More policy support is needed to help MSMEs navigate the economic distress

Written by Bornali Bhandari, Samarth Gupta, Ajaya K Sahu and K S Urs

The dual impact of demonetisation and the inefficient implementation of the Goods and Services Tax (GST) had adversely affected firms, especially the Micro, Small and Medium Enterprises (MSMEs) in India. The pandemic has added to their woes. The NCAER Business Confidence Index (BCI), a measure of business sentiments, which had fallen from 133.3 in the second quarter of 2016-17 (pre-demonetisation) to 111.2 in the third quarter of 2019-20 (pre-pandemic), fell to its lowest in the first quarter of 2020-21, recovering thereafter in the second and third quarters. But even after recovering, business sentiments in the third quarter are lower than what they used to be a year ago.

We apply the latest definition of MSMEs — firms with an annual turnover less than or equal to Rs 100 crore — to the NCAER Business Expectations Survey (BES) data to understand the differences in business sentiments between the MSMEs and large firms (those with an annual turnover greater than Rs 100 crore).

The Business confidence index (N-BCI) of MSMEs was lower than that of large firms even prior to the pandemic (Figure 1). It started declining from the third quarter of 2019-20, falling to its lowest in the first quarter of 2020-21, recovering thereafter. The rate of recovery of the BCI is higher for large firms as compared to the MSMEs — a gap which widened further in the third quarter of the ongoing financial year.

Source: NCAER Business Expectation Surveys.

The N-BCI is made up of four components that are shown in Table 1. Three key points emerge. First, the percentage share of positive responses is higher for large firms as compared to MSMEs throughout the period — from the second quarter of 2019-20 to the third quarter of 2020-21. There is one exception. Ninety-three per cent of MSMEs had responded that their capacity utilisation was optimal in the third quarter of 2019-20 versus 88.6 per cent of large firms. Second, the share of positive responses follow the overall trend — start falling from the fourth quarter of the last year, reaching a trough in the first quarter of the current year, and rising thereafter. Third, barring the “present capacity utilisation is close to or above optimal level” component, in all the remaining components, we find that the share of positive responses in the MSME category is less than 30 per cent whereas it is higher than 40 per cent for large firms.

Table 1: Share of Positive Responses from Firms (%), 2019-20:Q2 to 2020-21:Q3 (Source: NCAER Business Expectation Surveys)

While the good news is that business sentiments are recovering across firm sizes, there seems to be the emergence of a bimodal distribution of business sentiments in MSMEs versus large firms. Further, large firms are recovering at a faster rate than MSMEs. This is clearly a worrisome sign and could have an adverse impact on the recovery of the industrial sector.

The Union Budget 2021 shows that the actual expenditure of the Ministry of MSMEs has come down from Rs 6,697.6 crore in 2019-20 to Rs 5,644.2 crore in 2020-21 (Revised Estimates) — a drop of 15 per cent. For 2021-22, the Union budget has allocated a sum of Rs 15,699.7 crore (Budget Estimates) — a rise of 177 per cent. Out of that Rs 10,000 crore or 64 per cent of the total, is solely for the “Guarantee Emergency Credit Line (GECL) facility to eligible MSME borrowers” scheme.

The latest survey data shows that a third of MSMEs took credit over the last three months. However, about 75 per cent of them were not aware of the Emergency Credit Line Guarantee Scheme in December 2020. During the survey and after it, some firms asked reached out to us inquiring about the details of the scheme and how to utilise it. Forty-one per cent of the MSMEs faced challenges in accessing credit and out of that 40 per cent attributed it to lengthy paperwork. Even within MSMEs, it is the smallest firms with an annual turnover of less than Rs 1 crore that face the most challenges.

There is a need to raise awareness about the Emergency Credit Scheme and improve its outreach to the smallest of MSMEs. Ease of doing business at the last mile needs to be strengthened by making paperwork shorter and simpler. For the next year or two, a government helpline at the block/district level is needed to provide support to the MSMEs.

Access to credit is necessary, but not a sufficient condition for the recovery of the MSME sector. A holistic policy based on the challenges identified in the UK Sinha report is needed to help the MSMEs overcome the once-in-a-century pandemic. This will have a positive impact on labour markets as well.

Bhandari is Senior Fellow, Gupta and Urs are associate fellows and Sahu is senior research analyst, NCAER. Views are personal

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