Giving MSMEs the right push Editorial 13th Sep’20 FinancialExpress

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 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.

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
    • Only an incentive-based mechanism will work.
  • 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.
  • 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.
  • 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.

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

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