save-small-enterprises-before-they-collapse

Context: The COVID-19 pandemic has impacted all sectors of the economy, but perhaps none so badly as India’s micro, small and medium enterprises (MSMEs). 

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  • The sector was already reeling under the stress of twin shocks of demonetization (That led to end of legal tender for older 500 and 100 denomination currency) and a cumbersome GST (A uniform tax structure across India in the realm of Indirect tax) in 2016 and 2017.
    • The coronavirus lockdown of 2020 appears to have come as another nail in the coffin.
  • The business operations have been halted for nearly 40 days but the government is yet to come up with a fiscal support package for MSMEs.
    • MSMEs were already struggling in terms of declining revenues and capacity utilisation in the lead-up to the Covid-19 crisis. 
    •  A big hurdle to restarting now is the lack of labour availability.
  • With demand collapsing, and unlikely to rebound strongly in the near term, it will be increasingly difficult for these businesses to meet their obligations such as repayment of loans or wages to their employees.
    • Further, the working capital requirements of these firms will rise as payment cycles are likely to be stretched, creating additional cash flow problems.

State of MSMEs

Definition

  • Formally, MSMEs are defined in terms of investment in plant and machinery. But this criterion for the definition was long criticised because credible and precise details of investments were not easily available by authorities.
  • Owing to this reason, in February 2018, it was decided to change the criterion to annual turnover, which was more in line with the imposition of GST, which is yet to be formally accepted.
    • According to the proposed definition, a micro enterprise will be one with an annual turnover less than Rs 5 crore; a small enterprise with turnover between Rs 5 crore and Rs 75 crore; and a medium enterprise with turnover less than Rs 250 crore.

Source: The Indian Express

Contribution to Economy

  • Together, they account for roughly 30% of our gross domestic product, about 40%  of our exports, and employ at least 120 million people. 
    • There are over 63 million MSMEs roughly, offering assorted services and making stuff that ranges from machine parts and specialist paints to bread and shopping bags.
    • Around 51 per cent of these are situated in rural India. Together, they employ a little over 11 crore people but 55 per cent of the employment happens in the urban MSMEs.
    • A significant number of MSMEs are suppliers of intermediate products to large companies

Stratification of MSMEs

  • 99.5 percent of all MSMEs fall in the micro category. 
    • While micro enterprises are equally distributed over rural and urban India, small and medium ones are predominantly in urban India. 
    • In other words, micro enterprises essentially refer to a single person working on their own from their home.
    • The medium and small enterprises i.e.the remaining 0.5% of all MSMEs,  employ the remaining 5 crore-odd employees.
  • The distribution of enterprise by caste reveals that :
    • About 66 per cent of all MSMEs are owned by people belonging to the Scheduled Castes (12.5%), the Scheduled Tribes (4.1%) and Other Backward Classes (49.7%).
    • The gender ratio among employees is largely consistent across at roughly 80% male and 20?male.
    • In terms of geographical distribution, seven Indian states alone account for 50 per cent of all MSMEs
    • These are Uttar Pradesh (14%), West Bengal (14%), Tamil Nadu (8%), Maharashtra (8%), Karnataka (6%), Bihar (5%) and Andhra Pradesh (5%).
  • If this sector suffers a collapse, it would not just leave too many Indians jobless, it would grip the rest of the economy.
    • The pain will mostly be felt among the vulnerable sections of the society.

Problems faced by MSMEs

  • Most of them are not registered anywhere as they are just too small. 
    • Even GST has its threshold and most micro enterprises do not qualify.
    • Being out of the formal network, they do not have to maintain accounts, pay taxes or adhere to regulatory norms etc. This brings down their costs. 
  • Next is the single-biggest hurdle facing the MSMEs, lack of financing
    • Most of the MSME funding comes from informal sources and this fact is crucial because it explains why the Reserve Bank of India’s efforts to push more liquidity towards the MSMEs have had a limited impact.
    • A key reason why banks dither from extending loans to MSMEs is the high ratio of bad loans data show higher slippage for relatively bigger enterprises.
  • The other big issue plaguing the sector is the delays in payments to MSMEs, be it from their buyers or things like GST refunds etc.
  • The cash inflows of Small enterprises have either disappeared or slowed to a trickle, even as wage bills along with rent, electricity, etc., still have to be taken care of.
    •  Unless the Centre pays their workers, or gives them adequate money for this, entrepreneurs who run small units are apprehensive that they might be forced into either violating labour laws or shutting down
    • At the very least, these Small units want their power bills waived for the no-work period.
  • Unlike larger firms that operate on annual or quarterly budgets, small firms have very few cash reserves and tend to rotate tiny sums of capital in very quick cycles. 

Way Forward

  • Credit extension for MSMEs 
    • So far, heightened risk aversion among lenders has kept funds from reaching all but a few upper-end MSMEs. 
    • Loans to MSMEs are mostly given against property (as collateral) because often there isn’t a robust cash flow analysis available but in times of crisis, property values fall and that inhibits the extension of new loans.
    •  A credit guarantee fund by the government may come handy as it assures the bank that its loan will be repaid by the government in case the MSME falters.
    • In addition, the Centre could consider an interest rate subsidy to ease the payback burden on small firms.
    • The government can provide tax relief (GST and corporate tax), give swifter refunds, and provide liquidity to rural India to boost demand for MSME products.
  • Foreign Investment rules
    • The easing of foreign investment rules, would help a handful of MSMEs.
  • Further, all dues owned by governments and public sector undertakings to MSMEs can be immediately cleared. 
    • This will help ease their immediate cash flow woes

Source: https://www.livemint.com/opinion/online-views/save-small-enterprises-before-they-collapse-11588612324583.html

https://indianexpress.com/article/opinion/editorials/covid-msme-economy-6395652/

Image Source: Mint