The current economic downturn faced by the entire world in the aftermath of COVID-19 has been described by the International Monetary Fund (IMF) as the worst since the Great Depression of the 1930s. Most of us haven’t experienced such a crisis in our lives so far. The pandemic is expected to shrink global GDP by over US$9 trillion over the next two years. Of all those sectors affected by the pandemic, the MSME sector has been one of the worst affected in India.
According to a recent survey, about 47 % of Indian start-ups and MSMEs have less than one month of cash left, and 27 per cent are already out of funds. It has also been estimated that nearly 99 % of non-agricultural MSMEs are in the micro-segment, most of which are unorganized (proprietorship and partnership firms). Nearly 60% of the MSME units are in rural areas and about 14% of the units are women-led enterprises. Hence, the MSME sector can act as a catalyst for economic growth across the geographic, cultural and social strata of the country.
The importance of MSME sector can also be gauged from the fact that this sector contributes to a whopping 31% of India’s GDP, and 45% of exports. There are about 55.80 million MSMEs, providing livelihood to about 124 million people. This sector employs an estimated 28% of the labour force (next only to agriculture). Estimates suggest that the sector created around 13.5 million to 14.9 million new jobs per annum between 2015 and 2019.
With most of the firms in the sector living months away from bankruptcy, it is imperative that the sector needs special attention and concessions from both state and central governments as well as bigger businesses to tide over the present crisis and emerge stronger. Given the importance of MSME sector, closure of MSMEs, especially at this juncture, would lead to mass unemployment and fall in economic growth.
Impact of Covid-19 on MSME sector
Even before the present crisis, most of the firms in the MSME sector were hit due to the blows of demonetisation and GST implementation and the Reserve Bank of India (RBI) had to come out with a moratorium scheme to help the sector. However, COVID-19 and the consequent lockdown and the exodus of migrant labourers from cities and towns who formed the bulk of the workforce have severely impacted these units, especially manufacturing units. Also, as indicated earlier, most of the firms in this sector are struggling to stay afloat and are months away from bankruptcy.
Hence, to ensure the survival of medium and small-scale enterprises over the next few months, it is imperative to provide the much-needed liquidity to keep their basic operations running. The sector should also be provided with easy, low-interest bearing loans immediately.
What the Government of India is doing
In the early days of the lockdown, the Reserve Bank of India (RBI) announced several measures such as a moratorium on term loans and easier working capital financing. RBI also introduced Long Term Repo Operations (LTRO) worth ₹ 100,000 crores to help banks increase lending at cheaper interest rates. To further ease financial distress, some of the PSBs also provided emergency lines of credit for small businesses. RBI has also opened another ₹ 50,000 crore in refinancing window for NABARD, SIDBI and NHB under which banks would be required to make these investments within one month from receiving the funds from the RBI.
The Government of India (GOI) announced on May 13, 2020, Rs 3 lakh crore emergency credit line for the MSME sector. This would be in the form of four-year tenure loans, with an initial moratorium of 12 months. Unlike the guarantee provided by Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) which came with a guarantee fee to be borne by the borrowers, these loans are fully guaranteed by GOI with interest rate cap and no guarantee fee.
This will ensure that 45 lakh units will have access to working capital to resume business activities and safeguard jobs, according to the Finance Minister Nirmala Seetharaman. For the two lakh MSMEs which are stressed or considered non-performing assets, GOI will facilitate the provision of ₹20,000 crores as subordinate debt. A ₹50,000 crore equity infusion is also planned, through an MSME “Fund of Funds” with a corpus of ₹10,000 crores.
“The Fund of Funds will be operated through a mother fund and a few daughter funds. The government will provide equity funding for MSMEs with growth potential and viability,” said the Finance Minister. The fund will aim to help MSMEs expand their size and capacity, enabling them to get listed on the stock exchanges. GOI also announced on May 13, 2020, that MSME receivables from the government and central public sector enterprises would be released in 45 days.
Employees Provident Fund (EPF) support, provided to low-income organised workers in small units under the PMGKY is being extended for another three months and is expected to provide liquidity relief of ₹2,500 crores. Mandatory EPF contributions are also being reduced from 12% to 10% for both employees and employers in all other establishments. This is a welcome move which will increase liquidity for both distressed businesses and cash-starved workers.
In a bid to fulfil the Prime Minister’s vision of a self-reliant or “Atmanirbhar” India, global tenders will not be allowed for government procurement up to ₹200 crores. Also, to provide an impetus to the MSME sector, GOI recently changed the definition of an MSME enterprise. It may also be noted that the new definition of MSMEs does not differentiate between a manufacturing enterprise and a service sector enterprise.
Way forward for MSMEs
COVID-19 came as a bolt from the blue for the MSME sector and more so for businesses that were digitally under-prepared. Technology is the new backbone of MSMEs who want to succeed in the post-COVID world. Digitisation is no longer optional, it is a must for the very survival of these units. An accelerated pace of digitisation and progressive policies to support marketplaces promoting MSMEs in the domestic market as well as globally will be a crucial element in fast-tracking the revival of manufacturing MSMEs, going forward.
Apart from the initiatives by GOI for providing financial support, MSMEs need support in areas like partial concession/exemption up to a reasonable period in respect of utility bills like electricity, water, rent, property taxes etc. At the initial stages of operations, the units are likely to face input constraints as the suppliers may not be willing to provide any credit option, or may insist payment of arrears and may also hike up prices or some other artificial constraints may emerge.
While the MSME sector, in general, is hit hard due to this lockdown on account of Covid-19, the plight of MSME exporters is more deplorable. It is estimated that more than 50% of the country’s total outbound shipments are catered by MSMEs. The problem seems to be gloomier in the sense that due to this global pandemic, global trade in goods is set to decline steeply in the coming days which may vary from 13% to 32%, according to an estimate by WTO.
So a comprehensive incentive package for the export segment of MSMEs is the need of the hour. Hence, the Commerce Ministry’s latest move to cap the outlay for the Merchandise Exports from India Scheme (MEIS) at ₹9,000 crores for the April-December period seems to be ill-timed. According to the Federation of Indian Export Organizations (FIEO), the move is likely to hit many liquidity-starved exporters, especially MSMEs, hard and many businesses may go out of business. GOI should intervene and reverse this proposal immediately so that MSME units are not hit hard.
Rajnish Kumar, Chairman of State Bank of India, opines that MSMEs need to act with prudence and should avoid over-leveraging because of a lot of uncertainty pertaining to the current state.
Are these measures enough?
So far, GOI has desisted from providing a direct bailout package for MSMEs. The Credit Guarantee Fund is expected to nudge the banks towards providing more collateral-free loans as GOI would be completely taking over the credit risk associated with MSME lending. Given the troubled times faced by these units, it is a welcome measure. Most of these are basically supply-side measures, aimed at activating businesses in the MSME sector.
GOI seemed to have realized the importance of providing timely credit to MSME units. If implemented correctly and timely, these measures would definitely help both demand and supply-side economics and would help revive the ailing MSME sector post the COVID-19 pandemic.
About the Author
Rajan Sundaram is a banker with more than 3 decades of experience with Canara Bank. Earlier, he was a faculty with Canara Bank, specializing in the area of Credit, Risk Management and Legal & Recovery. He has also been AVP (Credit Analyst) with Wells Fargo.
A holder of MBA (Finance) and PG Diploma in Human Resources Management from IGNOU, Rajan Sundaram has been Academic counsellor for the MBA Program at IGNOU and guided students for their MBA projects. He has taught papers on Statistics for Management and HR for IGNOU. Sundaram has also taught papers on Trade Finance and Quality Management at B Schools. Apart from academic teachings, he is a freelance trainer on credit and soft skills programs.
Furthermore, he contributed articles to Canara Bank House Magazine and Vinimaya a publication from NIBM Pune. He has presented research papers at Management Development Institute (MDI), Gurgaon and other colleges. Currently, he is serving as a faculty of Banking in Manipal Global Academy of BFSI.