Is it truly a stimulus? The government has announced multiple “packages” for MSME’s and NBFC’s and
according to the government the stimulus is approximately 6 Trillion rupees (out of a total package of 20
Trillion). This is more a liquidity support package and not a stimulus by any means.
MSME’s Package
- Rs 3tn collateral-free automatic loans, with four-year tenor and 12-month moratorium. 100%
credit guarantee on principal and interest - Subordinate debt for stressed MSMEs (which are NPA or stressed) worth Rs 200bn (Rs 40bn
contribution by government to CGTMSE – Credit Guarantee Fund Trust for Micro and Small
Enterprises) - Rs 500bn fund of funds to be created for equity infusion into viable units
- In key positive for the sector, definition of MSMEs being changed as follows:
limits on investments revised upwards, additional criteria based on turnover introduced,
differentiation between manufacturing and service units removed -
- Micro units: Investments upto Rs 10mn and/or turnover upto Rs 50mn
- Small units: Investments upto Rs 100mn and/or turnover of Rs 500mn
- Medium units: Investments upto Rs 200mn and/or turnover of Rs 1bn
- Government tenders upto Rs 2bn will no longer be on global tender basis, making MSMEs
eligible to participate in government purchases - Post Covid, e-market linkage to be provided for all MSMEs
- Receivables by MSMEs from the government to be cleared in next 45 days
The structures, above, are medium to long term solutions and will not have much of any effect on
supporting the MSME’s from their financial malaise or from bankruptcy in the short term. It might help a
few MSME’s (the larger ones) ease their short-term liquidity pressure but not for long and not for many.
The MSME sector was already under considerable financial strain; before the outbreak of the
coronavirus, due to the systemic and economic slowdown that was already underway over the past 24
months, thus leading to an extremely stressed MSME sector which now faces real and dangerous
liquidity and bankruptcy stresses; limiting their capacity to weather any more economic shocks in the
future. This will be further exacerbated as the Indian economy slows further and a recovery is not in the
horizon. This will obviously have a detrimental effect on the financial sector and NBFC’s specifically.
Many of the other measures for MSMEs, like equity funding, etc, are a virtually impossible to implement
due to several obvious reasons and challenges such as valuations, ownerships, exits, vigilance, CBI, ED,
Income Tax Complexities, etc. The government does not have the mechanisms, knowledge, expertise to
implement equity investments and much less ensure the protection of their investments. An interest expense waiver for the near term (instead of equity funding/EPF payment, etc.) would have been a
more acceptable and needed support to the MSME’s.
The effectiveness of the execution of the plans above is yet to be gauged and more likely than not it will
take time to effectuate the plans making much of the support available over the long run and definitely
not in the short term.
What the MSME’s need is a pickup in Demand to normalize their Revenue cycles and unfortunately the
government has not done much to check the drop in demand and has totally neglected consumption
support. MSME’s cannot survive this demand shock for a long time – and may will perish.
Thus, in conclusion, MSME’s had expectations of direct financial support and demand stimulus through
fiscal spend and was disappointed due to a complete lack of it. The economic package (not a “stimulus”)
will have a minimally positive medium-term impact but the short-term growth still appears challenging
and may require additional measures from the government, which is yet to be seen.
The Government needs to help more!
Mudita Chaturvedi