- By Vishal Devanath
6.3 crore Micro, Small, and Medium Enterprises (MSMEs) of India employs around 11 crore people. However, they were, unfortunately, one of the worst-hit by the first wave of the pandemic that affected their access to markets, credit, and financial security. This prompted the Indian Government to announce a slew of measures aimed at shoring up their financial and transactional health. As we grapple with an even deadlier second wave of the pandemic this year, it would be interesting to see how last year’s schemes have fared so far, so that a useful indicator can be built of what worked and what didn’t. This might help policymakers as they work the numbers for the inevitable announcements this year too.
Taxes and compliance
Several announcements were made to provide relief to taxpayers including MSMEs from tax compliance norms and deadlines. The TDS rates to be deducted were slashed by 25 per cent for non-salary payments. Tax filing dates were extended by 30 to 90 days. There was a reduction in the rate of interest on delayed payment of taxes, and an amnesty scheme (zero penalty) for service tax dues paid within December 2020 was also announced. The last date for filing of GSTR 3B was pushed back, and there was also a small concession on the late filing fee.
Simple things like the GST structure and filing calendar do not agree with the definition of an MSME (small taxpayer) vis-a-vis large taxpayer. A micro-enterprise (turnover up to Rs 5 crores) is expected to file returns once a quarter, but the frequency is monthly for a larger company. That is why if such a micro-enterprise is a vendor, supplier, or contractor for a larger company, then the larger client often withholds the tax payment of the invoice or maybe the entire invoice till the time that enterprise declares the relevant returns. This is something that could be worked on.
Creating local demand
Because of their smaller scale and scope, MSMEs often find it difficult to fairly compete with larger corporations in the domestic market. Additionally, the opening up of business boundaries has also made the threat of multinational or foreign companies very real. This threat gets compounded in difficult times like the current pandemic. The Aatmanirbhar Bharat package announcements for MSMEs in 2020 also included one which barred global bidders for government tenders of up to Rs 200 crores, including consultancy services and turnkey projects.
While it is impossible to specifically pinpoint how many MSMEs won contracts from June 2020 onwards as a result of this ruling, but like the changes in GST rules, this initiative also needed a few more reforms in the procurement process to be really useful to MSMEs. For instance, bigger firms with more experience are better able to tackle the short application windows and high earnest money amounts. Also, some changes to the experience criteria for MSMEs could have helped them gain the confidence to bid for projects.
The Credit Linked Capital Subsidy Scheme (CLCSS) was introduced several years ago to encourage investment in technology upgrades. As per this scheme, any institutional finance (up to a maximum of Rs 1 crore) availed by small-scale units to incorporate the latest technologies in their workflow would be immediately given a 15 per cent capital subsidy upfront. Initially, an outlay of Rs 2,900 crore was allotted for the scheme but recently the scheme was changed to a demand-driven one without any upper limit on the overall annual limit.
This has led to a doubling of MSMEs which benefited from this scheme from 7,779 in FY20 to 15,188 in FY21. The total subsidy also doubled to Rs 1,100 crore from Rs 540 crore. While it is heartening to see this uptick in investment into technology, major gaps still remain. For instance, the scheme is limited to certain notified sectors and only applicable to existing borrowers. The benefits are concentrated around a few states like Gujarat, Maharashtra, and Punjab with Gujarat accounting for more than 42 per cent of the benefits. It would be a good idea to spread awareness and encourage MSMEs in other states to take better advantage of this scheme in FY22.
Faster payment cycles
Larger corporations can use their deeper pockets to meet the working capital requirements even if the payments for past work have not yet been received. But for micro and small enterprises, the smaller order book and modest cash reserves usually cripple them if payments are delayed too much. An MSME can, therefore, do better if their accounts receivables are settled faster. The Government acted on those over which it had control. All Central Public Sector Enterprises (CPSEs) were instructed to release their outstanding payments within 45 days. The CPSEs responded admirably. As the chart below shows, an average of Rs 3,000 crores was paid every month by CPSEs against dues outstanding for MSMEs for the first seven months after the announcement.
The same MSME Ministry statement from which the chart is taken also goes on to inform that orders placed to MSMEs by CPSEs also went up in this same period. To continue this good work, government agencies and CPSEs must be encouraged to keep a similarly prompt payment cycle at all times, not just during the pandemic.
Production-linked incentive scheme
This scheme was announced in early 2020 with an initial outlay of Rs 2 lakh crore aimed to boost manufacturing investment in India. The scheme provided financial incentives from 4 per cent to 6 per cent of incremental sales with FY20 considered as the base year to manufacturing units under certain key sectors. Due to the high capital investment thresholds and production targets, over the last year, most businesses that benefited from this scheme were large MNCs or corporate firms. While there was an indirect push from the government to source from local businesses expanding the supply chain in the country, the scheme has not had a direct impact on MSMEs. Several industry bodies have requested for a new MSME targeted PLI scheme or widening of the existing scheme to help small businesses reap the benefits of it.
One of the important measures taken by the government to tackle the pandemic and its effect on MSMEs includes a slew of financing support to local businesses. Some of the measures taken in 2020 were:
- A six-month moratorium on loan repayments (classified by banks as ‘standard’ at the time of announcement) by MSMEs was announced by the Reserve Bank of India for the March to August 2020 period. More than 30 per cent of MSMEs benefited from the RBI moratorium as it was availed by almost a third of MSMEs with current loans outstanding. But the moratorium functioned only like a temporary fix for the ailing MSME, and it did not guarantee complete recovery. Also, measures to strengthen the demand side were less visible, making repayment of loans plus the interest accrued during the moratorium difficult. Adding to the woes, localized lockdowns due to the second wave and non-extension of the moratorium this time has put MSMEs in a severe cash crunch. It remains to be seen if these MSMEs can emerge from it in a healthy manner.
- Additional subordinate debt facility of a total of Rs 20,000 crores was operationalised through the Credit Guarantee Fund Trust for MSEs (CGTMSE) and the loan disbursal limit was increased from Rs 1 crore to Rs 2 crore. Disbursements with credit guarantees of more than Rs 30,000 crores happened in FY21 under the CGTMSE scheme. While this is the second-highest amount in the last nine years, it still is a 30 per cent drop from last year.
- Support was provided for working capital needs, operational liabilities, and business restart expenses to the extent of Rs 3 lakh crores under the Emergency Credit Line Guarantee Scheme (ECLGS) scheme. Around 60 lakh MSMEs availed of the ECLGS scheme, with around two-thirds of the sanctioned amount disbursed in the first nine months of the financial year. While the scheme was in the right direction there were several issues pointed out by MSMEs like inequitable distribution of funds, benefitting only existing borrowers and not the first-time borrowers, tedious documentation, and hefty registration fee and stamp duty.
- A Fund of Funds of Rs 50,000 crores was set up for equity infusion into MSMEs to encourage them to augment their capacity and get themselves listed on the stock exchanges. Rs 10,000 crore would come from the government and the remaining Rs 40,000 crore was expected to come from VC and PE firms to fund innovative MSMEs and drive them towards growth and eventual listing on the SME or Startup stock exchange. As of now, there is no information on how much of this was mobilized and given out to startups and MSMEs.
The measures announced last year were well-intentioned. The dipsticks mentioned above showed that some of them did work reasonably well in certain pockets, while some others had a lukewarm effect on the MSME sector. In summary, there are two takeaways that should be kept in mind for the second wave. First, there are several fundamental roadblocks in the way our MSMEs work. Despite several well-intentioned announcements, the fact remains that there are a disproportionate number of compliance and regulatory burdens every MSME faces compared to larger businesses. The government needs to completely shift its mindset to a facilitator from a regulator. Second, financial and regulatory sops, while helpful, do not close the loop for MSMEs. More structural changes which help recharge the demand side and improve MSME operational efficiencies through technology and skilled labour would be the long-term strategy to reach the goal of raising MSME contribution to 50 per cent of India’s GDP.
Vishal Devanath is the Founder of Smergers. Views expressed are the author’s own.