REBUILDING THE MSME SECTOR.

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The Prime Minister has already announced a 3week total shutdown in wake of the Covid-19 epidemic. 

MSMEs will be the worst sufferers and this would push them to the brink. India’s MSME sector contributes about 30% to India’s $2.7 trillion GDP, and employs about 300 million people. A large number of MSMEs would incur business losses and also face severe cash flow disruption, which in all likelihood will have an adverse effect on the livelihood of several people working in this sector.At present, the industry is not able to pay even salaries, PF, ESI and TDS and also finding difficult to get additional bank financing. . It is also important to consider that 93% of over 400 million workers are largely employed in unorganized and informal sectors. Earlier reports suggested that a lockdown may affect Indian economy with recession and livelihood of 348 million could be affected. With the number of distress calls coming to us, we estimate that, over 25% of the over 65 Million MSME’s units in India will be shut if the lockdown in cities extends beyond 4 weeks and a staggering 35% will shut shop if the panic extends beyond 8 weeks.  

The UN Conference on Trade and Development (UNCTAD) estimates the economic impact of Covid-19 at a minimum of $1 trillion in 2020. India’s immediate measures are crucial, and the new economic taskforce, the Intervention by RBI and various steps for the citizens at the bottom of the pyramid are a right step in that direction.  

As the concept of work from home is hugely irrelevant for the MSME sector, the immediate impact of the lockdown is already being seen with the loss of jobs, especially in those businesses dealing in non-essential commodities.

To deal with such a situation, it is suggested that a wage subsidy may be provided for all registered workers for the period of disruption. Even countries like Canada are providing three-month wage subsidy of 10 percent to small businesses. 

If in the worst scenario, the lockdown continues to more than 3 weeks, it will be imperative for the government to come up with economic relief package aimed directly to the MSMEs. Countries around the world are implementing emergency tax measures to support their debilitated economies under the Covid-19 threat. In order to support its SME sector, countries like Saudi Arabia have already unveiled a $13.3bn stimulus plan. Even UAE decided to offer $27.2 billion economic support package to assist its corporate and retail banking clients and provide relief to the institutions affected. Austria is providing direct aid to sole proprietorships and family-owned businesses and also to the tourism and cultural sectors.

Although, the Finance Minister Smt. Nimala Sitharaman announced some relief measures as part of her press conference which were related to Taxation; including changes in Income Tax, GST, Customs & Central Excise and Banking Measures; including changes in Insolvency and Bankruptcy Code. But a much bolder step needs to be taken such as offering an ad-hoc additional credit of 25% of working capital to provide support to MSMEs severely hit due to the lockdown. It is important to make sure that there is enough money with the MSMEs to manage their working capital for their survival in this situation of uncertainty. 

MSMEs are vital to our economy and such cannot be left on its own. India must offer tax exemptions to its MSMEs and make plans for offering stimulus support direct to its MSMEs. Without a strong financial stimulus, MSMEs are likely to enter a slowdown cycle and thereby affect the whole of economy. China has reduced VAT from 3 percent to 1 percent for small businesses until the end of May. South Korea announced VAT cut for small businesses. Canada has suspended sales tax or income tax audits for 4 months for small businesses.This would be the right time to lower GST on all products and services offered by MSMEs with a turnover of less than 10 Crs, to half the current rate, more importantly payable on collection, which will make them continue to be competitive with large business and offer some sustenance mechanism.  

We must also prepare for the recovery of our economy post Covid-19 lockdowns. Countries like Australia are providing aid packages as relief to businesses through subsidized loans and central bank lending. The government of Finland and Netherland are supporting loan guarantees for small and medium-sized businesses. One important step that has been taken by RBI to ask banks to allow MSMEs more time to pay interest and installments without extra charges is welcome. Banks should also be geared up to deliver concessional loans @ 5% to MSMEs to counter the shocks of lockdown. An interest subvention of 5% on the working capital could also be the way out, because unless the industry gets some support on the borrowings, it’s not going to work out. Entrepreneurs employing 5 or more workers, who have not availed of any credit facility with any bank, must be given an ad hoc loan without collateral of upto Rs. 25 lakhs.

As entrepreneurs are facing the brunt of the lockdown while putting up a brave face, some measures that can be taken up by the government with the hope of consideration:

1. Clear all payments owed by government to MSMEs, as well as processing and refund of taxes, enabling more cash in companies to handle the crisis. 
2. Exempt all forms of tax on income for salaries paid in March and April for companies that aren’t retrenching any staff or daily wagers to benefit companies. The employee will get his net of taxes salary and company benefits with the tax part.
3. Make travel & tourism a priority sector. To help hotels and tourism, as a temporary measure, reduced GST rates should be considered on priority or alternatively, make GST rate at zero. 
4. Make all expenditure incurred on education & health institutions at zero tax. This will also bring down the cost of education and health services in the country.
5. The closure of Financial Year end for FY 19-20 may be extended.
6. There can be adverse impact on our exports and imports as well. Imports of materials like Pharmaceutical and auto parts while exports of materials like textiles can be adversely affected. Industries like Pharmaceutical, electronics, renewable energy and telecom are heavily dependent on China due to which they will be brought down to their knees. The government should develop ways and means to reduce over-dependence on any single country.

The aforesaid steps will help MSMEs sustain and provide timely salary and wages to their workforce over a prolonged period. Apart from the above policy changes, steps are required to ensure that this sector continues to act as an important link between the large-scale industries and the society. Besides, as we need to prepare for a long drawn out battle, the goal of the Modi Government will not just be providing relief, but also to ensure sustainability over a longer period

About the Author

• 

Vinod Kumar

President

India SME Forum, 

India’s largest Not for Profit Initiative for Micro, Small and Medium Enterprises with 86000 enterprises as members. Follow them on Twitter @SMEForumIndia 

You can follow the author on Twitter @VKwuthoo