MSME relief package is a damp squib

Prime Minister Narendra Modi had on May 12 announced a post-Covid stimulus package of ₹20 lakh crore (10 per cent of the GDP), which took many by surprise by its sheer volume. MSMEs received relief through financial and procedural stimulus, as follows:

For MSME borrowers with less than ₹25 crore outstanding and a turnover of ₹100 crore, an emergency credit line of ₹3 lakh crore was granted from banks and NBFCs, with a sanction limit up to 20 per cent of outstanding credit as on March 29, 2020. These collateral-free automatic loans can be availed till October 31,2020.

For functioning but stressed MSMEs, or those who have been categorised as non-performing assets, a subordinate debt of ₹20,000 crore was offered as an unsecured loan, which in the event of liquidation can only be paid after claims of secured creditors are met.

For units having a high credit rating (AAA) and wanting to list on stock exchanges, a ‘fund of funds’ with a ₹10,000-crore corpus was set up to provide equity funding. The fund of funds will buy up to 15 per cent equity in such MSMEs.

The TDS rates for non-salaried specified payments made to residents and TCS rates for specified receipts will be reduced by 25 per cent. This will benefit businesses/individuals who receive payments for contracting, professional services, interest, rent, dividend, commission, brokerage, etc.

Support in the EPF contribution was offered to certain eligible businesses and workers for an additional three months. Under the Pradhan Mantri Garib Kalyan Package (PMGKP), the 24-per cent EPF contribution of both employees and employers will be paid by the government. This was first provided for the March-May period and later extended till August 2020.

It was also announced that the statutory PF contribution of both employers and employees will be reduced to 10 per cent each from existing 12 per cent each for all establishments covered by the EPFO, for three months.

Global bids will be disallowed in government procurement tenders worth up to ₹200 crore, thus protecting Indian MSMEs.

The moratorium on EMI for all loans was extended up to August 31, 2020.

MSMEs were reclassified by broadening the range of investment, adding turnover criteria, and eliminating the distinction between manufacturing and services.

Is it enough?

The All India Manufacturers’ Organisation (AIMO) along with 10 other associations had carried out a survey and received response from over 47,000 MSME owners, experts, self-employed people and corporate CEOs.

The survey showed that 35 per cent of India’s MSMEs are headed for failure. The biggest challenge that lies ahead is saving these units, amid other concerns:

The first concern arises from the lack of demand across the economy, after massive job losses. With no boost in private demand expected, even spending on new government schemes has been suspended.

The government has covered over 45 lakh MSMEs under its loan schemes, but there are a total of 6.6 crore MSMEs in the country — both registered and unregistered, unorganised and organised. They are not covered by these loans.

There is little to no support for start-ups and self-employed individuals (except street vendors). Many start-ups that emerged in the last five years need support amid falling demand, to modify their business model and funding options. They need to be hand-held to safety.

Under the Insolvency and Bankruptcy Code (IBC), the threshold limit for initiating the insolvency process was increased from ₹1 lakh to ₹1 crore. In other words, firms that are owed upto ₹1 lakh by larger private firms (or public sector undertakings) cannot invoke the IBC. Where, then, is the recourse for those creditors falling below the ₹1 crore limit, most of whom are SMEs.?

A mere extension of the NPA norms to 180 days will only destroy early warning signs. Instead, why not announce a period of six months for restructuring by banks, before any recovery action is taken? What is now likely to happen at the end of the revised NPA norms, is that there will be a huge increase in the banks’ NPA numbers, threatening their very existence due to high provisioning. As it is, banks have already in trouble for years.

Today, winding up and closing a business is not easy. Why not announce an ‘ease of closing business’ regime and help entrepreneurs restart afresh, if their existing companies are no longer viable?

Post-Covid support

What support will the exporters get post Covid, as global demand collapses? They need to be protected from the imminent price disadvantages they will face. Exporters also need additional credit to extend to buyers, easier import of raw materials, exemption from the rule of input tax credit collection in the GST norms and subsequent claiming of refunds.

It is pertinent to ask whether the government is contemplating support for the revival of sectors which are declining over the last year (automobiles, real estate, hospitality, travel/tourism) — on which many SMEs and self-employed are dependent.

It is interesting to note that government dues to suppliers of goods and services will be released in 45 days, as claimed in the announcement of the stimulus package. Does this include the dues of the State governments and their undertakings? There were conflicting numbers (mentioned during the FM’s press conference) on the quantum of dues. Will any interest will be paid on the delayed period?

Maybe, a ‘one-time settlement’ be offered for pending financial disputes to enable entrepreneurs to begin life again, which might also help banks raise funds for fresh loans.

Making EMI payments will be tough hereafter. Can we waive all bank-loan pre-closure charges to enable SMEs to buy peace in one go? NBFCs/banks charge up to 5 per cent as pre-closure charges, although individual loans are exempt from these.

We are lacking in data on the unorganised industry, traders, migrant labour, and many such segments. It is necessary to map them immediately. Perhaps, an ‘Udyog Setu’ app can be launched, so that all enterprises, regardless of size, can be registered under one platform.

Mehrotra is Professor of Economics, Jawaharlal Nehru University. Raghunathan is former national president, All India Manufacturers Organisation

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