The Indian economy was under slowdown even before the COVID-19 issue. The reasons for slowdown may be demonetization, reduced demand in the market, and implementation of GST. Now the COVID-19 crisis forced the entire economy into complete lockdown. This aggregated impact severely affected all organized and unorganized sectors of our economy and hit the MSME sector of India hard
Why Micro Small and Medium Enterprises are essential to India?
Micro Small and Medium Enterprises(MSME) is one of the prime movers of the Indian economy. These MSMEs, along with the household and cottage industries, play a very vital role in meeting day to day demands of the people and enterprises.
MSME is the second most job providing sector in India apart from agriculture. This sector is very diverse and spread across the rural and urban regions, producing the products for both local and global markets.
Considering the economic aspect of MSME, it contributes 8% of GDP, 45 per cent of national manufacturing output, and shares 40 per cent in total exports of the nation.
The MSME is also known for driven by the least investment with high returns and also provides a vast number of job avenues for the people. This sector promotes enterprising skills and helps to tap the individual potential in self-employment generation.
To support the MSME sector, the Government of India put it under the Priority sector lending. Thus it will help in empowering self-help groups, women organizations, scheduled tribes, scheduled castes, disabled, ex-servicemen, and marginalized communities to get loans without much red-tapism and set business ventures. Periodically the Government of India has taken many initiatives like skill development programs, training, and entrepreneurship development programs for uplifting this sector.
How has lockdown impacted the MSME sector of India?
According to the annual report (2019) of the department of MSMEs, there are around 6.4 crore MSMEs in the country. Approximately 51% situated in rural regions alone. The sector employs more than 11 crore people nationwide.
Many of these units took a loan from various financial institutions like scheduled commercial banks, non-banking financial corporations, government institutions, and unorganized lending institutions. The workers here are mainly migrants, women, and people from marginalized sections of the society.
As we know, the NPA burden (Non-performing assets), impoverished lending of NBFCs, low market demand for MSME products caused the liquidity crisis in this sector. Subsequently, many institutions became under debt well before the COVID-19 pandemic.
Now nationwide lockdown further bulged the problem. Many migrants left to their native, the three months moratorium from RBI is approaching, raw material supply chain and distribution freight network are too severely affected. Even after lockdown, restarting these institutions requires substantial working capital for the initial few days. Many units may face worker scarcity also.
Due to the extended lockdown, people don’t have much expendable income at hand. It may require a few weeks or months to recover. Many behavioural economists are suggesting that COVID-19 may change the saving and spending nature of people. Usually, people may prefer saving over spending and resort to a less expensive lifestyle from now on. For example, March to May months is known for the marriage season. Due to lockdown and social distancing dependent industries like decor, lights, floral, clothing, jeweller and many more are fatally affected. And we may expect the same in other fields too.
What are the government actions to support the MSME sector?
The Ministry of Micro Small and Medium Enterprises classified the MSMEs under the Micro small and medium enterprises development act 2006. Initially, it was under the basis of the amount of investment, but later due to sectoral demand, it was changed to classification based on turnover per annum.
The new guidelines changed the definition of MSME.
The Finance Minister Nirmala Sitharaman in her speech, made key package announcements for the MSME sector. Namely,
- Rupees 3 lakh crore project free automatic loans for MSME.
- Rupees 20,000 crores subordinate debt for MSMEs.
- Rupees 50,000 crore equity infusion through MSME fund of funds.
- Global tender services load up to 200 crores.
- To substitute the market fairs and exhibitions, creating e-market linkage.
- Preferential treatment in settlement of dues to MSME vendors from Government institutions and Public sector undertakings.
- Rupees 30000 crore special liquidity scheme for NBFCs, HFCs, and MFIs.
The department of economic affairs under the Ministry of Finance has taken many initiatives for other fields also, like real estate, financial institutions, MGNREGA, taxation, agriculture, DISCOMs, EPF measures, labour codes, renting houses, credit-linked subsidy schemes, credit boost using Kisan credit cards, etcetera.
In a nutshell
As liquidity of funds in the market increases, the expendable income of people increases. It will create new demand in the market and helps in the revival of the economy from the COVID-19 crisis soon. But it all depends upon how people follow social distancing guidelines, regular handwashing, using sanitizer, and wearing face masks until the vaccine is available for corona pandemic. Till then, we have to follow health guidelines and keep our fingers crossed.