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Tags Current Affairs

Why MSMEs hit by the lockdown?

Date: 06 May 2020 Tags: Infrastructure

Issue

The Covid-19 pandemic has left its impact on all sectors of the economy but nowhere is the hurt as much as the Medium, Small and Micro Enterprises (MSMEs) of India. 

 

Background

It has also been reported that just like the first relief package, called the PM Garib Kalyan Yojana, which was announced by the government on March 26, the second package, too, would primarily focus on the MSME sector.

 

Details

  • Formally, MSMEs are defined in terms of investment in plant and machinery. But this criterion for the definition was long criticised because credible and precise details of investments were not easily available by authorities.

  • That is why in February 2018, the Union Cabinet decided to change the criterion to “annual turnover”, which was more in line with the imposition of GST.

  • According to the proposed definition, a micro enterprise will be one with an annual turnover less than Rs 5 crore; a small enterprise with turnover between Rs 5 crore and Rs 75 crore; and a medium enterprise with turnover less than Rs 250 crore.

  • According to the latest available (2018-19) Annual Report of Department of MSMEs, there are 6.34 crore MSMEs in the country. Around 51 per cent of these are situated in rural India. Together, they employ a little over 11 crore people but 55 per cent of the employment happens in the urban MSMEs.

  • These numbers suggest that, on average, less than two people are employed per MSME. At one level that gives a picture of how small these really are. But a breakup of all MSMEs into micro, small and medium categories is even more revealing.

  • The distribution of enterprise by caste further completes the picture. About 66 per cent of all MSMEs are owned by people belonging to the Scheduled Castes (12.5%), the Scheduled Tribes (4.1%) and Other Backward Classes (49.7%). The gender ratio among employees is largely consistent across the board at roughly 80% male and 20% female.

  • In terms of geographical distribution, seven Indian states alone account for 50 per cent of all MSMEs. These are Uttar Pradesh (14%), West Bengal (14%), Tamil Nadu (8%), Maharashtra (8%), Karnataka (6%), Bihar (5%) and Andhra Pradesh (5%).

  • To begin with, most of them are not registered anywhere. A big reason for this is that they are just too small. Even GST has its threshold and most micro enterprises do not qualify.

  • According to a 2018 report by the International Finance Corporation (part of the World Bank), the formal banking system supplies less than one-third (or about Rs 11 lakh crore) of the credit MSME credit need that it can potentially fund.

  • Most of the MSME funding comes from informal sources and this fact is crucial because it explains why the Reserve Bank of India’s efforts to push more liquidity towards the MSMEs has had a limited impact.

  • The total lockdown has raised a question mark on the existence of many primarily because these are not firms that have too much cash to wait out the crisis. A big hurdle to restarting now is the lack of labour availability.

  • The government can provide tax relief (GST and corporate tax), give swifter refunds, and provide liquidity to rural India (say, through PM-Kisan) to boost demand for MSME products.

  • A credit guarantee by the government helps as it assures the bank that its loan will be repaid by the government in case the MSME falters.

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