Key Revival Approach for MSMEs – A Missed Opportunity

Pandemic Covid-19 has led global economy towards a recessionary downfall. The fifth largest, Indian economy in terms of nominal GDP although managed to maintain lowest human capital loss (approx 3%) by its precautionary measures in the form of country wide lockdown and social distancing but the worrysome situation pushed the economy back to a couple of years. Its really hard to calculate the complete economic loss but to shade light on some serious impacts, which includes employee salary reduction and lay off  to minimize cost of business downfall, skyrocketing unemployment rate (27.11%), sharp demand fall and gloomy stockmarket sentiment.

To get a hold on this falling economy, Reserve Bank Of India and central government have come up with blended policy of dovish monetary and fiscal policy. Reserve Bank has taken certain controlling measures to boost up the money stringent market by reducing repo rate to 4.4% and reverse repo rate to 3.75%. RBI  has also announced 3.7 trillion  liquidity measures across three measures comprising long term repo operations(LTROs), a cash reserve ratio cut to 3% and increase in Marginal Standing Facility(MSF) to 3% of Statutory Liquidity Ratio.To help borrowers, RBI has also announced three month moratorium on loan repayments. The 30000cr liquidity push through open market operations for smooth supply of money.All these steps will certainly give a big push to investment channels in such a gloomy situation.

Central Government has also announced 1.7 lakh crore stimmulus package which is focused to direct cash help to lower income households and wage support of INR 500 to low-wage workers. Insurance coverage of Rs50 lakhs for front line COVID warriors is one of the noblest step taken.To ease tax compliance burden and also tax filling deadline extension are also included in GOI fiscal package.

Although the earlier packages may provide assistance to an extent in this disastrous period but in no way it will be an economic asset to mitigate the recessionary fear. So, to come up with a bold decision, recently, Hon’ble Prime Minister Narendra Modi has announced a mega revival package worth 20 lakh crore(10% of GDP) to make India self reliant nation  amid the pandemic crisis. This package is inclusive of earlier measures taken by both RBI and central government, a total of 9.3 lakh crore. India has been ranked 6th in taking huge fiscal measures next to USA(11% of GDP).

The self reliant movement call by PM Narendra Modi is based upon 5 key parameters:

Economy, Infrastructure, System, Vibrant Demography and Demand.

In the first tranche of economic package, Finance Minister Nirmal Sitharaman has announced big boost for MSMEs which includes

Rs 3 lakh crores collateral free automatic loans for MSMEs

MSMEs have been badly hitted due to Covid 19. So GoI has decided for emergency credit line to MSMEs from Banks and NBFCs upto 20% of entire outstanding credit. It will be beneficial to borrowers as it is exclusive of guarantee fee and fresh collateral. Capped interest rate and tenor of 4 years with 12 months moratoriumon principal payment are most likely to benefit 45 lakh business units to restart the business and thereby protecting jobs.

Rs 20000 crores subordinate debts for stressed MSMEs

To provide equity support to stressed MSMEs, GOI has planned to facilitate provision of Rs. 20000 crore as subordinate debts. MSMEs promoters will receive debts from banks which will later be used as equity in the unit. Functioning MSMEs which are NPAs can avail this help. In addition to these support for CGTMSE(Credit Guarantee Funds Trust for Micro and Small Enterprises), this fiscal help will benefit 2 lakh business units.

Rs 50000 crores equity infusion for MSMEs through Fund of Funds

To prevent equity shortage through Fund of Funds, Rs10000 crores worth corpus will be set. It will provide equity funding with growth potential and viability and also it will encourage MSMEs to get listed in SEBI which will be fruitful in size expansion and increased capacity.

As per the Revised MSME definition, criterion includes both investment and turnover.Manufacturing and service industries where investment is less than Rs1 crore and  turnover is less than Rs 5 crore are termed as Micro scale. Industries with investment less than Rs 10 crore and turnover within 50 crore but shouldn’t exceed are termed as Small scale. Industries with investment within Rs 20 crore and turnover not exceeding Rs 100 crore are termed as Medium scale. This revised definition will help our economy to climb up the ladder in ease of doing business ranking. MSME contributes 6.1% of manufacturing GDP and 24.63% of GDP from service activities as well as 33.5% of manufacturing output. MSMEs have been able to provide employment to around 120 million people and contribute around 45% of total exports.

As any economic discussions should be based upon rational thinking, my view on this MSMEs and the 20 lakh crore reform package as a whole has two side implications.First,to start with positive side, the most important step in current situation is creation of demand, so higher is the spending, more the earning will be leading to the circular flow of money in an economy.Secondly,with such huge fiscal measures by central government towards MSMEs, its most likely to create new opportunities and business growth for industries. Currently unemployemt rate is sky rocketing and rural unemployment has reached 21%. To meet operational liabilities built up, buying raw materials and restarting business, these loanable schemes will be of great help. As business restarts, employment generation will be there and income of people will go up thereby increasing their spending power.

Moreover,these measures will provide a big boost in working towards the goals- SDG1(No Poverty),  SDG2(Zero Hunger), SDG8(Decent work and Economic Growth) and SDG9 (Industry,Innovation and Infrastructure) by enabling enormous opportunities.

It is undoubtedly a great step, which Government has taken in such alarming situation but this 20 lakh crore stimulus can lead to an implication, which might increase  the fiscal deficit level to around 7.8% of GDP. Earlier this week government had announced an increase in its borrowing programme from budgeted amount of Rs. 7.8 lakh crore to 12 lakh crore. As a result, increased borrowing will lead to an increased loanable fund market interest rate and there by result in crowding out private companies(crowding out effect). Besides, the uncollaterallised loans will also ecourage borrowers not to pay back and will discourage banks not to lend them in future which can  act as a  contrary measure towards achieving the goal of announcing mega reform package.

Hence, to sum up,  the focus of the fiscal stimulus can bring benefit to wide array of sectors including MSMEs, Discoms, Real Estate, Middle class people and make the economy self reliant as a whole. However, a big boost to MSMEs will not only speeden up the economy by enabling a reduced unemployment rate but also will boost up the labour productivity rate which has been significantly low since last couple of years thereby increasing the GDP of our economy.

It’s yet to see how long would it take to be in action but yes, if everything works according to GOI has planned then in addition to recessionary up lift, this reform package will help India to move a bit faster towards achievement of SDGs(Sustainable Development Goals) by 2030.

By Anurag Dash. MBA I & Prof. Shikta Singh

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