More Means Less In MSME Mess

Outlook Money|July 2020

More Means Less In MSME Mess
Without robust and healthy MSMEs the economic and business skeleton of the nation can come crashing down
Aparajita Gupta
Four major crises in less than four years! From demonetisation, Goods and Services Tax (GST), economic slowdown, to COVID-19 catastrophe! The first killed many MSMEs. The second forced some to shut shop. The third led to fear and loathing. And the fourth, well, it decimated the sector. The future of more than 60 million Micro, Small, and Medium Enterprises (MSMEs) hangs by a thin thread. If the government-induced stimulus doesn’t work – the initial signs indicate that it is unlikely – the India economy is likely to go into a tailspin.

The policy makers assure us that we need to wait, as it takes a lot of effort to re-start a large economy like India after a nationwide lockdown for two months. They repeat that things have begun to move, and the positive impact will be visible in the coming months. “It’s too early to comment because many sectors resumed work only a few weeks ago,” says Anurag Thakur, Union Minister of State for Finance (See Interview on Page 26) He adds that the government took “extraordinary steps” in an “extraordinary situation.” Sadly, time is at a premium. If the straggling MSMEs are unable to recover from their precarious state of a combination of near-paralysis and comatose by September 2020, be prepared for an economic mayhem. The pandemic will turn into a pandemonium. Remember that the MSMEs account for a third of gross value added, more than 100 million jobs, and half the country’s exports.

Without them, the economic and business skeleton that India carefully constructed over the past few years can come crashing down.

A recent sector-wide survey concluded that four-fifths of the MSMEs had no faith in the official stimulus package that was announced more than a month ago. They want more. They pray that the government realises that what it thinks is more than enough to revive the economy, and MSMEs, is too less. The reason: there are several challenges in the implementation of these measures. The ground reality is different from the reports that the officials receive. The various stakeholders do not seem to be on the same page.

Despite the government guarantee, the banks are nervous to lend more money to the MSMEs. Hence, the lenders give excuses to fob off firms, especially the micro and smaller ones. Lack of clarity on equity-related policies results in a lack of confidence among entrepreneurs. Political and non-economic actors seem to have a larger say in how the schemes operate. There is uncertainty about what to do first – push credit to the firms to kick-start supply, or put money in the consumers’ hands to rejuvenate demand.

The liquidity factor

There is no doubt that the MSMEs need funds merely to resume their businesses. They have run out of cash, saddled as they are with both raw materials and components that they couldn’t use, and finished products that they couldn’t sell for more than two months. This is where the government-backed emergency line of credit of ₹300,000 crore, which comes without collateral and at lower interest rate, will help. Until July 19 this year, slightly more than ₹20,000 crore was disbursed under the scheme.

“Many impacted businesses need funds to meet their built-up operational liabilities, working capital requirements, and salary payments. This will help MSMEs to resume their activities,” says Raman Sobti, Partner and National Leader, KPMG India. DK Aggarwal, President, PHD Chamber of Commerce, adds, “The various reforms will enable the MSMEs to produce and compete strongly in the marketplace.” It will allow them to get over the immediate crises, and stabilise their operations until revenues flow in.

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July 2020