Role of MSMEs in Indian Growth Story

Impact of Pandemic on Lives and Livelihoods and Importance of MSMEs

The Covid-19 pandemic has impacted both lives and livelihood. India had been under lockdown since 25th March, 2020. Currently, the global count of confirmed Covid positive cases are around 23.4 Million, out of which 15.2 Million have recovered and there has been a loss of 809,000 lives. In India alone, there has been around 3,110,000 plus confirmed cases, with 2,340,000 recoveries and loss of around 57,542 lives. The health emergency has been intrinsically linked with economy and livelihood. The stock markets crashed the world over, with the Indian NIFTY plunging below the 8000 level, in what was being observed as a bigger collapse than the 2008 subprime mortgage crisis which triggered recession across the globe. Further, the pandemic has resulted in mass lay-offs across the industries which is on a cost cutting spree. According to Centre for Monitoring Indian Economy (“CMIE”), India’s unemployment rate had spiked from 8.75% in March to 23.5% in April when around 122 Million Indians lost their jobs and had further peaked up to 27.1% in May. Formal employment generation in April was lowest since 2017 when EPFO started mapping data of net additions to payroll. As per Global Economic Prospect Report of World Bank, nearly 60 million people could be pushed into poverty in 2020. It will not be wrong to say that the pandemic fronted us with the gut-wrenching realisation of the plight of our migrant labourers, who not only lost their livelihood but were battling for their lives and walking thousands of miles to reach their respective homes in search of a social security net.

In view of striking a balance between lives and livelihood, the Government recently started relaxing the lockdown restrictions, to prevent an economic collapse which could be far more devastating than the Covid-19 induced health crisis. The country was already witnessing a slow-down in growth prior to Covid-19 outbreak and Covid-19 had made things far worse. The Government had announced a fiscal stimulus package under “Atmanirbhar Bharat Abhiyan” of INR 20 lakh crores, equivalent to 10% of our GDP, in order to support the jittering economy during this crisis. The clarion call was to be vocal about local, and the package would focus on land, labour, liquidity and laws.

The special package includes five pillars – Economy, Infrastructure, System, Vibrant Demography and Demand. The roadmap for the package has five phases, the first one being on “Businesses including MSMEs”. This underlines the importance placed by the Government regarding the role played by MSMEs in the reboot of Indian economy and in enabling “self-reliance”.

This importance is well founded as MSMEs form the backbone of our economy, and is crucial, not only for our GDP growth, but also for our exports, tax revenue and employment generation. As per the 73rd round of National Sample Survey, conducted during 2015-16, there were 6.3 Crore unincorporated non-agriculture MSMEs in the country engaged in different economic activities. Out of these, 31% were engaged in Manufacturing activities, while 36% were in Trade and 33% in Other Services. The Micro sector accounted for more than 99% of total number of MSMEs. Small sector and Medium sector with accounted for 0.52% and 0.01% of total MSMEs, respectively. 51.25% of MSMEs were in rural area and 48.75% were in the urban areas.

These 6.3 crore MSMEs provide employment to over 12 crore people, contribute to 45 percent of exports and over 30 percent of manufacturing value added including service and manufacturing. 90% of India’s estimated 450 million-strong workforce is informal and MSMEs employ about 40 percent of these workers. The MSME Ministry had set a target to up its contribution to GDP to 50% by 2025 in sync with the USD 5 Trillion-dollar economy goal. MSMEs are an important part globally, as they represent 90% of the businesses and more than 50% of employment worldwide.

Government Reforms for MSMEs under Atmanirbhar Bharat Abhiyan

The government has, over past many years, initiated steps to formalise the financing of MSMEs by setting up a nationwide network of regional rural banks, NBFCs and MFIs, the specialised Small Industries Development Bank of India (SIDBI), and more recently, the Micro Units Development and Refinance Agency (MUDRA) under the Pradhan Mantri MUDRA Yojana.

The MSME sector, despite its rapid growth in the past years, was already facing distress before the Covid induced lockdown due to a perceived lack of creditworthiness. Hence, it was very crucial to usher in structural reforms and infuse economic support to address the financial and operational concerns of the leading catalyst of country’s growth.

On 12th May, the Prime Minister announced the mega stimulus package for the economy under Atmanirbhar Bharat Abhiyaan. Consequently, on 13th May, the Finance Minister announced several measures under the post pandemic financial package to help restore economic growth and achieve the goal of self- reliance. Out of sixteen measures announced under the package, six were targeted MSME Reliefs highlighting the importance of MSME sector as a catalyst to nations growth. The six measures are briefly as under:

1. Collateral Free Automatic Loans: INR 3 Lakh Crore outlay, benefitting 45 Lakh MSMEs. MSMEs with INR 25 Crore outstanding in loans and INR 100 Crore in turnover will get credit guarantee backed loans of 4 years tenure, with a 12 months moratorium on principal amount and a capped interest rate. The scheme can be availed up to 31st October.
2. Subordinate Debt for stressed MSMEs: INR 20,000 Crore outlay, benefitting 2 Lakh MSMEs. Government to provide INR 4,000 crores towards partial credit guarantee support to banks and banks will do onward lending to promoters who can use it to infuse equity.
3. Fund of Funds for MSMEs: With a corpus of INR 10,000 Crores, operating through primary and secondary funds, and will help leverage INR 50,000 Crore fund at secondary level enabling MSMEs to expand in size.
4. MSME definition amendment: Amendment in MSME definition to ensure efficient targeted reform intervention and in line with global standards and synchronised with GSTN framework.
5. Only Local Bids for Government tenders upto INR 200 Crores: This will act as a boost to MSMEs and protect it from foreign competition.
6. MSME dues and Market Access: E-market linkages for MSMES is on the anvil to promote trade. All receivables of MSME from Government and PSUs to be cleared in 45 days.

Further, to ensure liquidity to NBFC, MFI and HFCs with low credit rating to do fresh lending to MSMEs, a INR 45,000 Crore Partial Credit Guarantee Scheme is also introduced, wherein existing partial guarantee scheme will be extended to cover borrowings such as primary issuance of bonds/commercial papers and first 20% of loss will be borne by Government of India.

Out of the INR 3 Lakh Crore outlay under 100% Emergency Credit Line Guarantee Scheme (“ECLGS”), as on 9th July, 2020, the total amount sanctioned by Public and Private Banks stood at INR 1,20,099.37 Crores with disbursements of INR 61,987.90 Crores. Amount sanctioned by Public Sector Banks stood at INR 68,145.40 Crores of which INR 38,372.88 was disbursed. State Bank of India leaded the charts with a sanctioning of INR 20,788 Crores and disbursements of INR 13,893 Crores. The States of Maharashtra and Tamil Nadu received the highest sanctions with INR 7.305 Crores and INR 6,955 Crores respectively.

There have been many tax relief measures like extension of compliance due dates, reduction in TDS and TCS rates, speedy processing of income tax refunds etc, which will further provide the much required liquidity to MSMEs.

Revised MSME Classification (Composite Criteria)

In line with the promises made, on 1st June, the Government brought in an amendment to effect change in definition of MSME with effect from 1st July, 2020. The revised MSME classification, with composite criteria of investment and annual turnover, is as under:

The new definition abandons the difference between manufacturing and service MSMEs and classifies enterprises on the basis of combination of invested capital and annual turn-over. The turnover is excluding all export of products/services for all MSMEs, and hence increasing the coverage of MSME net. The calculation of investment in plant and machinery or equipment will be linked to the Income Tax Return of the previous years. Additionally, information as regards turnover and exports turnover for an enterprise shall be linked to the Income Tax and GST laws and also the GSTIN.

Key Institutional Support Mechanisms: CHAMPIONS, GeM, and Subordinate Debt

On 1st June, Government has also launched “Creation and Harmonious Application of Modern Processes for Increasing the Output and National Strength” (CHAMPIONS) in the MSME portal to register grievances around finance, raw materials, labour, regulatory permissions etc. and it has started to gain traction. In around five weeks since launch, the portal has resolved nearly 50,000 complaints filed by MSMEs. As the name suggests, the portal is basically for making the smaller units big by solving their grievances, encouraging, supporting, helping and handholding. It is a real one-stop-shop solution of MSME Ministry.

Another innovative existing mechanism is the GeM Marketplace, which was launched in August, 2016, to bring in transparency and efficiency in the public procurement process. The portal has over 3.87 Lakh sellers out of which 1 Lakh are MSME sellers. Overall, there are more than 17.76 lakh products listed on the portal that has a transaction value of Rs 54,184 crore. According to the government’s Public Procurement Policy (2012) for MSMEs, every central ministry, department, and PSU has been mandated to set an annual procurement target of minimum 25 per cent from micro and small enterprises of their total annual purchases. Further, within this 25%, a sub-target of 4% is earmarked for SC/ST entrepreneurs and 3% for MSMEs owned by women, in order to bridge the societal inequalities. In her Budget 2020 speech, Finance Minister had proposed increasing the turnover of the GeM portal to Rs 3 lakh crore. The portal had also partnered with Trade Receivables Discounting System (TReDS) platform operator Receivables Exchange of India Ltd to help government departments to finance their payments to MSME sellers of goods and services.

Most recently, on 24th June, MSME Minister, rolled out the subordinate debt scheme promised under the Atmanirbhar Bharat reforms, to provide INR 20,000 Crore guarantee cover to 2 Lakh MSMEs. This also entails a sub-debt facility to promoters of those operational MSMEs that are distressed or have become NPAs as on 30th April, 2020. It also guarantees covers to the promoters who can take loans from banks and further infuse it as equity in their MSME. Under the scheme, promoters of the MSMEs will be given credit equal to 15% of their stake (equity + debt) or INR 75 lakh, whichever is lower. In turn, promoters are liable to infuse this amount into the MSME unit as equity. This is expected to enhance the liquidity and maintain debt-equity ratio. In this sub-debt scheme, 90% of the cover will be given while the rest 10% falls on promoters concerned. The payment of the principal amount will be under moratorium for seven years. Maximum tenure for repayment will be 10 years. This is expected to ease out the liquidity crunch faced by MSMEs.

Impact on MSMEs – Crisis and Course Correction

The Indian economy was already suffering from slow growth prior to the pandemic and the Covid-19 has worsened the economic prospects to an unanticipated level. As per CRISIL, the Indian Economy will contract by 5% this fiscal and the MSMEs will be hit the hardest due to the Covid-19 induced lockdown. It is important to understand the MSMEs role in a global context, since the sector is heavily export oriented and plays a significant role across nations.

As per International Trade Centre Report titled, “SME Outlook” issued in June 2020, it is observed that there is no one-size-fits-all solution and small business travel through four phases as they travel through Covid-19 crisis:

• Shutdown Impacts
• Supply Chain
• Demand Depression – business investment may remain low and households may cut down on discretionary spends, SME bankruptcy might be on rise
• Recovery – The new normal will make recovery challenging

The accommodation and food services, followed by non-food manufacturing, retail & wholesale, and travel and transport were the most impacted and there are mostly SMEs. One Fifth of surveyed SMEs reported that they risk shutting down permanently within 3 months and highlighted need for rapid government action. Informal firms are 20% more likely to report that the pandemic is pushing them towards bankruptcy.

As per the report, given the difficulty of identifying and reaching businesses in the informal sector, the most popular way to support SMEs during the pandemic has been through cash transfers to their employees. India’s state of Uttar Pradesh has transferred INR 1,000 to 2.3 million people who have participated in the National Rural Employment Guarantee Scheme.

The Report suggests that four long-term trends will characterize the ‘new normal’ and as MSME play a major role in most economies, they are required to be involved in these four trends:

1. Resilience: This can strengthen the ability of the firms to ride out of crises and can be achieved through diversification, for production or sales, retention of profits, connecting to business support organizations and building collaborative platforms, and even public policy to encourage partnerships and research.
2. Digital: In the near future, digital facilities will no longer be optional. Customers, clients, business partners and workers will come to expect them as a matter of course. Cash payments and paper-based documents will be substituted with digital payments and cloud computing.
3. Inclusive: Making economies more inclusive starts with decent jobs and social protection for all. SME plays a significant role in job creation and without a strong SME sector, it will be impossible to achieve Sustainable Development Goals.
4. Sustainable: Climate change risk was rated as top global business risk in a 2019 survey of insurance industry experts and hence environment friendly development is the need of the hour.

CRISIL Report: “The Epicentre of an Existential Crisis”

As per a recent CRISIL Report titled “The epicentre of an existential crisis”, MSME sectors revenue growth will plunge into deep red this fiscal because of the Covid-19 pandemic. The fall in revenue for MSMEs has been estimated at 17-21%, while the EBITDA margin may shrink by 200-300 basis points to 4-5%. Demand destruction caused by Covid-19 has far outweighed the benefits of weak commodity prices. As per the Report, the impact on operations due to Covid-19 induced lockdown will additionally impact the creditworthiness and worsen the already existing liquidity crunch for MSMEs. The average interest coverage ratio could deteriorate to 1-1.15 times from the 2.4 level witnessed between fiscal 2017 and 2020. This is post factoring of the moratorium benefit provided by RBI, absence of which could have driven the ratio below 1. Micro Enterprises, which account for 32% of MSME debt are fronted with the maximum complications in view of stretched balance sheet and liquidity issue, particularly working capital.

The Report also observes the following sector specific challenges:

1. Small real estate contractors, ceramics and textile makers are the ones having most vulnerable credit profile.
2. Revenue growth of MSMEs in the real estate EPC segment could almost halve with sliding demand, rising cost, labour disruptions and margin pressure.
3. Lower utilisation and partial absorption of BS-VI price hike may erode margins of auto component MSMEs.
4. Working capital is highest for MSME sectors that have higher B2B clientele or dominant export share such as gems & jewellery, ready-made garments and real estate contractors.
5. In upstream sectors like construction, auto component and textiles, inventory build-up and stretched receivables have triggered working capital requirement and rebound is not expected before 2022. Construction units have seen an 80-85% drop in enquiries.
6. In downstream sector, in FMCG, initial benefit was visible by reason of panic buying, however, majority distributors reported 5-10% dip in sales in May due to product and manpower availability. Auto Distributors have reported near zero sales in April and seen more than 50% dip in enquiries in May, signalling a slow recovery.
7. About 70% of 40,000 companies have cash to cover employee cost for only 2 quarters.

Further, growth in NBFC credit to MSMEs has been tepid although MSME constitutes 14% in the overall credit book. Lack of credit growth is mainly attributable to lack of demand for new capex funding, low recovery sentiments in unorganized sectors, lack of client connect owing to lockdown, lack of demand or revenue growth visibility and severely impacted cash flow of MSMEs.

It is understood that out of the INR 3 Lakh Crore emergency credit guarantee line scheme of the Government to MSME under the May 13 reforms, only INR 32,000 Crore has been sanctioned by Public Sector Banks. To address this, leading public sector banks are appointing zonal officers to establish direct contact with MSMEs and to improve its market share with MSMEs which is currently controlled 30-35% by NBFC and MFIs.

A recent survey of over 46,000 MSMEs published by All India Manufacturers Organisation (“AIMO”) found that 1 out of 3 MSME considers its enterprise beyond recovery whereas a further 32 percent expect recovery to take at least six months. This will impact the lives and livelihoods of crores of workers and their families.

CEEW & NIPFP Joint Study: “Jobs, Growth and Sustainability”

A joint study report by CEEW & NIPFP, titled “Jobs, Growth and Sustainability”, has identified following broad parameters in relation to MSMEs:

1. The Government had announced INR 3 Lakh Crore collateral free loan facility for MSMEs, however, only a fraction of MSMEs are connected to any banking channel/NBFC/MFI. It is suggested that an accurate, scalable and real time information system is built to identify and serve genuine beneficiaries of government schemes and aid.
2. MSME information is currently scattered across datasets as Udhyog Aadhar Memorandum, MSME databank and the GST Network. These are either self-certified data or a mandatory requirement based on a turnover threshold and hence not reliable.
3. A fresh MSME census should be carried out and Unique Business Identity number should be allotted.
4. It is recommended that MSME Ministry prepares a vulnerability assessment framework based on economic importance and business risk dimension, to efficiently target support measures.
5. Enterprises in critical supply chains and markets, specially export oriented need special attention. MSME sector is India’s largest employer after agriculture. The viability of MSMEs decide the livelihood of 12 Crores workers and targeted interventions will preserve these workers and create new opportunities.
6. Textiles, the largest commodity in India’s merchandise export basket, is predominantly manufactured by MSMEs. This sector contributed 12.2 per cent of total exports in 2018-19 and is crucial for India’s forex earnings. Ensuring the vast and rapidly growing MSME sector’s revival after the lockdown will prevent a structural collapse of the economy and set India back on its growth path.
7. As of April, 2020, an estimated amount of INR 10,582 Crores were owed by Central and State Government Departments and PSE’s to MSMEs, and 40,000 delayed payment application filed by MSMEs in SAMADHAAN portal since 2017. These delays pose a huge challenge for MSMEs, which are already constrained by high fixed cost and disruption of revenue streams due to Covid-19. In a major relief, Finance Minister announced the clearing of all MSME dues from Government and PSE within 45 days.
8. In order to improve credit worthiness of MSMEs, the Government should mandate the lenders to introduce a mechanism to track fund utilisation and financial health of the borrowers on monthly basis and intervene at the sign of first distress.

Conclusion – Way Forward and Role of Professionals

Even in adversities, we can find opportunities. And Covid-19 has come as the biggest adversity which most of us would have faced in our lifetime. It has worked as a wake up call for all of us from slumbers, and made us realise that nothing in certain, whether in life or in business. It has definitely made us realise, how important it is, to have a backup plan to fall back on. Those, who build up resilience and invest in diversification, will fare out much better than those who do not. Businesses have to rethink and reboot on their strategy, and change their risk perception and revise their profitability projections.

Diversification of MSMEs into defensive sector like FMCG, pharmaceuticals, food products, hospitals, telecom etc. will make their credit profile less vulnerable and secure their revenue streams. A departure or change in portfolio of verticals may be required if the MSMEs are engaged in automobiles, construction, gems& jewellery, hospitality, textiles etc as recovery is not expected anytime soon.

Also, MSMEs should leverage technology and be tech-friendly in order to capitalise on upcoming opportunities. Collaboration with business support organizations will help MSMEs access required ecology support and even enable their entry into sectors based on Artificial Intelligence, Robotics, Commercial Drones etc.

It is essential to analyse and evaluate the ground realities, including supply and demand bottlenecks, higher fixed cost, industry sentiments and labour issues, before entering into any business ventures.

The sheer statistics with regard to quantum of MSMEs, and their contribution to our GDP, exports and employment, highlight their indispensable role as a catalyst to reset the path to economic recovery from this crisis and enable future economic growth.

The professionals, like Chartered Accountants, are well equipped to understand the regulatory and banking framework and have been engaged at ground level with entrepreneurs and start-ups and assisting them in their growth stories. They can play an enabling role by handholding the stressed MSME sector and assisting them in availing the benefits under the announced reforms and further help them optimise their business operation by cutting cost, introducing process improvements and even by facilitating restructuring of debt with the banks. The professionals can provide required expertise to the MSMEs in dealing with the regulators and financial institutions and help MSMEs optimise their working capital cycle by renegotiating credit terms and faster debtor recovery.

The importance of the role played and to be played by MSMEs cannot be stressed enough. They are the backbone of our economy and their fate will decide the fate of millions of our citizens and the dependent families. The UN General Assembly in its 74th Plenary had declared 27th June as Micro, Small and Medium-sized Enterprises Day, recognising the importance of Micro, Small and Medium-sized Enterprises in achieving sustainable development goals and in promoting innovation, creativity and sustainable work for all. As we celebrated the International MSME day, we hope that the MSMEs across the globe, receive the required support and infrastructure to truly achieve their potential as the catalyst to the global growth.