India’s Response to COVID-19: Stimulus Measures Driven by Credit Guarantee Schemes, Not Direct Relief

We list out some of India’s economic stimulus measures to overcome the disruptive impact of the COVID-19 pandemic, now in its second year. Unlike ASEAN and the US, India does not offer direct financial assistance, opting instead for a balance of credit guarantee schemes and sustained investment in public infrastructure.

Now in its second year, the COVID-19 pandemic has radically impacted trade and commerce and shrunk the performance of economic indicators like GDP, private consumption, new investments, etc. across the world. India, too, has suffered, owing to the unexpected distortions in the economic activity due to period restrictions on public activity and regional lockdowns.

To counter this, the federal government has announced a slew of reforms and relief measures to tackle the economic crisis, banking largely on a combination of liquidity injection into the economy through eased credit access, relaxed compliance deadlines, and cuts in trade tariff rates and taxes.

Economic outlook for India

According to data released by the National Statistical Office, Ministry of Statistics and Program Implementation (MOSPI), the national GDP registered four percent growth in the financial year 2019-20 (FY20) but is estimated to have declined by 7.7 percent in FY21. However, with prospects for rebounds in consumption and investment in the upcoming third quarter, India’s GDP growth rate is projected at 11 percent for FY22 (Economic Survey 2020-21).

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The reason for optimism comes from private consumption growth registered in the fast-moving consumer goods sector (FMCG), auto sales, and GST collections, suggesting demand recovery. The pandemic has witnessed new growth drivers for industries like drugs and pharmaceuticals, construction, technology (e-commerce, FinTech, EdTech, etc.), electronic equipment etc., including need for immediate healthcare support and vaccines, changing consumer behavior, preference for non-contact transactions, and remote work patterns. These growth drivers are likely to trigger long-term shifts in these industries as well. India has additionally sought to counter its import dependencies – made stark during the beginning of the COVID-19 outbreak – by announcing a series of production linked incentive (PLI) schemes aimed to boost export-oriented manufacturing capabilities and encourage investment viability for the expanding industrial ecosystems.

The record incoming FDI into India during the pandemic year, driven mainly by mergers and acquisitions (M&A) in the information and communication technology (ICT) industry highlights investor confidence in Indian enterprises. Reforms to ease doing business, streamlining labor regulations, and support for MSMEs have been coupled with governmental interventions to provide economic stimulus and offer businesses immediate relief from the pandemic-induced market disruptions.

The primary strategy underpinning these relief measures has been liquidity injection into the economy through new investments and government-backed loans to boost small businesses and aid private consumption – the latter was estimated to have contracted by 9.5 percent in FY21 owing to loss in incomes, movement restrictions, and supply limitations.

Stimulus measures in response to COVID-19

Here we look at some of the relief measures introduced by the Indian government to aid businesses and resuscitate the overall economy, to overcome the slowdown caused by the pandemic control strategies. However, data on the fiscal measures announced last year is lacking and it is questionable how many businesses ultimately availed the government’s credit-guarantee loans or were even able to access promised funds.

Measures to ease compliance and tax burden for businesses

• • Multiple deadline extensions for filing returns, both income tax returns (ITR) and GST returns (GSTR). To know more about these extensions, refer to our article here: Tax Deadlines and New Income Tax Rules in India in 2021
  • Reduction in rate of interest: Concessional rates of interest in place of the normal rate of interest of 18 percent per annum for late tax payments has been prescribed in certain cases. For temporary relief measures announced for GST taxpayers in India, you may refer to our article: Relief Measures for Taxpayers Announced Under GST Law Due to Severity of COVID Wave
  • Deadline extension for PAN-Aadhar linking from June 30, 2021 to September 30, 2021.
  • Compliances to be met by taxpayers, such as investment, deposit, payment, acquisition, purchase, construction or such other activity for the purpose of claiming any exemption, may be completed on or before September 30, 2021.
  • New TDS/TCS norms have been introduced with effect from July 1,2021. They are directed towards easing compliance norms for businesses. Read our detailed analysis of the new provisions here: New TDS/TCS Provisions in India from July 1,2021.
  • The pending income tax refunds to charitable trusts and non-corporate businesses and professions, including proprietorship, partnership and LLPs, and cooperatives shall be issued immediately.

Trade facilitation measures

• 24*7 customs clearance: A 24×7 custom clearance facility has been implemented at all customs centers in India to avoid any supply chain disruption.
• A dedicated single window COVID-19 help desk for export-import (EXIM) trade has been created on the CBIC website to facilitate quick resolution of issue(s) faced by importer/exporter.
• Shipping lines have been asked not to levy detention charges on containers held up for reasons attributable to lockdown measures.
• All major ports have been directed not to levy penalties, demurrage, charges, fee, rental on any port user (traders, Shipping Lines, concessionaries, licensees etc.) for any delay in berthing, loading/unloading operations, or evacuation/arrival of cargo caused by reasons attributable to lockdown measures.
• A special refund and drawback disposal drive has been launched to provide immediate relief to business entities, especially MSMEs, adversely hit by COVID. This initiative has provided much needed liquidity during the crisis.

Fiscal measures

First fiscal support package

The first fiscal support package, intended to provide immediate relief during the lockdown, was the Pradhan Mantri Garib Kalyan Yojana (PMGKY) announced in March 2020. It had an outlay of INR 1,700 billion (US$22.75)

“Atmanirbhar Bharat” package

Announced in May 2020 with an outlay of INR 20,000 billion (US$267.59 billion), it rested on the core pillars of Economy, Infrastructure, System, Vibrant Demography, and Demand. The Ministry of Finance posted a press release on the progress made under the Atmanirbhar Package on October 1, 2020 – see here. The key highlight of the package was the Emergency Credit Line Guarantee Scheme (ECLGS) to provide unsecured loans to MSMEs and business enterprises.

The package included the following measures:

• INR 3,000 billion (US$40.14 billion) emergency working capital facility for businesses, including MSMEs: To provide relief to businesses, additional working capital finance of 20 percent of the outstanding credit (as on February 29, 2020) in the form of a term loan at a concessional rate of interest will be provided. This will be available to units with up to INR 250 million (US$3.34 million) outstanding credit and turnover of up to INR 1 billion (US$13.38 million). This amount will be completely guaranteed by the Indian government, providing a total liquidity of INR 3,000 billion (US$40.14 billion) to more than 4.5 million MSMEs.
• INR 200 billion (US$2.68 billion) subordinate debt for stressed MSMEs: The government proposed to support around 200,000 stressed MSMEs by directing INR 40 billion (US$535.19 million) to the Credit Guarantee Trust for Micro and Small Enterprises (CGTMSE). Banks were expected to provide the subordinate debt to promoters of such MSMEs – equivalent to 15 percent of their existing stake in the unit subject to a maximum of INR 7.5 million.
• INR 500 billion (US$6.69) equity infusion through MSME Fund of Funds: The government will set up a ‘Fund of Funds’ with a corpus of INR 100 billion that will provide equity funding support for MSMEs. The Fund of Funds shall be operated through a mother fund and a few daughter funds. It is expected that with leverage of 1:4 at the level of daughter funds, the Fund of Funds will be able to mobilize equity of about INR 500 billion.
• Micro Food Processing Enterprises (PMFME) Scheme: Launched on June 29, 2020, the PMFME Scheme is being implemented in 35 States and Union Territories. The PMFME portal went live on January 25, 2021. A key component of the scheme is to achieve One District One Product (ODOP). The Ministry of Food Processing Industries has approved ODOP for 707 districts for 35 States and UTs, including 137 unique products as per the recommendations received by States/UTs (PDF list can be downloaded here). The GIS ODOP digital map of India, launched November 18, 2020, provides details of ODOP products of all the States and UTs. The digital map also has indicators for Tribal, SC, ST, and aspirational districts. This should enable stakeholders in the industry’s value chain development.

Modified definition of MSMEs

To avoid the phenomenon of dwarfism, the definition of MSMEs have been revised with effect from July 1, 2020. The new definition as notified is as follows:

• Micro enterprise, where the investment in plant and machinery or equipment does not exceed INR 10 million (US$0.13 million) and turnover does not exceed INR 50 million (US$0.67 million)
• Small enterprise, where the investment in plant and machinery or equipment does not exceed INR 100 million (US$1.34 million) and turnover does not exceed INR 500 million (US$6.69 million)
• Medium enterprise, where the investment in plant and machinery or equipment does not exceed INR 500 million and turnover does not exceed INR 2.5 billion (US$33.45 million)

Employees Provident Fund Support for businesses and organized workers

• INR 450 billion (US$6.02) partial credit guarantee scheme 2.0 for liabilities of non-banking finance institutions (NBFCs)/ micro finance institutions (MFIs)
• INR 300 billion (US$4.01 billion) Special Liquidity Scheme for NBFC/MFIs.
• INR 900 billion (US$12.04 billion) liquidity injection for DISCOM

Comprehensive stimulus package

Oriented mainly towards infrastructure, healthcare, and private public collaboration, this recovery plan with an outlay of INR 2,650 billion (US$35.46 billion) was announced on November 14, 2020. It introduced the following measures:

Self-sufficient economy

• The government introduced PLI schemes in 13 flagship sectors in India to make these sectors globally competitive in terms of production capabilities and export viability. The incentives are provided on incremental sale of goods in target segments and they are set to attract significant foreign investment.
• INR 30 billion (US$401.39 million) boost for promotion of project exports through lines of credit under the Indian Development and Economic Assistance (IDEAS) scheme.

Investment in infrastructure and planned urbanization

• Setting up a platform worth INR 1,100 billion (US$14.72 billion) for infrastructure debt financing through equity infusion of INR 60 billion in the National Investment and Infrastructure Fund (NIIF) to ease infra-financing and trigger infrastructure development.
• Other measures were announced to generate employment and provide sustainable housing for both rural and urban economy.
• Under this package, an extension of the ECGLS scheme was announced till March 31, 2021, to provide liquidity support to the 26 stressed sectors of the economy, as identified by the Reserve Bank of India’s Kamath panel by providing collateral free and 100 percent state-guaranteed loans.

Budget 2021

• Job creation through private and public investment through:
• Infrastructure boost
• Setting-up of textile parks, fishing hubs, and a financial services hub
• Increase the FDI limit in the insurance sector
• Allowing one person companies to help start-ups
• Allowing women in all categories of jobs and shifts
• Support to MSMEs by doubling allocation for the Ministry of Micro, Small and Medium Enterprises to INR 157 billion (US$2.11 billion).

Improving access to credit

• Setting up of a new asset reconstruction company and asset management company to take over stressed assets of banks
• Setting up of a Development Finance Institution (DFI) to finance infrastructure projects
• Equity infusion of INR 200 billion (US$2.68 billion) for public sector banks

Improving ease of doing business

• Setting up of a conciliatory mechanism for quick resolution of contractual disputes
• Strengthening of the NCLT system
• Adoption of e-courts
• Setting up of an alternative mechanism of debt resolution
• Decriminalizing of the Limited Liability Partnership (LLP) Act
• Setting up of a faceless dispute resolution mechanism for small taxpayers
• Increase in the threshold for tax audit from INR 50 million (US$0.67 million) to INR 100 million (US$1.34 million)

What’s in India’s 2021 stimulus package?

The government announced an INR 6,290 billion (US$84.4 billion) relief package on June 28, 2021 to minimize the impact of second wave of COVID. The package is mainly focused on public health, tourism, and the rural economy:

• Expansion of ECGLS with additional credit worth INR 1,500 billion (US$20.13 billion) for small and medium enterprises.
• New INR 75 billion (US$1.01 billion) scheme to guarantee loans up to INR 125,000 (US$1,677.26) to small borrowers through MFIs.
• Waiver for visa fee for foreign tourists to give a boost to tourism industry. Half a million tourists will be given one-month free visas.
• Indirect support for exports worth INR 1,210 billion (US$16.19 billion) over the next five years.
• Outlay for introducing new seed varieties to farmers.
• Expansion of broadband to all Gram Panchayats for better rural connectivity.
• Extension of time period by a year for large electronics manufacturers to meet their production targets under the PLI scheme, as many of them struggled to sustain or scale up operations due to restrictions and lockdowns to curb the second COVID-19 wave.

Key takeaways

Stimulus packages introduced in other parts of the world, including ASEAN and the US, focused primarily on direct measures like providing financial aid to households, businesses, and people who lost jobs.

In India, however, all the stimulus packages announced so far mainly rest on the provision of eased access to credit through reduced rates of interest as well as credit guarantee loans.

The packages lack direct measures, while focusing predominantly on low-cost lending and injecting funds into infrastructure and state-guaranteed loans. The only direct transfer of aid to people has come in form of free food grain distribution.

Though the liquidity injection is much required among MSMEs to ensure sustained operations, it will merely help them in the short-term, offering no significant assistance towards long-term recovery.

More direct measures are required in case of individuals and households to ensure an increase in demand and consumption patterns.

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