New Delhi: There is an art of asking what you want and there is an art of giving. A notch above is the art of promising something and giving entirely different. At the end this opinion piece you decide in which category the promises made by Finance Minister Nirmala Sitharaman to MSMEs fits in. I would like to begin with thanking the FM for the centrepiece of the revival plan meant of for MSMEs, that is Rs 3,00,000 crore lending facility. It indeed is a valiant attempt to address the national crisis courtesy COVID-19, the way she did doing five press conferences detailing the financial assistance package.
Let's begin with the package. The package has 4 key aspects – very briefly which are - One, collateral-free automatic loans, Two, fund of funds to provide equity, Three, PF assistance by the government as also lower PF contribution of 10%, and Four, GDS / TCS reduction by 25%. Before we proceed with the bounty, let us remind ourselves of the following key features of the MSMEs in our country. As per NSSO estimates, there are an estimated 110 million (mn) MSMEs of which 97% are micro (less than Rs 25 lacs investment in plant and machinery and Rs 10 lacs if it’s a service unit). Admittedly they contribute to about a third of the national GDP as well as some 40% of exports employing some 114 million workforces (30% of the labour force of 464 mn in 2015 –labour Bureau estimates. Also 97% of this workforce is deployed in the micro sector). Sectorally the majority of MSMEs are in textiles sector – ready-mades, woollen, knitwear apart from plastics and leather goods and food products sector. Tamilnadu leads in the number of MSMEs followed by Maharashtra, UP, WB and AP (combined), Karnataka, Punjab in that order (DC MSME).
Let us now open each of the sub-packages and see what further lies inside. The first concerns collateral-free loans and that too automatically granted. For this, we may quickly recall that the earlier MUDRA/START-UP etc scheme granted collateral-free loans with investment limits and with a guarantee from Credit & Refinance Guarantee Corporation of India apart from the 59-minute loan scheme announced some time ago. Analysis of the success of such schemes is not widely available, but informal anecdotal enquiries with banks etc would reveal that they have not been much success in achieving the goals they were intended to.
Eligibility and Size
Interestingly, the eligibility of the working capital facility is for the MSMEs that have existing loans. Now, this shrinks the number of MSMEsthat will effectively be eligible for this facility. Such MSMEs can now borrow up to 20% more of their loan outstanding on February 29. For example, if a business has a loan outstanding of Rs 1 crore, it can borrow another Rs 20 lakh. FM Nirmala Sitharaman, on her May 13 presentation had said "45 lakh units can resume business activity and safeguard jobs". 4.5 million MSMEs? We told you above as per NSSO estimates there are an estimated 110 million (mn) MSMEs in India.
Now here is the real devil. Forget corona coma, even when the economy was better, credit growth to all MSME segments was slumping. The share of small and microloans in total credit to industry shrunk to 12.55% in FY'17 as compared to 13.33% in 2015. According to a TransUnion CIBIL report the share of public-sector banks in MSME loans dropped from 57% in September 2017 to 48% in September 2019. Meanwhile, private-sector banks gained share from 32% to 39%. So how would Rs 3 lakh crores set apart for the MSMEs loan may not be very different from the past, in fact with much-discounted supply-side fulfilment due to ab initio ipso facto reduced demand driven by reduced purchasing power in the hands of the consumer value chain.
The demand re-generation
Scenario analysis will be well worth it in any which case. So let's come to the thought of demand-generation. Demand-side even if it is to drive MAKE IN INDIA would be in realistic terms driven more by price-sensitive Indian consumer than by sheer nationalistic fervour. This reality may not be lost sight of, particularly when it is also realised that net-net just about 15% of what India consumes is produced even today in the country (Nomura Research Institute).
So what is the solution? Well the answer my dear friend, lies in being competitively one-up on China (consumer goods - FMCG), Bangladesh and Vietnam (for textiles) and the manufacturing sector in general. Are the MSMEs geared to do that – make an informed guess. Cheap Chinese yarn in Bhivandi and Silk in Karnataka are just two examples. The competitive edge would come from power/fuel, GST tax slabs, credit interest rates and exports support along with technology drive. Do we know exactly how does the competitor operate? The micro model of the MSMEs cannot take on the Chinese industry for the simple reason that the Competitor is not manufacturing its exports from MSMEs but from large sector manufacturing base – assembly line – by the millions for any product. Visit Guangzhou and find out in person. In short, therefore, before raising the toast to the Rs 3 lakh crore windfall (Skyfall for Hollywood types), let’s look at the devil in the details of the actual ground level problems and then address them because it is the already stressed banking and NBFC sector who will be funding the subpackage and so, will they throw their doors open for liberal funding? Surely an issue to contend with.
Let us plod on. Rs 50,000 crores has been set apart for fund of funds for equity participation in the MSMEs. As per preliminary information, equity is to be taken by Government and other investors. Government participation in MSMEs equity outside the public sector (where in any case it is in the large sector and not in MSME size) is not available as data or metadata. So that leaves the investors too.
We do not yet know as to how the potential investors who could be the owners/entrepreneurs of the MSMEs also could be granted equity assistance outside any liabilities accounting for the money granted for equity participation? That is to say how exactly would the government or banks fund equity in MSMEs which can be outside the pale of loan type procedure is a good wait-and-watch subject.
This brings us to the third and fourth sub-package both of which are time dilatory steps and hope to make available more liquid cash in the hands of the MSMEs. They are no system transforming ideas and so even if there is a transitory demand for the same, its true effect on addressing demand-side issues in the mid-term after the 2nd quarter FY 20. We should have a quick reconnaissance of the fruits of labour. In fact till then, not just for the third and the fourth component of the Atmanirbhar Bharat package, we may also see how things playout for the other two sub-packages and do hope that the MSMEs will turn the COVID tide in their favour.