Clipped from: https://www.business-standard.com/
Covid-19 has forced MSMEs to become more flexible to withstand the headwinds. But their stress pre-dates the pandemic
The spine is a remarkable thing. It has helped humans walk on two legs, freed up their hands to shape civilisation, and become the dominant species on the planet. With 33 bones, 24 of which are separated by intervertebral discs, it is both sturdy and flexible. The spine is also highly vulnerable (this columnist would know, given his slipped discs!). India’s micro, small and medium enterprises (MSMEs) are the spine of the economy. When healthy, they contribute 45 per cent of industrial value, nearly half of exports, and employ 40 per cent of informal workers (180 million). When damaged, MSMEs can paralyse the entire economy.
Covid-19 has forced MSMEs to become more flexible to withstand the headwinds. But their stress pre-dates the pandemic. In a remarkable speech* last week, Union MSME Minister Nitin Gadkari called for ease of doing business and faster decision-making to strengthen MSMEs and scale innovations in urban and rural enterprises. Structural changes are needed if India’s industrial base has to stay upright. Three problems need strategic solutions.
We can’t see you: Understanding of India’s MSME sector is quite poor. India has an estimated 63.38 million unincorporated non-agricultural MSMEs: 99 per cent are micro, 0.33 million are small, and approximately 5,000 are medium. But the last MSME census happened for 2006-07. Information is spread across datasets such as the Udyog Aadhaar Memorandum, the MSME Databank, and the Goods and Services Tax Network (the first two are voluntary; the last applies to firms with more than Rs 40 lakh turnover).
There are two related problems: The sheer number of informal MSMEs (96 per cent are proprietary), and informal workers often having little or no records. This makes it difficult to effectively deliver financial or other relief. The government announced a collateral-free loan of Rs 3 trillion ($39.8 billion). But only a fraction of MSMEs operate within formal banking channels; most will struggle to access this facility.
MSMEs need a dedicated information system. We propose it be called MISHRII — MSME Information System for Holistic and Real-time Identification, Incentives and Support. A national, centralised online platform to identify and track enterprises, MISHRII would collect data on their size, distribution and economic contribution. It should be linked with tax databases and the banking network to facilitate direct benefit transfers.
For workers, MISHRII would seed details such as occupation, employment days, and monthly income. It would also help authorities identify beneficiaries of minimum wages (under the Wage Code, 2019), and target welfare schemes (for example, life and disability cover, health and maternity benefits, old-age protection, education and housing).
Such a system could increase coherence across recent (desirable but not linked) initiatives, such as the CHAMPIONS portal (to help MSMEs get access to finance, raw materials, regulatory permissions) and the SWADES portal (to map out skills of workers returning from overseas).
We can’t diagnose you: Since April, Rs 1.22 trillion ($16.3 billion) of additional debt and equity measures have been announced to infuse liquidity into MSMEs. The challenge is to prioritise sectors for relief. A vulnerability assessment framework is needed to understand risks. Council on Energy, Environment and Water (CEEW) researchers have assessed MSME sectors on two parameters: Economic importance accounts for relative contribution to gross value added and employment; business risk considers available cash reserves and the cash conversion cycle (time taken to recover receivables).
Accordingly, textiles, chemicals and basic metals show up as the three most vulnerable sectors (but there are others such as transport equipment and food products). Such an exercise, if undertaken periodically, would help to strengthen weak links in value chains (especially export-oriented units or with high employment elasticity) and target support to micro enterprises.
We can’t pay for your treatment: Various central and state government departments and public sector enterprises owe about Rs 10,582 crore ($1.4 billion) to micro and small enterprises. The Micro and Small Enterprises Facilitation Council (MSEFC) managed to deal with applications worth Rs 599 crore. In 2017, the SAMADHAAN Delayed Payment Monitoring System was launched; more than 40,000 applications have been filed. While MSEFC took up 18,000 cases, more than 9,000 remain under arbitration.
In May, in a welcome announcement, the finance minister promised that MSME receivables from the central government and central public sector enterprises would be cleared within 45 days. Priority should be given to clear dues owed to long-term suppliers and firms with good track records. The states must increase the capacity of state-level MSEFCs to expedite resolution of pending cases. If firms could turn attention to rebuilding businesses, they would contribute to taxes and boost household spending.
The National Company Law Tribunal (NCLT) also needs more capacity. Since its founding in 2016, it has handled 40,000 of the 62,000 cases filed. That record might not seem terrible, but cases referred to the NCLT are rising by 10 per cent annually. After the temporary suspension in sections of the Insolvency and Bankruptcy Code is lifted, there could be a jump in cases before the NCLT.
At present, 15 positions for NCLT judges remain open, which must be filled urgently. Temporary benches would be needed to handle peaks in bankruptcy cases. Orderly dissolution of businesses would reduce non-performing assets on bank balance sheets and increase liquidity for well-performing firms.
Our great ape cousins do not develop spondylolysis. Recent medical research has found this is because of evolution: Sometimes human vertebrae “overshoot” the ideal design for walking upright. Before we aim high for self-reliance, the economy’s backbone needs urgent correction for back pains: Identify, diagnose, and treat. Otherwise, we risk permanent damage.
The writer is CEO CEEW (https://ceew.in) and lead author of Jobs, Growth and Sustainability: A New Social Contract for India’s Recovery. (https://bit.ly/2Y6ikwL) Follow @GhoshArunabha @CEEWIndia; *https://bit.ly/2Y8X49K