Coronavirus: Stimulus package fails to excite markets

The first tranche of the stimulus package amounting to a whopping Rs 5.94 lakh crore announced by Nirmala Sitharaman( in picture) on Wednesday did not excite the markets which crashed about 3%. Here is a deep dive into the package to understand the impact on various segments of the economy.

TDS cut

From May 14, 2020 till March 31, 2021, Tax Deducted at Source (TDS) rates have been reduced by 25%. This reduction will be applicable to all contracts and professional fees. This move is expected to release Rs 50,000 crore liquidity into the system. However, there is a catch. TDS/ TCS rates have been reduced for non-salaried residents. This is just a measure to increase the liquidity in the hands of the taxpayer. The move may also potentially reduce any tax refunds that may arise in the tax returns, according to tax experts. The actual tax which will be due can be paid as advance tax or self-assessment tax. In total, the tax liability of the people will not reduce. So, the balance tax will have to be paid as advance tax or self-assessment tax before the filing of return. Also, for the salaried class, there is no change.

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MSME announcements

The government announced Rs 3 lakh crore collateral-free four-year tenure loan for micro, small and medium enterprises (MSMEs) with the moratorium on payment for the first 12 months and 100% credit guarantee on principal and interest and no guarantee fees applicable. The move may immediately push the liquidity into battered MSMEs, but will the cost of this credit be reasonable?

While many small scale owners have batted for a 4% interest loan, would the banks be willing to lend lower than the RBI’s repo rate? Well, there is a way out. RBI, as part of its mandatory external benchmarking, has allowed banks to link at least one of their loan products with external benchmark -- including 3-month and 6-month Treasury Bill yield published by the Financial Benchmarks India Private Ltd (FBIL). Both these instruments have yields of 3.45% and 3.71% respectively as on May 13.

Also Read: PM's stimulus package address garnered viewership of 193 million: BARC

The banks would have to look at a spread in the range of 29 basis points and 55 basis points only. Also, with uncertainty hanging around the demand scenarios going forth, the cash flow of the MSMEs can’t be guaranteed. While the banks are insinuated by the 100% credit guarantee by the government, servicing the debt will increase the operational cost of the MSMEs.

Extension of contracts

Urban Development ministry can extend the completion date of construction projects by six months if the project was registered after March 25, 2020, and issue fresh project certificates. However, the construction sector primarily depends on the migrant labourers, who are in a plight of unforeseen crisis right now -- with many going back to the hometowns on foot over hundreds of miles, as their sources of income have curtailed with the lockdown.

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The industry insiders say that they don’t see the labourers returning before six months after the lockdown is lifted.

This will increase the labour cost for the construction companies, along with uncertainty over the complete timeline of the projects. In most cases, the contracts for projects come with a clause wherein an extension is given in case the work is hit by unforeseeable circumstances.