Why our MSMEs have very few options left to survive

More than one-third of the micro, small and medium enterprises (MSMEs) will be pulling down their shutters as a result of the present economic trough, despite the liquidity measures promoted by the FM.

 |  5-minute read |   06-06-2020
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A very recent survey by All India Manufacturers’ Organisation revealed that more than one-third of the micro, small and medium enterprises (MSMEs) will be pulling down their shutters as a result of the present economic trough.

This phenomenon prevails despite the slew of liquidity measures promoted by the FM for the MSMEs, which entail collateral-free automatic loan worth Rs 3-lakh crore for borrowers with up to Rs 25 crore outstanding and Rs 100 crore turn-over, with loans having a 4-year tenure and moratorium for 4 months. MSMEs are able to borrow up to 20 per cent of their total outstanding credit as of February 29, 2020.

As envisaged by the government, the earmarked amount will plug the need for providing seed capital for these small enterprises that are slapped by zero cash flow due to the national lockdown. The lockdown is tantamount to locking the market forces that kept the MSMEs floating. When these forces are kept under lock and key, there needs to be a “Keynesian” response with government intervening. Such interventions become even more critical when private banks are apprehensive in providing loans for minimising their risk exposures, especially in times of economic downturn. Therefore, loans from governmental sources help MSME’s to cover the running costs of factor inputs (wages and salaries, operations and maintenance costs, etc) and keep them afloat.

Gaps in the scheme

The FM envisaged that 45 lakh MSMEs will gain from these schemes. The package also entails a partial credit guarantee scheme of INR 20,000 crore funnelled through the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) to enable promoters of small units to increase their equity. This enables banks to lend more to promoters which can be infused as equity in their businesses.

main_msme_reuters_060620113618.jpgThe concern remains for the MSMEs: where is the market for their products and services? (Representative photo: Reuters)

Further, there was a redefinition of MSME through inflation adjustment of investment and adding turnover to the criteria. This can help others with higher investment (than the previous threshold) to take advantage of the scheme. However, this opens up possibilities of moral hazard through underreporting: both the turnover and investment criteria can definitely lead to -under-reporting of turnover and investment size to -get classified as MSME, and take advantage of the schemes.

Additional issues

Despite this, the concerns of the MSMEs remain. This is due to the lack of effective demand on which the government has hardly worked in its package. What the government has done is taking a decision of not having global tenders for Government procurement up to Rs 200 crores. This is akin to providing protection and insulating the MSMEs from global competition. This doesn’t alleviate the long-pending problems of the sector. For example, as far as the steel industry is concerned, the National Steel Policy 2017 identifies the long-term problems of the sector in the forms of lack of domestic demand, high input costs, and cheap imports from China and the ASEAN. Similarly, the problems with edible oil processing units are related to cheap palm and soya oil imports.

On the whole, in the short and the medium run, the MSMEs will have to encounter drying up of demand. The Indian growth story of the last three decades is that of consumption-driven growth, and not private investment or fiscal interventions driven growth. The most crucial component of demand that has been hit by the lockdown is the purchasing power of the consumers with salary cuts and unemployment.

China is an interesting case in this regard: its vision of “consumption-led growth” stands on the pillar of enhancing domestic private consumption through increases in domestic purchasing power. China realised their earlier philosophy of “export-driven-growth” would fail after a host of global economic crises hit the US and EU, negatively affecting their export demand in the 2000s. They realised that the demand forces emerging from an unreliable external sector contingent upon the vagaries of world trade and finance should be replaced by the creation of a more reliable growth force within the domestic economy. In one sense, this is “self-reliance”: something the PM emphasised in his speech on May 12.

Modi stressed on land, labour, liquidity, and laws. Ideally, these should entail demand and supply-side conditions. Yet, the packages address only supply-side conditions suggested by the four aspects in Modi’s “self-reliance” speech. Unfortunately, the FM has failed to address demand-side conditions, especially the organic growth driver of the economy. Tax-payers needed the incentive through tax benefits or income transfers below a level of income.

Rest of the world

The concern, therefore, remains for the MSMEs: where is the market for their products and services? The neo-pandemic global economic order will witness trade routes being viewed with suspicion, and investment in foreign destinations to exploit the global value chains (GVCs) in usual destinations being cast with doubts. It is, however, a fact that India’s share in the GVC is negligible. Large parts of MSMEs have so far been unable to compete in the international markets due to their inherent weaknesses emerging from technology, productivity, and costs. With foreign markets becoming even more inaccessible than before, the MSMEs needed a more robust domestic consumption demand base to sustain. Unfortunately, that is not happening until now.

(Courtesy of Mail Today)

Also read: How Finance Minister gave liquidity lifeline for the economy but not the structural reforms India needs

Writer

Nilanjan Ghosh Nilanjan Ghosh

The author is the Director of Observer Research Foundation and is based in Kolkata.

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