Survival, Revival and Growth of MSMEs
CA. Nilesh N. Warule
The author is member of the Institute. He can be reached at canileshwarule@gmail.com and eboard@icai.in.
All sectors of the economy are overwhelmed by the havoc exacted by the unanticipated COVID-19. Therefore, the Government of India, Reserve Bank of India, State Governments and other organisations are determined to bring back the economy into the path of progress and prosperity by injecting right medicine in form of proper measures and their execution. The MSME sector is contributing immensely for the overall development of the economy in many ways. Some of the contributions are generation of employment opportunities, production of various range of products and services to fulfill the requirements of domestic and international markets, appropriate utilization of locally available resources, contribution to the gross domestic products (GDP) and contributing towards balance regional developments. Finally, we can say that, these are the backbone of an economy. It has been the lifeline of rural and semi-rural population.
Challenges Faced by MSMEs
Despite being a vibrant sector, majority of Indian MSMEs have often struggled to grow due to lack of timely financing and the situation is even worse after Covid-19 pandemic. The operational challenges are listed below:
1. High Cost of Credit
The cost of credit is high for this sector as cheap funds are not available. The innovation driven units require continuous flow of funds for their research and development (R&D) activities. The high transaction cost for bank loan and high-risk perception towards this sector makes the cost of funds high. In this sector the units are not in a position to provide collateral securities which causes non-availability of funds.
2. Lower Technology Levels
The MSMEs in India are categorized by low technology level units except few. The lower technology level in this sector pose a major drawback in emerging globalized market. As a result, the products from these sectors are not comparable to the imported one; which is a major cause for their sustainability into the market.
Today; we live in the world that is rapidly changing due to technological advancements. The technological advancements lead to fourth industry revolution which is known as “Industry 4.0”. Industry 4.0 is characterized by the increasing digitization, innovation, interconnection of products, business models and value chains. Various technologies are integral part of Industry 4.0 which includes data volumes, internet of things (IOT), computational power, augmented reality, business analytics, artificial intelligence, simulation, elemental design, advanced robotics, sensor-based technologies, additive manufacturing and cyber-physical systems. This digital revolution changing the business models of all manufacturing industries whether it is large, small or medium. Due to “Industry 4.0” revolution the companies face pressure to transform itself as quickly as possible. The need of digitalization is realized not only for large scale industries even small and medium size industries must be digitized to compete in global market.
3. Insufficient Infrastructure Facilities
The profitability and productivity of MSMEs are negatively affected due to insufficient infrastructure facilities including roads, water, power/electricity. There is a need to use updated technology to tune with the global trends to ensure MSMEs competitiveness with availability of skilled workforce and enough infrastructure facilities. The MSMEs which are located either at urban areas which are decades old or located at rural area which are in unorganized manner. The infrastructure facilities are poor and unreliable in these areas which pose great threat to innovate.
4. Lack of Skilled Manpower
Innovation needs skilled manpower; though India has a large pool of human resources but there is a scarcity of skilled manpower. The industry continues facing the problem of shortage of skilled manpower which are required for manufacturing, marketing, servicing, etc. Apart from it; there is a lack of culture of research which directly affect the innovations in the industry.
5. Problems of Storage, Product Designing, Packaging and Display
MSMEs face problems of storage, product designing, packaging and display their products. These units normally do not have any marketing organization hence products compare unfavorably with the quality products of large scale industries. Selling outlets are not available for their products which is also a serious constraint for MSMEs. The insufficient infrastructural facilities create problems for marketing their products even if a unit innovates the effective monetization remains a key concern. Effective technology will resolve the hindrance and remove the road blocks and allow companies to concentrate on their core business of innovation.
6. Delays in Settlement
Owing to limited bargaining power of MSMEs in the market; the largescale buyers usually have long settlement lead times when they deal with these units. It causes shortage of funds for their capex requirements and performance R & D activities.
Revival of Indian MSME’s (Post COVID-19)
There has been an unprecedented slowdown due to Covid-19 and MSMEs are worst affected. Given their pivotal role in Indian economy, urgent measures need to be taken for their survival, revival and growth. Indian Government has taken various initiatives including Atma Nirbhar Package, however, still majority MSMEs are looking for timely guidance and hand holding at this critical phase.
In order to bring more enterprises under MSMEs category, new rationalized pattern has been adopted with dual criteria of turnover as well as investments made.
| Enterprise Category | Old Norms for Manufacturing Sectors | Old Norms for Service Sectors | New Norms for Manufacturing & Services |
|---|---|---|---|
| MICRO | Investment < 25 L | Investment < 10 L | Investment < 1 Cr Turnover < 5 Cr |
| SMALL | Investment < 5 Cr | Investment < 2 Cr | Investment < 10 Cr Turnover < 50 Cr |
| MEDIUM | Investment < 10 Cr | Investment < 5 Cr | Investment < 50 Cr Turnover < 250 Cr |
The programmes initiated by Government of India “Make in India” pushed the MSMEs to attract FDIs, achieving growth and integrate with major global value chains. Some of the benefits made available are:
1. Benefits for Registration with Udyam Portal
Government of India has offered a free one-time registration facility to MSMEs through its Udyam portal and various incentives are available to registered entities. Traders are not allowed to do MSME registration and only manufacturing or service sector units can register with Udyam. Despite having 6.5 crores MSMEs, hardly 25% of them have been registered due to lack of awareness about following key benefits among the businessmen:
-
i) Priority sector lending under Credit Guarantee Trust Fund (CGTMSE) for:
- Overdraft interest rate concession of 1%
- Collateral free loans to micro and small enterprises
-
ii) Benefits of sourcing capital goods to start business:
- Credit Linked Capital Subsidy Scheme (CLCSS) for purchasing machinery & technologies
- Export Promotion of Capital Goods (EPCG) to allow import of capital goods at zero duty
- iii) 50% subsidy on patent registration & eligibility for industrial promotion scheme
- iv) Concessional rate of electricity tariff from few state electricity boards
- v) Reimbursement of ISO certification charges
- vi) Protection against delayed payment and allowed to seek interest after 45 days
- vii) Newly introduced ‘Samadhaan - Sambandh – Sampark’ scheme for empowerment
- viii) More than 30 schemes are available online at www.champions.gov.in
There is an urgent need to create awareness about above schemes offered for the benefits of business enterprises so that maximum entities can avail desired benefits.
2. Start-ups – Powerful Segment of MSMEs
As per Department of Promotion of Industry & Internal Trade (DPIIT), any firm or company having innovative approach as well as scalable business model with a high potential to create wealth and employment can register as start-up provided it is less than 10 years old and annual turnover is less than Rs 100 crores since inception. Following is category-wise data with DPIIT as on July 2020:
In order to promote innovation, development and improvement of key products, processes or services, Government of India has offered 100+ benefits to start-ups by launching special Startup India initiative. As a result, India is currently third largest ecosystem in the world after USA and China. Several local companies have started accessing international markets and even, many of them have secured good investments from investors. However, due to Covid19 meltdown, large number of start-ups are facing critical challenges and they urgent need help.
3. Massive Destruction due to Covid-19 Hit
Capital markets shrunk by 30% in a span of just few months in March 2020, while key indicators like Industrial Production as well as Purchasing Managers’ Index touched lifetime low in April 2020.
The Covid-19 and the accompanying lockdown has impacted almost every sector of the Indian economy. While in case of some sectors like the travel and hospitality sector, the impact has been more profound and disruptive, in other sectors like the service sector, the lockdown has fundamentally altered the manner of doing business. Both the start-up and the MSME sector have also experienced significant slowdown in the past year. However, some selective companies across different sectors made a comeback.
| Worst Affected Sectors | Moderately Affected Sectors | Least Affected Sectors |
|---|---|---|
| Travel & Tourism | Metals & Mining | Pharmaceuticals |
| Automobiles | Textiles | FMCG / Consumables |
| Real Estate | Logistics | Education |
| Aviation | Oil & Gas | Information Technologies |
Irrespective of the category to which the company belongs to, everyone is needing money at this critical time. While worst affected and moderately affected companies are needing money for survival, less affected companies are looking to grow inorganically by acquiring good targets at cheaper rates.
Utmost Support from Government to MSMEs
In the past few months, Covid-19 has taken the entire globe in its grip. It has severely affected the growth prospects of the major economies of the world and India is no exception. To ease out the negative repercussions of covid-19 on Indian economy, the honorable Prime Minister of India has announced a financial package of Rs. 20 lakh crore on 12th March 2020 which underlined the vision ‘Self-reliant India’.
Given the massive impact of Covid-19 pandemic and unprecedented slowdown, Government of India had taken various measures for survival, revival and growth of MSMEs. Following are some key measures:
- ₹ 3 lakh crores collateral free automatic loans.
- ₹ 20,000 crores subordinate debt for stressed assets.
- ₹ 50,000 crores equity infusion through “Fund of Funds” for listed companies.
- Reduction in TDS & EPF rates to offer more cash in hand
- Guidance to PSUs / Government departments for releasing payment in 45 days
- Relaxation in provisions under Insolvency & Bankruptcy Code in case of default
- Global tendering allowed only for projects beyond Rs 200 crores
Though Government has taken various measures which can help MSMEs to revive, many of them are not properly aware of the same and hence, they continue to face challenges. Being a partner of nation building, CA’s can be helpful for them to understand various schemes and take applicable benefits under them.
Endnote
In spite of financial difficulties owing to COVID-19 hit, the Government is determined to strengthen the MSMEs to contribute their full potential for the overall development of the country. Now, it is for the MSMEs to make use of these benefits and contribute their best to enable the country to realize its ambitious goals of ‘Make in India’ and ‘Self-Reliant India’ through the development of goods and services to substitute the imported goods and services, and to improve its export performance.
Pandemic Covid-19 has brought many challenges for MSMEs with ample number of opportunities too. To catch the domestic market with parallel export opportunities, Indian MSMEs have to prove their worth themselves by playing on volume with the high quality. Extensive product promotion, brand awareness programs, advertisement on different platforms, maintaining efficiency in cost, upgradation of products with the changing needs of customers are the key parameters for the success of Swadeshi Brands. Indians must change their perception towards Swadeshi Brands and switch their preferences to local products and promote them as well. Measures taken by government and changes in perception of Indian towards Swadeshi product will definitely work for the upliftment of MSMEs. A sound industrial policy and a new Innovation policy is required, and policies on making Industrial infrastructure are also required. These all will lead to the fulfilment of dream of “Aatmanirbhar Bharat”.
“When the Prime Minister said go ‘vocal for local’, he meant that products be made competitive vis-a-vis global brands. It didn’t mean that one must only buy products that have a logo ‘made in India’ on it. With the Vocal for Local theme capturing the imagination of the nation, the spotlight has also turned to Micro Small and Medium Enterprises (MSMEs) which can play a significant role in tapping the potential of local products.”