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MSME Sector Critical Times Covid-19

The document discusses the importance of MSMEs (Micro, Small and Medium Enterprises) to the Indian economy and the impact of the COVID-19 pandemic on the sector. It notes that MSMEs contribute 30% of India's GDP and employ around 50% of the industrial workforce. However, most MSMEs are small and informal, operating on a cash basis without government registration or contributions to employee funds. Existing government policies to support businesses during the pandemic focus more on larger, formal firms and may not help most MSMEs that are in need of immediate liquidity. The document argues for more direct measures to ease MSME liquidity constraints, as well as coordination between state and central governments, given the sector's concentration

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40 views3 pages

MSME Sector Critical Times Covid-19

The document discusses the importance of MSMEs (Micro, Small and Medium Enterprises) to the Indian economy and the impact of the COVID-19 pandemic on the sector. It notes that MSMEs contribute 30% of India's GDP and employ around 50% of the industrial workforce. However, most MSMEs are small and informal, operating on a cash basis without government registration or contributions to employee funds. Existing government policies to support businesses during the pandemic focus more on larger, formal firms and may not help most MSMEs that are in need of immediate liquidity. The document argues for more direct measures to ease MSME liquidity constraints, as well as coordination between state and central governments, given the sector's concentration

Uploaded by

Satish babu
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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The MSME sector is critical in times of Covid-19

While Indian policymakers face the tough task of containing a public


health pandemic as well as formulating swift policies to protect the most
vulnerable from its adverse economic effect, a committed response to
support the MSMEs is essential, imminent and key to easing the impact
of the crisis for these entrepreneurs, their employees and the Indian
economy as a whole.

A large fraction of India’s firms are small, informal and operate in the unorganised sector.
Recent annual reports on Micro, Small and Medium Enterprises (MSMEs) indicate that the
sector contributes to around 30% of India’s GDP, and based on conservative estimates,
employs around 50% of industrial workers. Over 97% of MSMEs can be classified as micro
firms (with an investment in plant and machinery less than ₹25 lakh), and 94% are
unregistered with the government.

These MSMEs are uniformly spread across rural and urban areas and are equally
represented in the manufacturing, trade and services sectors. Two thirds of MSMEs are
operated by socially vulnerable groups (Scheduled Caste/Scheduled Tribe/Other Backward
Classes) and 20% by women.

The current coronavirus pandemic (Covid-19) lockdown will substantially disrupt the
operations of these MSMEs due to their dependence on the cash-economy that is severely
hit by the lockdown, the physical non-availability of workers, and restrictions in the
availability of raw materials and transport infrastructure. This will have substantial
ramifications throughout the economy and therefore, a robust policy response is essential.

How can Indian policy respond to this crisis?

A useful place to start would be to examine the policy response of other countries in
protecting their industries during the pandemic. From the International Monetary Fund’s
policy tracker (that tracks key economic responses to the Covid-19 pandemic across 192
economies), these policy responses can be broadly categorised into: (a) loan guarantees
and immediate liquidity provision; (b) loan extensions and penalty waivers on repayment
delays and (c) interest rate reductions on future loans.

In line with the global response, the Government of India slashed interest rates, increased
limits on Non-Performing Assets (NPAs) to prevent triggering insolvency, and offered
payments from the government’s share of Employee Provident Fund (EPF) to avoid layoffs.
Several leading banks have announced special purpose loans at reduced rates for up to
10-20% of the firms’ working capital limit.

While these policy measures are encouraging, they are biased towards the larger, and more
formal/organised firms. However, the measures are inadequate for the smaller,
informal/unorganised firms, which form an overwhelming majority of India’s industrial
landscape. According to the Economic Census data, over 95% of firms (over 55 million firms)
employed fewer than five workers, and 94% were not registered with the government. Thus,
it is unlikely that these small firms contribute to EPF and may not benefit from the
Government’s contribution to EPFO.

Additionally, more than 81% MSMEs are self-financed with only around 7% borrowing from
formal institutions and government sources (Economic Census, 2013). Credit market
interventions (cheaper loans, increased limits on NPAs) therefore may not benefit this sector
directly. Since most MSMEs primarily operate on cash, they require immediate liquidity to
cope with adverse events. Moreover, many micro enterprises are small, household-run
businesses.

Given that other sectors of the economy and in particular, seasonal migration and
agriculture, are severely hit by the lockdown, allowing these micro enterprises to operate
smoothly could substantially help households cope with this economic shock. Hence, more
direct measures of liquidity may be the need of the hour, similar to the initiative of the
Confederation of Indian Industries (CII) that sets up a fund targeted directly at easing the
liquidity constraints of MSMEs.

Lastly, MSMEs are spatially concentrated, with Uttar Pradesh and West Bengal accounting
for around 30% of MSMEs and ten states accounting for around 75% of MSMEs. A joint
effort from both the state and central government therefore, is critical. Supply-side
interventions, in particular strengthening supply chains for MSMEs, can also help them
weather the storm. Ensuring that the MSME sector has access to raw materials and robust
downstream supply chains would not only help mitigate production shortages in the health
and the essential goods sector, but given its size, also potentially slowdown the adverse
impact on the Indian economy as a whole. The Government of India has already appealed to
MSMEs producing medical and other essential products to register and sell in the
Government’s e-marketplace. This should be expanded to other sectors as well with
co-ordination across different states to meet local supply and demand requirements.

While Indian policymakers face the tough task of containing a public health pandemic as well
as formulating swift policies to protect the most vulnerable from its adverse economic effect,
a committed response to support the MSMEs is essential, imminent and key to easing the
impact of the crisis for these entrepreneurs, their employees and the Indian economy as a
whole.

Ritam Chaurey is assistant professor, Johns Hopkins University School of


Advanced International Studies. Gaurav Chiplunkar is assistant professor, Darden
Business School, University of Virginia. Vidhya Soundararajan is assistant
professor, Indian Institute of Management (Bangalore).

The views expressed are personal.

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