Why credit alone is not enough to solve the problems of MSMEs


In his endorsement of the budget, NITI Aayog Vice President, Rajiv Kumar, wrote on February 10, 2020 that the MSME credit facilities “will broaden the growth impetus and ensure that job creation activity is spread in all the countries”. He cited the two unsecured credit schemes to back up this claim – the Emergency Line of Credit Guarantee Scheme (ECLGS) for which an additional ₹50,000 crore was provided in the budget bringing the total to 5 lakh ₹ crore available until March 2023, and the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) scheme, its oldest version running since 2000, is expected to provide an additional 2 lakh crore.

He forgot to mention the third program launched under the budget, ‘MSME Acceleration and Enhancement Program (RAMP)’, for which ₹6,000 crore is to be provided, over the next five years , to “help the MSME sector become more resilient, competitive and efficient”.

All these credit facilities are essential to revive the MSME sector hard hit first by the double shock of demonetization and GST and then by the pandemic disruptions for a year now. At best, however, they are largely insufficient to address the serious challenges facing the sector. The Center has not captured a full picture of the challenges, such as how many have closed shop permanently, how many have been revived through the credit offer and what more needs to be done to help since most MSMEs are working in the informal sector, are self-financed, and outside the institutional credit system.

The above is revealed through a series of responses that the Center provided to Parliament this month.

No data on MSMEs

On February 3, 2022, the Center said in response to a question on the number of MSMEs temporarily or permanently closed during the pandemic: “As MSMEs operate in both the formal and informal sectors, data regarding temporary and permanent closure MSMEs are not centralized. maintained.” That is, it does not contain the relevant information. He could have easily collected this information on his own or sought help from state governments.

In another response the same day to a question on job creation by MSMEs, he said: “The promotion and development of enterprises is a subject of the State. The central government complements the efforts of the state/UT governments through various schemes, programs and policy initiatives for the promotion, development and improvement of the competitiveness of MSMEs and to increase employment opportunities in the country. ..” Again, there was no attempt to find the status.

There was, however, another answer that provided some clues.

In response to a specific question about an official investigation aimed at assessing the impact of the second wave of the pandemic (and not the first wave), the Center admitted that its own entity Small Industries Development Bank of India (SIDBI) had conducted a survey in September 2021- January 2022. Based on a sample of 1,029 units across 10 states and two union territories, this survey found that: (a) 67% of MSMEs were temporarily closed for a period of up to three months (b) more than 50% witnessed a decline of more than 25% in revenue in FY21 and (c) approximately 66% reported a decline of profitability due to stable fixed costs and lower revenues.

The survey also revealed that (i) around 65% of MSMEs took out credit under the ECLGS and (ii) around 36% took out loans under the Micro Credit Guarantee Fund. and small businesses (CGTMSE).

This leaves many critical gaps: how many MSMEs closed permanently due to the second wave (this is not the same as saying how many were temporarily closed)? How many closed shop permanently because of the first wave? How many jobs have been permanently lost? Are the ECLGS and the CGTMSE sufficient to revive the sector?

In short, the SIDBI survey is sketchy at best and likely limited to only units operating in the formal sector, while most MSMEs operate in the informal sector.

Credit only reached 15% of MSMEs

This is a critical issue as industry associations and economists had called for direct cash support to the sector, with a May 2021 private survey even warning that 59% of MSMEs and start-ups could be sold or shut down by the end of 2021 due to the pandemic. disturbances.

The 2021-22 Economic Survey provides some answers. It says ₹2.28 lakh crore was disbursed to 95.2 lakh MSMEs under the ECLGS on Nov 19, 2021 and ₹59,858 crore under the CGTMSE in FY21 & 22 (till 30 November 2021) as “credit / money margin”. It was silent on the number of MSMEs who received the credit/margin money from CGTMSE and whether the beneficiaries were common to both.

At first glance, the credit extended to MSMEs of 95.2 lakh is impressive until one realizes that there are 6.34 million MSME units in India, according to the 2020-21 annual report of the Ministry of MSMEs. This would mean that credit has only reached 15% of MSMEs, leaving 85% in the cold. It is also important to know that 99.5% of MSMEs are “micro” units, most of which would have been without credit support.

The MSME Center’s lifeline ignores a critical aspect of the sector.

Most MSMEs operate in the informal sector, are self-financed

With very few exceptions, most MSMEs, especially micro-units, operate in the informal sector with limited access to institutional credit. IIM-Bangalore published an article on the challenges of the sector amid the 2020 pandemic. It stated that “over 81% of MSMEs are self-financed with only 7% borrowing from formal institutions and government sources” ; “94% are not registered with the government” and therefore credit market interventions “cannot directly benefit this sector”.

The paper argues that since most MSMEs are primarily cash-based, many of which are small, household-run businesses, they require direct cash support to cope with adverse events and since 10 states account for 75% of MSMEs, a joint effort by the Center and the States is essential to alleviate the pain in the sector.

According to the MSME Ministry’s Udyam registration portal, as of February 10, 2022, registered MSME units stood at 70,97,708. Given that the total number of MSMEs is 6.34 crores (according to the latest annual report of the ministry), this means that only 11% of MSMEs are registered and have access to formal institutional credit support.

Considering that the ECLGS covered 15% of MSMEs (according to the economic study), this is a commendable development, except that 85% is left behind. How does the Center reach them? The budget gives no clue, nor does NITI Vice President Aayog.

What are the real challenges facing MSMEs?

To design a comprehensive response, the Center must first collect relevant data – something it has not done since the 2016 demonetization that first crippled MSMEs and the entire informal economy for decades. months, the money being sucked up overnight and rationed into small trenches.

Several studies conducted by Azim Premji University, CMIE and Ashoka University have shown that the employment crisis has pushed more people into the informal economy and that a large number of job losses in the sector formal have swelled the ranks of the self-employed, many of whom may be struggling to start and run businesses. It is therefore essential to know how the realities on the ground have changed over the years, especially in the informal sector due to the three massive shocks – demonetization, GST and pandemic – in which most MSMEs operate.

For example, according to the 2014-15 annual report of the Ministry of MSMEs, 55.3% of MSMEs were in rural areas and 44.7% in urban areas. Its 2020-21 annual report says the distribution has changed. Today, 51% of MSMEs are in rural areas and 49% in urban areas. If the growth rate is compared over this period, rural MSMEs grew by 62%, while urban MSMEs grew by 91%.

Why this biased trend, especially when workers migrate from urban to rural areas in recent years? Is it due to lack of infrastructure and funding in rural areas or something else? No response is available.

Reverse migration is not just the product of pandemic disruptions. This also happened during the prolonged pre-pandemic downturn. The 2021 Ashoka University-CMIE study covering five years from FY2017 to FY21 showed: (a) manufacturing jobs fell by almost half (46% drop) (b) agricultural jobs fell increased by 4% (the share of agriculture in employment fell from 36% to 40%). %) and (c) overall employment fell by 7% over the period (from 407 million in FY17 to 378 million in FY21). This clearly shows a reversal of the earlier trend of jobs moving from agriculture to industry and services.

These results are also confirmed by the 2021-22 economic survey (which calculated unit-level data from the PLFS reports). He said that in 2019-20, agriculture’s share of employment increased to 43.5% – from 40.7% in 2018-19.

Both results point to structural change in which pressure is increasing on the rural economy – both informal agriculture and rural MSMEs. There is a need to push MSMEs into rural areas and reverse the trend indicated by the annual reports of the Ministry of MSMEs.

A year ago, RBI Governor Shaktikanta Das described MSMEs as “the engine of growth in the economy”, citing their huge contribution to the economy – “contributing to 30% of our domestic product (nominal GDP) and 48% of exports”. It also provides 25% of total jobs.

The Center could certainly do more to revive MSMEs.

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