Across the world, micro, small and medium enterprises (MSMEs) play an important role in the development of an economy. They help in job creation while keeping a tab on poverty and inequality. This is true for India too. MSMEs contribute to more than a third of the country’s GDP. With more than 63 million units, they account for 90 percent of the total number of enterprises in the country and provide jobs to 111 million people. Given the crucial role that they play, the sustainability of SMEs is the foremost concern of any government.
The Covid-19 pandemic unmistakably brings two aspects to the forefront—the scale of the sector and its sheer vulnerability. Even in the pre-Covid-19 phase, several studies pointed to challenges faced by the sector. The oft-repeated concerns always stated that MSMEs continue to face multiple challenges:
- Business environment including low level of formalisation, limited availability of skilled manpower, weak policy and legal framework and weak support institutions
- Access to finance including limited access to bank credit, lack of risk capital, limited financing in rural areas
- Market access constraints including access to domestic and international markets and low capacity to innovate among others.
The government has announced programmes in the past to tackle these very challenges, including MUDRA, Start-up India and Skill India. MSME development is also among the stated objectives of large pan-national programs such as the ‘Make in India’ and ‘Digital India.’
While the challenges remain, the Covid–19 situation amplifies their impact and raises questions on the survival of several MSME enterprises. This explains why the Finance Minister’s announcements were anticipated by many.
Of six initiatives that Finance Minister Nirmala Sitharaman announced for the MSMEs, three were finance initiatives, two were market access initiatives and there was one for definition alteration.
The finance initiative of a collateral-free automatic loan of Rs 3 lakh crore and a sub-ordinate debt program of Rs 20,000 crore for stressed MSMEs both will offer immediate relief to many businesses. The loans have easy access because of lower compliance needs, and would certainly be beneficial to most MSMEs facing difficulty in their day-to-day financing needs.
The outlay needs to be suitably supported by distribution agencies, such that relief can reach the beneficiaries as soon as feasible. The fund-of-funds initiative has been anticipated for a long time and is a welcome initiative, which should ideally remain active for a much longer period. It would be most useful for the growth-oriented MSMEs that have a low capital base.
The two market-oriented initiatives of e-market linkages and government procurement of tenders worth less than Rs 200 crore are most critical, since they are in the nature of demand-side interventions, which help our agencies find immediate revenues for sustaining operations.
The definition change of MSMEs that has been proposed is a systemic change, long awaited. This makes it possible for MSMEs to grow without the constraint that growth would be counter-productive with respect to MSME benefits. This is likely to be very impactful in the long run. Since 90 percent of MSMEs are micro units, the definition change from an investment criterion of Rs 25 lakh to Rs 1 crore would impact a vast majority.
The six package benefits announced today are beneficial, not only in the Covid-19 situation but also for the long term. We hope that it provides the necessary push to the MSME sector to become self-reliant, address its challenges around demand, resolve regulatory and liquidity issues, and help them eventually emerge stronger.
Mohammad Athar is partner – economic development and infrastructure, PwC India and Probal Ghosh is Director- MSME development, PwC India