Impact of Covid-19 on MSME Sector and Analysis of Relief Measures provided to them
Updated: Jun 11
- Mansi Barodia
The Covid-19 Pandemic was started as a health crisis but as a part of a strategic manoeuvre to deal with such a pandemic a long-term lockdown had to be adopted by the governments due to which this health crisis slowly and gradually turned into an economic disaster. GDP losses, increasing unemployment, supply chain disruptions and many more problems occurred at a time in such a way that this crisis can break the record of all the past economic crisis in the world. It has had its influence on all the sectors of the economy but no sector is as affected as much as the Medium, Small and Micro Enterprises (MSMEs) of India.
Defining Medium, Small and Micro Enterprises (MSME)
In accordance with the Micro, Small and Medium Enterprises Development (MSMED) Act of 2006, the Indian government has launched MSME, or Micro, Small and Medium Enterprises. The majority of these businesses are engaged in the production, manufacturing, processing, or preservation of goods and commodities. The MSME definition was officially amended in 2020 by the Union Cabinet, led by Prime Minister Narendra Modi. The investment and turnover figures were changed to larger values, thereby resulting in a larger number of medium-sized businesses. A micro-enterprise will be one with an annual turnover of less than Rs. 5 crores, a small enterprise with a turnover up to 50 crores and a medium enterprise with a turnover up to Rs 100 crores. The criteria to classify MSMEs from “investment in plant and machinery” was changed to “annual turnover.” There are 6.34 crore MSMEs in India, with rural India accounting for over half of them. They employ 11 crore people in total, but urban MSMEs account for 55 percent of all employment.
Challenges faced by them before COVID-19
Some of the major challenges faced by this sector prior to the covid 19 pandemic that had a significant impact are, despite this sector's contribution as a growth engine for the country, the majority of MSMEs operated on a self-financing basis because banks are hesitant to lend to these sectors, even if the Government of India declares this sector a priority. Furthermore, these industries have limited access to alternate sources of financing, such as equity capital, resulting in a severe shortage of working capital. The majority of MSMEs have experienced delays in receiving payment from large corporations as well as the government. This has made it difficult for them to manage their firm smoothly. Because of their tiny capital base and lack of sufficient finance, the majority of businesses employ old technology, and as a result, they are unable to compete with large companies' products or those imported from other nations. Small businesses cannot afford a broad distribution channel, therefore they are compelled to sell their products to intermediaries at a low price, which has a negative impact on their profitability and the production of excess funds for producing fixed and working capital.
Challenges faced by them post COVID-19
During the pandemic, MSMEs were already grappling with decreased sales and capacity utilization. During the pandemic, the news of a country-wide lockdown forced MSME owners, employers, and external stakeholders into unanticipated circumstances, where no one had expertise in dealing with such a situation. The lockdown had primarily raised a question mark on the existence of many firms because these are not the firms that have too much cash to wait during the crisis. According to survey estimates, the Covid-19 pandemic disrupted MSMEs' profits by 20 to 50 percent, with micro and small businesses bearing the brunt of the impact, owing to a liquidity constraint.
Policy Measures taken by the Government to revive the MSME Sector
In May 2020, the government announced various benefits and packages for the MSME sector in order to help scale up the businesses of such micro, small, and medium enterprises in the spirit of "Aatmanirbhar Bharat," or "self-reliant India," in order to revive the Indian economy in the face of the Covid-19 pandemic.
The government has revised the definition MSME sector. This would result in a greater number of enterprises, and it would encourage MSMEs to expand without sacrificing the benefits they have now. The investment and turnover restrictions have been lowered to allow more MSMEs to benefit from the programme. There is no longer a distinction between the manufacturing and service sectors. The government increased the investment limit of all the enterprises in order to make the sector more viable and competitive in the international market. The government announced Rs. 3 lakh crore in collateral-free automatic loans for this industry as part of the package. The emergency credit line of Rs. 3 lakh crore was set up to ensure that 45 lakh units have access to working capital to resume their respective business activities. The government allocated Rs. 20,000 crores as subordinate loans to 2 lakh MSMEs that are considered non-performing assets. It will aid MSMEs that are experiencing equity issues. The government also announced Rs. 50,000 crore equity infusion through Rs. 10,000 crore MSME fund. This scheme encourages businesses to list on the main board of the stock exchange, as well as assists them in growing their size and capabilities.
In March 2020, the Reserve Bank of India announced a three-month ban on term loan instalments for all industrial sectors. This was extended for a third time, to September 2020. To give MSMEs an advantage over international enterprises in government procurement tenders up to Rs. 200 crores, global tendering will be prohibited. This was a significant step forward in the government's efforts to make India "self-reliant." MSMEs will now face a level playing field and will be able to extend their operations to work on government procurement tenders worth up to Rs. 200 crores.
Providing an e-market will enable MSMEs to quickly reach out to the general population, resulting in significant benefits for them. It will be a fantastic opportunity for them to differentiate themselves in a market where the general public is linked to the internet. This will assist them in reducing the costs associated with selling their items in person. Furthermore, the government would clear all MSMEs receivables from the government, which will be released within 45 days.
MSMEs have played a critical role in ensuring the livelihood of millions of Indians. In rural places, this sector also provides a significant amount of non-farm work. They are, nevertheless, particularly vulnerable to external and internal crises because of their small size and disorganized nature. The Covid-19 pandemic has wreaked havoc on practically every aspect of economic activity. According to the report, the sector has lost a significant number of employees. Many businesses, particularly those in the micro and small segments of the industry, were compelled to close their doors. The government's measures for this sector, announced under the "Atma Nirbhar Bharat Abhiyan," are likely to have come at the right time and with the noble intention of reviving MSMEs and transforming them from "local to global" under the umbrella policy of the "Make in India" vision, allowing India to play a larger role in the global value chain.
Mansi Barodia is second year student at Pravin Gandhi College of Law, Mumbai.