Economic package announced by Centre can be seen an important first step towards reviving the sector
Small industry in this country has been battered in recent times especially due to the economic slowdown of the past year. The latest storm to hit what is known as the MSME (medium, small and micro enterprises) sector has been the pandemic and the lockdown of the entire economy. A multiplicity of problems has impacted these units in the wake of the country’s shut down. The primary issue has been huge revenue losses due to production stoppages and hence an inability to make payments either to workers, vendors, or banks. With the prospect of re-opening on the cards, they are hamstrung due to lack of working capital and the absence of migrant workers.
Given the fact that this sector comprises as much as 29 per cent of the country’s entire GDP, the stimulus package series announced by Finance Minister Nirmala Sitharaman began with a focus on this sector. But the question is, are these measures enough to revive a sector which normally employs over 100 million people?
The first big announcement was that three lakh crores worth of credit would be provided to MSMEs without any collateral. The fact that this concession will benefit 45 lakh units is not so impressive when one considers that there are a total of 6.3 crore such units in the country. Besides, the emergency credit line will be up to 20 per cent of the outstanding amount on the loans taken by units. Collateral, it must be pointed out, has already been given for the original loans. So it is the additional collateral on the fresh loan that is being waived with the government being the guarantor.
Even with these riders, however, this is bound to give a boost to companies already availing of credit which are now facing serious working capital hurdles. The big issue here is implementation as banks are notoriously slow in providing loans to units in distress. Manufacturers associations have already expressed doubts about just this issue.
On the other hand, the second step of providing Rs. 20,000 crore as subordinate debt provision for those in dire straits is indeed welcome for stressed units. It will support two lakh units that might otherwise have had to shut shop, even though subordinate debt entails a higher interest outgo.
There is a much larger group of MSMEs, however, that have been healthy till now but are floundering due to the lockdown. For them, the Finance Minister has offered the proposal of an Rs. 10,000 crore “fund of funds”. This is more of a long term measure rather than an immediate booster shot for these units.. So liquidity issues have actually been eased for only a small segment of the MSME sector, leaving the rest to literally face the music.
On the plus side, the launch of the special liquidity scheme for the non-banking lenders and the revision of the definition of various categories of small business will definitely give a boost to this sector. The Rs. 30,000 crore scheme allowing banks to invest in investment-grade debt papers should help revive non-banking financial companies. And this, in turn, should help small businesses that rely for credit on this sector.
Similarly revising the definition of MSMEs by raising the investment limits and including turnover criteria, is bound to give a spur to the growth of units that were constructed by the earlier provisions. But this is a long term reform and will not resolve the immediate crisis being faced by millions of small industries all over the country.
There is no doubt that the package for the MSME sector is just not enough to resolve the multifarious problems facing it right now. The bulk of micro, small and medium units which were viable and healthy till recently, do not have enough funds to pay their employees or buy raw materials and components. In many cases, there are not enough workers. The government needs to go back to the drawing board and find solutions that will benefit a much larger swathe of the small industry segment that is now increasingly described as the backbone of the economy. This is certainly the first step towards reviving the MSME sector but much more needs to be done.
(Sushma Ramachandran is a senior business journalist and commentator on economic issues)
The views expressed above are the author’s own. They do not necessarily reflect the views of DH.