MSME Sector Reforms – Breathing life into the beleaguered sector

MSME Sector Reforms – Breathing life into the beleaguered sector

08 June 2020

India can become ‘Aatmanirbhar’ if it increases its domestic production, in order to meet consumer demand, and reduce its dependence on imports. The best way to achieve this goal is by making a strong financial and infra base for MSME’s. Our honourable Prime Minister, Shri Narendra Modi, raised a slogan - “Be Vocal for Local”, and this is bound to lead to an increase in the consumption of Indian products, rather than imported products.

Many countries are observed to dump their products in India for the purpose of economic gains. If we work towards increasing our production capacities, and people actively support the call of being “Vocal for Local”, then the entire situation can be changed in our favour. We should read a hidden message in these two slogans - ‘Aatmanirbhar Bharat’, and being ‘Vocal for Local’, in terms of bringing the domestic economy back on track, which has been hammered by the COVID-19 pandemic.

According to official figures till December 2019, there are nearly 74.17 lakh Micro enterprises (88.62%), 9.17 lakh Small enterprises (10.96%), and 35,739 (0.43%) Medium enterprises. Out of the total registration of 83.70 lakh MSMEs, the maximum enrollment is from the state of Maharashtra, viz., 15.26 lakh (18.23%), followed by 9.46 lakh (11.31%) from Tamil Nadu.

The MSME sector is also one of the most prominent employment generators in the country. A total number of registered MSMEs from October 2015 to December 2019 have employed 4.6 Cr persons. Out of this, 2.8 Cr (61.46%) persons are employed in Micro enterprises, 1.5 Cr (32.20%) persons in Small enterprises, and 8.73 lakh (6.32%) persons in Medium enterprises.

nos Of Registered Entities
Year wise and MSME wise Employment(in Lakh)

The government went aggressive on this front, as they revised the MSME definition, which was a long-awaited reform. MSMEs have also received significant relief in the form of a tailor-made stimulus package. Let us discuss some essential aspects of the relief package announced by the government for this sector, as follows:-

Change in MSME Definition:

On 1st June, the Union Cabinet officially revised the MSME definition. The recent changes in the definition of micro, small, and medium-sized enterprises, made as a part of the Aatmanirbhar Bharat Abhiyan relief package, were approved.

Updated MSME Definition

Collateral – free loans:

The government announced collateral-free loans up to Rs. 3 lakh crores, backed by a government guarantee. It will help businesses suffering from a severe cash crunch due to the pandemic lockdown. The 100% collateral-free MSME loans, i.e. Emergency Credit Line Guarantee Scheme (ECLGS) is being provided by the National Credit Guarantee Trustee Company (NCGTC) to banks, NBFCs and Financial Institutions (FIs). Every eligible MSME or business enterprise will get a pre-approved sanction limit of up to 20% of the loan outstanding as on 29th February 2020.

Loan tenure and Moratorium on Principal Repayment:

The loan under this scheme is extended for four years from the date of disbursement, and there will be no pre-payment charge, if a borrower wants to repay early. There will also be no processing fee for such loans. There will be a moratorium period of one year on the principal repayment, but interest payment will continue during this period. The principal repayment will then be converted into EMI’s spread across the remaining period, which is 36 months.

The definition of MSMEs has been revised upwards, which can include more participants. Additional availability of credit will ensure faster growth. The government also wants to assure them that their products will get a decent market size, with the slogan ‘Vocal for Local’. Thus, they can quickly sell their products to the right consumer at the right time.

There is a lot to be done on the labour laws, and the land reforms front, so that the easy availability of workforce and land can be ensured to this sector. However, a government effort towards formalizing the MSME sector, and assisting with an extra credit limit, along with the revised definition, will infuse the much-required fuel to further fly higher.