‘Atma Nirbhar’ MSMEs: How govt measures will enable them for long-term sustainability, profitability

May 27, 2020 8:21 PM

Ease of doing business for MSMEs: In current times, where the mere survival of the MSME sector is at stake, Atma Nirbhar Bharat Abhiyan intends to address the needs of the MSME sector.

The collateral-free automatic credit line and the subordinate debt to MSMEs may be a game-changer for the sector.
  • By Atul Pandey

Ease of Doing Business for MSMEs: The Micro, Small, and Medium Enterprises (MSMEs) sector is the most vibrant and dynamic industrial sector contributing significantly to the GDP and export while employing around 40 per cent of the Indian workforce. The Prime Minister’s speech emphasized that the MSME sector will act as the bedrock for economic revival. Intending to get the MSME sector back on its feet, the Prime Minister announced the MSME sector to be within the purview of the Atma-Nirbhar Bharat Abhiyan (ANBA). Subsequently, the Finance Minister announced six regulatory measures as part of the ANBA especially for the MSME sector, as part of a series of announcements by the government. In current times, where the mere survival of the MSME sector is at stake, ANBA intends to address the needs of the MSME sector and paves a path for long-term sustainability and profitability of MSMEs.

First and foremost, revising the definition of MSME under applicable law is intended to bring more MSME enterprises under the purview of being classified as MSMEs so that they can reap benefits associated with it and grow under the watchful eyes. Under the new definition, the investment limit for micro, small and medium enterprises have been raised substantially and the distinction between manufacturing and services has been abolished. This measure will widen the net of benefits associated with classification as an MSME to more enterprises.

The collateral-free automatic credit line and the subordinate debt to MSMEs may be a game-changer for a sector which is finding it harder and harder to find credit support from banks and other financial institutions. It will make it lucrative for risk-averse banks to resume lending operations as the government will act as 100 per cent guarantor on both the principal and the interest. The guarantee from the government will ease pressure on banks and other financial institutions as they will not have to make provisions in case the loan account turns into a non-performing one.

Also read: Banks reluctant to lend despite govt guarantee under collateral-free loan scheme, MSMEs tell Nitin Gadkari

The Finance Minister also announced the creation of ‘Fund of Funds’ with a corpus of Rs 10,000 crores where the government through the funds will pick up an equity stake in the MSMEs with growth potential and viability. These equity infusions will lead to increase in size and capacity of the MSMEs and the revision in the definition of MSME is correlated to this. Further, the long-term goal of such equity infusion is to encourage the MSMEs to list on stock exchanges.

Online marketplace for MSMEs is intended to help all market participants, including end-consumer. Affordable products and services and the narrative of ‘Make-in-India’ and national unity during marketing will be attractive to the cash-strapped consumer.

Startups are not explicitly covered in the definition of MSME; however, startups operating in manufacturing and ancillary services sector especially medical devices, robotics etc. may consider registering themselves as MSME. The host of benefits such as priority lending to cluster financing, exemptions, tax soaps etc. will be available to such startups along with the new benefits under ANBA.

Lastly, ANBA may be construed as import substitution. Given the fact that India is a net importer, import substitution will empower us to shift away from our dependence on other countries. It may very well be argued that import substitution is primarily focused on giving a fillip to the MSMEs. As the internal demand potential that India has, coupled with a demographic advantage provides mass-scale employment, MSMEs will be on track to achieve economies of scale in the future.

Atul Pandey is the Partner at Khaitan & Co LLP. Views expressed are the author’s own.

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