Date: 02/11/2022

Relevance: GS-3: Changes in Industrial Policy and their Effects on Industrial Growth; Development and Employment.

Key Phrases: MSMEs, Robust Recovery, Support Measures, Emergency Credit Line Guarantee Scheme (ECLGS), Collateral-free Loan, CIBIL Report, Non-performing Asset, Digital Platforms, E-commerce, Open Network for Digital Commerce, Formalization of MSMEs, Udyam Portal, Goods and Services Tax, Formal Credit, Payment Delay, Regulatory and Compliance Burdens.

Context:

• As per the study, MSMEs have shown resilience in the face of steep challenges caused by the Covid pandemic.

Key Highlights:

• To reinforce the MSME sector’s future potential and support India’s economic progress, the government has allocated Rs.15,700 crore to the MSME sector in the financial year 2022 budget, which is more than double compared to 2021.

Challenges Faced during Covid-19 Pandemic:

• Survival challenges:
  • Some of the critical issues that destroy business are a lack of access to cheap capital, high fixed costs, poor digital or cutting-edge technology implementation, higher cost of capital, etc.
• Capital and cash deficiencies:
  • MSME's majority of money transfers are conducted in cash, and due to this, Micro, small, and medium-sized enterprises face a severe cash crunch due to a rapid decline in performance and operational challenges with little or no labour.
• High Transaction Cost:
  • When economic activity stalled due to lockdown and social distancing, fixed costs like employee remuneration or compensation packages, loan interest, lease of the premises, and so on became a huge burden for them.
  • All of this raises the fixed costs of MSMEs, making it more difficult for them to cover all expenses and costs.
• Cyber Attack:
  • The most significant trend of MSMEs is going digital during the COVID-19 pandemic.
  • The internet is a lifesaver for enterprises, allowing them to continue operating during the pandemic.
  • MSMEs, on the other hand, have been found to be more prone to cyber crime and malware due to a lack of adequate insight and knowledge about disseminating banking and transfer of funds activities.

Remedial Measures for MSMEs:

• New definition of MSMEs:
  • MSMEs have been given a new definition by the Indian government.

• Promotion of ATMANIRBHAR Bharat and Make in India:
  • The government has prohibited global procurement contracts of up to INR 200 crores and promoted ATMANIRBHAR Bharat.
• Emergency Credit Line Guarantee Scheme:
  • Loans of about Rs 3.67 lakh crore have been sanctioned under ECLGS till August 5, 2022.
  • The loans under ECLGS provide a 100 percent guarantee to lending institutions in respect of the credit facility extended by them under the scheme to eligible borrowers.
  • The ECLGS, in particular, has in the last two years been of benefit to 11.3 million MSMEs.
• Access to Digital platforms:
  • Apart from the government, the private sector has also supported MSMEs by providing access to digital platforms for marketing, easy payments, etc.
    • the total number of merchants listed for receiving payments through Paytm increased from 11.2 million at end-March 2019 to 26.8 million by end-March 2022
  • E-commerce websites have also encouraged the onboarding of MSMEs.
    • The number of small and medium enterprises onboarded on Flipkart increased from 3.05 million in 2018-19 and 7.35 million in 2019-20 to 10.5 million in 2021-22.
  • Open Network for Digital Commerce creating opportunities for MSMEs to access technology and diversify their target markets.

Sign of Robust Recovery:

• Greater Formalization:
  • These efforts to strengthen MSMEs have led to their greater formalization and aided the recovery of their businesses.
    • More than 10 million MSME units have registered on the Udyam portal since July 2020.
• Growth in GST Collection:
  • Goods and services tax paid by enterprises with a turnover less than ₹250 crore rose from ₹3.8 trillion in the pre-pandemic year of 2019-20 to ₹4.1 trillion in 2021-22.

Issues still Remain Unsolved:

• Credit GAP:
  • As per the U.K. Sinha Expert Committee on MSMEs' report, the overall credit gap in the MSME sector is estimated to be Rs 20 lakh crore to Rs 25 lakh crore.
• Lack of Reliable Data:
  • Lack of reliable data about enterprises operating in this sector is a major roadblock in the growth of the MSME sector.
  • The last MSME survey was conducted by the National Sample Survey Office (NSSO) in 2015-16.
• Delay in Payment:
  • Public and private sector enterprises continue to delay payments to them.
• Regulatory and Compliance Burdens:
  • It burdens claim a disproportionately large share of micro and small enterprises’ managerial and financial bandwidth.
• Sales Turnover Criteria:
  • Introduction of the sales turnover criteria to classify MSMEs is diluted by an insistence that they graduate to the next level if they exceed either of two criteria - sales turnover and investment - rather than both.

Way Forward:

• In addition to the various facilitating schemes announced by the government to support the sector, ramping up investment into the sector will be crucial.
• Amending existing FTA’s and ensuring that future FTAs include a charter on MSME will have a significant impact on the ability of small Indian producers to align with globalised trading regimes and explore cross-country opportunities more effectively.
• MSMEs need to be supported with better infrastructure and access to technology and finance.
• Regular surveys of the sector would significantly help bridge the credit gap for MSMEs in the country.
• Larger public and private enterprises play their part in treating them fairly and paying them on time.

Conclusion:

• The ambitious target of a $5 billion economy with a 25% contribution from the manufacturing sector will require the MSME sector to play a pivotal role.

Source: Live-Mint

Mains Question:

Q. “MSMEs sector not only boosts domestic production but also generates employment and has tremendous room for expansion”. Critically analyse the statement. (250 Words).