Amid slowing demand, Government’s recent announcement of loan
moratorium, collateral free loans and other infusing liquidity measures are not
enough to help small businesses to navigate through the crisis. Going forward,
a multi-pronged approach where a decent blend of fiscal and monetary policies
is required with policy interventions made at both centralized and a
decentralized levels.
The adverse effects of covid-19
pandemic are looming large on the economy, causing damage to both lives and
livelihoods. Among many areas, MSME sector has been bruised badly in the
aftermath of lockdown. The sector was already weakened by twin shocks of demonetisation
brought in Nov 2016 and cumbersome GST tax structure introduced in July 2017.
The pandemic has further added to their woes which are struggling hard to stay
in the business with many on the verge of getting bankrupt.
MSMEs are backbone of the Indian
economy. There are around 63 million MSMEs engaged in businesses ranging from
manufacturing to supplying and distribution of intermediate products to large
companies and to end consumers. Together, they account for roughly 30% of our
gross domestic product, about 40% of our exports, and employ at least 120
million people. Any breakdown of this sector would not only leave large
proportion of workforce jobless but also the consequent shock would trickle down
to the rest of the economy.
Of course various adhoc measures
ranging from liquidity infusion to loan moratorium and collateral free loans
have been adopted by the government, however, despite these measures, there are
reports that MSMEs are choking to the point of perpetual closure on lieu of tepid
demand, labour shortage, liquidity crunch and disruptions in supply chains.
They are unable to pay their rent, salaries and utility bills. Given their
increasing distress, a broad policy framework needs to be thought of that
raises their resilience to this on-going turmoil.
To tide over the Covid-19
lockdown-induced crisis, the finance minister announced the much-awaited relief
package for the MSMEs on 13 May 2020. The below mentioned pointers will analyse
the viability of such measures.
Wage support for MSMEs
As currently more than 90% of MSMEs are micro units employing largely informal workers with minimal cash reserves, it is impossible for them to pay full wages to their employees during lockdown or until they become fully operational again. The government has not announced any financial incentives or wage support programme to help employers to retain their employees during this crisis period. A public provision for at least a partial wage guarantee for MSME workers for few months by government can prevent them from violating the labour laws or shutting down. Further, some wage subsidy initiative which reimburses the employer – either in whole or in part – for wage payment or some statutory dues payment to the employees for some temporary period of time can be thought of. For self-employed or owner managed enterprises, some compensation (subject to a cap) can be announced for those businesses which can demonstrate a decrease in their turnover since lockdown. Moving ahead, the structural issue of identification of such enterprises and a policy framework for the wage or revenue compensation remains a challenge indeed for the government.
As part of Rs.1.7 lakh crore
covid relief package, the government’s proposal to pay entire 24% EPF
contribution for businesses having less than 100 workers for three months
(where 90 percent of these employees earn less than Rs 15,000 per month) is
welcome step. While this provision is estimated to benefit around 4 lakh
establishments, however, the Employees' Provident Fund and Miscellaneous
Provisions Act, 1952 is presently applicable to establishments with 20
employees or more; whereas above 90% of MSMEs enterprises are in the micro
category of enterprises (as per the erstwhile definition of MSMEs) that on an
average employ between 5-10 workers. This makes these informal micro economic
units ineligible to have PF accounts for their workers and therefore is
excluded from availing this relief measure.
As part of MSMEs relief
announcements, the government had also announced that the EPF rate would be
brought down from current 12% to 10% for three months. The government claimed
that this was a demand-side liquidity enhancement measure and would leave more
money in the hands of workers but, in reality, the workers would incur a loss
of 2% employer’s contribution for 3 months which would bring down their
aggregate accumulated EPF and would increase the tax burden of the tax payer.
Further industry has demanded that this concession should apply even to medium
enterprises with 200 workers and the ceiling of Rs.15,000 monthly income should
be scrapped.
Fiscal measures such as clearance of dues, tax reductions and refunds
As part of Covid relief package
for MSMEs, Finance Minister had announced a 3 lakh crore collateral free loans.
Further, an enterprise with an outstanding loan of up to Rs. 25 crore and
turnover of up to Rs.100 crore can avail of 20% of their earlier loan as
additional new loan without any new added collateral. However, amid slowing
demand, cost escalations and decreasing orders, this announcement seems useless
as most of the enterprises would not want to go for fresh loans or would turn
out to be defaulters.
Where on one hand cash inflows of
these micro enterprise have dried up, on the other hand they have soaring wage,
electricity bills and rent payments. In this context, an important measure that
can actually help MSMEs right away is the repayment of dues owed to them by the
central (including PSUSs) and the state government. The total outstanding
payments to MSME units by the center and state PSUs and state run agencies is
estimated to be above Rs. 5 lakh crore. Along with this, the GST credit refunds
need to be accelerated. These measures would add to their working capital and
will act like oxygen to these dying units. It will also help to make the units
atmanirbhar (self-dependent). In addition, reduction in GST to MSMEs can be announced
for this financial year
The finance minister in her
Atmanirbhar Abhiyaan announcements on May 13, had argued that government would
clear receivables owed to MSMEs within 45 days, however, nothing much has been
done where majority of the MSME sector is starving for funds.
Bailout from paying utility bills and deferment of Social Security
Payments
Since payment of personnel
salaries should be a priority for employers, any exemption from electricity,
power and rent bills at least for the lockdown period, will go a long way in
preventing further cost escalations.
Further, permitting deferment of Social Security Payments and reduction in
property taxes and fees can be other relief measures.
Interest subvention and tax reduction
The announcement of 3 lakh crore
collateral free loan for MSMEs has not impressed many MSMEs. Instead, reduced
interest rates on loans could be more welcoming. Center can think 50% interest
waiver to give some relief to these enterprises with mounting losses. Further,
although RBI has reduced repo rates, banks have failed to pass it on to
consumers. In this regard, to ensure the transmission of the monetary stimulus,
regional banks should be incentivized to pass on such lower rates to borrowers,
especially SMEs.
Credit disbursal
The sector because of its largely
informal and unorganised set up gets only about 15% of their credit from formal
banking channels and relies mostly on varied shadow banks and informal sources
of finance. Given this, there is a need to encourage non-banking financial
companies in making financing easily available to this sector. Also, efforts
should be made to create an active bond market with adequate depth and
liquidity to let some MSMEs raise their debt directly from it.
With growing NPAs with PSBs, banks
have adopted a risk-averse approach towards MSME lending. To this end, Mudra
scheme can help alleviate credit constraints. Further, while SIDBI can play a
relevant role in incentivising banks to lend to MSMEs, a sustainable lending
modal is required for this sector specifically, where banks are encouraged to
innovate new lending strategies with minimum future defaults. Also, banks
should improve their credit appraisal capability to deal with the first time
loan applications. The time is ripe for PSBs to collaborate with fin-tech
lenders to make faster and safer lending choices. Such digital finance lending platforms should
be encouraged to assess the creditworthiness of small businesses and enhancing
loan processing and disbursal processes.
Other measures
Further, to protect MSMEs from
large corporations and for facilitating higher volumes of transaction with
competitive pricing, listing of all micro enterprises on Trade Receivables
Discounting System (TReDS) should be made mandatory.
To fulfil the government’s vision
of increasing MSMEs contribution to
India’s GDP from the current 30% to over 50% and that for the Indian economy to
scale the $5 trillion mark, empowerment of this sector through sustainable
measures is must to make them resilient to any future risk.
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