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COVID-19 Stimulus Package to Credit-Starved MSMEs

Over the past few decades, the Micro, Small, and Medium enterprise (MSME) sector have occupied a position of strategic importance in the Indian economic structure. This sector contributes nearly 28 percent of the country’s GDP, employing over 111 million people in nearly 63.38 million widely dispersed enterprises across the country, accounting 45 percent of manufactured output, 40 percent of the country’s total exports and producing more than 8000 value-added products ranging from traditional to high-tech.

Further, these enterprises are the kindergarten for innovation and entrepreneurship, which will be the key to the future growth of India. It is also an acknowledged fact that this sector can help realize the target of the proposed National Manufacturing Policy of enhancing the share of manufacturing in GDP to 25 percent and creating 100 million jobs by the end of 2022.

Since the honourable Prime Minister’s addressed to Nation on 12th of May, 2020, its strategic importance further enhanced by multiple folds. The slogan of Atma Nirbhar Bharat and dream of seeing India as a hub for the global supply chain, unquestionably further strengthen the strategic importance of this sector.

Despite their significant and vibrant contribution and inherent capabilities for excellent and historical growth trajectory, this sector also faces multiple challenges. Unavailability of sufficient and timely funds to finance their operation has been the major hindrance in running and expanding of this sector. Various reports concerning credit availability to this sector indicate a considerable credit gap, which is a matter of serious trepidation.

In India, the MSME credit gap is estimated to be around 56 percent, approximately. While there is an estimated demand of INR 2,803,628 crore, the supply of finance through banks stand at ₹1,038,948 crores, reveals a study conducted by US-based Entrepreneurial Finance Lab (EFL). The data are sufficient enough to reflect the apprehension of this vibrant and dynamic sector.

Ongoing COVID-19 has further jolted and choked the economic and non-economic activities and dismayed the situation ranging from production to consumption across the world.

Undoubtedly, the enormous impact of deadly COVID-19 on the economy and humanity is believed to be bigger than the sum of all crises in the last century. The lives and livelihood of billions of people across the world have incredibly been affected by it. Complete shutdown in close to two hundred countries across the world is sufficient enough to believe so. Globally, more than 40 lakhs people have infected and close to three lakh people have died so far in the last five months.

The huge disruption and complete shutdown close to two months have created lots of problems, including the livelihood of millions of people in India as well. Seeing the socioeconomic dynamics of our country, for sure this lockdown cannot be continued further with the same situations and protocols. Economic activities will have to restart and GoI (Government of India) had to infuse huge money to stimulate the economy to fulfil the dreams of millions of operational Indians. As PM did on the 12th of May by announcing the INR 20 lakh crore (10% of GDP) stimulus package to bring back the economy on track.

MSME sector is the backbone of the Indian economy, it drew lots of attention of policy makers and therefore GoI has made enormous announcements, including INR 3 lakh core collateral-free loans for this sector.

Announcement Made For MSMEs

  • MSMEs can borrow up to 20% of their entire outstanding credit as on 29th Feb.2020.  Borrowers having outstanding up to INR 25 crore and turnover having INR 100 crore are eligible for the same.
  • The loan has a four-year tenure with no payment due for one year.
  • No guarantee fee, and no fresh collateral required.
  • INR 20,000 crore subordinated debt for stressed MSMEs.
  • INR. 50,000 crore equity infusion through Fund of Funds.

Apart from these stimulus measures, GoI has also decided to disallow the foreign companies forbidding the government contract up to INR 200 crore. It further gives MSMEs more room to manoeuvre.

The long-pending and highly demanded reform related to changing the definition of MSME, the GoI has redefined it by introducing the turnover as an additional eligibility criterion.

While addressing the press conference honourable Finance Minister (FM) said: “a change in the definition of MSMEs was needed so that they need not worry about growing in size”.msme-covid-19-marketexpress-in

This new definition will encourage the existing enterprises in each category to grow larger without being fear of losing the benefits and reliefs provided in each category.

The government has already implemented various schemes like Credit Guarantee Scheme, Credit Linked Capital Subsidy Scheme (CLCSS), Rajiv Gandhi Udyami Mitra Yojana (RGUMY) Performance and Credit Rating Scheme, Prime Minister Employment Generation Programme (PMEGP), Micro Finance Programme, Bills Discounting Scheme and many more to facilitate the flow of credit to this sector. But the outcome of these programs is not satisfactory so far.

How effective the current package will be? It’s a pressing question to be answered in times to come.