By – Ramesh Vaidyanathan & Mansi Singh
In an attempt to cushion the blow of the coronavirus on the Indian economy, the Prime Minister of India, Mr. Narendra Modi, last week announced a special economic package of approximately USD 265 billion, equivalent to 10% of India’s GDP. The package caters to various sections of the economy including cottage industry, micro, small and medium enterprises (MSMEs), labourers, middle class, and industries, amongst others.
As part of the special package, various structural reforms have been introduced to attract foreign direct investment (FDI) and promote ease of doing business in India. We have highlighted below the key aspects from the package.
1. Initiatives for businesses
To provide relief to MSMEs, approximately USD 39,502 million emergency credit has been made available that will ensure that 4.5 million units have access to working capital to resume business activity and safeguard jobs. Additionally, for 200,000 MSMEs that are stressed or considered non-performing assets, the GOI will facilitate the provision of approximately USD 2,637 million as subordinate debt. A USD 6593.79 million equity infusion is also planned through an MSME fund of funds.
2. Decriminalization of Companies Act defaults
The Government of India (GOI) is expected to pass an ordinance for the decriminalization of (Indian) Companies Act violations involving minor technical and procedural non-compliances such as shortcomings in corporate social responsibility reporting, inadequacies in board report, delay in holding annual general meeting, etc. The amendments are expected to de-clog the criminal courts and the National Company Law Tribunal.
3. Insolvency and bankruptcy framework
Minimum threshold to initiate insolvency proceedings has been raised to approximately USD 0.13 million from the earlier low threshold of USD 1,320. This has been done to essentially insulate MSMEs from creditor led insolvency filings. A special insolvency resolution framework for MSMEs is also expected to be notified soon. Fresh proceedings under the (Indian) Insolvency and Bankruptcy Code (IBC) have been suspended for a year. This move has been welcomed as the fear of being dragged into bankruptcy proceedings owing to pandemic-fuelled distress is eliminated.
4. Sectoral reforms
There are several sectors where reforms are being introduced and private sector participation being welcomed. These include coal, minerals, defence production, airports and aerospace management, power sector distribution companies in Union Territories (UTs), space sector and atomic energy sector. While details are awaited, a broad road-map has been provided under the package.
Coal: The coal sector is set for an overhaul with the introduction of competition, transparency and private sector participation. The closely guarded state monopoly of coal mining is now being opened up for private investments, with around 50 blocks being offered for bidding. Approximately USD 6593.79 million will be spent by GOI in creating appropriate infrastructure and reducing the environmental impact in this sector.
Minerals: Structural reforms are introduced to bring state-of-the-art technology especially in mining exploration through a seamless composite exploration-cum-mining-cum-production regime. A joint auction of bauxite and coal blocks would be done to enhance the aluminium industry’s competitiveness. Further, 500 mining blocks will be offered through an open and transparent auction process.
Defence Production: Foreign direct investment thresholds in defence manufacturing under the automatic route will be raised from 49% to 74%. This initiative is aimed at promoting indigenization of defence manufacturing under the Make in India umbrella. There will be a list of weapons and platforms (that will be expanded every year) that cannot be imported.
Airports and aerospace management: More air space will be opened up for civil aviation, six more airports will be auctioned under the public-private-partnership (PPP) model and the aircraft maintenance infrastructure will be ramped up to cut maintenance costs for airlines. These measures will help the civil aviation sector that has been hit hard by the coronavirus induced lockdown.
Power sector distribution companies in UTs: Electricity distribution companies in UTs will be privatised. A tariff policy that does not burden consumers with distribution companies’ inefficiencies will be guaranteed.
Space Sector: The private sector will be given a role in India’s space programme, including in satellites, launches and space-based services. Private sector will be allowed to use Indian Space Research Organization’s facilities and other relevant assets to improve their capacities. Further, future projects for planetary exploration and outer space travel will be open to the private sector.
Atomic Energy Sector: India will set up a research reactor in PPP mode for the production of medical isotopes in order to make available affordable treatment for cancer and other diseases.
The reforms introduced through the economic package are aimed at promoting business, attracting investment and further strengthening the Make in India agenda of the GOI. While the focus is also on ‘self-reliance’, in the words of the Finance Minister, “we are not looking inward or isolating ourselves but are taking steps to toughen against competition”. On the other hand, there is criticism that the economic package is liquidity driven and will not help increase demand. The impact of these reforms and their efficacy to make up for the massive economic shock caused by Covid-19 could possibly only come to light several months from today.