MSMEs: Go back to the crush, but not out of the woods

Written by Amarendu Nandi and Ayush Anand

The Covid-19 epidemic and prolonged lockdown have severely affected India’s 63 million micro, small and medium enterprises (MSMEs). The Government of India (GoI) has announced a number of assistance schemes such as credit guarantee scheme, debt restructuring, suspension of interest payments on loans and deferrals and a few more self-reliant India initiatives to help the sector emerge from the wild. . Has such a policy had any positive effect on the revival potential of the sector?

A recent Assocham-Crisil report entitled MSMEs back to the grind is therefore based on the following recommendations. First, the sector is likely to see a pro-cyclical increase in revenue between about 15-17% in FY22 and 11-13% in the current financial year. The recovery in construction, exports, goods and consumer services has seen some green shoots as normalcy of economic activity has been restored in these sectors.

Second, MSME lending by banks and non-banking finance companies (NBFCs) is showing steady year-over-year (yoy) growth, expected at 7% in FY21 and 7-9% in FY22, indicating growth in lending and investment. By MSMEs. The growing digitization of the sector has facilitated access to financial services provided by new age fintech firms.

Third, export-linked MSMEs continue to show steady growth this fiscal year, as global companies increasingly adopt a China + 1 strategy to diversify their supply chains. Sectors such as healthcare, chemicals, ceramics, dyes and pigments are posting strong recovery due to such risk-free (from China) strategies.
What does all this mean for MSMEs out of the forest? Not really.

Expected revenue growth in FY22 is behind the negative 10% growth in FY21, which means less base effect than anything else. Also, a previous survey across a random sample pool of 1,029 MSMEs nationwide found that 50% of surveyed MSMEs saw a loss of more than a quarter of their revenue in FY21. Nearly two-thirds reported a decline in profitability due to lower revenues and rising spending. Moreover, according to the MSME Ministry’s own acknowledgment in Parliament, the number of MSME closures has increased almost 17-fold – from 330 enterprise-registered entities in FY21 to 5,577 entities in FY22 – clearly indicating the current predicament in the sector.

Similarly, the recent trend of increasing credit acceptance needs to be weighed against the fact that MSMEs have seen a worrying rise in debt crime and NPAs. MSME NPAs rose 12.5% ​​from 8.6% in FY19 to 12.5% ​​in FY21, and are projected to remain close to the same level in the current financial year. Worryingly, NPAs have increased despite the announcement of four MSME-debt-restructuring schemes by the Reserve Bank of India (RBI) between January 2019 and May 2021. Also, despite the increase in debt, the sector remains grossly under-served. Recent estimates indicate that while MSME’s debt demand is around $ 500 billion, supply from formal sources is below $ 200 billion, indicating that the debt gap is substantial.

Conflicting signals emphasize the need for a more careful and concise interpretation of recent numbers and a realistic assessment of the ground situation. Otherwise, misdirected and premature optimism may unnecessarily divert policy attention from issues that hinder the resurgence of MSMEs after an epidemic. The scars caused by the epidemic (and prolonged lockdown) on MSMEs are really deep and painful, suggesting the need for continued and targeted public policy intervention.

First, the government should focus on reducing the business costs of MSMEs, given the high wholesale and retail inflation situation and the rising cost of debt in India. The 15% discount corporate tax rate, applicable to newly incorporated manufacturing units, should be extended to all MSMEs for at least the next 2-3 years. Reducing GST rates and tariffs on raw materials can also reduce overall costs, helping MSMEs thrive in such a challenging business environment.

Second, the recommendation of the Parliamentary Standing Committee on Industry to extend the loan repayment period for MSMEs to 7-8 years under ECLGS, and the original amount should be accepted without delay for at least two years. Such measures could provide much-needed cushioning against multiple attacks caused by the epidemic.

Third, there is an urgent need to create MSME-specific, export-linked insurance products. If India plans to wrap itself up as an alternative to China in the emerging global and regional price chains, the government will need to facilitate export credit insurance to protect export-linked MSMEs from global uncertainty and macroeconomic shock. The government should limit the time-bound approval of insurance cover and cause business delays due to excessive delays, especially in today’s challenging business environment.

Finally, only 14% of the total MSMEs are registered on the MSME Digital Registration Portal-Udyam. The remaining 86% of the estimated 6.33 crore MSMEs should be boarded in a mission mode. This is because most government assistance schemes aim to meet the operational obligations of MSMEs through low cost credit, such as the Emergency Credit Line Guarantee Scheme (ECLGS) and the Credit Guarantee Fund Trust for Micro and Small Enterprise (CGTMSE) scheme. Only available to registered entities. In addition, onboarding can help MSMEs take advantage of the solution portal, a late payment redressal platform, in a more streamlined and timely manner. Recent estimates suggest that about Rs 10.7 trillion (6% of India’s GVA for FY21) is stuck with MSMEs due to delayed payments, severely limiting their working capital demand.

India’s economic recovery from the protracted epidemic-induced recession is critically dependent on the performance of MSMEs, which represent 90% of the country’s enterprises, employ 60% and account for 49% of total exports and about 30% of India’s GDP. . When MSMEs are crushed, they are still not out of the forest. The government needs to formulate necessary reforms and policies to ensure rapid growth and vitality in the sector.

Author IIM-Ranchi View is private

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