What Do Indian MSMEs Need Urgently?
The micro, small and medium enterprises (MSMEs), which contribute almost 45% to India’s gross domestic product (GDP), are suffering greatly because of both supply and demand side issues. The government of India and state governments need to move very fast because, MSMEs are fast losing their meagre reserves and cannot hope to survive this crisis, unless, substantial help comes their way immediately.
 
This is true for manufacturing, service and other kinds of MSMEs.
 
On the supply side, MSMEs face a reduced labour supply as workers are still unable to come to work due to lock-downs and restricted movement. Also, workers may have gone elsewhere, could be unwell and/or would need to look after their families—all these impact their availability. Without a doubt, measures to contain COVID, such as lock-downs and quarantines, while necessary, have led to further and more severe drops in labour availability and hence, capacity utilisation. That is a critical issue facing MSMEs. This apart, supply chains have also been disrupted leading to severe shortages of components as well as intermediate goods in many MSME clusters.
 
As far as the demand side is concerned, a sudden and significant loss of demand (and revenue as a consequence) for SMEs has crippled their ability to remain viable and going concerns. This loss of demand has also caused severe liquidity shortages as MSMEs are incurring costs, with virtually no production—paying salaries (in many cases), maintaining infrastructure and the like. 
 
The demand shock is very severe because consumers themselves are experiencing several issues—income loss at the individual level in many cases, fear of infection and contagion and increased uncertainty about everything. All these have cascading effects and reduce consumption as well as spending. These effects have been exacerbated because in several instances, workers have been laid off en mass as large companies and some MSMEs have not been able to pay salaries, despite wanting to do so. 
 
Some sectors, such as aviation, tourism, hospitality, travel and transportation, have been strongly affected, also contributing greatly to overall reduced business and consumer confidence. Without question, while ‘social (physical) distancing’ is a very necessary measure to combat COVID-19, SMEs are more vulnerable to this ‘social (physical) distancing’ than are other companies.
 
In terms of credit markets, the all-round uncertainty is not helping and bankers and financial institutions (FIs) are reluctant to lend, despite being flush with funds and I would not blame them. As in other crisis situations, someone has to underwrite their risk for they in many ways are protecting depositor funds, which is also very crucial. In general, the overall confidence is very low and despite, RBI’s measures of reducing interest rates and providing a small directed lending facility of Rs50,000 crore for refinancing by National Bank For Agriculture & Rural Development (NABARD), Small Industries Development Bank of India (SIDBI) and the National Housing Bank (NHB)—I say small from the perspective of India’s size and its diversity of sectors and companies including MSMEs—I am afraid the bankers and FIs would need a stronger push to actually lend in real time. 
 
Overall, the impact of COVID on financial markets has been such that there is reduced confidence in lending and, therefore, a subsequent reduction of credit lines and the like.
 
While all of these various impacts affect both larger firms and MSMEs, the impact on MSMEs is especially severe due to their higher levels of vulnerability and lower resilience (because of their size and unique aspects).
 
So, what can be done?
 
The government of India has to think out of the box and try and help MSMEs immediately. 
 
As a first step, all MSMEs should be provided a complete one-year tax holiday from direct as well as indirect taxes. This would go a long way towards restoring some confidence among MSMEs. Many countries have done this almost immediately, for varying periods of time and the impact is already being felt there. 
 
Second, the RBI should immediately appoint a board member led national committee that ensures that banks and FIs fully pass on its interest rate cuts. This committee should also ensure that SIDBI fully and completely utilises its portion of the (small) directed lending facility of the RBI immediately, for the benefit of MSMEs. Remember, that the directed RBI refinance facility is for SIDBI, NABARD and NHB to lend to agriculture, MSMEs, microfinance and related sectors. Clearly, the earmarked funds for SIDBI (of the order of Rs15,000 crore) can only be partially used for direct support to MSMEs (especially, as refinancing of SIDBI’s microfinance institutions (MFIs) is also expected from this kitty). But that would be hardly enough for the large and attendant problems faced by India’s extensive MSME sector.  
 
Third, given the huge magnitude of the demand and supply side shocks and the uncertainty surrounding them, SMEs will urgently need to be supported in a sustained manner and for longer periods for various aspects including digitization, practicing physical ‘social’ distancing, compulsory use of personal protective equipment and the like. All of these will increase fixed costs significantly. 
 
The government of India should therefore immediately establish a specialised larger MSME refinance/investment facility (SME India Refinance and Investment Facility) for enabling quick emergency lending, that is, term loans and working capital support and quasi-equity investment in MSMEs.
 
Given the size and diversity of India’s SME sector, the facility must be of the order of at least Rs2 lakh crore
 
The quasi equity facility is a provision to convert a portion of the debt (term loan) lent now as equity at a later date for MSMEs satisfying some minimum (performance) criteria at the time of conversion of debt to equity, which can be anywhere between three to five years from now. Multi-lateral and other private funds can be easily tapped for the same, especially for the Indian SME sector and if specific knowhow on tapping global funds is required, the same can be shared. 
 
This facility must be used by bankers and FIs for refinancing their lending support to SMEs. Incidentally, bankers are flush with funds but given the overall uncertainty, I am not sure that they would be readily forthcoming to lend to MSMEs. They are extremely risk averse and therefore a refinance facility will work and work effectively. 
 
I have personally been involved in such efforts globally in many such crisis-impacted environments and believe me, the bankers and FIs forget their risk aversion and readily lend, provided their lending is underwritten by someone (which in this case will be the government of India). 
 
While all of the above are important to implement, time is of essence here and this calls for immediate operationalisation of the above. Perfection is the enemy of the good and it would be in the huge interest of MSMEs and India to see the above implemented immediately and in quick time as the future of India’s MSMEs and their very survival is what is at stake! 
 
(Ramesh S Arunachalam is author of 12 critically acclaimed books. His latest release in January 2020 is titled, “Powering India to Double Digit Growth: Five Key Steps To A Robust Economy”. Apart from being an author, Ramesh provides strategic advice on a wide variety of financial sector/economic development issues. He has worked on over 311 assignments with multi-laterals, governments, private sector, banks, NBFCs, regulators, supervisors, MFIs and other stakeholders in 31 countries globally in five continents and 640 districts of India during the last 31 years.)
 
Comments
bpugazhendhi
1 year ago
Disputes over the data apart, some concrete suggestions are as follows:
1. As this sector has been ailing for some time now and the recent crisis only has pushed it to the brim, there is a need to take into account the accumulated distress too. Hence, Govt as a one time measure has to alleviate the liability side stress of SMEs. It should write off the dues on account of EPF and ESI. This will not only help the SMEs but also the employees.
2. Secondly, the Govt should also write off the existing dues of SMEs to the Public Sector Banks and financial institutions, as well as the Private Sector Banks, either fully or atleast 50%. Moratorium does not help.
3. The above two steps will take care of the existing liabilities of the SMEs. In order to handhold the running of the SMEs for the present, the Govt should give advances against confirmed orders to the tune of at least 80% of the order value. This can be done in two ways. One as far as the Govt orders are concerned, the concerned procuring agency can extend the advance to be adjusted towards the final payment. As far as the other orders are concerned, the Banks should give this advance. The interest of the Banks should also be protected by a scheme of insurance to be financed by the Govt.
Only these steps can revive the SMEs and ensure that there is minimal loss of employment. As the demand is not likely to be high in the near future for the SME products, the outgo to the Govt on account of point 3 above will not be much. As far as Point 1 and 2 above, the Govt anyway, cannot expect to recover much from the SMEs, which will fold up or already folded up in reality.
rameshsa2009
Replied to bpugazhendhi comment 1 year ago
It is not that I disagree with your suggestions. They are important and perhaps can be taken up later. As far as I see it and based on discussions across India with several people, liquidity is an attendant problem as SMEs have been paying salaries, half salaries to their key staff, whose skill sets are crucial. Some of them are incurring costs in opening again in terms of physical distancing costs and the like. Most of them have received no positive response even from their bankers despite the directed lending facility of the RBI through SIDBI (and NABARD). May be it is an issue of percolation with time but this crisis is both a demand and supply side shock and the level of urgency for survival is huge, at least for all SMEs. If people cannot survive and units cannot survive because they dont have immediate cash, then what use is waiving of liabilities. What you say is important, provided the SME units and their staff can keep home fires burning. Cash in their bank account and hands is crucial and other countries have already ensured that. I would very much like the RBI to step in, press the accelerator and ensure disbursal of funds immediately and to the most needy and deserving units asap (criteria must be drawn up for the same). Thanks again for your comments and deeply appreciated.
bpugazhendhi
Replied to rameshsa2009 comment 1 year ago
I agree that the most urgent requirement is immediate liquidity to kick start the industries. We see in practice that the banks are not of much help because they have to first protect themselves, whatever the Govt may goad them todo. They are not willing to take risk. That is the reality. We should find a way out . The way out is to route the money through another channel. My suggestion is that the local associations of the MSMEs may be asked to prepare a list of industries which require help and also suggest the quantum of financila assistance that they need. The quantum may be assessed objectively based on the turnover during the last one year ending February 2020 (since the industries might have submitted their report for the month of February 2020 for GST purpose, wherein the turnover would be mentioned.) Take the average monthly turnover and multiply by three or simply divide the annual turnover by four. That much amount should be given by the Govt as a one time grant. No strings attached. This payment may be routed to the banks from which the industry wants to receive them. This will take care of the immediate liquidity requirement. This amount is not huge. But this should be implemented alogwith the other three suggestions that I had posted in my original post two days ago. Then only it will be a package. If only one portion is implemented ignoring the package, it will not bear any fruits.
rameshsa2009
Replied to bpugazhendhi comment 1 year ago
Thank you sir for your useful suggestions.
rameshsa2009
Replied to bpugazhendhi comment 1 year ago
Thanks for the suggestions but SMEs need immediate liquidity first. What has been started as a measure (RBI directed lending through SIDBI and other banks etc) should be implemented on the ground immediately. The usual practice of under utilisation of the directed lending facilities and/or making SMEs run from pillar to post will not work. In some countries that I work, SMEs have already received huge liquidity assistance. First is survival today. Rest can follow as I have indicated in my article and you say above. Survival money first for many SME units is critical...
rameshsa2009
1 year ago
All this formal sector SME data (without Micro's) is based on registered units and having the following classification in India:

Small and Medium Enterprises in India are now defined based on annual revenue. This is a recent shift from the earlier definition of SMEs based on self-declared investment with regard to plant and machinery.

Micro enterprise: Revenue of up to Rs 5 crore (USD 0.8 million)
Small enterprises: Sales between Rs 5 crore and Rs 75 crore (USD 0.8 million- 1.2 million)
Medium enterprises: Sales between Rs 75 crore and Rs 250 crore (USD 1.2 million- 4 million)

Almost all informal sector units are never registered and there are a very large number of them. That is where data is almost absent but some guesstimates are possible using reports like the Arjun Sengupta report.

The above differs from international definition's of SME. One such definition is that of the IFC:

Micro enterprise: Revenue of up to USD 100,000
Small enterprises: Sales between USD 100,000 and USD 3 million
Medium enterprises: Sales between USD 3 million and USD 15 million

OECD's, defines SMEs as per firm size according to employee numbers. Under such definitions firms are generally much bigger: small firms are firms with 10-50 employees with turnover up to EUR 10 million, medium with 50-250 employees with turnover up to EUR 50 million.

These also differ from the definition that banks and FIs use based on loan size/SME
borrower needs.

So, depending on how you define SME and how you estimate the micro-informal sector enterprises, the contribution to the GDP will vary. But all said, I have seen most people talk of formal SME sector as contributing close to 30% of GDP (in India) and informal sector micro units contributing to about 15% of GDP. That is how the about 45% came. Much more sophisticated data is required and we have saying this for years since1990s but not much progress has been there probably because of difficulty in identifying and tracking informal sector enterprises, which itself would be a very costly and tough task as they are often remote, single person operated and mobile.
rameshsa2009
Replied to rameshsa2009 comment 1 year ago
I am attaching another article for your reference. It is study by sidbi and others. While the study pegs contribution to GDP by formal sector SMEs at 37%, rbi deputy governor puts it at 31%. The informal sector micro units should at the minimum exceed 15% as the ministry suggested. Clearly, we need date on unregistered micro units in the informal or unorganized sector.

See

https://m.economictimes.com/small-biz/sme-sector/sidbi-and-transunion-cibil-launch-msme-pulse/articleshow/63269240.cms
aneeshn
Replied to rameshsa2009 comment 1 year ago
Ramesh sir, do we have data on which industries have high level of MSME participation where this data is classified by formal and informal sector? Any quantitative data?
angelinmadhumitha
1 year ago
Can you provide the reference for indicating 45 % contribution of MSMEs towards GDP
rameshsa2009
Replied to angelinmadhumitha comment 1 year ago
I basically got it from the ministry of MSME and I have the citation also in my book. Will look at it and post it Tomo/day after. Thanks.
rameshsa2009
Replied to rameshsa2009 comment 1 year ago
I have gone back to my notes and book and seen the discussions. There is no citation. They measured contribution to GDP in two ways. One is formal SMEs on which data is available which they peg at around 29 to 31%. Other is informal MSMEs which is guestimate. They also quoted the Arjun Sengupta report on informal sector and all MSMEs therein. Together, they have pegged it at about 45% of the GDP. Thank you. Just recovered my note book and referred to the discussions and also saw my book and have posted this to you. Thanks.
rameshsa2009
Replied to rameshsa2009 comment 1 year ago
Here the quote on informal sector given to me from AS REPORT

"The task of the Sub-committee was to review the existing methodologies for estimating the contribution of unorganised/informal sector to GDP and suggest measures to facilitate direct estimation. The Group reviewed the 'Labour input method' contained in an OECD publication titled 'Measuring the Non-Observed Economy - A Handbook' and the 'Method of Apportioning' proposed by Shri Ramesh Kolli and Suvendu Hazra in a paper presented in the Eighth meeting of the 'Delhi Group'. Given the existing data systems in the country, it is not found feasible to use the 'Labour Input Method' unless substantial improvements are made in the statistical system of the country. Though, it would be necessary to introduce such improvements in the statistical system, realistic estimates need to be generated in the interim-period. The Sub-committee, thus, developed an alternative method of apportioning by using estimates of labour inputs and productivity differentials of both the organised and unorganised sectors. According to the estimates worked out by the Sub-committee by using the modified apportioning method, about 50 percent of the GDP was contributed by the unorganised/informal sector. "

rameshsa2009
Replied to rameshsa2009 comment 1 year ago
Here is some more data from a project/conference. Formal SMEs without the micro's! Please kindly note the M's are missing.

SME & Employment opportunity: Employs about 106 million, 40% of India’s workforce.

Products: produces more than 6000 products.

GDP Contribution (Formal SMEs): Currently around 6.11% of manufacturing GDP and 24.63% of Service GDP - hence formal SME contribution to GDP is 30.74%, which sort of matches what the Ministry people told me. Additionally, the ministry people told me that the informal Micro's would be at least 15% of GDP (guesstimate, no data on these informal MSMEs right the 2000s and that is what Arjun Sengupta report also mentioned). Hence, total contribution of MSMEs = contribution of formal SMEs + informal MSMEs = 30.74% + about 15% = 45.74%.

Formal SME Output: 45% of the total Indian manufacturing output.

Formal SME Exports: 40% of the total exports.

Bank Lending to Formal SMEs: Accounts for 16% of bank lending.

Fixed Assets of FOrmal SMEs: Current fixed assets at INR 1,471,912.94 crore. [US$206.2B]

Formal SME Growth Rate: Has maintained an average growth rate of over 10%.

This is data I received in December 2019
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