By Neelam Rani and Anvita Gupta
The Micro, Small and Medium Enterprises have been affected badly by the economic crisis triggered by the COVID-19 pandemic. A large number of MSMEs are grappling with a cash crunch, unable to meet their payment deadlines, face operational constraints and difficulties in recovery of dues as well as weak consumer demand. Future seems bleak for a number of MSMEs with some of them facing an existential crisis. The Narendra Modi government has introduced a number of measures to tackle the economic crisis triggered by the coronavirus pandemic.
The Finance Minister has announced the following reforms to support the MSMEs.
- SMEs to get collateral-free automatic loans worth Rs 3 lakh crore. They are also exempted from paying the principal amount in the first year. This measure will help 45 lakh units to resume their operations.
- Functioning MSMEs that are either NPA or economically stressed will be provided subordinated debt worth Rs 20,000 crore. The government will also provide partial credit guarantee support to banks worth Rs 4,000 crore in addition to equity infusion by banks into MSMEs.
- Fund of funds for the infusion of Rs 50,000 crore as equity into MSMEs.
- The definition of MSME has been changed to include bigger players so that they can also enjoy the benefits provided by the government. Also, the government has revised the law to remove the differentiation between manufacturing and service MSMEs.
- Government procurement tenders will be restricted for the foreign players, giving MSMEs a fair chance to compete. This is a step towards creating a self-reliant India.
- The government is providing a e-linkage market to MSMEs to boost trade. Also, the receivables of MSMEs will be cleared in 45 days.
While the government has announced several forward-looking reforms, the revised definition of MSMEs is the most important one. It allows the businesses to grow bigger and expand without losing the benefits conferred on them by the MSME tag.
In the light of the economic emergency due to the nation-wide lockdown, the population is scrambling for jobs, while the employers are bleeding badly. The nation wants more jobs and needs more job-givers. Most of the jobs in the country are created by MSMEs as in the case of every country on the planet. India needs jobs to be created in millions and it cannot be done in areas such as Artificial Intelligence and information technology.
The government’s initiative of providing collateral-free loans is a nudge for the technically trained youth to start their own ventures. If each individual unit employs 10-50 people and 1 lakh such units spring up in India, think about the number of jobs they could create. There will be close to 2 to 3 million jobs. If these business units enter the value chains of several domestic and export markets, the Indian economy will be on the path of recovery.
Historically, MSMEs have been hesitant to borrow from financial institutions. At least 83% of them are self-financed. Imagine the amount of growth that they could achieve with banks investing Rs 3 lakh crore.
While the government paints a rosy picture of the expected outcomes of the reforms, there are several hurdles in the road ahead. The balance sheets of several formerly healthy businesses will now have an unhealthy debt-to-equity ratio. Also, the timeline required for relief is actually not the same as the timeline in which credit will come. There is a difference in the loans being available and the cash needed being available in time. Indian banks have been hesitant in dealing with a large number of small borrowers, they would rather have one large borrower for the same amount.
The government is focused on keeping the businesses afloat by providing them long-term credit packages that are unlikely to support their immediate cash requirements. There should have been more cuts in taxes and fees due to the government that could help the MSMEs in such turbulent times.
Another angle to consider is the role of bigger companies that are the buyers of the products manufactured by the MSMEs. The government has mandated payment to MSMEs within 45 days. There is no denying that the COVID-19 pandemic has badly hit the MSME sector, but it has also affected the cash flow and operations of large companies. Such a timeframe puts undue pressure on large companies that are already facing a liquidity crisis. Also, there is a possibility of cuts in purchasing that such large companies undertake from MSMEs, thereby further affecting the already weak demand in the market. The government has received complaints that several public sector companies have failed to make payments to the MSMEs within the timeframe.
The government has come up with the MSME Udyam platform through which it has redefined the MSME criteria. It has also launched various schemes and services to help small businesses and medium entrepreneurs. SMEs stand to avail benefits like protection against delay in payments, collateral-free loans, octroi benefits, claim on stamp duty and registration charges, concession on electricity bills, subsidies, exemptions on applying for government tenders and direct tax exemptions.
In the light of the good response to the Udyam Registration Portal, there is also a sizeable section of businesses demanding government assistance in registrations and migration from the old portal to the new one. It is reported that the new registration form is quite lengthy and complicated. The MSMEs have been responding positively to the orientation courses on online registration process and on the use of the portal. In the light of social distancing norms being followed these days, the government should organise more online sessions for MSME entrepreneurs.
(Dr Neelam Rani is Associate Professor (Finance & Control) at IIM Shillong. Anvita Gupta is a PGP student at IIM Shillong.)