By Amar Patnaik
The MSME sector contributes approximately 40% to the GDP and generates employment for 114 million Indians, comprising about 93% of the total labour force of the country. However, over the last few years, economic distress has plagued the sector on several counts , and this has only gotten exacerbated by the current pandemic. All India Manufacturers Organisation (AIMO) suggests that 35% MSME businesses are now beyond recovery. The sector is, thus, staring at massive unemployment, only to worsen the unemployment problem, which was already at a 45-year high prior to the shutdowns and the lockdowns.
The government’s commitment to revive the MSME sector was revealed in its Rs 20,000 crore economic stimulus package for Atmanirbhar India, which includes a Rs 10,000 crore fund to finance equity infusion. However, credit guarantee has a limited appeal as only 15% of the credit requirement is fulfilled through formal financial channels; 86% of the enterprises are unregistered, and 71% of the workers have no contracts, therefore, opening new lines of credit may not be adequate to revive the sector. The finance minister herself has indicated that the sanctioned loans are not being availed and utilised by enterprises in the absence of strong demand and consumption.
The UK Sinha-led expert committee on MSME in 2019 highlighted the need to create an enabling environment for MSMEs. It proposed several long-term solutions to ensure financial sustainability. However, a holistic MSME policy rests on the ability to overcome some historical barriers.
First, inability to receive timely payments in return for the goods and services, and slim profit margin is a nagging issue. An urgent solution is the payment of dues. More loans—a supply-side solution—cannot resolve the limited working capital problem as it would unnecessarily increase the debt burden, which, in turn, would put pressure on the already thin margins. A new regime, based on discounting for early clearance of dues by their principals or all supplies being made against advance payments or creating a hold in the bank which gets released right after receipt of supply from the MSME supplier, could be alternatives. Only an incentive-based mechanism will work.
Second, the average cost of capital is still high, at around 13%, compared to agriculture. It is challenging to generate an IRR over 13% in the near future to pay back loans availed at almost the same rate or even higher, and even if they could, the gestation period for demand to pick up will continue for 5-6 years. To help MSMEs avail capital at sub-5% rates, lending institutions must reduce transaction costs.
Third, historically, a lack of internal competitiveness in the industry has reduced the urgency for innovation within the sector, despite the ‘Make in India’ and ‘Startup India’ campaigns. This requires support to reorient production lines and investments in R&D.
Last, the sector has been unable to channelise a global market for products and services. The current crisis has drastically contracted export-led growth opportunities as importing nations adopt a protectionist policy. With the global demand at an all-time low, consumers are not compelled to make non-essential purchases. A lot of our exports such as textiles, perfumes, jewellery and gems are non-essential goods and services which would see negative pressures after Covid and lockdown, including the IT and IT-enabled export market. Only 3% of MSME respondents in the AIMO survey suggest that they will be unaffected as the business is focused on essential goods. A sustained push through e-commerce channels can enhance the scope of domestic goods and services with low transaction and intermediation cost. It will also help eliminate the middleman and reduce cost of doing business, an important factor in the survival of small businesses.
India now has the opportunity to leverage its technological prowess in enhancing the competitive advantage that we already have in the export of IT/ITes products and services. The rise of AI, IT, digital learning and communication-based businesses are evolving the traditional business paradigm, and MSME’s should be encouraged to harness this through the right kind of policy push. The government must adopt a comprehensive approach to revamp the MSME ecosystem.
The author is Member of Parliament, Rajya Sabha
(With inputs from Kazim Rizvi, who heads The Dialogue, a Delhi-based think tank)