A survival-of-the-fittest approach towards MSMEs

| Updated on May 28, 2020

The structuring of their relief package suggests that the Centre is only keen to ensure the sustenance of somewhat large and viable MSMEs

After taking a fair bit of time to respond to distress calls from MSMEs, the Centre has lately come up with a flurry of relief measures for the sector. To help MSMEs tide over the working capital crunch caused by the lack of orders, banks will now offer a Guaranteed Emergency Credit Line of ₹3 lakh crore, to supplement existing credit to MSMEs. The loans are subject to a rate ceiling, with the Centre underwriting ₹41,600 crore via the National Credit Guarantee Trustee Company. For equity funding of stressed firms, ₹20,000 crore has been proposed as subordinate debt and a further ₹50,000 crore through a fund-of-funds structure. To lighten the wage burden, the Centre has offered to bankroll provident fund contributions for MSMEs with upto 100 employees. To give them a bigger share in the public sector pie, it has barred global tenders for government procurement contracts upto ₹200 crore. A long-pending reform has also been swept in on the MSME definition. It has been harmonised for manufacturing and services, with higher investment thresholds of ₹1 crore, ₹10 crore and ₹20 crore respectively for micro, small and medium enterprises, with turnover as additional criterion.

While banks may take a couple of weeks to operationalise the credit scheme, it is substantive in relieving stress for MSMEs as it enhances working capital limits by 18-19 per cent. The Central guarantee means that bankers may no longer worry about being hauled up for wrong credit judgments while disbursing them. Government orders may open up a sizable playing field for MSMEs, at a time when private tendering is at a standstill. However, the structuring of this package suggests that while the Centre is keen to ensure the sustenance of somewhat large and viable MSMEs, it is not particularly focussed on the survival of micro and small enterprises tottering at the brink. The ₹3-lakh crore credit support has been made conditional on MSMEs with existing credit lines with banks. The expanded MSME definition is also expected to lead to banks favouring larger MSMEs in a bid to avoid risk, crowding out micro firms. The FM’s presentation highlighting 45 lakh MSMEs (of the total of 6.3 crore in the country) as expected beneficiaries suggests that most micro enterprises may not make the cut. For micro enterprises, government entities clearing their dues expeditiously and direct support in the form of GST, interest or utility bill waivers may have proved more useful. Attempts to sweep sectors such as retail trade under the scheme’s purview also dilute it.

While size-based incentives have been a key contributing factor to India’s MSME sector remaining permanently stunted, the Centre needs to think through the implications of a survival-of-the-fittest approach to it at a time like this. High MSME mortality can have significant knock-on effects on employment, consumption and GDP numbers, which it may be ill-prepared to handle at this juncture.

Published on May 27, 2020

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