Insights
Uncertainty looming over COVID-19 crisis bottoming out for MSMEs to assess need for more govt stimulus
June 18, 2020Ease of Doing Business for MSMEs:
The MSME sector contributes significantly to India’s GDP and provides livelihood to more than 10 per cent of the national population. It involves low capital costs and this makes it particularly suitable for the socio-economic set-up of India. Several thousands of MSMEs are falling sick every year owing to lack of resources, market or inappropriate business strategies, and Covid-19 and the related economic crises are likely to aggravate the situation. The seriousness of the situation has led the government to introduce substantive reforms for this sector, with a special focus on providing credit, liquidity, demand and marketing infrastructure.
As a part of the ‘Aatma Nirbhar Bharat Abhiyan’ – self-reliant India campaign, the government intends to provide a Rs 3 lakh crore collateral-free emergency credit line (Credit Line), Rs 20,000 crore subordinate debt for stressed MSMEs and Rs 50 thousand crore equity support through fund of funds (FOF) to the adversely impacted MSME sector. These are direct measures, and they will go a long way in benefitting those MSMEs, which are aware, and are able to get access to such measures. The Credit Line intends to make available loans of up to 20 per cent of the outstanding credit to MSMEs and it is remarkable that within 14 days from the launch of the Credit Line that PSBs have already sanctioned loans exceeding Rs 24,000 crores to 5.46 lakh MSMEs.
Banks will provide subordinate debt to MSME promoters to enable capital infusion, and this will strengthen the net-worth of MSMEs and prevent them from becoming sick and unviable. The FOF is to be operated through a ‘mother fund’ and ‘daughter funds’, where equity funding will be provided to MSMEs which have potential to grow and are viable. As a result, a wide range of investors such as financial institutions, corporate investors and HNIs are likely to make investments in conjunction with the government in the MSME sector.
Read More+
The definition of ‘MSME’ has been revised to increase coverage, and the new definition is based on ‘investment and turnover’. This has resulted in a lot more enterprises being covered in the scope of ‘MSME’ and becoming entitled to several MSME incentives. With a view to strengthening demand in the MSME sector, global tenders in government procurement tenders of up to Rs 200 crores have been disallowed. Special emphasis is being made on e-market linkage and fintech, and this will help meeting social distancing requirements and to reap benefits of technology.
Despite all these efforts, it does not seem like enough has been done. We are not even sure if the present crisis has bottomed out to assess whether what has been done is good, or what more needs to be done. Specialists are already comparing the present situation with earlier grave economic crises which took several years to come out. MSMEs have treaded a difficult path in their evolution over the past couple of decades and have had to cope with a lot of hurdles. In recent times, they have had to cope with severe stress on account of demonetization and the GST implementation. However, it was not an easy process, and the present Covid-19 situation is not an easy encounter.
The recent measures are all well-intended and should drive growth across various economic sectors. Start-ups catering to strengthen MSMEs, be it in the space of logistics, finance, technology, fintech and manufacturing will be particular beneficiaries. However, there is a lot to be done and achieved as a huge void has been caused by Covid-19, the lockdown and the unprecedented crisis. Credit cycles and collections are impacted, and capital has eroded or been consumed. Bad debts are bound to pile up and entrepreneurs will be anxious. Time is of the essence. The right strategy, orientation and further stimulus are obligatory.
Read Less-
Disclaimer
This is intended for general information purposes only. The views and opinions expressed in this article are those of the author/authors and does not necessarily reflect the views of the firm.
