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Atmanirbhar Lets Down MSMEs

The mood in MSMEs is grim. The Atmanirbhar Bharat package announcements have confirmed their worst fears. Bureaucracy does not understand the felt-needs of the sector nor does it care to learn. SKOCH Group had led a multi-institutional survey of MSMEs in collaboration with Federation of Indian Micro and Small & Medium Enterprises (FISME), Tax Law Educare Society and Bhartiya Vitta Salahakar Samiti (BVSS). The survey clearly brought out that the MSMEs need enhancement in working capital to pay salaries, collateral free loans and a moratorium on loans for at least 2 years.

No wonder all major MSME associations and domain experts have come down heavily on the announcements. Opposition parties cannot go scot free either. All they had asked for was a wishy-washy loan guarantee scheme of Rs 1 lakh crore. 

They turned each single discussion on MSMEs towards migrant issues. For the ruling party and opposition both, the vote bank is at the bottom; and, the top in any case is better equipped to get benefits. MSME and middle class both do not seem to matter much in the electoral arithmetic. 

MSMEs have already been badly hit due to economic slowdown and lock down has been a last nail in the coffin. The Rs 20 lakh crore package does not address the immediate problems of the MSMEs and focuses only on the medium to long-term. The impact would be measurable only after enough time has elapsed. But by then a majority of them would also have perished.

In order for the MSMEs to survive, SKOCH Survey had recommended:

  1. Extend moratorium on all term-loans for two years, interest-free for first year and simple interest during the second year.
  2. Two-times increase in working capital limit.
  3. Unified electronic platform to provide all services and financial support, integrated with GSTN.
  4. Change in the definition of MSMEs based on turnover.
  5. Multiple credit guarantee institutions to spread the risks.
  6. Multiple exchanges for invoice financing as in TReDS model. The system should be based on cash flow.
  7. Pending government payments to be released immediately.
  8. Develop a technology-based system to identify well performing MSMEs
  9. Develop an app-based credit network linked with GSTN, Income Tax system or any other database; it should also link the system details of sellers and buyers

On 13 May 2020, Finance Minister Nirmala Sitharaman’s announced a package of the Rs 3.75 lakh crore for MSMEs businesses, which included the following:

  • Rs 3 lakh crore of collateral free automatic loans for businesses including MSMEs
  • Rs 50,000 crore of equity infusion for MSMEs through a Fund of Funds.
  • Rs 20,000 crore subordinate debt for stressed MSMEs
  • The additional principle of turnover along with the investment was also added
  • Government and CPSUs will release all pending MSME payments in 45-days
  • Extension of the due date for ITR for FY’19-20 to 30 November 2020

Clearing Government Dues

It is heartening to note that the pending MSME payments with the government and PSUs may see the light of the day. But if the government says that it will take another 45-days before the payments are released, it means 1) further delay; and, 2) burden of paying interest on the loans already availed. Would it not have been prudent that the government paid market interest rates on all the government payments delayed so far and till the payments are made to mitigate the interest burden? Also, since all the invoices submitted have been there in the system, payments to these could have been instantly released. Instead of 45-days, a date deadline should have been set.

MSME Definition

The definition of MSMEs has been changed based on turnover. But by adding investments to it, confusion was perpetuated. While it is easy to verify turnover from the GSTN database, there is no similar mechanism or database to determine investments. Perhaps, considering this anomaly, the Minister for MSME and Road Transport and Highways, Nitin Gadkari said on 19 May 2020 that the criteria should be based on investment “or” turnover instead of investment and turnover both as announced, adding that the government “will rectify the same”.

“The government has adopted a middle path rather than going the full way, which actually would have benefitted the MSMEs the most. Turnover based definition would have been more transparent
Rathin Roy, Director, NIPFP

Economist Rathin Roy, Director, National Institute of Public Finance and Policy (NIPFP), a government economic think tank, expressed his skepticism in an interview to online media The Quint, about the new definition of MSMEs as announced by the government and said that the government has adopted a middle path rather than going the full way, which actually would have benefitted the MSMEs the most. Turnover based definition would have been more transparent.

Despite the colossal package announcements by the government, the Atmanirbhar Bharat Abhiyan falls short on various measures that could have benefited the sector in a larger way. In the current scenario, the prerogative will lie entirely with the banking system to grant loans to MSMEs. Only they deem an MSME as either worthy or unworthy of getting a loan. This absence of checks and balances is going to be a major obstacle for the MSMEs to avail even such minor relief.

Collateral Free Loans

On the immediate challenge of working capital, the collateral free loans will be given to MSMEs – another recommendation from SKOCH Survey. These are 4-year loans, with a moratorium of 12-months on both principal and the interest guaranteed by the government. But the benefit of this scheme can be availed only by those stressed MSMEs who have outstanding loans as on 29 February 2020. This is expected to benefit 4.5 million units out of 63 million. It further says that the 20 per cent enhancement on the loan can be taken without collateral.

In other words, this collateral free ‘enhancement loan’ is not available to those who had zero loan outstanding as on 29 February 2020 or took loans post 1 March. The Atmanirbhar Bharat Abhiyan’s assumption that if you are not stressed pre-COVID, you will not be stressed during COVID as well, is not well-founded. It is also not clear that an MSME unit is automatically entitled for this and bypasses the banking approval procedures. While the government has enhanced the credit limit, the withdrawal based on drawing rights are still in the hands of the bank branch head. The withdrawals should have been allowed automatically irrespective of drawing rights. 

Direct Benefit Transfer

“The government has guaranteed loans, but the question is, who will take fresh loans. A direct benefit transfer support would have helped MSMEs face the crisis better.
Mukesh Mohan Gupta, President, CIMSME

“The government has guaranteed loans, but the question is, who will take fresh loans?” asked a worried Mukesh Mohan Gupta, President of industry body Chamber of Indian MSMEs (CIMSME). A direct benefit transfer (DBT) support would have helped MSMEs face the crisis better, he added.

In the same vain, Anil Bhardwaj, Secretary General, Federation of Indian Micro and Small & Medium Enterprises (FISME), recently said that the main focus of the government should have been on reviving the MSME sector’s liquidity rather than offering indirect benefit in the form of loan schemes. He also questioned, what if I needed relief during COVID, there is nothing for me! Outstanding invoices, zero cash flow and absence of working capital are the problems that is leading to a crash, he added.

Citing the example of Austrian motorcycle giant KTM, Bajaj Auto Managing Director, Rajiv Bajaj, told in an online interview to Mojo that their government has given 85 per cent reimbursement of employee wages to the employer. What we need here is a protection of wages that could have brought instant relief to those losing their jobs, he added. Other countries that have given an actual ‘relief stimulus’ include Japan and the US.

“The main focus of the government should have been on reviving the MSME sector’s liquidity rather than offering indirect benefit in the form of loan schemes. Outstanding invoices, zero cash flow and absence of working capital are the problems that is leading to a crash.
Anil Bhardwaj, Secretary General, FISME

Experts argue that the fiscal impact on the government’s treasury is actually going to be just between Rs 15,500-Rs. 55,000 crore. This is because most of the measures announced by the Finance Minister are credit-focused. By nudging the financial system to lend more money, none of these announcements actually will involve the government spending a great deal in the current financial year.

Roy submitted that any form of relief fund given by a government is defined as “a fund that comes directly out of the government’s treasury and goes straight into the hands of the people through a linear channel. The Atmanirbhar Bharat Abhiyan is far from that.”  He further added that, “It is apparent that there is going to be very less spending from the government’s treasury in this scheme; there is no real cash-out mechanism announced by the government and no tangible amount seems to be going into the hands of MSMEs directly.”

EPF and TDS

The EPF scheme is a good measure but reducing the rate of TDS may not help much as it does not reduce the liability, it merely defers it. Under the current circumstances, it is dangerous to assume that there would be income generation and enhancement by the end of the year. On the contrary, it may cause even more stress, therefore, this is purely an administrative measure that holds no real financial significance for the MSMEs and their employees.

MSME Registration

The government should have indulged multiple agencies to offer financial support and stimulus to MSMEs while being linked to one common electronic platform to keep checks and balances. Instead, it has talked of “Registered MSME”, which crumbles under the lens of scrutiny. The question that arises from the new rule is why National Small Industries Corporation (NSIC) registration is required if the government already has a turnover-based definition and the data of businesses available through GST about the number and value of invoices MSMEs have raised.

It so appears that the registration on Udyog Aadhaar has been made compulsory to attain the status of a “Registered MSME”. It is a welcome move, but the portal https://www.msme-udyogaadhaar.com is cumbersome that needs to be upgraded as it crashes constantly and takes more than a dozen attempts to submit the form.

“With zero revenue coming in throughout the last two months, the survival of MSMEs is today very much at stake. The cost of salary and wages in the sector goes up to 30-35 per cent and then there are fixed costs like rentals, and electricity.
Animesh Saxena, President, FISME

Animesh Saxena, President, FISME, told Economic Times, that while he welcomes the government’s announcements, what the MSMEs have been looking for is something that could immediately rescue the fund starved sector. “With zero revenue coming in throughout the last two months, the survival of MSMEs is today very much at stake. The cost of salary and wages in the sector goes up to 30-35 per cent and then there are fixed costs like rentals, electricity etc,” said Saxena.

“The government clearly isn’t giving them (MSMEs) any money; rather it is showing them a path to borrow money, for now, providing an uncertain and dangerous but short path to deal with this crisis,” Roy pointed out. The government should have announced a cash flow based financing system that could have brought immediate relief to the ailing enterprises. On the contrary, it is feared that creating institutions and layers for the MSMEs to seek financial relief will only delay cash flow rather than enhance it. It could have been a breather for small businesses had the government taken care of their fixed expenses.

Under the current circumstances, the MSMEs are left with no other option but to approach the government once all over again seeking financial help that bails out the sinking businesses. It will also help save millions of jobs that otherwise may lead to civil unrest.

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3 Comments

  1. ITS ABSOLUTLY VERY TRUE AND AGREE ON MOST OF YOUR ANALYSIS AND ALSO AGREE WE MUST APPROACH THE GOI JOINTLY TO MAKE THEM COMPLSION TO ONCE AGAIN THEY REVIEW THE WHOLE PACKADGE DECLARED FOR THE UPLIFTMENT OF MSME SECTOR WHICH IS IN REAL SENCSE NOT PRACTICAL VIABLE AND WORTHY .

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