MSME Stimulus Package to Boost Economy

Dr. S P Sharma & Dr. Neelam Tandon

The proactive and fast track measures undertaken by the Government to combat the daunting impact of pandemic COVID-19 on trade and industry is encouraging. The announcement of a mega stimulus package of Rs 20 lakh crore along with various structural reforms and relief measures, relaxations & extensions of various compliance deadlines would go a long way to address COVID-19 related hardships of trade and industry.  The pandemic impact of COVID-19 has resulted in the fall in business & consumer confidence, the slump in production and sales, subdued demand, squeezing working capital vis-à-vis piled up inventories; thereby impacting the overall economic, trade, and industrial activities in the country. The industrial growth has been severely affected; there is a drastic fall in the growth of IIP at around (-) 17% in the month of March 2020 as compared to 4.6% in February 2020. As Micro, Small and Medium Enterprises (MSMEs) are one of the most important segments of overall growth of industry and economy and create tremendous employment opportunities for skilled, semi-skilled and unskilled workforce in the country, the Finance Minister has announced Rs. 3.7 lakh crore to be infused in MSMEs to create adequate liquidity, improve their working capital cycle, promote investments and strengthen their contribution in India's industry and economic growth trajectory. The sound financial and operational health of micro, small and medium enterprises (MSMEs) is vital for India's businesses and its inclusive economic growth as they contribute around 32% in gross value added; employs around 111 million people (36.1 million in manufacturing, 38.7 million in trade and 36.2 million in other services) with a contribution of more than 48% in total exports of India. The operational efficiency and supply chain management of the medium and small enterprises could be the connecting link between international trade and the manufacturing sector. But COVID-19 has disrupted the financial health of MSMEs, with a decrease in revenue, increase in debt obligations with an increase in the working capital cycle. Keeping into consideration the significant contribution of MSMEs in the Indian economy and international trade, the Government of India has relaxed credit norms towards MSMEs to generate higher liquidity and improve their financial health.

Economic Package of Rs 3 .7 Lakh Crore to MSMEs

Ease of doing business and costs of doing business are two important aspects of market-competitive products and services. To increase the market competitiveness of MSMEs Government of India has increased the global tender limit for MSMEs up to Rs 200 crores. The government has proposed to create an electronic marketing platform for MSMEs products to increase its reach to more number of consumers; this could also be beneficial to various companies to promote online financial transactions. Hence simplification of operational norms, ease of access to credit, promotion of marketing of MSMEs products and services on electronic platforms, with an increase in a financial transaction on an electronic platform would enhance the operational efficiency, create a competitive advantage for the MSMEs sector in India and would create better job opportunities for the non-farm workforce within the country. The social cost of investment and financial constraints in the MSME sector is at a significantly higher rate of industrial unemployment in urban and semi-urban India and a disguised unemployment in rural India. Keeping into consideration the Government of India has been consistently working to financially help MSMEs.   In the financial year 2019 almost 5.70 lakh micro enterprises had been supported with margin money of Rs 12,902 crore that could create tremendous employment opportunities. For manufacturing businesses, the second financial assistance in the financial year 2019 had been proposed by the Government of India to give  up to Rs 1 crore while for service/trading business it was up to Rs 25 lakh. The subsidy on interest offered was 15 percent while 20 percent was for businesses based in hilly states and northeastern region. The PMEGP scheme intends to boost entrepreneurship by supporting individuals setting up micro-enterprises with loans up to Rs 25 lakh in the manufacturing sector and Rs 10 lakh in the service sector along with a 15-35 percent subsidy for various categories. The manufacturing sector with ease of credit and investment promotion incentives can be immensely benefitted. The incremental benefit of investment in MSMEs is an improvised product and process innovation with sustainable contribution to the economic growth of the country. An increase in investment in the MSME sector and the enhancement of market competitiveness creates immense job opportunities and reduces the dependence of the workforce in the agricultural sector. Government initiatives to promote investment with the simplification of procedural norms for the micro, small, and medium-sized enterprises are encouraging and would go a long way to promote the growth and sustainability of MSMEs.

Simplification of Investment Norms for MSMEs

On June 1st 2020 the government of India has extended the  opportunity of Emergency Credit Line to Businesses/MSMEs, as part of stimulus package announced by Hon'ble Finance Minister, of Rs 3 lakh crores collateral-free automatic loans for MSME units with turnover of up to Rs 100 crore to the MSME units with turnover of up to Rs 250 crore. This would increase the trust of MSMEs to manufacture goods and help the country to become self -reliant with immense employment opportunities for micro entrepreneurs in India.  

According to the government's Financial year 2019 MSME report, out of a total of 6.33 crore MSMEs in India, 6.30 (99 percent) are micro-units while only 3.31 lakh are medium enterprises and 0.05 lakh are medium businesses. Industries creating demand for MSME sector goods and services had been adversely affected due to pandemic and national lockdown.  It is worth to note that the investment simplification norms and? 3.7 lakh crore credit facilities would benefit more than 4.5 million MSMEs in India. It would be highly beneficial to not only urban, rural, and semi-urban MSMEs but also to industries creating demand for the MSME sector.

To overcome the financial crunch with ease of financial liquidity and policy initiatives, it is equally important to create a positive environment towards investment in technology to enhance the productivity of employees and reduce the operational cost of firms. The productive and efficient firms would create new opportunities for the innovative production process and this would reduce the debt obligations of small firms. Better working capital cycle and improved financial health of business units will reduce the probability of default in bank's books and hence as a result banks will be incentivized to lend more.  The revised and broadened definition of MSMEs will help a large number of impacted businesses to meet their additional funding requirements for undertaking business activities. It will enhance the production possibility frontiers of MSMEs and increase their market competitiveness and create a level playing field for them to tap new opportunities in the domestic and international markets.

 Market competitive MSMEs with lower operational cost and better technological incorporation can improvise the financial health and can make them a competitive market player of the global value chain. Hence Indian MSMEs can be a significant contributory in international trade and the global economy. Government support to MSMEs strengthens productive capacities of small firms and contributes to the higher level of income of employees, creation of a higher probability of manufacturing jobs and an increase in export proceeds. To be a part of the Global value chain MSMEs of India have to adopt product and process  innovation  with imparting a higher level of  skill to workers and create a business environment that enables firms  to meet international standards with continuous  innovative and technological investment.

Increase in globalization, exponential development in information and communication technologies, increase in factor mobility and tariff reductions have created immense opportunities for medium and small enterprises to contribute to the global value chain. Becoming a part of the global value chain and strengthen their financial health, increase productivity and expand their markets, micro, medium and small enterprise needs greater managerial and financial resources. These firms can also, contribute to waste management and recycling projects of India and the rest of the world with government support.

So, in conclusion, MSMEs are the pillars of economic growth with employment generation for around 111 million people (36.1 million in manufacturing,38.7 million in trade and 36.2 million in other services) with a contribution of more than 48 percent  in total exports of India. During pandemic COVID 19 the sector has incurred huge financial crisis due to the operational constraints of its unique payment structure based on product linked wage structure. The freezing domestic demand as well as third party supply chain finance platform, cross border trade has been adversely affected because of a sharp decline in exports to prominent countries like Europe, the US, and China. The increased limits for medium enterprises will help a larger number of such enterprises to avail the benefits of various Government Schemes and ensure that MSMEs are able to resume, restart and revive from the current distressed times along with enhanced ease of doing business and can positively contribute to India's exports.

Hence during COVID 19, MSMEs having financial constraints of  working capital shortages and disrupted supply chains with most of the industries such as poultry and seafood, consumer durables and electronics, tourism, hospitality and apparel, demand has decreased and hence  revenue generation has also been adversely affected. Keeping into consideration the liquidity crunch of MSMEs, Government of India has created adequate trade finance support to deal with supply chain management and has created a positive environment to promote business continuity plans that involve more automation with suppliers and customers.  The new definition of MSMEs with Rs 250 crore annual turnover and Rs 50 crore investments in plant and machinery for medium enterprises will further bolster the manufacturing sector, increase its contribution in GDP and create millions of new employment opportunities for the growing young workforce in India.

It will change the supply chain issues and will be highly beneficial to MSMEs with a reduction in various operational costs. With government financial support and product and process innovations with skill enrichment, MSMEs has immense potential to become a significant contributor in India's global value chains, more contribution in India's manufacturing, exports, and overall growth trajectory of the Indian economy. 

It is worth to note that the MSMEs  financial health is vital for the economy to rejuvenate from the daunting impact of pandemic COVID-19; the consistent structural reforms for MSMEs  initiated by the Government of India will help MSME workforce to contribute positively  to the macroeconomic objectives of generating employment, reducing poverty and addressing rural-urban migration and would strengthen the demand and supply linkage for achieving the  government of India's objective to make India self-reliant by promoting local goods and services.The government of India has left no stone unturned to strengthen the financial, operational and emotional health of the MSMEs in India. On the 2nd June 2020 government has created a unique online platform for the hand-holding of such enterprises," Champions.gov.in". The acronym CHAMPIONS word signifies "Creation and Harmonious Application of Modern Processes for Increasing the Output and National Strength". The government with its holistic and determined approach of creating a harmonious environment with an objective to achieve incremental productivity of MSME sector with the adoption of innovative modern processes in the manufacturing of goods and services  and make such enterprises the front leaders of the growth engine  and self-reliant economy. It has been felt essential by the government of India to put up and promote a unified, empowered, robust, bundled and technology-driven platform for helping and promoting the Micro, Small and Medium Enterprises (MSMEs) of the country. As the name suggests it will aim at Creation and Harmonious Application of Modern Processes for Increasing the Output and National Strength. Three basic objectives of the CHAMPIONS are ;(a) to provide financial and operational  help to  MSMEs in the difficult situation of Pandemic, (b) to enable MSMEs to capture new opportunities including manufacturing of medical items & accessories,(c) to identify the  potentially viable firms  who can be resilient to the present supply disruption and become national and international champions. The visionary measures of the government of India for the MSMEs will go a long way to strengthen the economic goal of self-reliance (Atmanirbhar Bharat) and retain the sustainable economic growth trajectory of the country.

(Dr. S.P. Sharma is Chief Economist, PHD Chamber of Commerce & Industry and Dr. Neelam Tandon is Senior Research Fellow PHDCCI, e-mail: spsharma@phdcci.in)

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