In India, MSMEs contribute nearly 30 per cent of India’s gross domestic product. There are about 6.33 crore unincorporated MSMEs primarily engaged in non-agricultural economic activities. These employ nearly 11 crore people across the country. Given the major slowdown in economic activity due to Covid-19 outbreak, it is clear that innumerable MSMEs may come to a point of losses and perpetual closure.
As the country is witnessing and trying to manage the effects of the global Covid-19 pandemic with the help of unprecedented public health and economic measures. As adverse outcomes loom large on the economy, relief interventions are needed to minimise permanent damage to many livelihoods. The economy requires immediate attention as far as micro, small and medium enterprises are concerned.
Impact of Covid-19 on MSMEs
A recent survey of approximately 5,000 MSMEs (micro, small, and medium enterprises) found that 71% of them are not able to pay salaries to their workers due to the Covid-19 lockdown in India. The government has since announced that a stimulus package directed towards supporting the MSME sector is on the agenda. The issue remains as far as the identification of beneficiaries is concerned. This, especially in the absence of a comprehensive dataset on MSME units.
Measures by Government
The Reserve Bank of India has, so far, announced an indicative list of Covid-19 operations and business continuity measures to be designed and executed by scheduled commercial banks, nonbank financial companies, payment banks etc. The RBI has allowed a moratorium on term loans, eased working capital financing and deferred interest payment on working capital facilities without an asset classification downgrade.
Within ad-hoc relief measures, a lot of public sector banks have introduced emergency credit lines whereby a maximum loan amount of up to Rs. 200 crore or 10 per cent of the existing fund-based working capital limits can be availed by MSME borrowers. The Small Industries Development Bank of India has announced a concessional interest rate of 5 per cent for MSME loans under the SIDBI Assistance to Facilitate Emergency Response against Covid-19. These loans would be provided within 48 hours, with no collateral and minimum paperwork but only those MSMEs that are manufacturing products or delivering services related to the Covid-19 fight are eligible for these loans. The government has also introduced measures permitting delayed GST payments until June 2020, without levy of interest, late fees or penalties.
Suggested MSME Policy Framework
The Ministry of MSMEs must draw up a policy framework with multiple scenarios around how to continue business operations, commensurate to the spread of the virus. Governments across the globe have been using various policy measures to soften the economic blow rendered to their MSME sectors.
A policy framework has to be designed based on fostering the resilience of MSMEs to the onslaught of such a health emergency, considering both supply and demand-side impacts. It is important to note that the lack of accurate information on this sector due to the absence of a dedicated MSME census conducted in recent years (the last MSME census was held in 2006-07), and the absence of a unified (and verified) MSME database could hinder targeted relief delivery and making access to credit easier for enterprises that need it the most.
Way Forward for MSMEs
A stimulus package of Rs. 10 lakh crores could act as a big push to the MSME sector and could help close the debate around the survival of the sector in the near future. This package can be released in a staggered manner and slowly released into the economy instead of all at once. This will ensure optimum and economic use of the available resources.
This quantum of the package along with tax concessions would ensure greater liquidity for small businesses and cash in the hands of the poor, helping drive demand for goods and services. Taking inspiration from other nations, paying part of the worker wages, savings in rent and utility bills, or providing low-interest loans and loan guarantees can be an effective way to extend minimum support at the moment. The government can consider covering the salary cost of the workers.
Policy measures could incorporate longer loan repayment moratorium for small businesses and suspension of the Insolvency and Bankruptcy Code for companies for at least six months.
For large insolvency, arising out of the cash and liquidity crunch faced by firms whose demand has declined, the government must intervene and avoid the same by providing a quick relief package. Several economists have advised the government to scale up it's spending to help revitalize the economy, including by monetizing a portion of its debt.
Apart from the relief package from the government, banks should also be considerate by giving the MSME sector more time. Since there may be a delay in interest and instalment payments to the banks, they should be more patient and not declare their account NPAs. Banks should give them more time to pay interest and installments without paying charges, treat them as regular accounts and allow them some grace period to fulfil the payment. Banks and NBFCs should also provide moratoriums with extremely low interest rates. Sustainable low interest rates are the need of the hour.
The government must address the high collateral security leading to a denial of credit for the MSME sector. It is also the same case with the limit on margin money being extremely high. These combined factors ensure a lack of access to available credit for MSMEs.
While the revenue streams of most MSMEs are starting to dry up in the current Covid-19 pandemic situation, many companies are utilising these days to upgrade the skill set of their workforce. Since it is not clear when life will come back to normal, government and businesses will have to work together towards phased re-starting of business operations and be prepared for structural changes in business activities.