Effect of Coronavirus on MSME Sector

Context:

MSMEs are likely to be the most affected by this economic downturn, both sparked and accelerated by the coronavirus pandemic, as they don’t have the buffers of the bigger firms or access to cheap capital to help them tide over this period. This situation is unlikely to revert to normal in the near term even as restrictions on large parts of the country are lifted.

MSME Definition

MSME stands for Micro, Small, and Medium Enterprises. In accordance with the Micro, Small, and Medium Enterprises Development (MSMED) Act in 2006, the enterprises are classified into two divisions.

  1. Manufacturing enterprises – engaged in the manufacturing or production of goods in any industry
  2. Service enterprises – engaged in providing or rendering services

Formally, MSMEs were defined in terms of investment in plant and machinery.

  • But this criterion for the definition was long criticised because credible and precise details of investments were not easily available by authorities.
  • The Union Cabinet decided to change the criterion to “annual turnover”, which was more in line with the imposition of GST.
  • On 13th May 2020, Finance Minister Nirmala Sitharaman added the additional principle of turnover along with the investment.

MSMEs in India

  • According to the latest available (2018-19) Annual Report of Department of MSMEs, there are 6.34 crore MSMEs in the country.
  • Around 51 per cent of these are situated in rural India.
  • MSMEs employ a little over 11 crore people but 55 per cent of the employment happens in the urban MSMEs.
  • 5 per cent of all MSMEs fall in the micro category.
  • While micro enterprises are equally distributed over rural and urban India, small and medium ones are predominantly in urban India.
  • Micro enterprises essentially refer to a single man or a woman working on their own from their home.
  • The medium and small enterprises — that is, the remaining 0.5% of all MSMEs — employ the remaining 5 crore-odd employees.
  • About 66 per cent of all MSMEs are owned by people belonging to the Scheduled Castes (12.5%), the Scheduled Tribes (4.1%) and Other Backward Classes (49.7%).
  • The gender ratio among employees is largely consistent across the board at roughly 80% male and 20% female.
  • In terms of geographical distribution, seven Indian states alone account for 50 per cent of all MSMEs. These are Uttar Pradesh (14%), West Bengal (14%), Tamil Nadu (8%), Maharashtra (8%), Karnataka (6%), Bihar (5%) and Andhra Pradesh (5%).

Problems faced by MSMEs in India

MSMEs face a wide array of problems which in turn limits the potential of these undertakings.

1.Lack Of registration:

  • Most of them are not registered anywhere.
  • A big reason for this is that they are just too small. Even GST has its threshold and most micro enterprises do not qualify.
  • This apparent invisibility tends to work for enterprises as well as against them.
  • Being out of the formal network, they do not have to maintain accounts, pay taxes or adhere to regulatory norms etc. This brings down their costs.
  • But, as it is clear in a time of crisis, it also constrains a government’s ability to help them.
  • For instance, in some of developed countries, the government has tried to directly provide wage subsidy and extra credit to smaller firms but that could happen because even smaller firms were being mapped.

2.Lack of financing

  • This is possibly the single-biggest hurdle facing the MSMEs.
  • According to a 2018 report by the International Finance Corporation (part of the World Bank), the formal banking system supplies less than one-third (or about Rs 11 lakh crore) of the credit MSME credit need that it can potentially fund.
  • Most of the MSME funding comes from informal sources which explains why the Reserve Bank of India’s efforts to push more liquidity towards the MSMEs have had a limited impact.

3.High Ratio of Bad Loan in MSME sector:

  • A key reason why banks dither from extending loans to MSMEs is the high ratio of bad loans
  • Data show higher slippage for relatively bigger enterprises.

4.Delayed Payments :

  • The other big issue plaguing the sector is the delays in payments to MSMEs — be it from their buyers (which includes the government also) or things like GST refunds etc.

Effect of Covid-19

MSMEs were already struggling — in terms of declining revenues and capacity utilisation — in the lead-up to the Covid-19 crisis.

  1. The total lockdown led to an existential crisis of many firms primarily because these are not firms that have too much cash to wait out the crisis.
  2. Loans to MSMEs are mostly given against property (as collateral) — because often there isn’t a robust cash flow analysis available — but in times of crisis, property values fall and that inhibits the extension of new loans.
  3. With demand collapsing, and unlikely to rebound strongly in the near term, it will be increasingly difficult for these businesses to meet their obligations such as repayment of loans or wages to their employees.
  4. According to a recent survey in manufacturing, only 7% said they will be able to survive for more than three months with their cash in hand if their business remains closed.
  5. Further, the working capital requirements of these firms will rise as payment cycles are likely to be stretched, creating additional cash flow problems.
  6. A big hurdle to restarting these firms would be the lack of labour availability.

Government and RBI Initiatives and Challenges within

  1. To ease the firms’ financial distress during this period, the Reserve bank of India has announced several measures such as
    1. moratorium on term loans
    2. Easier working capital financing.
    3. Extension of realization period of Export proceeds
  2. Some public sector banks have also opened up emergency credit lines for businesses.
  3. Most announced measures have been regulatory and administrative in nature.
  4. The government is working on a package to address the needs of the MSMEs.
  5. There are concerns over an across-the-board provision of relief measures and the open-endedness of such a package.
  6. There will also be issues of targeting as providing support to MSMEs operating in the informal economy will pose challenges.

Further Course of Action

  1. The government can provide tax relief (GST and corporate tax), give swifter refunds, and provide liquidity to rural India (say, through PM-Kisan) to boost demand for MSME products.
  2. With banks turning risk averse, credit flow to MSMEs is likely to be depressed as solvency concerns will dominate. In such a situation, the government could step in. It could set up a credit guarantee fund that backstops loans to MSMEs.
  3. All dues owned by governments and public sector undertakings to MSMEs can be immediately cleared. This will help ease their immediate cash flow woes.
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