Pandemic package: Big day for MSMEs. But, implementation will be key

Pratim Ranjan Bose

In his speech on May 12, Prime Minister Narendra Modi made it amply clear that the government is ready to take “bold measures” to safeguard interests of local business and particularly in the MSME (Micro, small and medium enterprise) sector.

True to the promise, the finance minister Nirmala Sitharaman on Wednesday announced some big bang measures which not only aimed addressing the immediate liquidity concerns, but laid foundations for giving the sector much needed impetus for long term growth.

Source: Presentation by Finance Minister

Structural reform

It is a pity that the sector had to wait for decades for as simple a measure as changing definitions so that growth does not come as a disincentive. It was a pity that policies in the past created different classifications within the same small or micro industry for manufacturing and service sector.

The worst part was classification benchmarks were set on investment limits, while the global practice is to follow turnover limit.

All these are history now. Same benchmarks are set for all types of industries. Along with investment, turnover is introduced as additional benchmark.

And all limits are revised upwards by a few times, so much so that a Rs 99 crore turnover company can now be recognized as medium and Rs 4.9 crore turnover enterprise be referred as micro.

The importance will be felt in the years to come. A business will try to achieve higher growth. There is less need to camouflage growth by dividing total revenues under multiple companies of small balance sheets. With a bigger balance-sheet they can bid for bigger contracts and get due loan facilities from banks.

It is a structural reform and will help improve compliance.

Source: presentation by Finance Minister

Credit guarantee

The finance minister announced a multi-billion dollar credit guarantee scheme to remove all hurdles before the MSME sector - which is a major employment generator – to get bank loans to overcome the current crisis.

The Rs 3,00,000 crore worth collateral-free automatic loan by banks and NBFCs to the MSME sector is definitely one big step to address the liquidity issues and give the enterprises a fair chance to survive.

The window also has provision for emergency credit line and will be operative till October 31. Nearly 45 lakh MSMEs are eligible to get four-year loans with one year moratorium on principal repayment and capped interest, meaning there is no risk of interest rate volatility.

There is an additional Rs 20,000 crore subordinate debt-window for two lakh stressed MSMEs, which were not considered bankable under normal conditions.

This coupled with fresh three-month extension of the EPF contribution scheme should help protect many jobs in the sector.

Hand-holding the promising

The best part of this liquidity infusion announcement was Rs 50,000 Fund of Fund provision, created to ensure equity contribution in promising MSMEs, which suffered during the COVID pandemic.

The idea behind the initiative is somewhat similar to venture capital finance, except that here the aim is to ensure that such enterprises survive are able to sail through the crisis period safely and get bigger.

The provision will help create Fund or Funds, which will invest in equity – to avoid immediate repayment obligations – in promising MSME and handhold them to grow into big companies. The finance minister specifically mentioned that the fund will encourage the MSMEs, selected for support under the scheme to get listed.

No global tender

On Tuesday the Prime Minister raised the slogan of “Be vocal about local”. True to the spirit of the call, the finance minister announced that “global tenders will be disallowed in government procurement contracts, upto Rs 200 crore.”

The initiative – which is a rerun of the pre-liberalisation practices - will help create local industries and suppliers who were subjected to unfair competition from deep pocket companies, resorting to undercutting to corner all the contracts.

The intent behind the initiative is definitely good. However, the implementation will remain a question. The main worry is how the government will ensure that best quality goods are offered at competitive prices.

In the past when global tenders were not there, India witnessed growth of an inefficient set of ancillaries who survived on contracts from the State-owned enterprises without much competition. It ensures self-reliance but quality suffered.

EOM.

(This blog is reproduced in ETV Bharat) .