SUPPORTING MSMEs SURVIVE THROUGH COVID-19 LOCKDOWN

SUPPORTING MSMEs SURVIVE THROUGH COVID-19 LOCKDOWN

Covid-19 has Created Existential Crisis for MSMEs

Small businesses- both industrial and services- play an extremely important role in meeting the consumption demands of final consumers and supplying intermediate goods to large businesses. These small producers are estimated to generate 30% of India’s GDP and 40% of India’s exports. The small businesses universe has about 7.5 crore micro, small and medium enterprises (MSMEs) and employ about 13 crore workers.

The economic lockdown imposed in the country on 23rd March, 2020 shuttered about 70% of the economy for more than five weeks. 50% of the economy is still shuttered after the lockdown was partially relaxed on 4th May. The MSMEs and the workers employed therein are the worst victim of the economic lockdown. Over 10 crore workers have lost their jobs.

How should India support small businesses, including their crores of workers, survive through this crisis and revive their businesses?

What should the MSME package be and how can it be delivered? I explore these issues in this blog.

MSMEs are Big in Number but Lack Identity

India identifies each of its over 130 crore individuals and assigns all the individuals a unique ID. But India does not uniquely identify and recognise each one of its micro, small and medium business enterprise. MSMEs are defined and classified in terms of investment in plant and machinery fixed in year 2006. These limits have remained unaltered for last 14 years.

We don’t know how many MSMEs are operational in the country. Firm wise data on their turn over, value added, number of people employed, location, wages paid, profits made, tax paid, credit availed etc. are simply non-existent.

About 7.5 lakh crore small businesses in India, in myriad forms, are almost totally unincorporated. These businesses have no unique business ID to be recognised as unique business entities. There is no single authority to recognise and maintain the register of unincorporated enterprises. There is no national business register of unincorporated MSMEs in India.

The MSME Ministry started assigning a unique ID number in 2015 to an MSME- called Udyog Aadhar Numbers or UAN. Total number of MSMEs assigned UAN by now is 92.63 lakhs. The UAN scheme is fundamentally flawed. It essentially assigns an enterprise number to an individual, not to a business. It also covers only about 12% of estimated MSMEs in the country. Finally, it does not have any details of business operations of MSMEs.

We should have a unique ‘business’ identity number, not an ‘industry or udyog’ enterprise number. It should better be called Business or Vyavsay Aadhaar Number or VAN. This number can then be universally used for transacting with small businesses by all- tax authorities, banks and other lenders, EPFO and all other entities.

We Have Only Broad Estimates of MSMEs

The last Economic Census, the Sixth, was conducted in 2013. It found 5.85 or about 6 crore business establishments in operation. The Economic Census 2013 also found that there were 13 crore workers employed in these businesses.

National Sample Survey 73rd Round (NSS 73rd Round) conducted in 2015-16 broadly substantiated the data and findings of the Economic Census 2013. It found 6.34 lakh unincorporated non-agriculture MSMEs in the country. It also estimated that more than 99% of these enterprises (6.30 crore out of 6.34 crore) were micro-enterprises.

During the intervening period of about 8 years between Fifth and Sixth Economic Census, the number of establishments in the country increased by a little over 40%. Even if we assume 1/3rd growth in last 7 years, the number of non-farm agricultural, industrial and services establishments in India should be around 7.5 to 8 crores presently.

Interestingly, more than 70% of establishments or about 5.5 crore establishment were estimated to be Own Account Establishments (i.e. establishments without any hired worker). About 90% establishments were proprietary establishments. A significant proportion of establishments were home based or without any fixed structure to work from.

Over 13 crore persons were found employed in the establishments in 2013.

This number could have grown over 15 crores by now.

The Economic Census did not classify the establishments in micro, small, medium and large enterprises. The 73rd NSS Round did. If we assume all the establishment employing 10 or more workers as large, 99% of the establishments are MSMEs. This corresponds with the finding of 73rd NSS Round.

Equity Finance for MSMEs

It is a stark fact that Indian governmental and financial ecosystem does not provide any equity support to MSMEs. It does not even talk about it. The Annual Report of the Ministry of MSMEs for the year 2018-19 does not use the word ‘equity’ even once in its entire 150 pages report.

International Finance Corporation (IFC), an affiliate of the World Bank, made an estimate of equity requirement of MSMEs in India. It found that the demand for equity finance by MSMEs was Rs. 18.4 lakh crore out of total finance requirement of Rs. 87.7 lakh crores. Unfortunately, after estimating the requirement of equity finance, the IFC forgot about it completely and the entire report concentrated only on credit finance.

The small and medium companies have an option to raise equity on the SME exchanges of BSE and NSE. This exchange allows companies with post issue face value capital up to Rs. 25 crores, which is far higher than the maximum Rs. 10 crores investment permissible for medium enterprises in plant and machinery. Still, only about 300 companies are, in all, listed on both the BSE and NSE SME exchanges. These companies raised a total of about Rs. 6000 crores in equity capital since the inception of these exchanges in 2012. Details of how many of these companies are MSMEs are not available.

MSMEs in India are completely starved of the equity capital.

Credit Support

There is a big gap between the credit required and credit being made available to MSMEs. The IFC report concluded that overall demand for debt for MSMEs was estimated to be Rs. 69.3 lakh crore.

The report further informed that a whopping 84% of the debt demand of Rs. 69.3 lakh crore i.e. Rs. 58.4 lakh crore was met by informal sources. Only about Rs. 11 lakh crore of debt demand was met by all the formal sources put together- the banks, regional rural banks, urban cooperative banks, non-banks, SIDBI and the government.

RBI data broadly confirms IFC findings. For the year ending March 2020, total credit outstanding against Micro and Small Enterprises (MSEs) from scheduled commercial banks was Rs. 11.63 lakh crore.

Grants by Government

By its very nature, grants can be provided only by the government and the charity. The MSME Ministry has an annual budget of about Rs. 7500 crores spread over 40 schemes.

The largest scheme is called Prime Minister Employment Generation Programme. Under the Programme, establishment of micro enterprises are encouraged by provision of a capital subsidy. There is an upper limit of support- Rs. 25 lakhs in manufacturing and Rs. 10 lakhs in service enterprises. Assuming an average capital subsidy of Rs. 5 lakhs, the scheme can provide capital subsidy support to 50000 enterprises a year, not even .1% of micro enterprises in the country.

There are two line-items in the MSME Ministry budget 2020-21 about Funds. One is MSME Fund and the other is Fund of Funds. The idea of a MSME Fund was conceived in 2017-18. For the past three years, a provision has been kept in the budget but not a single rupee has been used. This year, a Fund of Funds has been proposed and a provision of Rs. 200 crores have been kept. Considering that only Rs. 63 crores have been invested cumulatively by the SME Funds registered with SEBI, it will be interesting to see whether Fund of Funds idea takes off materially this year.

Fiscal Package for MSMEs

MSMEs need fiscal support for two main heads of expenditure/losses.

First, most MSMEs could not produce and sell goods and services during this 40-days lockdown period. At least 90% of MSMEs, numbering over 7 crores, simply shut shop. For a period of at least 40 days, these MSMEs received no income. These businesses could avoid the cost of inputs, but will have to bear several fixed costs- rents, interest payments (moratorium even when granted is only postponement of interest payment, not waiver), some wage payment, some maintenance expenditure and the like. Most MSMEs are not in a position to live with this liability. Unless supported, millions of MSMEs would simply close down and default on these obligations.

Second, the 8 crore MSMEs employ about 15 crore workers. Barring a few medium and small industries, most MSMEs, will not be able to pay wages to their workers. For the self-employed/ own account micro entrepreneur, their net income from the businesses is really the wages of the entrepreneur/labour. Over 10 crore MSME workers are estimated to have lost their jobs and wages. While a good part of these MSME workers may find their jobs again when the economy goes back in the normal production and distribution mode (this is likely to be a long drawn out process), the loss of wages suffered during 40 days of lockdown, at the minimum, requires government support.

MSMEs produce about 30% of gross value added. If we take 70% of GDP loss for the 40 days period of economic lockdown, India is likely to have lost about one month’s GDP or about 16 lakh crores of GDP. 30% of GDP contributed by MSMEs implies that MSMEs could have suffered losses of at least Rs. 5 lakh crores of gross value added.

MSMEs have larger share of wages in the gross value added. For micro enterprises, share of wages in value added might even be in the range of 75%-90%. On an average, let us take share of wages to be about 80% of MSME gross value added. This would mean that over 10 crores of MSME workers who lost jobs would have suffered wage loss of about Rs. 4 lakh crores of wages.

The government should offer to pay 50% of the normal wages for the period of shut down subject to a certain maximum, let us say Rs. 10,000 per worker. As an estimated 10 crore MSME workers are out of the jobs, this will not cost the government more than Rs. 1,00,000 crores. Lot of these workers will not go back to earn their normal wages/income for some more time and therefore it might be advisable to provide them additional transition support for some more time say until June end. This might cost another cost another 1 lakh crore. The wages package cost of Rs. 2,00,000 crores for 10 crore MSME workers can be juxtaposed against Rs. 75000 crores support package for 8 crore farmers. Farmers have lost their incomes marginally whereas the MSME workers have lost it majorly.

Second package of approximately Rs. 1 lakh crore can be extended to about 8 crore MSMEs to cover a part of their fixed cost (excluding wages) based on some self-certified details of fixed costs they have to bear for the period of shutdown.

The survival package for MSMEs should be made of two components- a part of the lost wages of 10 crore workers (Rs. 2 lakh crore) and a part of fixed cost which MSMEs have to bear for the period of lockdown (Rs. 1 lakh crore). In all, the MSME Survival Package should be of the order of about Rs. 3 lakh crores.

Will a Credit Financed Support Backed by Government Guarantee Work?

Two proposals are being speculated in the media. The first proposal envisages additional credit support of 20% by banks over and above the line of credit currently approved. Banks’ additional exposure is proposed to be secured by a government guarantee. The second proposal envisages creation of an SPV owned by the Government of India. This SPV will be provided equity by the Government of India. The SPV will leverage its equity to raise debt. The total funds so raised will be used for providing credit support to the MSMEs.

These proposals appear to be unsuitable for the needs of MSMEs and quite unworkable for several reasons.

The SPV proposal is a complete non-starter. Forming such an SPV, staffing and operationalising it, is impossible in the current circumstances. If the SPV were to only refinance the banks, existing vehicles like MUDRA Bank can do it.

A credit-based package does not address crores of MSMEs and their workers. 60% of MSMEs have no access to credit from Banks. A fraction of MSMEs get credit from NBFCs and Micro-finance Institutions (MFI) and not banks. Most MSMEs borrow from informal sources.

Even the MSMEs which have credit lines from banks may not be able to avail additional credit. A good proportion of MSMEs drawing credit from banks are not really creditworthy in the normal banking parlance. Several MSME loans have formally become non-performing loans. Many other MSME loans are structured accounts without formal classification as non-performing. A whole lot of MSME businesses have not made their due payments but these accounts continue as standard accounts. Moratorium granted for three months raises a lot of suspicions about the standard nature of such loans.

Banks will be extremely risk averse to lend to such businesses, even if supported by a government guarantee, especially when their credit standing would have further suffered on account of closure of business in the lockdown period. We have the experience of government backed financing facility created for addressing liquidity concerns of NBFCs.

Essentially, the affected MSMEs need grant support to survive through this crisis and not more loans. In their desperation, even if they accept credit, they may not actually repay. In such a case, the government, if it honours guarantee, will end up providing fiscal grant to cover the losses finally. Why go through the tortuous route?

How to deliver the Fiscal Package to MSMEs

Delivering fiscal package to unknown universe of MSMEs is a real challenge.

Yet, we have capability to deliver it.

The fiscal package for MSMEs can be delivered by taking two institutional action. First, we should leverage the strength of our Unique Identification Authority for quickly registering all MSMEs and assigning them as unique business identity. Second, the MSME Ministry can establish a digital system of Registrar of Unincorporated MSMEs for filing a two-pages return which provides key business operations details of MSME.

Using the opportunity of distress in the MSMEs caused by the Covid-19 crisis, the Central Government can announce survival package conditional upon MSMEs registering for a unique business ID with Unique Identification Authority and filing a return of business operations with the Registrar of Unincorporated MSMEs linked with unique ID.

Structural Reforms for Long-Term Growth of MSMEs

The crisis can be converted into an opportunity to place our MSMEs on a stronger formal pedestal. Fiscal package can also be delivered in a more organised manner.

Our policies and programmes for assisting small businesses in India are based on a fundamentally flawed view of small businesses being inherently unviable businesses and being poor cousins of large businesses. Small businesses are not weaker businesses; these are different businesses. The comparative advantage of large businesses is scale of business built on investment in machinery, automation and technology use. The comparative advantage of small businesses is customised, localised and personalised delivery of goods and services to consumers. Large businesses tend to employ large capital. Small businesses tend to employ larger proportion of workers.

The distinguishing criterion between large and small businesses should be the preponderance of the share of two principal factors of production- capital and labour- in the value added by the business. Businesses with more than 50% of value addition being used to pay wages should be classified as small and those which have more then 50% of value addition going to capital and taxes should be treated as large enterprises.

We should have a system of recognising and assigning a unique business ID to every small unincorporated business in the country. For this, the MSME Act, which should be renamed and reconceptualised as Small Businesses Act, should institutionalise a Registrar of Unincorporated Small Businesses to register and receive annual business performance reports.

A National Register of Unincorporated Small Businesses should be created on a decentralised-centralised mode. All the small businesses should be registered and assigned a unique small business identity (USBID). All the registered small business should be expected to file a short annual return digitally to provide key details of their businesses.

All interactions of government, banks and other institutional partners with the small businesses should be mapped to this unique ID- USBID. This would ensure that all relevant details of a business are mapped at one place. This would help enormously in delivering government benefits to such businesses, build creditworthiness record for better bank and non-bank financing and in conducting their businesses in general.

Government support for small businesses should be thoroughly reorganised. Plethora of schemes with small allocations and overlapping objectives are not delivering any results. Evan otherwise, a budget of Rs. 7500 crores for 7.5 crore small businesses is too small. It should be better targeted. It would be far more effective if the government budget is used for delivering two benefits to small businesses. One, an incentive linked to registration and filing of annual returns on digital small businesses platform. Second, to provide equity support for covering the rental expenditure of small businesses for initial period of 3-5 years.

CONCLUSION

Small businesses- both industrial and services- play an extremely important role in meeting the consumption demands of final consumers and supplying intermediate goods to large businesses. There are an estimated 8 crore small businesses in the country. The small businesses, or the MSMEs as we call these, employ about 15 crore workers.

The economic lockdown imposed in the country on 23rd March, 2020 shuttered about 70% of the economy for more than five weeks. 50% of the economy is still shuttered after the lockdown was partially relaxed on 4th May. The MSMEs and the workers employed therein are the worst victim of the economic lockdown. Over 10 crore workers have lost their jobs.

MSMEs produce about 30% of gross value added. If we take 70% of GDP loss for the 40 days period of economic lockdown, India is likely to have lost about one month’s GDP or about 16 lakh crores of GDP. 30% of GDP contributed by MSMEs implies that MSMEs could have suffered losses of at least Rs. 5 lakh crores of gross value added.

MSMEs have larger share of wages in the gross value added. On an average, share of wages form about 80% of MSME gross value added. This would mean that over 10 crores of MSME workers who lost jobs would have suffered wage loss of about Rs. 4 lakh crores of wages.

The government should offer to pay 50% of the normal wages for the period of shut down subject to a certain maximum, say Rs. 10,000 per worker. As an estimated 10 crore MSME workers are out of the jobs, this will not cost the government more than Rs. 1,00,000 crores. Lot of these workers will need additional transition support for some more time say until June end. This might cost another cost another 1 lakh crore.

Second package of approximately Rs. 1 lakh crore can be extended to about 8 crore MSMEs to cover a part of their fixed cost (excluding wages) based on some self-certified details of fixed costs they have to bear for the period of shutdown. In all, the MSME Survival Package should be of the order of about Rs. 3 lakh crores.

Two credit-based stimulus proposals are being speculated in the media. The first proposal envisages additional credit support of 20% by banks over and above the line of credit currently approved. Banks’ additional exposure is proposed to be secured by a government guarantee. The second proposal envisages creation of an SPV owned by the Government of India. The SPV will leverage GOI equity to raise debt. The total funds so raised will be used for providing credit support to the MSMEs. These proposals appear to be unsuitable for the needs of MSMEs and quite unworkable for several reasons.

The SPV proposal is a complete non-starter. Forming such an SPV, staffing and operationalising it, is impossible in the current circumstances. If the SPV were to only refinance the banks, existing vehicles like MUDRA Bank can do it.

60% of MSMEs have no access to credit from Banks. Any credit-based package will leave these out completely. Even the MSMEs which have credit lines from banks may not be able to avail additional credit. A good proportion of MSMEs drawing credit from banks are not really creditworthy in the normal banking parlance. Several MSME loans have formally become non-performing loans. Many other MSME loans are structured accounts without formal classification as non-performing. A whole lot of MSME businesses have not made their due payments but these accounts continue as standard accounts. Moratorium granted for three months raises a lot of suspicions about the standard nature of such loans.

Banks will be extremely risk averse to lend to such businesses, even if supported by a government guarantee, especially when their credit standing would have further suffered on account of closure of business in the lockdown period. We have the experience of government backed financing facility created for addressing liquidity concerns of NBFCs.

The fiscal package for MSMEs can be delivered by taking two institutional action. First, we should leverage the strength of our Unique Identification Authority for quickly registering all MSMEs and assigning them as unique business identity. Second, the MSME Ministry can establish a digital system of Registrar of Unincorporated MSMEs for filing a two-pages return which provides key business operations details of MSME.

Using the opportunity of distress in the MSMEs caused by the Covid-19 crisis, the Central Government can announce survival package conditional upon MSMEs registering for a unique business ID with Unique Identification Authority and filing a return of business operations with the Registrar of Unincorporated MSMEs linked with unique ID.

This system can be converted to serve long term goals of formalising small businesses in India as described in little more details in the last section of this blog.

SUBHASH CHANDRA GARG

NEW DELHI 05/05/2020

(Subhash Chandra Garg is an IAS officer of the Rajasthan cadre. He has served in various key positions for both the Union Government and the Government of Rajasthan. He served as Economic Affairs Secretary and Finance Secretary of India. He has also served as an Executive Director in the World Bank. To know more, follow him on LinkedIn: https://www.linkedin.com/in/subhash-garg-2241682/)