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Giving MSMEs the right push Editorial 13th Sep’20 FinancialExpress
Importance of MSME sector:
- The MSME sector contributes approximately 40% to the GDP and generates employment for 114 million Indians, comprising about 93% of the total labour force of the country.
This sector under severe stress:
- Over the last few years, economic distress has hurt the sector on several counts, and this has only gotten exacerbated by the Covid pandemic.
- All India Manufacturers Organisation (AIMO) suggests that 35% MSME businesses are now beyond recovery.
- The sector is staring at massive unemployment, which will only to worsen the unemployment problem in the country.
Package for MSMEs under Atmanirbhar Bharat:
- The government revealed its commitment to revive the MSME sector in its Rs 20,000 crore economic stimulus package for Atmanirbhar India, including a Rs 10,000 crore fund to finance equity infusion.
- The objective of the Rs 10,000 crore Fund of Funds scheme is to help MSMEs with growth potential at a time when they are facing severe shortage of equity and low revenues.
- The objective of the Rs 10,000 crore Fund of Funds scheme is to help MSMEs with growth potential at a time when they are facing severe shortage of equity and low revenues.
- The government also has Emergency Credit Line Guarantee Scheme (ECLGS) for the MSME sector impacted by the economic slowdown triggered by COVID-19.
- However, credit guarantee has a limited appeal as only 15% of the credit requirement is fulfilled through formal financial channels.
- However, credit guarantee has a limited appeal as only 15% of the credit requirement is fulfilled through formal financial channels.
But this itself is not enough:
- A major problem with the MSME sector is that 86% of the enterprises are unregistered, while 71% of the workers have no contracts.
- Therefore, opening new lines of credit may not be adequate to revive the sector.
- It was noticed that the sanctioned loans are not being availed and utilised by enterprises in the absence of strong demand and consumption.
Need to create an enabling environment for MSMEs:
- The UK Sinha-led expert committee on MSME in 2019 highlighted the need to create an enabling environment for MSMEs.
- It proposed several long-term solutions to ensure financial sustainability.
- However, a holistic MSME policy rests on the ability to overcome some historical barriers.
This needs help to overcome historical issues in the MSME sector:
- Timely payments for their goods and services:
- The inability to receive timely payments in return for the goods and services, and slim profit margin is a nagging issue for the sector.
- An urgent solution is the payment of dues.
- More loan cannot resolve the limited working capital problem as it would unnecessarily increase the debt burden, which, in turn, would put pressure on the already thin profit margins.
- Need a mechanism for this:
- A new regime could be brought, with options such as:
- Discounting for early clearance of dues by their principals or
- All supplies being made against advance payments or
- Creating a hold in the bank which gets released right after receipt of supply from the MSME supplier
- Discounting for early clearance of dues by their principals or
- Only an incentive-based mechanism will work.
- A new regime could be brought, with options such as:
- Lower cost of capital:
- The average cost of capital is still high, at around 13%, compared to agriculture.
- It is challenging to generate reasonable returns in the near future to pay back loans, and it could takes years for demand to fully pick up.
- To help MSMEs avail capital at sub-5% rates, lending institutions must reduce transaction costs.
- The average cost of capital is still high, at around 13%, compared to agriculture.
- Improve competitiveness:
- Historically, a lack of internal competitiveness in the industry has reduced the urgency for innovation within the sector, despite the ‘Make in India’ and ‘Startup India’ campaigns.
- This requires support to reorient production lines and investments in R&D.
- Historically, a lack of internal competitiveness in the industry has reduced the urgency for innovation within the sector, despite the ‘Make in India’ and ‘Startup India’ campaigns.
- Creating a global market:
- The sector has been unable to channelise a global market for products and services.
- Further, the current crisis has drastically contracted export-led growth opportunities as importing nations adopt a protectionist policy.
- With the global demand at an all-time low, consumers are not compelled to make non-essential purchases.
- As per a survey, about 97% of MSME respondents expect to be affected as the business is focused on essential goods.
- Leverage e-commerce channels:
- A sustained push through e-commerce channels can enhance the scope of domestic goods and services with low transaction and intermediation cost.
- It will also help eliminate the middleman and reduce cost of doing business, an important factor in the survival of small businesses.
- A sustained push through e-commerce channels can enhance the scope of domestic goods and services with low transaction and intermediation cost.
- The sector has been unable to channelise a global market for products and services.
Conclusion:
- India now has the opportunity to leverage its technological prowess in enhancing the competitive advantage that we already have in the export of IT/ITes products and services.
- With new business paradigms evolving with the rise of IT, AI and communication-based businesses, MSME’s should be encouraged to harness this through the right kind of policy push.
- The government must adopt a comprehensive approach to revamp the MSME ecosystem.
Importance:
GS Paper III: Indian Economy