Future of MSMEs in context of pandemic

By Vivek Pattanayak*

The contraction of the Indian economy would be much more than what was predicted on the eve of pandemic. A double-digit figure is being quoted now.  It is pertinent to note that US which drives the world’s economy may experience a slump of 34% according to the latest news.

In certain sections of media, it was reported that green shoots have already started appearing in India after announcement of bailout packages amounting to 10% of GDP almost equalling Rs 20 lakh crore. This optimism was understandable since after the first “unlock” there was demonstration of   pent-up demand. However, recent quarterly financial statements of companies like Bharati Airtel, Maruti, Indigo, Dr Reddy and TVS Auto do not augur well.

IATA states that airline industry is not expected to have the same level of air traffic till 2024. International tourism which depends on air transport cannot recommence unless international flights fully resume. Fear of virus inhibits people to travel even internally. Domestic tourism can however start first before international tourism begins as the present restrictions are under the control of the central and state governments.

MSME segment in travel sector provides huge employment. It supports hotels and restaurants. The hotel industry in India is in the verge of collapse. Hotel Association of India is asking for the government support.

Added to this is border tension with China. India-China trade had reached USD 80 billion.  The government of India’s ban on 59 Chinese IT applications and subsequent restrictions on their clones, cancellation of MOUs of various projects and abrogation of contracts in sectors like railways etc. will have further impact on the economy.

When the large organized sector has been gravely affected MSMEs, called the “engine of growth” will naturally take its toll. According to a recent study made 80% of micro-small business in the country have been impacted negatively, only 24% are operational now and of which 18% are operating at less than 50% capacity.

MSME sector’s contribution to the economy is substantial in terms of share of GDP being 30%, by way of employment generation giving 11 crore jobs and earning of foreign exchange through exports being 48%. The sector has a large compass which include manufacturing, service, trading etc. Street vendors, tailors, laundry, salons, beauty parlors, small eating places and retail shops also come within the ambit. Financing of this sector is a massive challenge. The public sector banks, private commercial banks, cooperative banks, non-banking financial companies, and micro-financing institutions all play their role in supporting the segment in addition to private financing including usurious money lenders. The State Finance Corporation (SFCs) in the past had a robust presence in financing MSMEs. Industrial Development Bank of India (IDBI) was a refinancing institution of SFCs. Now SIDBI has taken up the role. Since 2014, MUDRA has supplemented refinancing. In addition, start-up concept has gained currency in India in last few years where some in the MSME sector depend upon angel funding. Crowd funding is yet another mechanism. In the past, technical entrepreneurs used to get initial capital from Risk Capital Foundation of IFCI and seed capital from IDBI.

In the recent years, the PSU banks have gathered humongous amount of NPAs. Following BASEL III norms prescribed after 2008 financial crisis the recapitalization of banks have been recommended. In India there has been introduction of Insolvency Bankruptcy Code (IBC) to overcome the problem of NPAs. To what extent the recapitalization of PSU banks has been done, it is in public knowledge. Settlements of NPAs through IBC route required haircuts which would envisage the Banks making some sacrifices. Decision-making is fraught with risk of future investigation and enquires which bank executives would prefer to avoid. This is also true of future loans. Risk averse atmosphere is cause of stagnation of investment. Credit expansion was no wonder all time low in the last few years even before the onset of pandemic.  Collapse of ILFC has caused a vacuum. Non-financial banking institutions and micro-financing institutions have not performed well in last several years. The cooperative banks have been avoided by prospective entrepreneurs for variety of reasons including political influence. Some urban cooperative banks have collapsed after earning dubious reputation.  Presently there is veritable institutional atrophy in the area of financing MSME sector. Notwithstanding these limiting factors it is heartening to note that Banks have sanctioned 43.5 per cent of targeted Rs 3 lakh crore under the Emergency Credit Line Guarantee Scheme according to official statistics. However, many in the chamber of commerce and industry associations feel that micro level institutions have virtually collapsed, unable to take credit as they cannot meet the norms of financing private sector banks and even public sector banks have prescribed. Moreover, absence of active and vibrant NBFCs and MFIs has created a void. Only those who have regular credit facilities in the past are capable of availing loan. When business is absent there is even reluctance to take credit. More credit would mean increase in debt without possibility of repayment. Start ups have faced collapse. Many going concerns are bleeding as they cannot afford to pay staff without revenue generation.

These systemic and legacy problems have not been addressed by the governments for a long time as has been pointed out by Prof. Raghuram Rajan former Governor of RBI and no wonder the country is facing uphill task after pandemic.

Way forward must be shown at the level of the central government. The State governments are struggling for funds. The Central government is unable even to compensate States for their revenue loss on account of nationwide adoption of GST model. There is talk of market borrowing by GST council.

The central government should therefore float bonds in international market without being constrained by rating agencies and in addition central bank must buy sovereign bonds. The Quantitative Easing as it is called had been resorted to when the global economy was facing sub-prime debt crisis in 2008. The State governments should be allowed to float bonds. Money generated can be spent on infrastructure like construction of rural roads, warehouses, cold storages, highways, irrigation projects, ports, airports and housing and health sector which would create jobs and give work to MSMEs for supplies during construction. Many MSMEs are languishing for non-payment of their bills mostly by governments and public sector undertakings. This is a priority and hence should be urgently addressed.

Even during this crisis, serious effort should be made to revive NBFCs and MFIs. Even SFCs and SIICs should be resuscitated as they have infrastructure, experience and expertise. These financial institutions should be allowed to float bonds. Example of the developed countries could inspire the Indian decision makers in the financial sector. There is chorus of voice in favour of much bigger bail out packages.

What should be new mantra for the struggling MSMEs? Promoters of these enterprises should try to adjust to the rapidly changing situation. As practice of working from homes (WFH) has become quite common in the world, and video conferencing has substituted physical meetings, and increasing transactions through cyber space is becoming quite common, other innovative ideas should come from the entrepreneurs. Diversification of existing business, looking for new financially healthy and viable partners, and disposal of unutilised assets etc. could be in the list of things to do in order to adjust to new reality. Lakhs of micro-small business must reinvent themselves for the present economy. For example, some have produced sanitizers and personal protection equipment moving away from stitching clothes for school children. This group of entrepreneurs need guidance and support at the grassroots level, mostly handholding by the functionaries of government, Zilla Parishad, Panchayat Samiti and Gram Panchayat. Time has also come for revival of cooperative credit institutions and Micro Finance Institutions (MFIs).

The Panchayat-level primary credit cooperative institutions, district-level central cooperative banks and urban cooperative banks can serve as excellent lending institutions for MSMEs if freed from political influence.

India is a huge market. It is a geographic  sub-continent , quite well connected by roads, railways and even by air transport, a  world by itself. Indeed, it is an ocean of diversities of demand, supply and variety of opportunities endowed by huge demographic dividend and magnificent institutional infrastructure handed down over generations of leaders. If self-reliant India is the clarion call, let the MSMEs be inspired with guidance and financial assistance to make a dream of five trillion-dollar economy a reality. Present time demands focussed action, not talk.



*The author is a former bureaucrat and held important positions in aviation and power regulatory body. He can be  reached through e-mail at [email protected]


DISCLAIMER: The views expressed in the article are solely those of the author and do not in any way represent the views of  Sambad English.





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