Daily Financial News Analysis – 2nd June’20

Table of Contents

Cabinet approves MSME, farm support measures

The cabinet raised the turnover and investment threshold for medium-sized enterprises
Investment limit for medium-sized enterprises: Rs 50 crore
Turnover limit for medium-sized enterprises: Rs 250 crore
Atmanirbhar Bharat Package: Rs 10 crore investment and Rs 100 crore turnover.
Exports will not be counted toward these limits, freeing micro, small and medium enterprises (MSMEs) to freely sell overseas without losing any benefits.
There is no further change in the limit for micro and small enterprises
1. Micro: up to Rs 1 crore investment and turnover limit of Rs 5 crore
2. Small: Rs 10 crore investment and turnover of up to Rs 50 crore
The Cabinet Committee on Economic Affairs (CCEA) approved the Rs 20,000 crore subordinate debt fund and Rs 50,000 crore fund-of-funds to provide equity support to MSMEs.
This will help in attracting investments and creating more jobs in the MSME sector.
It approved more support for farmers, including higher prices for kharif produce.
Farmers will get Rs 55-755 per quintal extra minimum support price (MSP) for the 14 kharif crops in the 2020-21 marketing season, which gives them a return of 50-83% on costs.
The PM SVANidhi (Street Vendor’s AtmaNirbhar Nidhi) will provide working capital loans of up to Rs 10,000, which can be repaid in monthly instalments over a year without any penal provisions.
The government expects the scheme – to be launched by the Ministry of Housing and Urban Affairs in July – to help 5 million people, including vendors and hawkers, restart their businesses.

Manufacturing

India’s manufacturing activity continued to shrink in May.
This made firms cut staff numbers at the quickest pace since data collection began over 15 years.
The seasonally adjusted IHS Markit India Manufacturing PMI rose to 30.8 in May from 27.4 in April.
Weak demand from international markets added to the deteriorating sales trend.
Anecdotal evidence suggested that global measures to stem the spread of COVID-19 continued to stifle exports.

Moody’s cuts India rating

International rating agency Moody’s downgraded India’s sovereign rating by a notch to Baa3 from Baa2 with a negative outlook.
Weak reform push contributing to a prolonged period of slow growth that it expects to continue beyond the Covid-19 pandemic.
The agency, which had upgraded India in 2017 after 14 years, endorsing the policy change agenda of the Narendra Modi government, made it clear that the latest downgrade was not driven by the impact of the Covid-19 pandemic, but due to weak implementation of reform measures.
The downgrade comes at a time when the government faces criticism of its handling of the lockdown to counter Covid-19 and lack of measures to stimulate demand in the 20 lakh crore stimulus package.
Most agencies have forecast a permanent GDP loss of as much as 10% this fiscal.
The action lowers India to the last rung of the agency’s investment grade rating — the same level at which Standard & Poor’s and Fitch put the country.
Hong Kong, France, South Africa, Mexico, Thailand and Israel are among those that have faced rating downgrades in the past few months.

Worker shortage

Top industrialists and executives are voicing apprehension over what they describe as inconsistent regulations and lack of collaboration among various levels of government, municipalities as well as state and central governments.
A shortage of workers owing to the exodus of migrant labourers has impacted production significantly.
It is important for the Centre, state and local authorities to speak in one voice and collaborate with each other.
A flip-flop on regulations every few days has thrown plans out of gear.

IBC

The road towards changing the Insolvency & Bankruptcy Code (IBC) is less simple than it seemed a fortnight ago when the finance minister announced a suspension of fresh IBC proceedings in the wake of Covid-19 pandemic.
The government, it is widely felt, will have to involve the Reserve Bank of India (RBI), large lenders, and some of the other stakeholders to deal with questions that have cropped up in considering an ordinance.
The proposed Ordinance will also have to consider allowing existing companies to do their own restrucuring under IBC in the present environment.

Just as financial and operational creditors can initiate the IBC process on a company, the code allows the corporate debtor to opt for self-insolvency.
According to RBI rules, banks have to review the borrower within 30 days of the first default and implement a resolution plan within the next 180 days, failing which they have to make extra provisioning (which eats into their profits and capital).
RBI, according to banking circles, is likely to insist that it should have the final say on any change in the definition of default in IBC in the context of the pandemic.
RBI has given a six-month moratorium beginning March 1 on interest servicing and loan repayment.
Should IBC continue for borrowers which defaulted before March 1? Should it be for those where banks have reached an inter-creditor agreement (during the 30-day review post default)? Should the moratorium period be considered under the IBC framework?” a senior banker asked.
“While the moratorium and lockdown happened in March, there are borrowers who suffered due to supply chain disruption in February or January,” said a senior official of a large PSU bank. All these issues will have to be dealt with before the government finalises an Ordinance for amending IBC to take care of stress caused by Covid-19.