Atmanirbhar Bharat Abhiyan Explained: Part -1 Businesses including MSMEs

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Context: Recently, the Union Finance Minister announced liquidity measures for businesses, especially Micro, Small, and Medium Enterprises (MSMEs), as part of the first tranche of Atmanirbhar Bharat Abhiyan. The announced measures also form a part of the Rs. 20-lakh-crore economic stimulus package to deal with the Covid-19 pandemic. This economic stimulus includes both liquidity financing measures and credit guarantees.

Prelims: Current events of national and international importance.
Mains: GS III-

  • Indian Economy and issues relating to planning, mobilization of resources, growth, development, and employment. Inclusive growth and issues arising from it.
Key Announcements

Changed Definition of MSME

  • Previously, an enterprise with an investment up to Rs 25 lakh was called a micro-unit. Under the new definition, a firm up to an investment of Rs 1 crore is to be called Micro unit, of Rs, 10 crore is to be called as a small unit and investment greater than Rs 20 crore will be called as a medium unit.
  • With the changed definition both investment and turn over are used to define MSMEs. Under the new definition a firm with turn over of Rs 5 crore is to be called a micro-unit, of Rs 50 crore will be called a small unit and turn over greater than Rs 100 core is to be called as Medium unit.
  • It is to be noted that for an enterprise to come under the category of MSME it has to fulfill both investment and turn over conditions.
  • Also, under the new definition, the differentiation between manufacturing and service-based MSMEs are being removed.

Collateral free loans to MSMEs

  • In a major boost to the MSME sector, a collateral-free loan of 3 lakh crore rupees has been announced with a moratorium of 12 months. These loans will benefit 45 lakh small and medium units.
  • ₹30,000-crore special liquidity scheme for NBFCs. The investment would be made in primary and secondary market transactions in investment-grade debt paper of NBFCs, HFCs, and MFIs.

Salaried Workers and Taxpayers

  • The deadline for income tax returns for the financial year 2019-20 has been extended, with the due date now pushed to November 30, 2020.
  • The rates of Tax Deduction at Source (TDS) and Tax Collection at Source (TCS) have been cut by 25% for the FY 2020-21.
  • The statutory Provident Fund (PF) payments have been reduced from 12% to 10% for both employers and employees for the next three months.

NBFCs, Housing Finance Companies, and Microfinance Institutions

  • Many of these institutions serve the MSME sector financially and will be supported through an Rs.30,000 crore investment scheme fully guaranteed by the Centre.
  • Further, an expanded partial credit guarantee scheme worth Rs.45,000 crores also has been offered, of which the first 20% of losses will be borne by the Centre.
  • For instance, if the government provides a 100% credit guarantee up to an amount of Rs 1 crore to a firm, it means that a bank can lend Rs 1 crore to that firm; in case the firm fails to pay back, the government will repay all of Rs 1 crore. If this guarantee was for the first 20% of the loan, then the government would guarantee to pay back only Rs 20 lakh.

Power Distribution Companies

  • These companies are facing an unprecedented cash flow crisis and thus will receive Rs. 90,000 crore liquidity injection.

Real Estate and Contractors

  • Contractors (those dealing with the construction/ works and goods and services contracts) will get a six-month extension for completion of work from all Central agencies and also get partial bank guarantees to ease their cash flows.
  • Registered real estate projects will get a six-month extension for registration and completion of Real Estate Projects under the Real Estate (Regulation and Development) Act (RERA) with Covid-19 to be treated as a “force majeure” event.
  • A Force Majeure (FM) means extraordinary events or circumstances beyond human control such as an event described as an Act of God (as a natural calamity).

Global Tenders to Be Disallowed

  • Indian MSMEs and other companies have often faced unfair competition from foreign companies and would be difficult to compete in the future due to the Covid-19 pandemic.
  • Therefore, global tenders will be disallowed in government procurement tenders up to Rs 200 crores.
Liquidity Measures for Medium, Small and Micro Enterprises (MSMEs)

New Definition of MSMEs

  • The definition of an MSMEs has been expanded to allow for higher investment limits and the introduction of turnover-based criteria.
  • Earlier MSMEs were defined on the basis of the limit of investment in machinery or equipment.
  • The ‘turnover’ is the more efficient way to identify an MSME as it allows a lot of firms, especially in the services sector like mid-sized hospitals, hotels and diagnostic centers to be eligible for benefits as an MSME.
  • There will be no difference between a manufacturing MSME and a service MSMEs.

Infusion of Liquidity

  • Instead of directly infusing money into the economy or giving it directly to MSMEs, the government will offer credit guarantees for MSMEs.
    • Emergency Credit Line:
      • The collateral-free loans of worth Rs. 3 lakh crores will be available for MSMEs. It will ensure access to working capital to resume business activity and safeguard jobs for 45 lakh MSMEs
      • The above measure is available for MSMEs that have an already outstanding loan of Rs. 25 crores or those with a turnover of less than Rs 100 crore.
      • The loans will have a tenure of 4 years and they will have a moratorium of 12 months (that is, the payback starts only after 12 months).
    • Subordinate Debt Scheme:
      • The loans of amount Rs 20,000 crore will be provided to MSMEs that were already categorized as “stressed”, or struggling to pay back.
      • In this case, the government provides a partial guarantee.
    • Equity Infusion:
      • Fund of Funds with a corpus of Rs 10,000 crores will be set up which will provide equity funding for MSMEs with growth potential and viability.
Credit Guarantees to MSMEs
  • Description:
    • Credit Guarantee Schemes (CGS) by the government assures the bank that its loan will be repaid by the government in case the MSME falters.
  • Reasons for Introduction of CGS:
    • Though there was an option to pump liquidity via the bank's suspect any new loans due to rising Non-Performing Assets (NPAs).
    • Thus, the government faced a dual problem where banks had the money but were not willing to lend to the credit-starved sections of the economy, while the government itself did not have enough money to directly help the economy.
    • The credit guarantees solve dual issues faced by the government.
  • Implications:
    • Such CGS creates moral hazards as borrowers remain assured of paying back and the lender remains assured of receiving credit amounts. Subsequently, the government is forced to pay the amount.


Significance of these measures
  • Measures for MSMEs through guarantees, equity infusion, and debt support will incentivize bank lending to MSMEs as well as provide critical support to stresses entities in the current situation.
  • Credit guarantee will mean that banks do not have to make any provision for the loans, that is, they do not have to set aside capital in case the account turns non-performing.
  • The special liquidity support to lower-rated NBFCs will mean banks do not have to take credit risk and NBFC papers are likely to be lapped up.
  • Mandatory sourcing — up to ₹200 crore — would insulate local companies from external competition.
Why these measures were necessary?
  • Banks have been reluctant to lend, which is evident from over ₹8 lakh crore being parked by these lenders with the RBI’s reverse repo window.
  • Besides, a lot of borrowers were not fully drawing up to the sanctioned loan limits due to the lockdown. As a result, banks have no other option but to keep the funds with the RBI.
Is it sufficient?
  • The package of ₹20-lakh crore announced by PM includes already allocated money of ₹6-lakh crore and monetary policy directives to banks and non-banking financial companies.
  • And the latest announcements by the Finance Minister involve no additional public spending, even though this is urgently required to revive the economy and prevent further contraction.
  • Besides, the package has nothing for migrants, who are the worst hit and no effort has been done to stimulate the demand in the economy.
So, what the government should do immediately in fiscal terms for reviving the economy and supporting livelihoods?
  • Provide free food and cash transfers to those rendered incomeless.
  • Employment has to be provided to workers where they are, for which the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) must be expanded greatly and revamped with wage arrears paid immediately.
  • In urban areas, it is absolutely essential to revive the Micro, Small, and Medium Enterprises (MSMEs). Simultaneously, the vast numbers of workers who have stayed on in towns have to be provided with employment and income after the proposed cash transfers run out.
  • The post-pandemic period must see significant increases in public expenditure on education and health, especially primary and secondary health including for the urban and rural poor.

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