The biggest thrust of the central government’s relief package has been on Micro, Small & Medium Enterprises (MSMEs), but as the pandemic endures, this segment of India’s industry does not appear to be optimistic about the prospects and road ahead.
A survey by an industry body, All India Manufacturers’ Organisation (AIMO), of 46,525 MSMEs, self-employed, corporate CEOs, and employees conducted online between May 24-30 had 35 per cent of MSMEs and 37 per cent of the self-employed respondents saying that their enterprises were beyond recovery.
A slightly lower 32 per cent of MSMEs said a recovery would take six months, and just 12 per cent expected a recovery in less than three months.
Only 3 per cent of MSMEs, 6 per cent of corporates, and 11 per cent of the self-employed respondents said they would stay unaffected and would continue to do well, primarily since they were engaged in supply of essential services during the lockdown.
So, what explains this pessimism?
There could be four main reasons for the downbeat mood.
They were troubled already, lockdown has made things worse
The problems faced by the MSME sector, which makes up about 45 per cent of the country’s total manufacturing output, 40 per cent of its exports, almost 30 per cent of the national GDP, and employs an estimated 11 crore persons, precede the pandemic.
While both demonetisation and the faulty implementation of the Goods and Services Tax (GST) regime hit this sector the most, the mess in the banking sector and subsequent problems with the Non-Banking Financial Companies (NBFCs) further impacted MSMEs, depleting their internal reserves, and exacerbating the low visibility of demand.
A LocalCircles survey in April — the first month of the lockdown — had pointed to 74 per cent start-ups and small businesses (out of 13,970 responses) saying that they expected to shut down or scale down their businesses in the following six months.
The problems were already festering. The lockdown impact has come on top of this, compounding them further.
Financial channels are mostly informal, credit guarantee of limited help
The dissatisfaction over the government’s MSME package, in particular at the lack of fiscal support which would share some of the costs inflicted by the pandemic lockdown, is based on the view that the proposals on credit guarantee has limited relevance for the sector as a whole, given that only a little over 15% of the Rs 70 lakh crore MSME credit demand was met by formal financial channels.
Willingness of lenders uncertain, so too the availability of future resources to service loan
While the extension in moratorium on term loan instalments is aimed at providing relief to borrowers and companies facing cash flow problems, much of the intended relief will come through only if banks are willing to take the bait and lend.
It’s a divided house on whether this will happen as planned.
Plus, much of this intervention is aimed at firms whose loan accounts continue to remain standard up to a cut-off date. A majority of smaller units are already behind on this count, given that their receivables from customers — larger companies and state-owned units — are way behind schedule.
For leveraged companies facing a cash crunch, the moratorium of 6 months is intended to provide survival time.
But for a unit owner to borrow to essentially meet working capital expenses during a period where hardly any production happened, the interest rate will be a key determining factor, the facility of collateral-free loans notwithstanding.
Also, the concern among MSMEs is that with the additional loans, they would have to earn a sizable amount to service the loans after 12 months.
A lot of payments are pending, and there is no confidence they will be cleared soon
The total outstanding payments to units in the MSME sector is pegged at upwards of Rs 5 lakh crore, with the larger private companies and government entities accounting for a big chunk of this.
Most MSME players are not convinced by the government’s assurance of dues being cleared in 45 days. Similar assurances have been handed out in the past, but have not been fulfilled.
In September last year, then Expenditure Secretary G C Murmu had said that of the outstanding non-litigated MSME dues of Rs 60,000 crore, a payment of Rs 40,000 crore had been cleared.
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But not much has moved on the ground, say MSME representative bodies such as AIMO. As per industry estimates by AIMO, almost 30 per cent of the outstanding amounts are due over 120 days, 45 per cent are between 60 to 120 days, and the rest below 60 days. An estimated amount of over 60 per cent is pending from state governments and their undertakings.
There is a lack of conviction among MSME units that the government’s fiat will work, especially since a bulk of the dues are on account of state government entities and larger private companies.
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