The economic disruptions from COVID-19 have hit the MSME sector in India hard. Majority of them had issues relating to their cash-flows, business operations, and supply chains. The Government has declared wide range of measures to help the MSME sector tide over the adverse impact of the pandemic through various specific and general measures as part of the gigantic economic stimulus declared and other policy measures continuing thereafter.
The reason is obvious. MSME sector may be comprising of enterprises of relatively smaller sized units vis a vis most large companies but they are critical component of India’s growth story, making significant contributions to GDP, employment and exports. About 6.34 million MSME units contribute around 6.11% of the manufacturing GDP and 24.63% of the GDP from service activities as well as 33.4% of India’s manufacturing output. They have been able to provide employment to around 120 million persons and contribute around 45% of the overall exports from India. These data are based on the erstwhile definition of the MSME sector and their combined contribution is likely to improve with the change in the definition of the MSME sector which now has been revised.
A comparison of the previous and the new definition of the MSME Sector is given below:
The Landscape has enhanced for the MSME sector
Earlier, the MSME enterprises had a relatively much shorter range of investment in Plant, Machinery and Equipment set for their classification in respective categories. In other words there was a limit to the extent they could scale up their operations given the small size of investment.
Now these limits have been revised. According to the new criteria, a micro enterprise, where its investment in Plant and Machinery or Equipment does not exceed one crore rupees can increase its Annual Turnover up to Rs. 5 Crore and still remain in the Micro Enterprise Category. Similarly, a small enterprise, where the investment in Plant and Machinery or Equipment does not exceed Rs. 10 crore can increase its operations up to 50 crore rupees; and a medium enterprise, where the investment in Plant and Machinery or Equipment does not exceed 50 crore rupees can scale up its operations to Rs. 250 crore and continue to be classified as small and medium enterprise respectively.
The revision in the definition of the MSME sector has three important implications: One, the existing MSMEs can increase their investment, two, they can increase their operations and three, it will increase their employment generation potential. This will benefit particularly the sectors that are largely labor intensive. Many MSME units work as ancillary units or service providers to the large industries and if they scale up their capacities or operations it may actually benefit the large enterprises also as later may have access to more resilient supply chains.
The distribution of MSMEs in India across sectors is given in the Chart below:
The recent covid19 measures can be game changer for MSME sector:
In addition to the basic change in the definition of the MSME sector the Government has announced several general and specific measures that are targeted at helping the covid19 hit MSME sector in India boost their liquidity, competitive strength and network as part of the economic stimulus to bring the covid19-hit MSME sector back to normalcy.
- Emergency working capital facility for specified standard accounts
To provide relief to the business, additional working capital finance of 20% of the outstanding credit as on 29 February 2020, in the form of a Term Loan at a concessional rate of interest will be provided. This will be available to units with upto Rs 25 crore outstanding and turnover of up to Rs. 100 crore whose accounts are standard. The units will not have to provide any guarantee or collateral of their own. The amount will be 100% guaranteed by the Government of India providing a total liquidity of Rs. 3.0 lakh crores to more than 45 lakh MSMEs.
- Subordinate Debt for stressed MSMEs
Provision is to be made for Rs. 20,000 crore subordinate debt for two lakh MSMEs which are NPA or stressed. Government will support them with Rs. 4,000 Cr. to Credit Guarantee Trust for Micro and Small enterprises (CGTMSE). Banks are expected to provide the subordinate-debt to promoters of such MSMEs equal to 15% of his existing stake in the unit subject to a maximum of Rs. 75 lakhs.
- Equity infusion through MSME fund of funds
The Government will set up a Fund of Funds with a corpus of Rs. 10,000 crore that will provide equity funding support for MSMEs. The Fund of Funds shall be operated through a Mother and a few Daughter funds. It is expected that with leverage of 1:4 at the level of daughter funds, the Fund of Funds will be able to mobilise equity of about Rs. 50,000 crores.
- E-market linkage for MSMEs
E-market linkage for MSMEs will be promoted to act as a replacement for trade fairs and exhibitions.
- Release of outstanding dues
MSME receivables from Government and CPSEs will be released in 45 days.
- Be Vocal for Local
No Global tenders for Government tenders of up to ₹200 crores. General Financial Rules (GFR) of the Government will be amended to disallow global tender inquiries in procurement of Goods and Services of value of less than ₹200 crores. MSMEs will be benefited as they may not have to compete with their global counter parts in this bracket.
- General Measures
MSMEs will also be benefitted by several measures taken by the government, central bank and other regulatory authorities for enthusing liquidity, reducing compliance burden and resolving insolvency at the incipient stage for defaults up to Rs. One crore without triggering the IBC Code.
Strategies for survival and growth
According to CMIE data, unemployment rate is fast returning back to pre-covid19 levels. An extract from their data table for last four months is given below:
Some states are working at negligible rate of unemployment. However, there are few other States having unemployment rate exceeding the average by about 100%. Things may improve further, once these states are also able to open up after lock-down periods are over.
There has also been a massive increase in the MGNREGA allocations as part of the economic stimulus announced by the government which may partly address the unemployment issues cropping up due to reverse-migration of workers back to rural areas in the wake of the covid19 pandemic. Besides, the monsoon rainfall are projected to be normal this year. These can be construed as favorable factors for keeping level of effective demand for MSMEs high. Around 51% of MSMEs are situated in the rural areas as depicted in the Chart below:
While the government and the central bank are pumping money into the economy in direct and indirect ways and the banks, NBFCs, HFCs and MFIs are being given liberal credit lines, now it is up to the MSMEs to take the call and gear up their operations and bloom again. Every threat brings in opportunities. And every opportunity throws up challenges to reckon with.
Enterprises which will adapt to the new ways of survival and growth in this fast digitizing world, and are able to provide more resilient supply chains to their customers or clients in a cost effective, quality tested and covid19 compliant production, packaging and delivery schedules will have an edge over the others. And those MSME enterprises, be it in the manufacturing or the service sector, which survive this pandemic shall grow well in the future. After all, it is essentially an era in which the fittest will survive, and MSMEs are no exceptions!