With around 31% contribution towards GDP and 45% of the exports of the country, the development of the MSME sector is an important driver of the Indian economy. This article aims to analyse the pre-COVID-19 and the present scenario of MSMEs, and also discusses the various schemes introduced by government to boost the sector. Through schemes like Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE), AatmaNirbhar Bharat Abhiyan etc., the government has initiated reforms to bring liquidity by providing collateral free loans for the cash crunched MSMEs during the national lockdown. By the introduction of CHAMPIONS and MSME SAMBANDH portals, the government has started moving towards a more transparent and easy mechanism to cater to MSMEs.
The Micro, Small and Medium Enterprises (MSMEs) generates nearly 80 million jobs, having a network of 36 million units1 and manufactures more than 6000 products In the context of COVID-19 Pandemic crisis, MSMEs have arisen as one of the top employment generators. According to Udyog Aadhaar Quarterly publication, number of MSMEs registered on December, 2019 is 83,70,447. Out of total registered MSMEs 88.62% (74,17,890) are Micro enterprises, 10.96% (9,17,401) are Small enterprises and 0.42% (35,156) are Medium enterprises. It is no surprise that it has surpassed the much-touted employment generator tech startups that increased from 8,900-9,300 in 2019 generating only 60,000 direct and 1.3-1.8 lakh indirect jobs in 2019. With a share of 14.20 percent of the total MSMEs in the country the state of Uttar Pradesh has the largest number of estimated MSMEs. West Bengal comes as close second with a share of 14 percent, followed by Maharashtra and Tamil Nadu at 8 percent. MSMEs are vital for development of a country. It enables for a sustainable and balanced growth.
The Indian MSME sector has been severely affected by COVID-19 pandemic. For instance, according to a study conducted by Indian Institute of Technology – Madras (IIT-M) in association with industry bodies on the impact of COVID on MSMEs in Tamil Nadu, the phases of lockdown announced by the government witnessed a revenue shortfall of more than 60 percent for the sector, creating an unprecedented crisis to the industry2. The MSME sector is thus facing a severe shortage of working capital, including delay in payments, shortage of labour and disruption in supply chain.
In order to overcome this crisis, the government has announced many lucrative schemes for MSMEs and nationalised banks have launched credit guarantee schemes to start-ups as well as existing businesses of MSMEs without collateral security.
WHAT ARE MICRO, SMALL AND MEDIUM ENTERPRISES?
The definition of Micro, Small and Medium enterprises in terms of the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 is as under
Main objectives of revision of classification of MSMEs
- Facilitation and credit flow to MSMEs
- Improving competitiveness of MSMEs
- Improve manufacturing base through upgradation of technology
- Promotion of MSMEs through cluster bases approach
- Marketing support to MSMEs
- Skill development and entrepreneurship development training
MSMEs CONTRIBUTION TO INDIAN ECONOMY
MSMEs play a vital role in various areas of the defence sector such as R&D, Maintenance Repair and Operating Supply, naval and land system, sub system and accessories, software development, casting, forging, metal wires etc. They are providing immediate largescale employment with lower investment and occupy a position of prominence in Indian economy and are the second largest manpower employer after agriculture. By providing resilience to ward off global economic shocks and adversities, the Indian MSME sector is the backbone of the national economic structure and has unremittingly acted as the bulwark for the Indian economy.
With around 83.7 million units throughout the geographical expanse of the country, according to National Statistical Office, the share of MSME sector in the country’s total GDP during 2018-19 has been 30.3%, overall exports from India have been 48%3. The MSME sector presently provides employment to around 120 million persons.
The salient features of MSMEs:
- Creation of employment opportunities and more equitable income distribution;
- Utilizing indigenous resources;lContribution in rural industrialization and economy;
- Improving of foreign exchange resources;
- Creation of backward and forward linkages with existing industries;
- Encouraging Entrepreneurial spirit.
This sector consistently maintains a growth rate of over 10%. About 20% of the MSMEs are based out of rural areas, which indicates the deployment of significant rural workforce in the MSME sector and is an indicator of the importance of these enterprises in promoting sustainable and inclusive development as well as generating large scale employment, especially in the rural areas.
Registration of MSMEs
If any Micro, Small or Medium Enterprises want to start any business, they need to do the registration with MSMEs Udyog Aadhar. This facility provides the business with a lot of benefits and subsidies.
PRE-COVID SCENARIO OF MSMEs IN INDIA
India’s MSME sector is self-assured for a mega transformation in 2020, following the launch of an Alibaba like e-market place, trendy yet affordable Khadi products to appeal to the master and digital data-based credit ratings to help entrepreneurs avail loans. Timely availability of low-cost credit remains a challenge. India has more than 50 million small and medium enterprises which face the problem of liquidity crunch.
The MSME Sambandh is the Public Procurement Portal launched by Central Government for the MSMEs. The main objective to launch this portal is to monitor the implementation of the Public Procurement from MSEs by Central Public Sector Enterprises.
The Ministry of MSMEs came out with the Public Procurement Policy for Micro and Small Enterprises (MSE) Order, 2012 on 26th March 2012 which has mandated that every Central Ministry/Department/PSU shall set an annual goal for procurement from the MSE sector at the beginning of the year to the extent of mandated minimum total annual purchases from the products produced or services rendered by MSEs.
The Ministry also made amendment in the Public Procurement Policy for the Micro and Small Enterprises (MSEs) Order, 2012 on 9th November, 2018 making a special provision for Micro and Small Enterprise owned by women. Out of the total annual procurement from Micro and Small Enterprises, 3% from within the 25% target shall be earmarked for procurement from Micro and Small Enterprises owned by women.
The government has also approached multilateral banks like ADB, World Bank and KFW to provide low cost funds for the sector. It has also declared plans to launch digital data-based credit ratings of MSMEs to help entrepreneurs secure bank loans on the basis of these credit ratings.
Entrepreneurship and Skill Development Programme (ESDP)
Entrepreneurship promotion and development programmes are being organized regularly to nurture the talent of youth by enlisting them on various aspects of Industrial/Business activity required for setting up MSMEs. The following activities are conducted under the ESDP Scheme4,
- Industrial Motivational Campaign (IMC) – Two days
- Entrepreneurship Awareness Programme (EAP) – Two Weeks
- Entrepreneurship – cum-Skill Development Programme (E-SDP) – Six Weeks
- Management Development Programme (MDP) – One Week
RECENT REFORMS AFTER NOVEL COVID-19 PANDEMIC IN INDIA
Banks are now expected to become more comfortable in assisting this category of borrowers because the rise in zero loans are guaranteed by the Central government. A partial credit guarantee scheme has been extended to enable promoters of 45 lakh MSMEs to increase their equity. A total of Rs. 20,000 Crores will be funded through credit guarantee fund trust for Micro and Small Enterprises (CGTMSE) whereby banks will lend money to promoters to infuse as equity in their business.
AATMA NIRBHAR BHARAT ABHIYAAN
As a part of Aatma Nirbhar Bharat Abhiyaan for standard MSMEs, collateral-free automatic loans worth Rs. 3 Lakh Crores will be rolled out. This package will be available till 31stOctober, 2020. This financial stimulus package is expected to benefit 45 lakh units to resume their business operations and safeguard their employees from losing jobs.
MSMEs can avail loans from banks to sustain their operations over a period of time along with paying a certain percentage as interest to the banks. For the sustenance of MSMEs in the country a subordinate debt is being given, worth Rs.20,000 Crores.
Along with this, the finance minister also announced that there will be a new fund for MSMEs which will include a substantial equity infusion of Rs. 50,000 Crores through MSMEs’ Fund of Funds. In addition to that the Finance minister mentioned that Global tender is not to be allowed up to Rs. 200 crores. This will be a step towards supporting ‘Make in India’ and self-reliant India. Further, E-market linkage for MSMEs will be promoted to act as a replacement for trade fairs and exhibitions.
At the behest of Hon’ble Minister of Micro, Small and Medium Enterprises, on 19th March, 2020, a proposal has been sent to the Finance Ministry suggesting measures for providing relief to Micro, Small and Medium Industries from the impact of COVID-19. On 12th April, 2020, the Finance Minister stated that the MSME sector will tide over huge blow caused by the lockdown and reduce its dependence on imports from China in particular by ramping up domestic manufacturing with the government support. On 7th May, 2020, the Hon’ble Minister urged major industries to release the outstanding dues to companies in the MSME sector within a month to save them from collapse in the wake of the pandemic.
CREATION AND HARMONIOUS APPLICATION OF MODERN PROCESSES FOR INCREASING THE OUTPUT AND NATIONAL STRENGTH
A new technology platform to empower MSMEs was launched by the Hon’ble Prime Minister on 1st June, 2020. The new web portal is called Creation And Harmonious Application Of Modern Processes For Increasing The Output And National Strength6(CHAMPIONS), which is a tech-driven control room- cum-management information system. From the name it can be understood that it will aim at Creation and Harmonious Application of Modern Processes for Increasing the Output and National Strength. Accordingly, the name of the system is CHAMPIONS. This is basically for making the smaller units big by helping and handholding.
Three basic objectives of the CHAMPIONS are:
- Help the MSMEs in this difficult situation in terms of finance, raw materials, labour, permissions, etc.
- Help the MSMEs capture new opportunities including manufacturing of medical items & accessories.
- Identify the sparks, i.e., the bright MSMEs which can become national and international champions.
PROPOSALS IN THE AMENDMENTS OF LLP ACT
Major relief is expected for small and medium businesses in India as the government proposes to decriminalize the compoundable offences under the Limited Liability Partnership Act, 2008. In India, more than 1.45 lakhs LLPs are registered under the LLP Act and majority of them are small and medium enterprises.
Further, the government plans to decriminalize compoundable offences involving minor, procedural or technical violations or offences which may not involve any harm to public interest. The offences proposed to be decriminalized include non-compliance with norms regarding:
- Eligibility and appointment of designated partners;
- Registration of changes in partners
- Maintenance of books of account, other records and audit;
- Filing of annual return.
BENEFIT FOR MSMES DUE TO RECENT REFORMS
All MSMEs with a turnover up to Rs. 100 Crores and with outstanding credit up to Rs. 25 Crores will be eligible to borrow up to 20% of their total outstanding credit as of 29th February, 2020. For these small enterprises hit by zero cash flow due to the national lockdown, this will act as initial seed money This would help to buy raw materials, pay initial bills and daily wages to employees. Further, it is prescribed that these loans are not required to be backed by collaterals.
CREDIT GUARANTEE SCHEME (CGTMSE)
One of the well-known problems of the Micro and Small Enterprises is availability of bank credit without the hassles of collaterals / third party guarantees. Resolving this problem would be a major source of support to the first-generation entrepreneurs to realise their dream of setting up their own Micro and Small Enterprise (MSE). Keeping this objective in view, Ministry of Micro, Small & Medium Enterprises (MSME), Government of India launched Credit Guarantee Scheme (CGS) so as to strengthen credit delivery system and facilitate flow of credit to the MSE sector As a first step to operationalise the scheme, Government of India and SIDBI set up the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE).
CGTMSE has presented another “Half breed Security” item permitting ensure spread for the part of credit office not secured by insurance security.
The salient features of the Credit Guarantee Fund Trust for Micro And Small Enterprises (CGTMSE)9, briefly are as under:
- Guarantee coverage is 85% (micro enterprises up to Rs. 5 lakh) and 75% for others.
- Extent of guarantee cover is 50% of sanctioned amount of credit from Rs. 10 Lakhs to Rs. 1 crore for retail trade activity.
- Extent of guarantee cover is 80% for micro and small enterprises operated by women and for those enterprises in Northeast region for credit facility up to Rs. 50 Lak.
About 2 lakhs stressed MSMESs with non-performing assets are projected to benefit from this. The CGTMSE will offer partial credit guarantee to banks.
“All MSMEs with a turnover up to Rs. 100 Crores and with outstanding credit up to Rs. 25 Crores will be eligible to borrow up to 20% of their total outstanding credit as of 29th February, 2020. For these small enterprises hit by zero cash flow due to the national lockdown, this will act as initial seed money. This would help to buy raw materials, pay initial bills and daily wages to employees. Further, it is prescribed that these loans are not required to be backed by collaterals”.
FUND OF FUNDS
As per the announcement made by the Hon’ble Finance Minister, the aim of the Fund of Funds (FoF) scheme is to infuse Rs. 50,000 Crores of equity into MSMEs. Government will provide Rs. 10,000 Crores as initial corpus of the fund through “fund of funds” system. This will be leveraged to raise Rs. 50,000 Crores which will be used to support MSMEs in desperate need of equity through “daughter funds” of the main fund of funds.
The Indian MSME sector has been particularly hit hard by the COVID-19 pandemic. Even before the pandemic the MSME sector had been under stress. The challenges are payments not coming on time as also lack of skillset and technology available being limited. After the pandemic has started, there is Zero revenue coming in for the last few months. The PSUs have started to clear all the payments in 45 days which come as a relief. Consequent to the awareness and the measures taken through MSMED Act and other mechanisms, the private sector has also recognized the need to pay MSMEs on time. Around 30 to 40% units have opened and work has begun as they had some unfinished orders to complete, which they were unable to do because of lockdown. The Hon’ble Union Minister of Micro, Small and Medium Enterprises while addressing a webinar on India’s electric vehicle roadmap post COVID-19 said, “India needs to boost exports as investors shift their focus from China to India”. Hopefully, the things will be clear soon in some time to come, since as of now, only the loan part is operational.
Now, the only hope is to wait for the pandemic to end and then sincerely hope that the worst days are behind us. The Indian MSMEs definitely have a lot to look forward to as they pray for the beginning of the days when they can see gradually improving light coming as it would after the end of a long winding tunnel.
Founder & CEO| Fox Investor – Financial Blog Portal & A.V.A. Taxway Associates- Corporate & Tax Law Firm
Dr. Viibhor Agarwal has a Ph.D. in IPR, start-ups, and corporate law, as well as an MBA in finance from NMIMS Mumbai, and achieved numerous certifications in corporate law. He is a practicing corporate lawyer and the founder of two business verticals. He has advised over 2000 businesses, 5000 students, and 400 new start-ups all over India and other countries like Dubai, London, the USA, and Qatar. Dr. Viibhor Agarwal assists people with business expansion and branding, regardless of size, as well as business setup, financial literacy, start-up guidance, licensing, tax planning, and other legal compliance issues. Dr. Viibhor Agarwal’s goal is to provide complete financial and business literacy to all businessmen who want to start new businesses and grow existing businesses and to those students who want to open their start-ups. In each video, Dr. Viibhor Agarwal not only explains the method of the solution but also advises subscribers on practical tips learned from and faced by clients handled by Dr. Viibhor Agarwal daily. This blog portal provides you with an easy and clear solution to your business problem, allowing you to take your business to the next level.