India’s 63 mn MSME units provide 45% of its manufacturing exports, 40% of its GDP and over 85% of jobs and cannot be allowed to collapse, for want of appropriate government policies.
The latest reports say that the covid virus is staging a fierce comeback in the West. All the EU nations that battled it first i.e. Italy, Spain, France UK and Germany, are witnessing the return of covid, with a vengeance. They have announced a national lockdown/curfew again. In the meanwhile, the US too continues to face an unrelenting onslaught of covid, and needs to take similar measures of a lockdown, but does not, fearing a hit to its slowing economy and a public backlash in an election year. A lockdown means that the economy gets disrupted, slows down and halts and the worst affected due to it is the MSME sector in any nation. A recent report further says that 55% of small businesses will close down in Europe, by September 2021, if their revenue remains at the present levels. In Europe, already, one out of every ten small business is expected to go bankrupt in the next six months. An American report also says that half of the SMEs there may shut down permanently, battling the covid crisis.
Small and informal businesses are the backbone of any economy and the biggest drivers of job creation and their widespread closures can trigger a grave national economic crisis for any nation. On an average, about 30% to 40% of national GDP in any nation, is contributed by the MSME sector and their closures would mean a dip in jobs, national growth and per capita income too. The recent case of the per capita income of Bangladesh, surging past that of India, is due to India’s MSME crisis, in large measure. The report further says that MSME closures are happening in the EU and the US because they are not getting enough support from the government. What their governments have given primarily, is a fiscal stimulus, which only provides temporary relief, because once the stimulus is spent and over, the shaky economy is back to square one. Apart from providing a fiscal stimulus, even providing bank credit to the small units has not helped there, because most of them do not have access to bank credit and are not eligible to take bank loans.
So, what is needed from the government, are measures to support the insolvent but viable SMEs and that has not quite taken place in the west. Such measures include the restructuring of loans, provision of equity capital to deserving units, direct working capital money transfers to tide over cash flow shortfalls in the pandemic period and tax breaks, waivers and incentives. It is after all, in the interest of every nation, that viable entities and the jobs that they create survive and so do the taxpayers. After all, a taxpayer who survives will continue to pay tax in the long run, which only benefits the government and the nation at large. The reports say that the EU nations have focused, more on fiscal stimulus to revive their economy and have not quite initiated targeted measures, to directly support/revive their struggling MSME sector in particular and that now reflects on the rising rates of bankruptcy and business closures there. And the policy mistakes that the EU nations have committed, is being reflected and repeated in the stimulus policy packages in India too. The government fiscal stimulus has contained little by way of direct support to the doddering MSME sector, leaving it to the RBI to do its bit through monetary policy measures.
The RBI, on its part, has made liquidity available to the banks, to provide credit to the cash strapped MSME sector. But then most of such units, which are in dire need of credit support, have no eligibility to access such credit support from banks. And even if they are eligible to do so, the risk-averse banks are in no mood to lend liberally to the MSME sector. Most of these borrowers are unable to provide the high margin money and collateral security that the cautious banks demand, thus making the credit availability to the sector, to be a non-starter. Further, the option of restructuring of loans is flawed, in as much as that most of the needy and deserving MSME units fail to meet the standard stringent eligibility parameters set by the RBI, and thus, with the December end deadlines for loan restructuring approaching fast, it has provided little relief to the sector. Moreover, at an institutional level, India has a weak culture and structure of equity infusion into MSMEs and therefore, such a relief measure for the struggling MSMEs gets ruled out. And finally, with tax collections falling and an empty treasury, the government is unwilling or rather unable to give any kind of tax rebate, waiver or incentive to the stressed MSME sector.
Since no direct cash support has been provided by the government to business entities in India, so as to tide over the expenses and repayments during the pandemic period, their ability to stay afloat and remain solvent is diminishing and thus business closures, job losses and downsizing continues unstopped. At this point of time, devoid of any effective direct support, each entrepreneur is battling his crisis on his own individual strengths and resources which are not unlimited and infinite.
The fact is that if at all India’s economy is recovering from the pandemic, then it is what is widely called, a K shaped recovery. The big ones, who have access to credit, liquidity and resources, are thus growing, with no loss in momentum and are cashflow surplus, on the other hand, the small ones are struggling to survive. This is evident in the financial results of the fiscal half of this FY, of the large companies, as compared with those of the small firms. The EU/USA MSME crisis and closures are likely to be repeated here and that will mean widespread economic calamity for the public at large. India’s 63mn MSME units provide 45% of its manufacturing exports, 40% of its GDP and over 85% of jobs and cannot be allowed to collapse, for want of appropriate government policies.