Over the past few days, finance minister Nirmala Sitharaman has unveiled a slew of measures that would help the Indian economy battle and recover from the adverse impact of the coronavirus crisis. With its focus on promoting “Atma Nirbhar Bharat”, transformational and structural reforms have been introduced across several key areas, which will be instrumental in rebuilding the Indian economy and paving the way for a sustained economic revival.
  
First, radical reforms in the agricultural sector, such as the amendment of the Essential Commodities Act (ECA), contract farming, and inter-state sale of produce are long-awaited policies for transforming the way farmers sell their produce. This represents the freeing up of the agricultural market, much in the same way that industry was delicensed after 1991.

Deregulation of agricultural commodities such as cereals, edible oils, onions, pulses, etc adds to this effort and brings in stability in contractual obligations along with better price realisation for farmers.  The formulation of a Central law on agricultural marketing will help in barrier-free inter-state trade and enable farmers to sell their produce at more attractive prices. This will also encourage e-trading of agricultural produce and ensure levelling of prices for consumers across the country.

The creation of a facilitative legal framework to bring farmers in contact with food processors, aggregators, large retailers and exporters in a fair and transparent manner, and provide them with assured produce, price and quantity is another commendable step. A contract farming mechanism will guarantee better predictability of price and produce, with better signalling on the next year’s planting plans. The action of state governments will be central to the success of the agricultural package, and we believe that given its benefits as well as the current crisis situation, the states would partner in this mission.

Two, redefinition of the micro, medium and small enterprises (MSMEs) with revision of investment limits for the first time after 2006 with an additional turnover criterion results in two critical benefits. It brings in a large number of enterprises into the MSME benefits fold, and it encourages smaller enterprises to grow without anxiety about losing these benefits. Given that MSME are the chief employers and it is their growth that creates fresh job opportunities, this is indeed a strategic policy. We hope that this can be implemented at the earliest.

Three, a new Public Sector Enterprises (PSE) policy is to be announced, wherein all sectors will be open to private sector participation while PSEs will continue to play an important role in notified strategic sectors. As per Ms Sitharaman’s presentation, all PSEs in non-strategic sectors will be considered for privatisation, which is truly a game-changing reform.

A coherent PSE policy will play a catalytic role in promoting efficiency and better resource allocation by reducing wasteful administrative costs. Further, it will add to the government’s revenues. While the government might make more gains in waiting for equity markets to improve before placing PSEs on the block, it is suggested that the implementation is carried out at the earliest so that efficiency and resource use gains can be unlocked quickly.

Four, the government has taken key steps to revitalise the power sector, now suffering from huge debt overhang in state distribution companies. The facility of Rs 90,000 crores from PFC and REC would help to alleviate this. Further, it is notable that discoms’ reform has been linked to the enhancement in the states’ borrowing limits. Reforms in the power tariff policy would avert such situations in the future, and this promises to also address the issue of cross-subsidisation of power tariffs, which is adding considerably to costs for manufacturing companies.

Five, the liberalisation of the coal and mining sectors are major reforms that would boost India’s fuel production and attract greater foreign investments. Introduction of commercial mining on a revenue sharing basis in the coal sector will help to leverage India’s coal resources better and end the monopoly situation prevailing in this sector. Apart from greater availability of coal at market prices, technology and safety will also benefit in India’s mines.

This move has been accompanied strategically by the allocation of Rs 50,000 crores for coal evacuation infrastructure to encourage private sector participation. Another major reform is a seamless composite exploration-cum-mining production regime, which promises to remove the hurdle currently facing prospective investors. Joint auction of bauxite and coal will unlock huge potential in making India a leader in the global the aluminum industry as well.

Six, the foreign direct investment (FDI) limit in defence manufacturing was raised from 49 per cent to 74 per cent through the automatic route. While encouraging greater investments from global defence majors, greater infusion of technology in the sector will give a major boost to India’s defence manufacturing.

These reform measures address key pain points of the economy and will contribute towards enhancing its global competitiveness at a time when the world stands at a critical turning point.
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This article was first published in The Deccan Chronicle on May 22, 2020

The announcements made by the Finance Minister for five days consecutively, added up to a prudent combination of stimulus and reforms. A well thought out package was presented aimed at addressing the short-term challenges posed due to COVID-19 induced crisis, medium term support to business and enterprises coupled with significant policy reforms which is likely to act as a catalyst for economic recovery post the lockdown period. To address the immediate distress in the short term, cash and food support is being provided through Pradhan Mantri Garib Kalyan Yojana (PMGKY) while more money is being put in the hands of people though tax concessions and EPF support to public and enterprises. Immediate regulatory relief was also provided both to individuals and enterprises to avoid defaults on account of lockdown through relaxation in tax deadlines as well as suspension of fresh activities and exclusion of COVID-19 related debt from IBC proceedings.

Agricultural reforms and initiatives were taken up very strongly by the Finance Minister, unshackling the sector from many outdated laws. Amendment of legislation such as Essential Commodities Act has been a long pending expectation of the stakeholders in the sector, as it this acts as a barrier in the process of price realisation. This together with agricultural marketing reforms and strengthening of agri-infrastructure with a fund of Rs 1 lakh crore will lead to improved agricultural output and better pricing for farmers.

Mining is of critical importance and the sector has been deprived of major investments. CII had been requesting for commercial mining of coal and liberalising the captive mining policy which were both extremely important for improving the efficiency and viability of the mining and metals sectors. Incentivising coal gasification is the right step to use the existing Coal resources while taking care of the environment to which India has global commitments. Introduction of reforms in the mining sector through seamless comprehensive exploration cum mining cum production policy will help build certainty in investment and attract global mining companies to India.

Upgradation of industrial infrastructure and ranking of states in terms of investment attractiveness, among other measures would go a long way in facilitating investors. Global investors looking to invest in India need handholding and guidance on where the best facilities are available. A portal providing information on ready to invest land in industrial estates and parks would be very useful for such guidance. A bailout of the beleaguered state power distribution companies will ensure that their accumulated debt is wiped out. Reforms in tariff policy will pave the way for a more viable power sector.

In view of the heightened stress which the MSMEs are facing due to prolonged lockdowns, we are heartened by the fact that the stimulus package included several measures to help the beleaguered sector. A significant measure which is expected to alleviate the cash flow problems being faced by the MSMEs currently, is the move to extend Rs 3 lakh crore collateral-free automatic loans with 100% government credit guarantee. Moreover, the decision of the government to reduce all pending dues to MSMEs within 45 days is a considerable positive for the cash starved entities and has been long-standing demand for industry. However, we urge the government to have a re-look at the proposed turnover thresholds in the redefinition of the MSMEs as these are deemed to be too low, hence will not encourage these entities to grow.

Other critical components of the package include those related to public health, public sector entities, defence, real estate and construction. The announcements made in April on cash transfers were further supplemented by food distribution to the people at the bottom of the pyramid who are facing distress. The allocation on MNREGA has also been increased so that migrants returning to the rural areas are able to find a livelihood. Industry is confident that the entire package as it is implemented will drive a gradual economic recovery. The announcement of a rental housing scheme for migrant workers would could lead to meaningful change in their condition in the long-term.

Many of the structural reforms have been industry asks for some time and if carried out in a time-bound manner, would have a significant impact on the economy's competitiveness, with wide-ranging implications for each of the sectors under consideration. The economy, when it recovers, will be a stronger and more competitive one. In addition, the stimulus of Rs 20 lakh crore, as it gets spent will have a multiplier impact on the economy. To the credit of the government and the policy makers, they have managed to achieve this without putting excessive burden on the government coffers with estimated deficit impact in FY 2020-21 likely to remain under Rs 3 Lakh Crore, which leaves additional room for contingency measures in the future, should the need arise.
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This article was first published in The Morning India on May 19, 2020

With most economic activities in pause mode due to the Covid-19 contagion, businesses are expected to be hard-hit for at least a few quarters before operations return to normal. The humanitarian crisis is leading to huge demand disruption, which may persist and change habits overnight. The government is taking all necessary steps to ensure that the country and people of India are well prepared to face the challenges and threats posed by this pandemic. The tax regime will be one of the key systems impacted by the emergency situation, and it can also be a potent instrument for supporting economic revival.

The immediate impact was felt in terms of compliances with statutory requirements as well as in reduced ability to pay taxes. The relaxation in statutory and regulatory timelines in the taxation regime by the finance ministry was indeed a welcome relief for taxpayers. The move to reduce corporate tax rates from October last year could not have come at a better time, as it imparted confidence to businesses.

The two key issues being faced by industry in this challenging period relate to compression of fund inflows, which is combined with the necessity of continuing to pay for fixed costs. One of the key asks of industry has been that such extraordinary circumstances require unconventional measures. While companies are willing to pay the taxes due, we would request the government to consider extending the timelines for payments. All tax payments should be deferred until September 30, 2020.

All payments of tax due till then should be deemed to be paid. This will go a long way in adding extra liquidity in the hands of enterprises.

The government has made donations to the PM CARES Fund eligible under the corporate social responsibility (CSR) obligations. Medical relief contributions by industry would gain considerably by adding donations of masks, personal protection equipment, testing kits, and ventilators under the CSR-eligible expenditure. Other relief measures can also be considered for full deduction under this head.

Many companies have come forward to convert their plants into producing critical care items. This can be further incentivised with full depreciation for machinery used to manufacture such items or any equipment used for combating Covid-19.

Tax provisions could also be made for certain stressed sectors where demand needs to be revived. For example, vehicles are often purchased in March to avail of depreciation benefits, and this could be extended until June. For machinery purchases, accelerated depreciation could be provided for one year.

With the need to preserve export markets and prevent flight of buyers to other countries, it is important that export procedures be facilitative. One suggestion is to provide direct benefit transfers to all exporters as well as manufacturers of exported products, instead of issuing duty credit scrips. Input tax credit should be allowed for deposit of countervailing duty or special additional duty for regularisation of the advance authorisation/export promotion capital goods (EPCG) scheme. Also, export of alternate products should be allowed for fulfilment of export obligations.

A lot of cash is held up under goods and services tax (GST) payments. Interest rates under GST should be reduced and tax rebates can be introduced for making early GST payments in cash, which will be a win-win for both governments and industry. The accumulated input tax credit can be allowed to be utilised for payment of GST liability under reverse charge as well, which would help unlock cash. Further, all blocked electronic credit ledgers should be immediately unblocked until normalcy is restored in business operations.

There are several other inconveniences which changes in tax could address. In the medium term, simplicity of GST structure would go a long way towards easing the coming pain. There is need to converge GST rates to three slabs and also include some exempted sectors, such as fuel and alcohol, within the system. Some key sectors, such as health care, would benefit from being able to avail of input tax credit, which is currently not available to them due to non-applicability of GST.

These are extremely challenging times, and collective efforts by the government and industry would be required to bring the country back on track. It is important that Indian industry is encouraged to support the government in all possible ways to combat the Covid-19 pandemic.
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This article was first published in the Business Standard on May 09, 2020