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Capacity building in MSMEs amidst COVID-19 second wave

Saket Mehra
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Saket Mehra
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Despite being a major contributor to the growth of the Indian economy, the MSME sector has been managing the daunting task of meeting its credit requirements.
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The Indian micro, small and medium enterprises (MSME) sector has shown its continued resilience towards economic shocks and adversities. The sector exhibits its importance in promoting sustainable and inclusive development as well as generating large-scale employment.

With approximately 63 million MSMEs dominating the sector, the number of registered enterprises with MSME ministry is nearly 2.5 million which grew 18.5 percent y-o-y in 2020. The sector showcases a great opportunity of being integrated into the global supply chain with the capability to create more than 110 million jobs, contributing to nearly 30 percent of the country's GDP and around half of the country's exports.

Credit gap: An area of concern for MSMEs

Despite being a major contributor to the growth of the Indian economy, the MSME sector has been managing the daunting task of meeting its credit requirements. For example, it is estimated that there exists a viable credit gap of Rs 20 trillion against a total demand of Rs 36 trillion. Hence, the government under the aegis of the Atmanirbhar Bharat, included a special package for the MSME sector in the Union budget in February 2021 with the aim to boost the crucial sector that currently faces severe liquidity crunch resulting in delinquency and eventually the credibility.

While MSMEs were yet to recover from last year’s shocks and post moratorium through the storm of the first covid wave, the second-and-severe wave of the pandemic is likely to bring unexpected disruption to MSMEs. The pandemic has compounded issues within the sector were rapidly rising covid cases have become the biggest challenge to ongoing recovery, making it detrimental to their survival.

Moreover, with adverse outcomes looming large on the economy, relief interventions are required to retrench permanent damage to the sector through collaboration and participation, skill development, funding alternatives and overall capacity enhancement. Consequently, it’s imperative to learn from past experiences and develop policies that focus on incremental investments aligned with industrial growth national initiatives; thereby protecting the sector.

Current scenario demands an MSME-focused stimulus

The government and RBI need to immediately roll out MSME-focused stimulus to support the sector in this current situation. The RBI in 2020 allowed a debt restructuring scheme for stressed MSMEs that marginally helped enterprises survive Covid amid disruption in income but did not help much to revive their businesses largely due to slower acceleration in demand.

Thus, in the current scenario, MSMEs are hoping for stronger working capital handholding for a much longer period. The sector is expecting sedation of moratorium, capital support to enterprises having lost revenues, deferred payment like GST, PF, ESI, etc., in order to utilize funds in this emergency. Business continuity measures are required to be set in place by scheduled commercial banks, non-banking financial companies (NBFCs) and payment banks.

Talent pooling collaboration need of the hour

A risk-averse conservative approach towards lending where a health emergency has hit the economy may only worsen the situation in these times. The current situation requires active participation by the large manufacturing units to work in coordination with the MSME in providing support not only in the nature of credit or working capital management but also talent and expertise on various functions like Finance, Human Resources, Production planning or Supply chain.

MSMEs need digital transformation: Govt should consider establishing an independent consultancy body

There is also a need to ensure that digital transformation in the sector is fostered to enable them to capitalise on current opportunities. E-commerce enabled several MSMEs to shift to online marketplaces owing to a lack of demand in retail markets; thus, the adoption of enhanced technology coupled with the right input and maintaining quality would play a significant role in defining the long-term success of the sector.

The government may establish an independent consultancy body for MSMEs to help them navigate through the digital world. With this, MSMEs would be able to expand their outreach not only nationally but also globally wherein digitising MSMEs may be considered to be a high prerogative for the economy.

The COVID-19 crisis seems to have an unforeseeable ending. Though, the unprecedented scenarios have made it clear that the government and businesses will have to work together in a strong nexus to ensure the protection of workers, perform risk management and put together frameworks and structures to face inadvertent structural changes in the business activities.

India’s MSME sector being more significant to our economic and financial strategy, one should hope that it would be able to fight the second wave with strong conviction which would lead the sector to a growth trajectory.

The author, Saket Mehra, is Partner, Risk and Auto sector leader, at Grant Thornton Bharat LLP. 

The article was first published on CNBCTV18