Of Modi's four 'Ls' of production, FM Sitharaman focused on liquidity

With the MSME segment contributing to output and providing widespread employment, successfully supporting it is money well spent.

When Prime Minister Narendra Modi announced a Rs 20 trillion Covid-19 economic stimulus last evening, it was India’s “Shock & Awe” moment. The number, a whopping 10% of India’s current GDP, was substantially more than even the wildest expectations. It was an immediate cause of celebration in domestic equity market circles and consternation in the domestic debt market group. However, discerning citizens realised two things quite swiftly. Firstly, the amount included all that had been announced by the Government and the RBI so far. And secondly, details of new measures will be provided by the Finance Minister (FM) only later.

So, when the FM addressed the press at 1600 hours today, the nation waited with bated breath. At the outset itself, the FM made it clear that this was just the first of a few such announcements scheduled over the next few days. Each of these announcements will address different aspects of this economic package, starting with those considered most urgent.

As expected, the most urgent measures today addressed the challenges faced by our Micro, Small and Medium Enterprises (MSMEs). These also commanded a lion’s share of the allocation. Unlike the earlier moratorium measures announced by the RBI, which left much to the discretion of banks and NBFC, these measures provide relief to the MSMEs based on transparent eligibility criteria.

The most heartening aspect of these measures was the acknowledgement that not all MSMEs were in good shape even before the pandemic. While a large part of the allocation is to MSMEs which were “standard” in terms of their debt servicing, some allocation has also been made available for MSMEs which were already stressed before the lockdown. In addition, provision has also been made for equity support to MSMEs which exhibit growth potential through an innovative Fund of Funds structure that preserves the operational flexibility unique to this industry segment. These were accompanied by non-fund support measures which addressed common concerns of this segment as well.

These measures display an awareness of ground reality that has often been missing. But most importantly, they exhibit a willingness to utilise unconventional means to achieve well defined economic goals. With the MSME segment contributing to output and providing widespread employment, successfully supporting it addresses both the supply and demand side of the economic equation. This is money well spent.

The theme of increased awareness and innovation in the measures announced flowed through to the measures announced to support Non-Banking Finance Companies (NBFCs), Micro Finance Institutions (MFIs) and the Power sector.

Most NBFCs and MFIs which, on account of weaker credit quality, did not benefit from RBI measures will find succor in the substantial liquidity support measures announced for their benefit. This should help restore stability in last mile lending operations, the absence of which can result in widespread distress and demand destruction. In addition, lack of liquidity for many of these could have resulted in credit stress and if unaddressed, credit contagion.

Similarly, the initiative to unclog the liquidity pipeline of power producers through provision of focused liquidity to state electricity distribution companies ensures that the supply of electricity remains uninterrupted at this time of economic revival. It shows a willingness to address second and third order challenges which, once again, is quite unusual and very welcome.

The rest of the measures announced emphasized on increasing cash flow to individuals and MSMEs by allowing the deferment and reduction of some statutory payments. These do not have a financial cost and serve to either reallocate available liquidity or advance its schedule.

In summary, of the four factors of production sought to be addressed by the economic stimulus package, today was undeniably focused on “Liquidity”. This isn’t to say that this was the last of liquidity support measures, but it would be no surprise if the rest of the announcements in coming days shift the focus to the other three; Land, Labour and Laws.    

(The author is an economist, capital markets expert and the former CEO of Essel Mutual Fund. The views expressed are personal.)