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The Indian MSME sector has been slowing down for about half a decade. Indicators pertaining to employment and output of this sector have recorded downhill movement. The stress has been very severe, particularly, after the Covid-19 pandemic set in.

The Indian government has taken several steps to revive the sector. But a large number of stakeholders and observers are critical about the measures taken by the government. At the same time, there is positive movement in a big section of the sector – which seems to be recovering well. However, according to industry insiders, it is mostly those units that were performing well before the pandemic, which are now recovering well. The issue of this sector is to rescue those units which did not do well before the pandemic. Without government help, most of these units will perish.

Measures declared by the FM

In the Budget proposal, financial allocation has been announced in favour of MSMEs. According to Rajiv Kumar, Vice Chairman, Niti Ayog, “These will broad-base the growth impulse and assure that employment generation activity is spread across the country.”

There are collateral free credit schemes to support MSMEs such as the Emergency Credit Line Guarantee Scheme (ECLGS) for which additional `50,000 crore was provided in the Budget. As a result, a total of `5 lakh crore is available in this scheme till March 2023. Under the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE), an additional `2 lakh crore is also available for this sector. There is another scheme in the Budget, namely the Raising and Accelerating MSME Performance (RAMP) programme, which has been allocated `6,000 crore. These are no doubt very important schemes for the revival of the MSME sector.  

Only 15% of MSMEs could avail financial schemes

Many observers including Prasanna Mohanty (Fortune India, 12February, 2022) consider that only a small section of the sector has been able to avail the financial benefits of the government financial schemes till date. That is why credit facility alone cannot solve the problem of the MSME sector. Mohanty pointed out a private survey published in May 2021 that observed that 59% MSMEs and start-ups might be sold off or shut by the end of 2021. The situation has turned worse since then.

It is also to be noted that in the Economic Survey 2021-22, it is mentioned that `2.28 lakh crore was disbursed to 95.2 lakh crore MSMEs under the ECLGS as on November 19, 2021. Additionally, in FY 21 and FY 22 upto November, `59,858 crore was disbursed under the CGTMSE scheme as credit or margin money.

But how many MSME units have received this credit or margin money? One has to go to another source. As per the report Annual Report (2020-21) of the MSME ministry, there are 6.34 crore MSME units in India. This means the credit reached only 15% of the MSME units of the country.  One can conclude that India has been a special case where about 99.5% of the MSMEs are micro units and most of those have no organised credit support. They are mainly self-financed and only organised credit support cannot revive the sector. So direct cash support might be of help.

IIM Bangalore study in support of the view

This observation has been supported by a recent study by the Indian Institute of Management, Bangalore. It said that more than 81% of MSMEs are self-financed with only 7% borrowing from formal institutions and government sources. The study also found that 94% units were unregistered with the government. Hence, as the study observed, credit market intervention may not benefit this sector directly.

Other proposals

There are some other measures in the Budget proposals. These are mainly indirect measures. The foremost is the Production Linked Incentive (PLI) scheme. The scheme has been expected to be the fulcrum of India’s ‘Make in India’ programme. As many as 15 sectors will be benefited in creating employment and output from the scheme. Secondly, the Phased Manufacturing Programme (PMP) will help the wearable and hearable manufacturing devises industry by slashing customs duty to nil on their imports of components from April 1,2022. But the customs duty on imports of these products will be 15 to 20% over FY 23-26. Thirdly, a new thematic fund has been proposed in the Budget to extend tax benefits to registered start- ups for a year and to cap long term capital gains (LTCG) surcharge. This may benefit start-ups, investors and high net worth individuals.

The overall sentiment

Many MSME bodies reportedly expected more favourable proposals in the Budget. In this regard, Hitangshu Kumar Guha, President, FACSI told BE that the Budget mentioned certain benefits for MSMEs and yet, these were not sufficient. The sector is still under the pandemic shock. The government had evaluated the overall conditions of the hospitality sector and helped in the form of credit guarantee but the other sectors were also equally impacted.

Guha said that the extension of CGTMSE for a further period of one year might not be beneficial to the small players unless the specificities of their paying capacity were considered.