The Coronavirus disease (covid-19) has tumbled the economy and brought a state of global pandemic resulting in economy and financial crisis. The situation is like the great depression of 1930 and International Monetary Fund has observed the covid-19 pandemic will lead to a global recession in 2020. Almost half of the globe is affected and India is not left behind in this outbreak.
Out of the emerging and fastest growing economy over few years the pandemic has deaccelerated the GDP and will be down to 1.5%, still better than some of the countries in the world. India has to take measures to revamp the financial and economy crisis as enumerated below:
I. Providing financial assistance by government/the RBI:
1. SIDBI can ease the process of credit guarantee of bank loans to Micro, Small and Medium Enterprises even more favourable.
2. If the banks are unable to provide credit facility to MSMESs, then Government/the RBI can help the MSMESs by providing additional loans upto the amount of tax paid by MSMESs at a nominal rate. Incremental loans should be provided regardless of any earlier loan provided by the banks.
3. Guarantee of loans by Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) – As per reports MSMESs requires incremental loan of approximately Rs. 50,000 crores for revival of business post COVID -19. Banks have requested Union Government to fully guarantee their incremental loans to MSMESs. As per the RBI Report, banks have lent a total of Rs. 4.78 trillion to MSMEs for the fortnight ended February 28, 2020. In such pandemic the MSMEs sector has been affected a lot that led to closure of their factories and business, the CGTMSE should guarantee 100% of their loan and increase the quantum of loan. Currently CGTMSE guarantees 50-85% of loan upto Rs 2 crores.
4. Reduction of REPO rate by 0.25% i.e. the new rate is 3.75% (immediately preceding rate 4%).
5. The LCR was introduced as part of the Basel III reforms following the 2008 global financial crisis and was finalised by the Basel Committee on Banking Supervision in January 2013. Banks are required to hold High Quality Liquid Asset (HQLA) equivalent to at least 100% of projected cash outflows during the stress scenario. In this COVID-19 pandemic, Liquidity Coverage Ratio (LCR) have been reduced to 80% from 100% and restored in phases.
6. If the RBI has sufficient liquidity in point no 2 sub point 3 (refer title providing financial assistance by corporate), then it should provide financial assistance to those NBFC which are collaterally rich, organized, well controlled and managed.
7. Those financial institutions which are at the verge of declaring or declared dividend should be encouraged by the RBI to keep on hold their dividend payment for some time as enormous funds are required due to havoc by COVID-19. Later, the fund could be utilized by the Government in some or other means for the welfare of masses.
II. Providing financial assistance by Corporates:
1. The Conglomerate or financially sound Corporate can provide trade advances to MSMEs and other entities. This would help the corporates to get raw materials or job work for their product which will scale their business operations as well as benefit the intermediaries.
2. Inter-corporate loans should be encouraged by amending the provisions of Section 186 of Companies Act, 2013. Hence Corporates should provide loans or credit facility to other Companies at a lower rate of interest rather than at the prevailing market rate or government security.
3. The conglomerate Corporates should raise fund by issuing bonds and such funds should be transferred to the smaller entities. The bonds should be purchased by mutual fund companies, banks and insurance companies and the RBI should assist in lending money to banks, insurance and mutual fund companies considering the viability of bonds through repo rate. The government companies or its subsidiaries, intermediaries and agencies should cooperate with the government to accumulate fund for the RBI by clearing their dues.
III. Measures to be adopted by Government in Real Estate:
Another sector which is largely affected by COVID-19 is real estate. Some of the measures the government must take to restore Real Estate.
1. Government and developers must restrain migrant labourers from flocking to their hometown by providing them suitable lucrative incentives. The early labourers return to the construction sites and resume their work the much better will be the economy.
2. Reduction in stamp duty and registration charges of houses. The reduction should be temporary as it hits the state revenue so for the time being it should be reduced and restored later on when the economy revives.
3. The developers should focus and complete the existing projects in hand and can delay the new projects.
4. The Government should review ready reckoner rates fixed by the state government.
IV. Socio-economic assistance by the Government:
1. India has approximately 77 million of stock of food grains at the FCI in March 2020 which is 3 times the buffer stock. The GOI has already taken measures for distribution of food to the underprivileged or at or below poverty line. India will take time to revamp the economy after the lockdown so three months of time is not enough for recovery of economy. The food should be distributed till the government is satisfied that the economy has not improved. The food should be distributed even to those who does not have proper ration cards especially in the case of migrant labourers. For instance, the capital of Bihar, Patna has 54000 pending applications and state Jharkhand has approximately 7 lakhs ration card applications pending.
In the state of emergency, the country does not have to think who has ration card, the country
has to find who is hungry.
2. Government should set up of camps and canteens for migrant and houseless labourers and ensure that food is adequately provided to them so that they do not starve. At this COVID-19 outbreak Government should make effective use of Public Distribution System (PDS). The present scenario is not less than mid-day meal scheme but even graver and wider.
3. The Government should make use of local NGOs and national level charitable trust and NGOs as they have wider reach and thoroughly connected to end to end user. Food and other supplies can be provided to NGOs which ultimately will reach in the hands of needy.
V. Reform in taxes
1. Interest on Gold Sovereign Bonds for the F.Y 2020-21 should be exempt due to COVID- 19 as it will motivate large number of subscription and it would lead the RBI to generate more cash.
2. Residential status for individual who is a citizen of India leaves India for employment during a F.Y., he/she will qualify as a resident of India only if he/she stays in India for a period of 182 days or more should be amended for the F.Y 2020-21. As per the budget 2020 the period of 182 days has been reduced to 120 for those individuals whose income exceeds Rs. 15 lakhs. Now keeping in mind, the era of COVID-19 this 120 days shall be applicable to all the individuals left India for employment and even if their income is less than Rs. 15 lakhs for F.Y 2020-21.
3. Date for obtaining additional deprecation as per section 32(1) (iia) @20% to be extended till June 30, 2020.
4. Another sector which has been affected due to COVID-19 is tourism so to boost tourism the government should reduce the rate of GST to 5% from existing 18%.
Brief about Author CA Hrithvik Raj
The writer is a partner of NSH & CO, Chartered Accountants and has experience of working in one of the Big-4s for 5 years. He has completed his internship from J.C Bhalla & Co, an esteemed chartered accountant firm in Noida.
Hrithvik has extensive experience in risk based assurance and auditing services and wide spectrum of finance functions including compliance, reporting and accounting advisory.
He has deep interest in article writing in the field of finance and economy and imparting video lectures on Standards of Accounting and Auditing.
*Above blog is based on the basis of information available in public domain and to the best of knowledge of Author. The author shall not be responsible for any action or decision taken on the basis of above blog.