The Covid-19 pandemic has disrupted sectors across the economy, with the Medium, Small and Micro Enterprises (MSMEs) sector being no exception. In response to this, the government has launched relief packages, such as the PM Garib Kalyan Yojana for the poor and vulnerable sections of the society. An anticipated second relief package is predicted to center primarily on the MSME sector.
MSMEs in India and their definitions
In 2018, the Union Cabinet declared the criterion for defining MSMEs would switch from investment in plant and machinery/equipment to an annual turnover framework, matching the Goods and Services Tax (GST) imposition. The proposed yet to be officially adopted definition classifies enterprises into three categories:
– Micro Enterprise: Annual turnover less than Rs 5 crores.
– Small Enterprise: Annual turnover between Rs 5 crores and Rs 75 crores.
– Medium Enterprise: Annual turnover less than Rs 250 crores.
Statistical overview of MSMEs in India
As per the Department of MSMEs’ Annual Report (2018-19), there are approximately 6.34 crore MSMEs in India. Of these, about 51 percent are located in rural areas while the rest are concentrated in urban areas. These enterprises employ over 11 crore people, with a significant proportion (55%) of the employment generated in urban MSMEs. Interestingly, micro enterprises make up a staggering 99.5 percent of all MSMEs and are evenly distributed across rural and urban areas. However, small and medium enterprises are primarily centered in urban areas.
From a social perspective, around 66 percent of MSMEs are owned by individuals from Scheduled Castes (12.5%), Scheduled Tribes (4.1%) and Other Backward Classes (49.7%). The gender ratio among employees is roughly 80 percent male and 20 percent female.
Geographically, seven Indian states account for 50 percent of all MSMEs namely; Uttar Pradesh (14%), West Bengal (14%), Tamil Nadu (8%), Maharashtra (8%), Karnataka (6%), Bihar (5%) and Andhra Pradesh (5%).
Challenges faced by MSMEs in India
Many MSMEs face a plethora of issues. Due to their small size, they often remain unregistered and do not adhere to regulatory norms. While this may bring down costs, it also hampers government efforts to assist them during a crisis. Lack of financing is another significant hurdle. Most MSME funding comes from informal sources, reducing the impact of liquidity-boosting measures by the Reserve Bank of India. They are also hampered by delayed payments from buyers and GST refunds, leading to financial turmoil.
Covid-19 impact on MSMEs
The onset of Covid-19 has exacerbated these pre-existing challenges. Declining revenues and capacity utilization were already a concern before the pandemic. The total lockdown has further threatened the existence of MSMEs due to a cash crunch that may lead to job losses. The return of migrant laborers also poses a labor shortage issue. Further, most loans to MSMEs are given against property as collateral, but in a crisis, property values fall, impeding the extension of new loans.
Measures taken and way forward
To alleviate financial distress, the Reserve Bank of India has announced various measures like a moratorium on term loans and easier working capital financing. Some public sector banks have also introduced emergency credit lines for businesses.
Going forward, the government could provide tax relief (GST and corporate tax), expedite refunds, and boost liquidity in rural India through the PM-Kisan scheme. A credit guarantee by the government could assure banks that their loans will be repaid by the government if the MSME defaults. Such a guarantee, if defaulted upon, would simply appear as an expense in the budget.
