Sustaining MSMEs

Media reports of April 21, 2020, revealed details of a study by Ernst & Young according to which the lockdown because of COVID-19 could wipe out about 40 percent of the defence sector’s micro, small and medium enterprises (MSMEs) within three months unless a support package is put in place by the government. The study pointed to problems of cash flow, raw material prices and logistics problems even after lockdown is lifted and assessing complete MSMEs revival will need at least 6-12 months; cost of products could go up marginally when production is resumed and input costs of defence equipment would also rise. .

In terms of military modernization, the study recommended enforcing 20% cap budget outlay in segments that don’t hamper military modernization; low movement of troops, temporary ban on military exercises and international engagements, utilizing savings on revenue side to ensure no impact on modernization and manufacturing orders. Army Chief General MM Naravane recently told media that COVID-19 will not affect modernization of the Army. However, if expenditure on combating COVID-19 mounts with warnings of second and third waves of the virus likely in coming months, it could impact defence allocations. A Ministry of Defence (MoD) official stated on April 28 that military spending could be cut by at least 20% from FY 2020-21 allocations and possibly by as much as 40% He confirmed government has ordered military to limit its first quarter (April-June) spending by 15-20% of the entire year’s budget, and similar cut could be extended to next three quarters.

On May 2, Union MSME Minister Nitin Gadkari stated that the central government is likely to announce a relief package for the MSMEs that have been affected due to the COVID-19 lockdown. Urging industries to have a positive attitude and adopt an integrated approach to overcome the crisis while ensuring the lives and livelihood of people, he said this is a golden opportunity for industries and entrepreneurs to explore new businesses, and suggested adopting technological innovations and import substitution to attract investments from global businesses. Earlier interacting with Associated Chambers of Commerce of India (ASSOCHAM), Gadkari had said, “We have prepared a fund of Rs 1 lakh crore and government will pay for the insurance. We will fix a formula on how to coordinate between all three stakeholders – the one who has to receive money, the one who has to pay money and the bank”.

In a press conference on May 13, the Finance Minister announced a package which is being termed as the COVID-19 “Relief” for MSMEs for making MSMEs ‘Aaatm Nirbhar’. These can be summarized as under:

  •  Rs 3 lakh crore collateral-free loans – 20% of outstanding credit as on February 29, 2020 by Banks/NBFCs with up to Rs 25 crore outstanding credit and Rs 100 crore turnover eligible with 4-year tenor and 12-month moratorium on principal payment. Government to provide credit guarantee cover to lenders.
    • Rs 20,000 crore subordinate debt – MSMEs declared NPAs/ those stressed eligible for equity support as subordinate debt. Also Rs 4,000 crore to CGTMSE offering partial credit guarantee banks lending to MSMEs.
  • Rs 50,000 crore equity infusion – ‘Fund of Funds’` with corpus of Rs 10,000 crore to give equity based funding to MSMEs having growth potential, also encouraging them to list on stock exchanges.
  • MSME definition revised – addressing MSMEs fear of outgrowing in size to receive benefits given by the government to businesses categorized as per the current MSMEs, manufacturing and service MSMEs defined under common metric of mix of investment in plants and machinery or equipment and turnover: investment less than Rs 1 crore and turnover under Rs 5 cr defined micro-units; investment less than Rs 10 crore and turnover under Rs 50 crore defined small businesses, and: investment under Rs 20 crore and turnover less than Rs 100 crore defined medium enterprises.
  • Global tenders – global tenders will not be allowed in schemes up to Rs 200 crore by MSMEs to halt unfair competition from foreign companies in government procurement tenders.
  • MSME Dues – government and central public sector enterprises to release all pending MSME payments in 45 days.

Given the foundational role MSMEs play in India’s growth and the fact that almost 50 percent of Indian exports are affected by MSMEs, the above package does looks attractive. However, how much of this was worked out after holistic interaction with MSMEs taking into account their ground level problems after sudden impact of the pandemic, if at all is unknown. The package strictly is an effort to ‘sustain’ MSMEs through more loans, with many of them repaying loans already taken to sustain their businesses. Government would do well to examine ground situation of the MSMEs and effect of the package announced so that MSMEs in extreme distress don’t shut shop with adverse effect on our economy.

In addition, news about China having funded 30 Indian startups with a cumulative investment of about $4 billion in startups/MSMEs/small businesses should raise concerns whether these are related to defence production, ancillary to defence industry or otherwise. China does not invest money without ulterior motives, which has been more than proved globally. Disallowing global tenders in schemes up to Rs 200 crore in government procurement tenders is good, but this backdoor entry by China through investments in industry, especially in critical sectors like telecommunications, data, artificial intelligence (AI) and robotics must be effectively sealed off.

Finally, it would be prudent for the government to give special attention to MESMEs engaged in AI, robotics, biometrics, telecommunications, mobile platforms, data etc. We must take a cue from the rapid advances made by China in the abovementioned spheres, as also advanced human-computer interaction, video surveillance, automatic indexing of images, video database, access control, surveillance facial recognition and the like.


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