By KE Raghunathan
Though micro, small and medium enterprises (MSME) are pivotal for India’s economic growth, they are yet to recover fully from the body blow dealt by the Covid pandemic five years back. KE Raghunathan explains how eligibility criteria for availing government schemes are a bottleneck for MSMEs
Has the MSME sector seen a revival since the Covid pandemic?
Demonetisation and the Covid pandemic put most of the MSME sector out of action and out of focus. The survey conducted by us on behalf of All India Manufacturers Organisation brought out the fact that almost 32% of MSME have perished. Others either recovered or changed their business models to survive and grow. Micro-enterprises were predominantly hit by demonitisation, GST implementation or the Covid lockdown phase. Their rhythm was completely destroyed.
Was the ECGLS scheme able to help the sector?
The Emergency Credit Line Guarantee Scheme (ECLGS) launched in May 2020 offers an additional adhoc 20% of an existing loan outstanding with a concessional interest rate and longer repayment schedule. The stimulus package offered by the government during the Covid pandemic was more of a short-term remedy especially on loan moratorium for six months. The eligibility norms made many of those enterprises which actually required the funds to survive, ineligible. The implementing agencies like the banks used this funds to adjust moratorium period EMIs and other statutory payment dues. This was proved when almost 50% of loan sanctioned were not actually disbursed as the entrepreneurs found it unviable to take this to service existing loans.
How has the 45-day payment norm helped units?
The government, realising the seriousness of this issue, brought out a modification in the Income Tax Act to ensure MSME payments are not delayed beyond 45 days by disallowing the purchase under expenses. It was such a poor solution; it became counterproductive in reality which even the CEA acknowledged recently. The corporates rather cancelled orders to MSMEs or took a complete year to clear, as in the last week of March or took invoices late. This delay in receipt of payments led to an extremely difficult situation with micro-enterprises barely able to survive the squeeze on payments.
How is the export slump impacting the sector?
There are two types of problems: short term and long term. The export slump was a sudden and short-term global issue, mainly due to the Russia-Ukraine war and the global meltdown. Many exporters either operated at 30% capacity utilisation or operated only for three days a week to meet the reduced production targets. Long-term problems are those when an existing technology becomes obsolete or changes. For instance, the conventional automobile sector adopting electric mobility, simple machinery or manual processes in manufacturing changing to automation and robotics or conventional sales and marketing process changing to e-commerce and socia media marketing. In both cases, the government can’t do much.
What is the scope of the credit guarantee scheme?
Budget 2024 announced the Rs 100 crore credit guarantee scheme for MSMEs which was notified just before Budget 2025. Primarily, the government stands guarantee for the loans extended to MSMEs so that banks can easily make funds available to them without insisting on collateral security.
Many of the Budget announcements for MSMEs made in July 2024 are yet to be either formulated or implemented. The credit guarantee scheme is one such announcement. What actually the micro and small enterprises require is to enable them to repay loans and still continue to run their operations by either reducing interest or recharging the duration. The norms of lending were more based on past profit performance or CIBIL score. Most of the enterprises could not maintain these. Simply giving the credit guarantee scheme will not actually benefit the needy ones unless the norms are relaxed.
Budget announcements for MSME
While Budget 2025 has raised the credit cover for MSMEs from Rs 5 crore to Rs 10 crore , the biggest blow was doubling the eligibility criteria to Rs 500 crore turnover from Rs 250 crore turnover. This will ensure that many of the micro and small units lose the benefits under the MSME Act such as priority sector lending, mandatory purchase conditions for government procurement from MSME, tender benefits of price advantage as hereafter units up to Rs 500 crore turnover will corner most of these. Many corporates will also float separate entities to come under MSME classification to take advantage of this.
What actually was required was a separate ministry for micro enterprises to nurture them with separate policies and support as the issues faced by them are a lot different from that encountered by a small or medium enterprise.
Will the schemes for startups aid MSMEs also?
Budget 2025 has announced a new Fund of Funds (FoF) with an expanded scope and a fresh contribution of Rs 10,000 crore for startups, to foster innovation and entrepreneurship. It also outlined a plan for doubling guarantee cover for startups from Rs 10 crore to Rs 20 crore, with a reduced fee of 1% for loans in 27 priority sectors. We need to wait for details and criteria to avail these benefits. Many announcements look great but eligibility criteria actually prohibit needy units from availing these benefits.
What are the policy changes required?
There is a huge gap in understanding the issues faced by micro and small enterprises. The government is clueless about the right solutions to help them. The issues can be classified into four ‘M’s — money, manpower, marketing, and materials. Each category poses different challenges to the micro and small enterprises. For example, frequent hikes in prices have turned many enterprises non-profitable as they are unable to control costs even though the selling price is constant for more than a year. The least the government can do is to create fair price shops and supply basic raw material where prices do not change for one year. Like this, each ‘M’ has a problem and the right solution too. The government must enable auto remedies for short-term and long-term issues.
New schemes for leather and toys
Budget 2025 has announced a Focus Product Scheme for the footwear and leather sector to support design, component manufacturing, and non-leather footwear production, expected to create 2.2 million jobs and generate a turnover of Rs 4 lakh crore and exports of over Rs 1.1 lakh crore.
Building on the National Action Plan for Toys, the government will also implement a scheme to develop the clusters, skills, and manufacturing ecosystem in India to create better-quality toys and position India as a global toy manufacturing hub. However, we need to first see the details of the scheme and norms of eligibility. This may again end up benefitting a few medium sized enterprises with upto Rs 500 crore turnover. The cluster model of development for MSMEs can help provided right assistance and support is extended to the units established there.
The writer is national chairman, Association of Indian Entrepreneurs.
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