Re-energising MSMEs: A key conundrum for government

MSMEs are the growth accelerators of the Indian economy, contributing about 30% of the country’s gross domestic product (GDP). There are close to 60.34 million MSMEs in the country as per the latest Annual Report of MSMEs 2018-19. MSMEs exposed to a higher level of integration with global value and supply chains contributing about 40% of the overall exports are playing a critical role in global trade systems.

In terms of exports, they are an integral part of the supply chain and. MSMEs also play an important role in employment generation, as they employ about 110 million people across the country. Interestingly, MSMEs are intertwined with the rural economy as well, as more than half of the MSMEs operate in rural India. Research has emphasised that this sector acts as a catalyst for the socio-economic development of the country. All this becomes more important with the government’s new mission of achieving the $5-trillion economy target by 2025.

Unfortunately, the Covid-19 pandemic and the ensuing national, state, and local lockdowns that ensued thereafter hit these largely informal and small units severely. The MSME survey reports have shown that disruptions caused by the Covid-19 pandemic impacted MSMEs earnings by 20-50% and led to a severe liquidity crunch. While some enterprises innovated their ways by shifting focus from non-essential commodities towards essential commodities; the vast majority struggled hard to survive in the challenging economic situation owing to low demand and ambiguity in future trade.

MSMEs present in remote areas also faced a lot of difficulties due to interrupted supply chain systems and intrastate lockdown provisions. With an intent to tackle the Covid-19 disruptions for the MSMEs, GOI provided access to institutional credit. Measures such as increased emergency credit line guarantee schemes to businesses, subordinate debt schemes, and Funds of Fund schemes to provide financial relief to this sector has been introduced. The launch of CHAMPIONS portal and World bank’s TReDS to facilitate credit have also been initiated. Sturdy credit growth to MSMEs portends revamped credit flows for enterprises to survive and grow.

The Union Budget presented on Monday has attempted to put a breath of life in the Covid-hit MSME sector. The Budget-2021 has taken a number of steps to support the MSME sector by doubling the allocation to micro, small and medium enterprises (MSMEs) to Rs 15,700 crore in comparison to the previous year. This move has been welcomed by the MSME sector and applauded as a timely booster to stem the present downslide in the economy.

The customs duty on semis, flat, and long products of non-alloy, alloy, and stainless steels for the benefit of the MSMEs hard hit by the coronavirus pandemic has been reduced to 7.5% uniformly. For copper recyclers, the customs duty on copper scrap has been reduced to 2.5% from 5%. For the textile industry and MSMEs in the textile industry, the price of nylon chain has been made at par with polyester and other artificial fabrics as part of rationalising duty on raw materials.

To incentivise the MSME exporters of garments, leather, and handicraft items, the budget has announced the withdrawal of exemptions on imports of some types of leathers as they are manufactured domestically in quality and quantity. Further, custom duty on finished synthetic gemstones has also been increased to encourage its domestic processing. The government has also proposed to allocate Rs 300 crore towards the establishment of new technology centres for the MSME units.

The Finance Minister also announced several measures aimed at improving the regulatory framework that supports the MSME sector. To resolve cases faster, the Budget has announced that the National Company Law Tribunal (NCLT) framework will be strengthened, and the e-Courts system will be implemented. This involves the creation of a special framework for MSMEs for debt resolution. In particular, an asset reconstruction company (known as Bad Bank) will be set up to take over stressed loans. The Bad Bank is modelled on the lines of an asset reconstruction company which will clear hurdles in lending to MSMEs.

The MSME Council has termed the Budget as “pro-development” and “industry-friendly”. The Council has specifically lauded the introduction of pre-paid electricity meters and allocation of Rs 27,000 crore for the industry. According to the Federation of Indian Micro and Small & Medium Enterprises (FISME), reduction in Customs Duties on steel and ferrous and non-ferrous scrap is a major direct benefit to the MSMEs as it will help reduce the raw material prices.

This was one of the main demands of the sector. The MSME sector was looking for the formation of a Committee to address the problems caused by an increase in raw material costs. The sector was also looking for an announcement on the reduction of GST to 5% from 18 at present, reduction in the interest rate on loans for manufacturing industries to 8%, and permanent extension of duration for NPA settlement to 180 days.

The government had announced a Rs 3 lakh crore Emergency Credit Line Guarantee Scheme (ECLGS) for MSMEs under the Aatmanirbhar Bharat Abhiyan package in order to mitigate the stress caused by the lockdown. The scheme was valid till the month of October. Finance Minister Sitharaman had later extended the ECLGS till November 2020 and had further extended it till March 21, 2021.

(The writers are Ph.D candidates, Faculty of Management Studies, University of Delhi)