We have the first instalment of the Rs.20k crore package! Let us analyse!
- Biggest one first - Collateral free loan facility adding up to Rs.3 Lakh crores for MSMEs to avail.
- Smaller Rs. 20kcr subordinated loans for stressed MSMEs that wont otherwise get fresh loans due to bad credit etc.
- Rs. 10 Kcr equity infusion scheme. Details not clear but guess this is yet another way of helping them survive and grow.
- Tenders under Rs.200cr will be only for local companies.
- Extend and tweak the EPF contributions to employers.
- Rs. 30kcr fund infusion for NBFCs
- Rs. 90kcr fund infusion into DISCOMS. Plus another Rs. 45kcr for partial credit guarantee.
- Tweaks on definition of MSME so more benefit.
- Reduction of TDS by 25%
A lot of the steps are actually cash flow related - they dont result in immeidate cost to government in their Income & Expense statement. For example, the additional loans. Unless of course, they turn bad. This is good from inflationary stand point.
That doesn’t reduce their significance by any means. MSMEs are gasping for breath and any help is welcome. But if a step doesn’t add to Governments’ cost, it also doesn’t go into the MSME’s P&L! That is basic accounting!
Having said that, increased liquidity will help businesses that need that to get back in shape. That assumes their core business is still profitable and it is only lack of funds that kept them constrained. I am pretty sure a good % of entities fall in this bracket. After all, if they are structurally unprofitable or their business has collapsed post COVID, nothing can help and pouring money into them is likely to go down the drain.
Businesses that are paying interest on loans and cannot pay post COVID may not find much here but they can get fresh loans and that door is kept open. So on the whole, it is a good move.
The moves to infuse funds into NBFCs and DISCOMS are also variations of the same theme - eventually they will find their way into the economy and into MSMEs hopefully. And help keep the circulation going. That is clever thinking because it doesn’t involve any cost to government. It is like giving a push to a stalled car that should then keep moving on its own.
The TDS reduction, while good on paper, again costs the government nothing. After all, if TDS is less and the firms are profitable, they pay advance tax! Furthermore, profits are bound to be lower this year, perhaps by more than 25%. So by acknowledging this, FM has simply bowed to reality.
In any case, the TDS rates are exhorbitant. For example 10% on turnover is often 100% or more of the net profit. If a company reports, say, 20% profit before tax (which is damn good and most dont make that much), their tax will be about 6-7%. So 10% is already excess, so is 7.5%.
A bigger bang would have been removing TDS altogether. But our babus dont think out of the box. And our FM seems unable to challenge them. The way she defended the nonsensical MCA COVID form shows she too thinks like them not like the LSE trained economist we expected.
All these schemes really depend on the quality of decisions made at the ground level. Who gets the loans? After how painfu and stressful an effort? Who gets the equity infusion? On what quality of assessment of their business? If badly executed by the usual incompetent, corrupt bureaucracy that has zero understanding of business, it can cause HUGE bad loan issues few years down the road. One hopes that is not the case!
The tender concession for MSMEs looks good. But global tenders are the norm for externally funded projects, and many government infra projects are funded by Japan, ADB, World Bank / IMF etc which insist on these conditions. Let us see what it amounts to.
A good start..but as we said earlier, “Yeh dil maange more!”