By Gyan Pathak
COVID-19 has placed India’s already ailing MSME sector in a precarious condition. Majority of 6.33 crores of micro, small, and medium enterprises are facing the question of survival. The World Bank’s MSME Emergency Response programme of $750 million, says that it will be addressing the immediate liquidity and credit needs of some 1.5 million viable MSMEs to help them withstand the impact of the current shock and protect millions of jobs. The Government of India had announced a special package of Rs 3 lakh crore for the same purpose. However, these are too little to overcome the crisis in the sector that has been suffering since demonetization in November 2016. Even before the outbreak of COVID-19 and subsequent lockdown on March 24, millions of MSMEs have already been shut down, and millions of others were struggling for survival.
The question of survival of the MSMEs is an important issue, and we do not know how many of them are still viable, after the total shut down of all the units in the country from March 25 to May 31 due to lockdown of the country. There is no capital, no labour, and no consumer demand, and total disruption of the supply chain of produced goods. The new definition and provisions for MSMEs do not make distinction of manufacturing and service sector, therefore, we need to include even the total disruption of services as additional factors impacting the recovery of the Indian economy in general and the MSMEs in particular. If the World Bank’s figure of viable units of 15 lakh for which they are giving emergency support is of any indication, we can assume the majority of 6.33 crore MSMEs are now not viable at all. The Modi government needs to do much more in this scenario than they have announced.
It must be noted that the MSME sector is the backbone of India’s economy – contributing to 30 percent of India’s GDP and 40 percent of exports, under severe stress. The sector, which employs about 150-180 million people, is today burdened with cancelled orders, loss of customers and supply chain disruptions – causing a sharp fall in revenues. This cash flow shortage is exacerbated by constraints to accessing finance, potentially leading to solvency problems. The broad-based loss of cash flows has triggered a chain of non-payments throughout the economy, including to the financial sector.
Unlocking liquidity has remained a challenge despite India’s financial system benefited from early and decisive measures taken by RBI and the government of India to infuse liquidity into the market. In the current uncertainties about the economic situation due to the increasing number of COVID-19 patients in thousands on a daily basis, lenders remain concerned about borrowers’ ability to repay. Government is trying to support by de-risking lending from banks and non-banking financial companies (NBFCs) to MSMEs through a range of instruments including credit guarantees, but the progress is very slow.
Improving the funding capacity of key market-oriented channels of credit, such as the NBRCs and Small Finance Bank (SFBs) will help them respond to the urgent and varied needs of the MSMEs. The Union Government and RBIs efforts in this regard is not sufficient. It’s a dismal state of affairs that only 8 percent of the MSMEs today are served by formal credit channels. In this scenario, financial innovations are required to successfully address the issue. Programmes relating to incentivizing and mainstreaming the use of fintech and digital financial services in the MSME lending and payments must be immediately strengthened. Union government’s new initiative of registration of all the MSMEs through a portal is only a small step, but does not guarantee the revival and survival of the units. We have already seen the dismal effectiveness of the registration system for startups. Out of around 50,000 startups, only about 27,000 are registered and getting benefits from the government’s programme. Death rate of startups is very high. About 90 per cent of the startups die within three years of their launch. Moreover, there are 30 unicorn startup companies, out of which 18 have Chinese investors. Emerging troubles with China have also deepened the problems of millions of our MSMEs. If we need quick revival and survival, we must strengthen the financial system. A recent report suggests that the banking crisis is also deepening day by day. It’s a bad omen.
The enormity of the task before us can be imagined by the fact that the number of registered MSMEs in FY20 had increased by 18.49 per cent to 25.13 lakh units from 21.21 lakh in FY19, according to government data. The growth rate, however, declined from 39.7 per cent in the last financial year that had increased from 15.17 lakh MSMEs registered in FY18. Overall the number of registered MSMEs in India in the past five years stood at 90.19 lakh. According to the MSME Ministry’s FY19 annual report, the MSME sector is dominated by micro-enterprises. India has 6.33 crore MSMEs out of which 6.30 crore — 99.4 per cent are micro-enterprises while 0.52 per cent — 3.31 lakh are medium and 0.007 percent — 5,000 are medium enterprises.
Government will need to work on various fronts due to disruption caused in the supply chain, warehousing, export credit etc. MSMEs all over India need special attention, however, the states like Haryana, Himachal Pradesh, J&K, Karnataka, Kerala, Andhra Pradesh, Delhi, Gujarat, UP, Telangana, Rajasthan, Maharashtra etc need much more due to concentration of MSME clusters.
MSMEs are largely unorganized and in the informal sector. Helping them has remained a tough task for the government and financial institutions. Since 90 per cent of employment in the country depends on this sector, India cannot afford the death rate of MSME units to increase. (IPA Service)