The state governments will provide a guarantee.
  1. EPF: Govt cuts EPF contribution to 20% for coming three months

(a) Government announced cutting of employees’ provident fund (EPF) statutory deductions to 20% (from 24%), that is 10% (instead of 12%) each by employers and employees for the next three months.


  • This means reduced cash expenditure for companies in the form of EPF spending.
  • Nearly 650000 companies are expected to get the benefit for this step.
  • The relief is expected to provide ₹6,750 crore liquidity support to companies during the covid-19 crisis.

(b) Government will pay EPF on behalf of the employees and employers:

  • Government will contribute to the EPF on behalf of employers and employees (12% each) for the three more months.
  • In March, the government announced that it will pay this amount for March, April and May.
  • Now it will be extended for June-August.

Condition – only companies where the headcount is less than 100 and 90% of the employees earn less than ₹15,000 per month will be eligible for this benefit.

This will benefit 7.2 million low-paid workers and cost an extra ₹2,500 crore to the government.

  1. Tax Concessions
  2. TDS for non-salaried payments for period up to March 31, 2021 and that for TCS for specified receipts has been slashed by 25%. This will give a relief of ₹50,000 crore.

Payment for contract, professional fees, interest, rent, dividend, commission, brokerage, etc shall be eligible for this reduced rate of TDS.

Tax collected at source (TCS) is the tax payable by a seller which he collects from the buyer at the time of sale.

  1. The deadline for the tax dispute resolution scheme, Vivad se Vishwas scheme extended till 30 December 2020. The earlier deadline was June 3o, 2020.
  2. Pending refunds to entities including LLPs, cooperatives, trusts etc will be given immediately. All refunds to charitable trusts etc are to be made quickly.
  3. Due date of filing all income tax returns extended to 31/July to 30, November 2020.
  4. Tax audit deadline has been extended from 30th September 2020 to 31st October.

Financing the stimulus

The Finance Minister indicated that only after consultation, the stimulus financing side will be revealed.

Risk factor: Pushing the banks to lend more: How to eliminate the fear factor in the banking sector is a real problem when several measures are using bank lending channel.

Still, an interesting feature is that the government’s direct expenditure from the package is not big. At the same time, several measures including tax concessions will led to revenue loss. This will increase government’s borrowings and the fiscal deficit for the next year.


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