Post covid devastation Enhanced role for MSMEs  for National Reincarnation through Smart and Secured Governance

The MSMEs constitute over 90% of total enterprises in most of the economies and are credited with generating the highest rates of employment growth and account for a major share of industrial production and exports.

Post covid devastation Enhanced role for MSMEs for National Reincarnation through Smart and Secured Governance

Micro small and medium enterprises (MSMEs) have been accepted as the engine of economic growth and for promoting equitable development. The labour intensity of the MSME sector is much higher than that of large enterprises. The MSMEs constitute over 90% of total enterprises in most of the economies and are credited with generating the highest rates of employment growth and account for a major share of industrial production and exports.

The MSMEs play a vital role in the overall growth of the industrial economy of the country. With its agility and dynamism, the sector has shown admirable innovativeness and adaptability to survive the recent economic downturn and recession and have lots of opportunities to grow in the future. This paper enlightens the growth of MSMEs and outlines the opportunities available for the MSMEs in the Indian economy.

MSMEs are the growth accelerators of the Indian economy, contributing about 30% of the country’s gross domestic product (GDP). In terms of exports, they are an integral part of the supply chain and contribute about 40% of the overall exports.

Post covid devastation Enhanced role for MSMEs for National Reincarnation through Smart and Secured Governance

MSMEs also play an important role in employment generation, as they employ about 110.1 million people across the country. Interestingly, MSMEs are intertwined with the rural economy as well, as more than half of the MSMEs operate in rural India. MSME sector has emerged as a highly vibrant and dynamic sector of the Indian economy over the last five decades. MSMEs not only play a crucial role in providing large employment opportunities at comparatively lower capital costs than large industries but also help in the industrialization of rural & backward areas, thereby, reducing regional imbalances, assuring more equitable distribution of national income and wealth. Post covid devastation Enhanced role for MSMEs for National Reincarnation through Smart and Secured GovernanceMSMEs are complementary to large industries as ancillary units and this sector contributes enormously to the socio-economic development of the country. Ministry of MSME envision a vibrant MSME sector by promoting growth and development of the MSME Sector, including Khadi, Village and Coir Industries, in cooperation with concerned Ministries/Departments, State Governments and other Stakeholders, through providing support to existing enterprises and encouraging creation of new enterprises.

COVID 19 & MSMEs: The Identification Problem

The micro, small, and medium enterprises (MSMEs) are perhaps one of the hardest hit due to the COVID 19 lockdown in India. With severe supply-chain disruptions, especially for those businesses that do not manufacture or provide essential services, the capacity to continue paying workers (without any reductions) during the lockdown, as per government directives, looks bleak. Reports from across the country raise similar alarm bells for how these businesses are unable to meet immediate capital requirements.

The government has announced that a stimulus package focused on the MSME sector is in the offing, to address medium- and long-term issues that will test their resilience. Emergency credit lines introduced by Public Sector Banks (PSBs); a concessional interest rate loan announced by the Small Industries Development Bank of India (SIDBI) specifically for MSMEs engaged in manufacturing goods or providing services related to COVID 19; and deferring GST (goods and services tax) payments until June 2020. While these are good steps to be taken to ease short-term liquidity concerns, the stimulus package focused on the MSME sector will have to be more far-reaching.

Governments across the world have been introducing a range of measures to infuse more confidence and credit into their small business lines. These measures include short-term liquidity providing ones as are being offered in India currently, but also involve wage support/subsidy (capped) for a period of three to six months, direct subsidies to one person businesses and micro units, deferral of rent and utility payments, compensation for decrease in turnover during lockdown periods, etc. While India must consider introducing such financial and safety net measures as well, the real challenge will lie in identifying these 63.4 million unincorporated MSMEs, of which 99% are micro-enterprises that remain largely informal.

Informality in the MSME Sector

The number of enterprises in the unorganised sector (unregistered) is estimated to be 99.7% of all unincorporated non-agricultural enterprises (excluding construction). What is also pertinent to note is that 84.17% of this universe of unincorporated businesses are the owner-managed/self-employed firms (with characteristic features of household enterprises), and the next highest share is of units that employ up to five workers (micro units). The International Labour Organization (ILO) has specifically highlighted how economies with large informal sectors will need to acknowledge and act on the fact that workers in such sectors have no income replacement and are directly affected by lockdown measures – the worst affected group being the self-employed, street vendors, hawkers, construction, transport and domestic workers, to name a few.

Issues in Identification

The lack of a comprehensive dataset on MSME units and their employment profiles will exacerbate issues of targeted relief delivery in this crisis situation. An RBI Expert Committee on MSMEs, in June 2019, has also noted the absence of reliable (and updated) information on this key sector of the economy. In the event that the government decides to directly aid workers in micro-businesses or provide a separate set of relief measures for say self-employed/owner-managed enterprises. With no end in sight by when the virus spread will be contained and the lockdown eased, it is clear that only currently available structures/mechanisms can be utilised to identify MSMEs and drive home relief measures. Some of these measures are discussed briefly here.

Targeted relief delivery for MSMEs: Potential Mechanisms

  • The SIDBI, a financial institution set up for the promotion and development of the MSMEs, must herald the cause of targeted loan delivery. The Bank has already announced emergency assistance loans and must ramp up efforts in financing and refinancing this sector. This assumes more importance in light of the fact that as per RBI’s data on sectoral deployment of non-food credit, the MSMEs’ share in total outstanding bank credit has fallen to 37%, as of February 2020 (it clocked 5.58% share in March 2019). Coupled with a dwindling share in bank credit is another troubling fact – the weighted average lending rate to the MSMEs is 11.24% – the second highest amongst different segments. The need to push cheaper credit to these enterprises cannot be overstated, and SIDBI will be the ideal institution to drive this agenda, given its vast network and experience in this sector.
  • There have been serious concerns around the MUDRA scheme in the recent past, in terms of these collateral-free loans coalescing into NPAs. However, information about enterprises that have availed this scheme will be vital to general enterprise identification in this crisis. A bulk of these loans is known to be sanctioned in the Shishu category that is loans up to INR. 50,000, with a majority of these beneficiaries being women. Around 13 million accounts have received these loans as of FY (fiscal year) 2018-19, and 10 million enterprises are reported to avail this scheme each year, since roll-out. Financial institutions should be able to draw up information about MUDRA beneficiaries and their employment profile to establish potential firm size, sector and employment profile, location, and other such details.
  • The UAM and the MSME Databank, as mentioned in the previous section, are also additional avenues to identify enterprises better. It records 12 million registrations as of date while the MSME Databank is seen to have much fewer registrations at 160,000. It is unclear whether there are overlaps between these two datasets. Irrespective, basic information on 10 million MSMEs can be assumed to be readily available with the MSME Ministry.
  • The Jan Dhan, Aadhaar, and Mobile (JAM) trinity is being utilised to push direct cash transfers provided under the first stimulus package that the government announced days into the lockdown. While state-wise presence on JAM varies, it might be a good mechanism for wage support transfers to daily wage and casual workers, who have been unable to collect payments (in cash) from their employers due to the lockdown affecting movement. If wage support is rolled out for labour/workforce in MSMEs, the JAM would be ideal to use as a transfer mechanism. The importance of a wage (and incentives) support programme also comes highly advocated by the ILO – a recent report mentions that countries such as India, Brazil, and Nigeria, with a ‘lion’s share of the workforce in the informal sector’, will need to introduce such wage support to thwart increase in poverty in working classes.
  • It is critical to note that while tax cuts may be necessary for larger businesses, such measures will exclude the informal sector where employment and turnover will not meet minimum thresholds required to pay income tax or to be registered under the GST. Relief for informal workers and tiny micro-enterprises with 5-10 workers, will need to be targeted such that it reaches them, in time to save their lives and livelihoods. The role that trade unions and other labour market institutions in India can play in identifying these businesses and workers, should also be encouraged. The government will need to collaborate with manufacturing and retail trade associations, and pay heed to the findings from surveys they have been conducting with their member businesses.
  • Permanent structures to support the informal sector have been long overdue, and the hope is that these will be set up immediately post crisis recovery. For now, it is clear that money is not the real challenge, choosing the ideal mechanism to direct relief to the targeted vulnerable group will be.

Asit is, the Nation was reeling under slowdown of economy; COVID 19 has now struck as a proverbial last straw on camel’s back. Burdened by fixed costs of employees, rentals, finances, electricity etc., on one hand and cancellation or drying up of orders, default on payment by customers and non- availability of funds on the other hand, is pushing a large number of MSMES to either shut the shutter or go bankrupt.

Recent relief packages announced by RBI, Public Sector banks and SIDBI, especially for MSMES are at best capable of providing symptomatic relief. It is time that whiles some more quick fix solutions are being worked out, a long term strategy is put in place, keeping fast changing business environment in view.

Special Characteristics of MSMEs

  1. Vast discrepancies in legal structure. It is estimated 4 million MSMEs are unincorporated. Out of these, 99% are in micro sector, functioning in an informal way.
  2. Vast product and services range. While on one hand 31% of MSMEs are in manufacturing, 36% in trading and 33% in services; on the other hand, 51% are in rural areas.
  3. Mostly starved of cash flow. Except for a few MSMEs, which been well established and have developed good way of generating capital resources; others mostly rely on working capital loan and cash inflow from sales. The outstanding credit by banks is only 37% that too at a weighted average interest rate 11.24%. Structurally strong MSMEs are better placed to current turmoil. Hence they are more eligible for financial assistance.
  4. Agile like a fighter aircraft. As most of MSMEs are ownership managed, their capability to re-position products or services to meet changing market requirements, and ramp up and ramp down is great.
  5. Market reach, productivity and visibility. MSMEs lack basic capabilities to enhance their market reach, adopt new software driven productivity tools and use social media for greater visibility.

Need of Comprehensive Package

New Secretary MSMEs has stated that thrust in the coming days will be that small businesses come out of distress. This is a very welcome statement. However, package must be comprehensive. While immediate aim should be to bring MSMEs out of distress, at the same time, government should put plans in place to reposition them to grab the new opportunities arising out of changing world order due to COVID 19. Here are a few suggestions:

  1. Financial Support. While this is most obvious action, the problem is in enforcement of Government directives and ensuring that the benefits reach to even micro industries. In first case, even when Government directive for banks is to give loans without collaterals, the banks demand collaterals. Here Government must give guarantees. It is estimated that unorganised micro industries are about 99.7% of the unincorporated sector. This is where there is major problem, as how to ensure the package reaches the right entity. This is because most of them are household entities with no proper records available in Government departments. Here, a highly flexible approach may be required. For this, data available in various schemes like MUDRA, UAM (Udyog adhar memorandum), MSME data base and Jan dhan, Adhar and mobile (JAM) etc. Should be utilised.
  2. Prepare them for future. In this regard, enhanced skill training, adaptation of digital tools, enhanced use of social media should be encouraged. MSMEs should be provided access to market by enhancing incentives to their customers and making reserved quota more attractive. Centralised platforms to be provided to increase their market reach. Also, focus should be on productivity, for this emphasis to be laid on Industry 4.0. Similarly, quality has to be ensured. All these measures will enhance their competitiveness. As India is positioning itself to be the global manufacturing and services hub, MSMEs will be able to grab a big chunk out of this.
  3. Help them to help themselves. As stated earlier, MSMEs are highly flexible. This has been amply proved in the recent times, where some of them have generated opportunity amongst COVID gloom. A large number of them have started manufacturing PPE and masks. Many chemical companies have switched over to sanitizer. There are MSMEs who are forming clusters to manufacture components of ventilators and producing reagents in volumes for use in COVID 19 testing kits. Formation of clusters is a very smart move as it will make it easier for the government to provide support to them. In addition, a large number of SEZs are coming up along with highways; these will need large network of ancillaries. This is where government can play a leading role by providing incentives, access to market, financing and making infrastructure highly economical.

Apart from such measures, it is also imperative that a plan be drawn up to allow businesses to reopen activity, in a phased manner, with social distancing norms in force. Regular and surprise checks even may be introduced to enforce state guidelines. But it is important to now engage with the idea of slowly restarting business operations in areas with low infection levels, albeit with necessary and vital precautionary measures in place. Covid-19 is a crisis with an unforeseeable ending. What is clear though is that the government and businesses—both large and small—will have to work together to ensure the protection of workers, be ready for risk-management in terms of phased re-starting of business operations and be prepared and open to structural changes in business activities.

Self – Sustained Economic growth through Secured Governance

“Secured Governance offers a strategy for the government to get all the basic infrastructure development with a negligible investment by the Government. It is a concept of developing Techno Economic Corridors connecting HUBs which will act as growth centre for individual sectors. The very concept of “Secured’’ here implies a secured convergence or knitting with various sectors defining a growth for an economy.”

Secured Governance – A Holistic Approach to Infrastructure Development

Secured Governance is a concept that is catching the attention of many as a holistic approach to infrastructure needs, promising a great deal. It professes taking advantage of valuation of assets created, and delivering at negligible cost to the government. It aims at balanced growth in all sectors in need of better facilities, in a more holistic manner, rather than focusing only on say expressways, or power or any one of numerous other sectors. While addressing any one of them, the others also get due attention ensuring all round development. It promises more societal participation and benefit sharing with transparency. Underlying this is a strategy of developing techno-economic corridors connecting urban areas across the country.

Secured Governance advocates a pragmatic approach of taking Advantage of Valuation of Assets Created

This is not new. We all know when development takes place there is valuation in property. Who benefits from this? More often than not it is incidental and taken advantage off by land and property sharks. Imagine a model where this valuation can be ploughed back into the project and also benefit the people around. First the cost of the project is reduced, and can actually be at negligible cost to the government if carefully planned. Next the population sees it as benefitting them and so they participate more enthusiastically, helping with early completion of the project rather than being an impediment.

Secured Governance Strategy for MSMEs

  • Each company should be a living entity and cannot be closed but only ownership transferred;
  • All companies and owners have to give yearly, and cumulative date of the total taxes paid, no of persons directly and indirectly employed;
  • CSR and social work done;
  • Interest paid on loans taken these should be used to rate the companies with its management;
  • For larger companies on management front proper positioning of the owners, independent directors to play a positive role for the overall growth and these should have their rating;
  • Banks, large enterprises, Trusts should be encouraged to start Industrial hubs as also be Anchor organisations complimenting and ensure Ling term growth;
  • These should be properly strategiesed taking a Global view;
  • Encourage active association with International business and funding houses participation;
  • Overseas Indians should be encouraged to actively be involved in all these. They should be encouraged to set up banks and Fiduciaries for easy inflow of their investments and FDIs into the country.

Secured governance compliments the present PPP developmental model by ensuring balanced participation of the private and public sector taking advantage of value and valuation of MSME clusters thereby yielding higher returns. This valuation of clusters, which grows many folds need to be shared by the society and by the private investors to support other infrastructure development, ensuring balanced growth. This will have a spiraling effect on Global Economy with a defined regions being developed as “MSME HUBs” and multiple HUBs connecting each other creating a Techno- Economic Corridor. The Mini and Nano clusters will be spread over Semi Urban and remote rural regions promoting Industrial development and adoption of modern amenities and technologies to generate additional employment in those areas with minimal rural urban migration and pay rich dividend to elite and rich investors.

The imperative of rapid scaling up of the entrepreneurs – in the private sector (developers, contractors, consultants, financial intermediaries, and investors) – entails developing and implementing business centre of the required scale and within the tight time frames envisaged.

Keeping in view of the above thought process, below are suggestions that can be implemented to boost the sustainability and increase the sustenance of MSMEs.

  1. MSME does not just need money but the knowledge of how to use the money. Such knowledge can be provided by creation of sectoral guidance centre attached to the lenders having constructive say in financing MSME.
  2. There is an extreme need to have a competent and authenticated counsellor for every MSME who should be acting as a guardian. Economics of the same is to be meticulously designed so that both banks and borrowers are given reasonable protection.
  3. No MSME should be allowed to die unless they become obsolete. They should be treated as a living human being.
  4. The principle should be productivity / business has to be protected and not banks or borrowers then both will get automatically protected.
  5. There has to be a smooth mechanism / transition for change of management instead of only lending there should be equity contribution which will help to bring down BEP at the same time help in smooth transition of management when needed
  6. There should be a concept of adoption of sick units and promoting this concept by providing tax incentives and finance priority incentives with concessional rate of interest coupled with undertaking to revive business.
  7. Separate funds should be made available to the guardian organization supporting and providing impetus to the MSMEs.
  8. Initial period, the rate of funding should be at low rate.
  9. The outstanding balance interest can be converted into equity so that bank can participate in the management.
  10. There should be a proposal for holiday period for declaring NPAs in initial stage.
  11. Need to establish banker’s accountability for the misdeeds of bankers.
  12. If any MSME is shut down, proper investigation needs to be initiated and action to be taken on the misdeeds of the person responsible for the same including bankers.
  13. Coercive recovery processes should be adopted only when all options of revival are closed.
  14. Adoption of coercive recovery process without exploring revival options should be treated as provisions in law equivalent to attempt to murder.
  15. The SARFAESI act, DRT regulations should be repelled on the lines of SICA, instead IBC code should be strengthened with more emphasis on resolution and revival.
  16. Establishment of a professional body to look over the revivals and guardians.
  17. Scraping of Section 138 of the Negotiable Instruments Act as it has killed the productive time of business class.
  18. Provisions in the law such as Bombay Relief Undertaking Act to be renewed.
  19. Social protection should be provided to entrepreneurs, a separate act to be introduced on the same.
  20. Resolution Professional and IBC experts should have access to revival funds.
  21. Emergency fighting experts, trained business survival counsellors and agencies to be created, trained and given certain authorities, power and recognition.
  22. Capping/ Scrapping of CIBIL record whereby tenure of CIBIL visibility and impact needs to be defined for a fixed period.

Lastly, to implement an ambitious roadmap for this MSMEs, improved standards of secured governance and concerted action would be required to take these targets and goals from inspirational statements to actual development. We need a system to integrate economic interdependence in today’s modern societies which not only decreases uncertainty regarding where risks begin and end, but also help in judicious planning and development of new empowered, transparent and interdependent Governance systems with higher degree of society participation in nation building Process. Secured Governance is an ideal strategy which equips to create adequate and coordinated measures to ensure the provision of financial, human, technical, information and other capacity building resources.

Secured governance for has major characteristics like participation, rule of law, transparency, responsiveness, equity and inclusiveness, effectiveness, efficiency, accountability and strategic vision and consensus orientation. Challenge for us is to create a system of governance that promotes supports and sustains development. With improved resource allocation, enhanced governance, Interdependency among sectors and transparency in the system going hand in hand with Information Technology and Innovation can deliver a safer, cleaner and more accountable delivery of self-sustaining infrastructure and services. A high degree of technical integration and economic interdependence in modern societies will also increase uncertainty regarding where risks begin and end, help them judiciously plan and be prepared for even minor event and rings in society participation in nation building Process.

Dr. Visswas Paanse,
Dr. Visswas Paanse
MSME Expert For Their Growth And Prosperity

Dr. P. Sekhar,
Dr. P. Sekhar the policy times
Unleashing India Global Smart
City Panel & MTGF

Article Name
Post covid devastation Enhanced role for MSMEs  for National Reincarnation through Smart and Secured Governance
The MSMEs constitute over 90% of total enterprises in most of the economies and are credited with generating the highest rates of employment growth and account for a major share of industrial production and exports.
Publisher Name
Publisher Logo