scorecardresearch
Follow Us:
Saturday, February 27, 2021

What the budget can do for MSMEs

The focus should be to create an enabling environment for entrepreneurship and small businesses to thrive, creating productive firms that will generate formal employment.

Written by Amrita Pillai |
January 15, 2021 8:24:31 pm
UP fifth in generating jobs in MSMEs, says govt citing RBI reportAn unmitigated loss of demand and revenue in the past year would have impacted the ability of Indian MSMEs, especially given the vast informality that mars the sector.

The Micro, Small and Medium enterprises (MSMEs) are the largest employers in the country after agriculture. The labour intensive sector employs approximately 114 million persons and contributes close to 30 per cent of India’s GDP, not to mention approximately 50 per cent of our exports come from goods and services within the sector. The last available database to understand the scale of informality in India’s enterprise structure is the 73rd NSS Round 2015-2016. As per this database, India has 63.4 million unincorporated non-agricultural enterprises, excluding construction. Of these, around 99 per cent are micro units. Amongst these enterprises, the predominant share is of units which are owner-managed or self-employed. The next highest share is of units which employ upto five workers. Both the NSS datasets on the informal sector (67th and the 73rd Rounds) denote low and stagnant wages especially amongst these micro units.

Although there is no official estimate of this, the MSMEs would have been previously affected by the twin shocks of demonetisation and the roll-out of the GST regime. However, the COVID-19 pandemic, and national, state and local lockdowns that ensued thereafter have hit these largely informal and small units very hard. Various surveys by representative bodies such as the All India Manufacturers’ Organisation capture how a vast majority of them could not meet their capital requirements, pay their workers and thought that they will need to wind down.

In May 2020, the sector received a tailor-made stimulus package under the Atmanirbhar Bharat Abhiyaan, comprising of collateral free loans, a subordinate debt provision inclusive of a partial guarantee support, equity infusion, a government directive to all departments and PSUs that MSMEs must be paid in 45 days and disallowment of global tenders in government procurement upto Rs 200 crore. There was also statutory reform in the MSME definition itself. However considerable pain points remain in lieu of sluggish demand conditions in the economy. Some proposals that the upcoming budget may consider in order to alleviate stress for this sector are detailed below.

The stimulus package did not take into cognisance first-time borrowers. In the budget, the government may consider introducing a fiscal package with new loans for first-time MSME borrowers. Credit backstop can be provided by the government, with a timely claims process in place. This initiative can also be used as a channel to formalise many MSMEs and also encourage entrepreneurship in these times.

The largest share of the stimulus package for MSMEs was plugged into the Emergency Credit Line Guarantee Scheme (ECLGS) which has been extended until March 31. This is still only applicable for units with a total credit outstanding (fund based) of upto Rs 50 crore as on February 29, 2020. As of October 2020, only a little less than half the total amount (Rs 1.36 lakh crores) has been disbursed. Of the total disbursals, only around 5 per cent has been provided to individuals. This scheme should be extended until the 3 lakh crore limit is reached and the banks should be mandated to disburse a portion of the remainder only to registered micro units. Post the upward revision of definition criteria, many more units are expected to choke an already bloating micro units segment. Some provision such as this has to be made to ensure that those at the lower end within the spectrum are not crowded out.

Another crucial addition could be establishing a commission to review and rationalise compliance requirements for MSMEs. The blueprint of the Labour Commission that rationalised central labour codes recently may be used. Ease of Doing Business for small businesses has to be taken seriously. A heavy compliance burden forces enterprises to start off as informal units with lower productivity, employing as few workers as possible without providing social security to these workers or paying them satisfactory wages. Redundant compliance items should be identified and rationalised on the basis of what is necessary with respect to the nature of activity undertaken by the enterprise and proportional to its size.

Delayed payments have long plagued the MSMEs. After various directions to clear pending dues to MSMEs, including the levy of a 1 per cent penal interest per month to those who do not do so, government departments and corporates are understood to have made considerable progress in disbursing the same. However, as the age and category-wise pendency report on the Samadhaan portal suggests that 42.8 per cent of the 11,942 applications filed by MSEs are pending as of now. Eighty-seven per cent of these pending applications have been pending between 61 days to more than a year.

In such a situation, the use of electronic platforms such as the Trade Receivables and Discounting System or TReDS assumes all the more importance. When using such a platform, the sellers (MSMEs) do not have to wait for buyers (government departments, PSUs, CPSEs, corporates) to make the payments. Financiers, which are financial intermediaries permitted by the RBI, provide the seller with the required financing/discounting as per the invoice uploaded. The scope of eligible financiers on the TReDS has been widened to include all non-banking financial companies (NBFCs) and not just a select few. While this is a welcome intervention, the linkage of the TReDS platform with the GSTN has not been operationalised yet. First announced in the budget 2018, it is time that the measure be fully implemented. This would generate better credit discipline by reducing fears concerning fraudulent invoices which financiers may harbour. It may also play a crucial role in increasing uptake of these platforms. A minuscule fraction of the one crore MSMEs that are Udyog Aadhaar registered, around 10,000 of them, are using TReDS. Additionally, only 1,300 buyers are registered on the 3 TReDS platforms that exist.

An unmitigated loss of demand and revenue in the past year would have impacted the ability of Indian MSMEs, especially given the vast informality that mars the sector. Informality exists both in the nature of these businesses and the precarious relationship between them and their workers, one that is defined by low wages and lack of social security. Impending bottlenecks in the system, be it regulatory, economic or cultural in nature require long-term reform in order to move forward with the mammoth exercise of formalisation of these businesses and the workers they employ. The upcoming budget should be focussed on creating an enabling environment for entrepreneurship and small businesses to thrive, creating productive firms that will in turn generate more formal employment in times to come.

Pillai is a researcher at NIPFP. Views are personal

📣 The Indian Express is now on Telegram. Click here to join our channel (@indianexpress) and stay updated with the latest headlines

For all the latest Opinion News, download Indian Express App.

0 Comment(s) *
* The moderation of comments is automated and not cleared manually by indianexpress.com.
Advertisement
Advertisement
Advertisement
Advertisement