After being severely impacted by the Covid-19, the Indian government offered a relief package for MSME. However, the government’s stimulus package, launched last year, has been insufficient in assisting economic recovery, according to a report submitted in the Rajya Sabha by the Parliamentary Standing Committee on Industry.
The group recommended that the government issue a larger package to assist the economy, especially small companies, in recovering from the pandemic’s hardship.
The research highlighted that, in the aftermath of the first wave of the pandemic, the second wave shredded the economy even more severely, particularly the MSME sector. The government should “immediately come forward with a broader economic package targeted at strengthening demand, investment, exports, and employment generation to help the economy, particularly MSMEs,” according to the Committee.
Last year, the government announced the Rs 3 lakh crore Emergency Credit Line Guarantee Scheme (ECLGS) as part of a Rs 20 lakh crore stimulus package – equivalent to 10% of India’s GDP – to assist MSMEs in recovering from the Covid effect. Recently, the scheme’s ceiling was raised to Rs 4.5 lakh crore.
Emphasising that Covid has had a significant impact on MSMEs, the Department’s Parliamentary Standing Committee on Industry has advocated for soft loans to MSMEs at a low interest rate of 3-4 per cent, liquidity support for small businesses, and the establishment of a National Electronic Employment Exchange, as well as a new employment policy.
Various industry groups stated in their presentations to the Committee that MSMEs are suffering a severe financial constraint as a result of the pandemic, which reduced their profits by 20-50 per cent. According to the study issued Tuesday, “it is projected that over 25% of MSME loans may fail since numerous MSMEs are having difficulty obtaining working capital from banks,” the chambers informed the Committee.
The Committee noted that, based on the Ministry’s written responses, no comprehensive analysis of the sector’s real losses as a result of the lockdown has been performed by the Ministry of MSME. In reality, the second wave revealed MSMEs’ vulnerabilities like never before, highlighting issues including late payments, significant informality, and insufficient financial resilience.
The committee, led by Rajya Sabha MP K Keshava Rao, recommended that the Reserve Bank of India should modify non-performing asset (NPA) categorization rules for MSMEs and align them with the payment cycle. It said, The RBI’s 90-day restriction for categorising MSMEs’ overdue should be raised to 180 days so that MSMEs are not forced to shift their working capital to service their loan payments and settle their debts at the expense of normal company operations. This proposed modification in RBI standards will prevent a huge number of MSMEs from going out of business or closing down, resulting in a loss of economic activity and jobs. The MSME sector accounts for around 30% of the country’s production and nearly half of its exports.
The panel offered suggestions for promoting indigenous production and reducing import dependency. “Availability of soft loans to MSMEs at a minimal interest rate of 3-4 per cent with extended repayment tenure, easy land acquisition, fewer parameters of compliances etc. could help in developing import substitution in the country. Besides, Special Economic Zones (SEZ) focusing upon import substitution could be developed across the country,” it said.
The Committee also asked the government to increase the guarantee amount, citing the fact that almost 2.5 crore dealers are now eligible for the programme. It was also proposed that the government broaden the scope of the plan to include small merchants and dealers who do not have access to MSMEs-specific institutional financing. Retail and wholesale trades were recently restored within the MSME classification by the government.
“The Committee recommends that while formulating policies/schemes, the Ministry should consider the benefits of MSEs which are often deprived of the benefits of various policies/schemes announced by the Government. The stimulus package announced by the Government last year could not percolate down properly to the lower levels of the MSME sector,” the Parliamentary panel said.