Tweaking the new definition of MSMEs and enhancing cost competitiveness will help them tide over the pandemic impact
Apart from these issues, the country’s supply chain was massively disrupted.
Gradually, the proactive measures undertaken by the government in the last 8-9 months, which included a economic relief package of around ₹30-lakh crore, began to yield results. In May 2020, the MSME Ministry also launched the CHAMPIONS (Creation and Harmonious Application of Modern Processes for Increasing the Output and National Strength) portal, with the aim of assisting MSMEs march into the big league.
In consonance with the clarion call by Prime Minster Narendra Modi for a self-reliant India, the Finance Minister announced various relief and credit-support measures to businesses, especially MSMEs. These include the ₹3-lakh crore Emergency Working Capital Facility for Businesses; a new definition of MSME with revised investment limit; and e-market linkage for MSMEs.
Recently, to ensure more credit to small businesses, the RBI exempted banks from keeping the cash reserve ratio (CRR) requirement against loans disbursed to first-time MSME borrowers; units that had not taken any credit as of January 1 can be considered for this exemption. This will go a long way in incentivising new credit flow to MSME borrowers and fulfil their financial needs.
The new, broadened definition of MSMEs — ₹250 crore annual turnover and ₹50 crore investments in plant and machinery — will bolster the manufacturing sector, and create millions of new jobs for India’s young workforce. This will also enhance the production possibility frontiers of MSMEs, increase their competitiveness and create a level-playing field for them to tap new opportunities in the domestic and international markets.
However, a clarification is essential, as to whether both the criteria of investment and turnover or either one of them is required to be met for an enterprise to be classified as MSME.
The objectives of expansion, growth and technology upgradation of MSMEs would not be achievable if both the criterion are required to be fulfilled. Preferably, the turnover criteria should be set for an enterprise to be classified as MSME.
Going ahead, the cost competitiveness of MSME exporters should be enhanced and a level-playing field created. Apart from boosting exports, this will reduce imports of items where India has domestic capabilities.
MSMEs have been seeking tax-free status for export income. This will help in partly compensating the additional cost of logistics and other bottlenecks which exporters face. MSMEs not only play a crucial role in providing large employment opportunities at comparatively lower capital cost than large industries but also help in industrialisation of rural and backward areas, thereby reducing regional imbalances and assuring more equitable distribution of national income and wealth.
Often, the origin/source of raw materials for MSMEs is far away, which hampers ease of accessibility and raises the cost of procurement. Also, economic power/activity is concentrated in mega cities. The Government should, therefore, rationalise or simplify the existing laws to distribute this concentration of economic power help bring raw-material and manpower resources closer to MSMEs.
Further, the focus should be on ensuring hassle-free disbursement of loans to MSMEs, especially in rural areas. Banks must see that the significant repo rate cuts announced by the RBI are transmitted fully to borrowers. Lowering the compliance burden of MSMEs will improve ‘ease of doing business’ at the ground level and a lower tax regime will increase the personal disposable income of the people and create an overall virtuous circle of growth and development in the economy.
Both MSMEs and start-ups require a lot of support to help them tide over the pandemic. The value chain of MSMEs should be enhanced, to make them structurally more competent and add to their efficiency.
Keeping in view the disruptions in global supply chains, India should build domestic capacities to mitigate the impact on import demand and to fulfil domestic demand with indigenous production. Domestic capacity building at this juncture will not only reduce the impact of pandemic but also provide an opportunity to increase our presence in global exports. This will help the country become the manufacturing hub of global supply chain and an export powerhouse.
The writer is President, PHD Chamber of Commerce and Industry