MSME Sector: Benefits Owing To COVID-19
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India is one of the fastest-growing economies in the world and in a developing country like India, micro, small and medium enterprises (MSMEs) play a dominant role in the growth of the economy. The past few year’s trend shows that the MSMEs have stood out as the key sector behind the economic development of the country. The sector contributes around 6.11 per cent of manufacturing GDP and around 24.63 per cent of GDP from service activities, providing employment to around 120 million people. The sector’s contribution to total exports is around 45 per cent. Hence, it is a known fact that India's MSME sector has emerged as an important and dynamic industrial sector contributing significantly to GDP and export while employing a significant portion of the country’s workforce. Considering the fact that these sectors need support and nurturing from the government, many benefits of MSME registration in India have been designed, which can be only availed if the business registers itself as an MSME under MSME Act.
The impact of COVID-19 is continuing and far reaching. The economic activities in most sectors have come to a halt due to prolonged lockdown, MSMEs being no different. Hence there is a need of a stimulus and as a significant contributor to the economy MSMEs require immediate attention to reel out if this crisis. Keeping that in mind the government is taking requisite measures to curb the loss caused due to this global pandemic.
Revision of criteria for being recognised as a MSME
First and foremost benefit is revising the definition of MSME under applicable law which is intended to bring more MSME enterprises under the purview of being classified as MSME so that they can avail the benefits associated with the status. Earlier, MSMEs were classified in two categories, namely manufacturing and service enterprises and defined on the basis of investments in the Plant & Machinery or Equipment.
Now this definition has been revised and criteria for attaining the MSME status has been relaxed to a great extent. This revised definition will also include turnover (excluding exports of goods or services or both for the purpose of classification) of the company.
An enterprise shall be classified as a micro, small or medium enterprise on the basis of the following criteria:–
Under the new definition, the investment limit for micro, small and medium enterprises have been raised substantially and the distinction between manufacturing and services has been done away with. Also a new criteria has been added in terms of Turnover limit. This measure will widen the net of benefits associated with classification as an MSME to more enterprises. Also these entities will grow without the fear of losing their MSME Status owing to enhancement in their capacity and can continue to enjoy the benefits available to MSMEs.
Collateral free loans
Collateral-free automatic loans for businesses has been planned including MSMEs and emergency credit line to businesses/MSMEs from banks and NBFCs up to 20 per cent of entire outstanding credit.
Subordinate debt for stressed MSME
MSMEs needing financial support from the government, has been provided INR 20,000 crore subordinate debt for functioning MSMEs which are NPA or are stressed. Under this scheme credit facility would be provided to the Promoters of the stressed MSMEs by Scheduled Commercial Banks for infusing the same as equity/quasi equity/ sub-debt in the unit.
The collateral free automatic credit line and the subordinate debt to MSMEs may prove to be a boon for the sector which is finding it harder to find credit support from banks and other financial institution owing to the requirement of collateral or higher interest rates. It will make it profitable for risk averse banks to resume lending operations as the government will provide 100 percent guarantee on both the principal and interest which will ease pressure on banks and other financial institutions as they will not have to make provisions in case the accounts turns into a non- performing asset.
An interest subvention scheme has also been announced under Mudra Scheme’s Shishu Cover whereby a 2 per cent interest subvention will be allowed on loans up to INR 50,000. This subvention will be extended to all those prompt payees who are making regular payments for 12 months.
As MSMEs face severe shortage of equity, INR 50,000 crore equity infusion has been provided for MSMEs with growth potential and viability and that will help to expand its size as well as capacity. Through this a fund will be set up by the government worth INR 10,000 crore which will be able to finance equity infusion in small businesses. This will lead to expansion of size as well as capacity of the MSMEs and will further encourage listing in stock exchange
Indian MSMEs and other companies have often faced unfair competition from the foreign companies. Therefore, global tenders has been disallowed in Government procurement tenders up to INR 200 crore. This will be a step towards self-reliant India or support Make in India and will also help MSMEs to expand their business.
Government has always taken positive steps towards bringing this sector to the fore front. Be it collateral free loans or protection against delayed payments, MSMEs have always received the needed push to excel. The government has also provided support to this sector for giving a boost to the Export Promotion and Import Substitution objectives of the economy.
COVID-19 has brought in a lot of woes for this sector like any other due to the stagnation in economic activities owing to the restriction in movement of people as well as goods. These relief measures are expected to help in augmentation of this sector which will give the needed stimulus to the objectives of the foreign trade policy of the country.