Why MSMEs are still looking for more government support?

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March 31, 2021 4:19 PM

Ease of Doing Business for MSMEs: As the new fiscal begins, MSMEs share their asks from the government to help them get their feet on the ground.

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Ease of Doing Business for MSMEs: Micro, small and medium enterprises (MSME) is the largest affected sector in India due to the Covid-19 pandemic lockdown and it has been fighting on many fronts. It is dealing with a liquidity crisis, delayed payments, high default risks, supply chain disruption, and shortage of labour amongst others.

Last year, the government announced a series of initiatives for the sector. Many worked such as the Rs 3 lakh crore Emergency Credit Line Guarantee Scheme (ECLGS scheme) that offered a guarantee for full coverage to banks and NBFCs so they can provide emergency credit facilities to Covid-hit MSMEs and businesses. Under ECLGS, banks have sanctioned loans worth Rs 2.46 lakh crore to about 92 lakh borrowers.

However many sectors, especially services, were left to fend for themselves. Companies in beauty, travel and tourism, and the hospitality industry are still struggling to get back on their feet and many have shut down.

Read More: GST e-invoicing welcome step for midsize firms but might be a challenge for micro, small units: FISME

“Given the size and scale of the sector, these initiatives don’t offer financial support to the MSME sector, but are only for moral support,” Chandrakant Salunkhe, Founder and President, SME Chamber of India told Financial Express Online. He added that according to their survey, only 45 percent of the labour is back at their jobs, the rest are still in their villages even one year after the lockdown was announced – most of those are in sectors such as infrastructure, real estate, and logistics. Many factory workers have still not come back. Several of these issues, including delays in trade receivables, will impact their turnover which in turn will drastically reduce their withdrawing limit from banks.

As MSMEs find their feet on the ground, Anil Bhardwaj, Secretary-General, Federation of Indian MSMEs (FISME) said that the gamechanger for the sector would be the quick legislation and notification of the insolvency resolution framework for the MSME sector. He explained that currently the Insolvency and Bankruptcy Code (IBC Code) is targeted at corporates whereas 97 percent of the MSME sector that comprises proprietorship and partnership firms are outside its ambit. Hence, if they default for any reason, there is absolutely no mechanism for them to file for insolvency or restructure their loans.

“While the RBI has restructuring schemes for MSMEs, they are straight-jacketed and not efficient in catering to the needs of the sector,” he said. It is seen that when an MSMEs defaults, banks are predisposed to take over their assets for liquidation to enable loan recovery. “What would work is if a distinction is made in terms of enterprises that are really sick and those that have the potential for a turnaround if a moratorium is granted. This would help the country in retaining its productive assets thus creating more jobs and revenue in the future, he said.

One of the long-standing demands of the sector is the simplification of GST and reduction of the tax rate, something that is direly required as the sector revives and adapts to the new normal. “To help MSMEs recover from the liquidity crisis, the government can introduce a mechanism wherein once an SME raises an invoice for their clients, especially large corporates, the latter can pay the GST directly to the government,” said Salunkhe. This will ensure SME’s working capital doesn’t get held up in GST.

He also suggested diluting strict adherence to labour laws up to a year for SMEs that employ up to 100 workers to help bring down the compliance cost.

The last Budget focused on promoting domestic manufacturing that benefits the MSME sector, but the input cost increase is putting a lot of pressure on the small and mid-size businesses. “There is a need to address the rising cost of inputs in the form of steel, iron, copper, and other metals which has become a matter of grave concern for the sector. Input costs have gone up which in turn had thrown many small players out of the market,” said Rajesh Khosla President and CEO of glass bottle manufacturer AGI Glaspac.

The government can also vindicate duty and tariff rates to increase MSME’s contribution to exports. This can be encouraged by research and development through incentives and helping small industries with tech upgradations plans, suggested Milan Thakkar, CEO of construction material manufacturing firm Walplast.

Heavy investment towards infrastructure and development should also be looked at. “The support that the National Bank for Financing Infrastructure and Development (NBFID) shall provide will determine how much support the MSME sector will also receive in terms of amenities and investments which indirectly also create new jobs,” said Thakkar.

While several schemes have been announced by the government, there is a need to offer MSMEs a compendium of incentives that look at their concerns holistically.

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