Why credit alone isn’t enough to address MSME woes

In his endorsement of the Budget, NITI Aayog vice chairman Rajiv Kumar wrote on February 10, 2020, that the credit facilities to MSMEs “will broad-base the growth impulse and ensure that employment generation activity is spread across the country”. He quoted the two collateral-free credit schemes to support this assertion — Emergency Credit Line Guarantee Scheme (ECLGS) for which additional ₹50,000 crore was provided in the Budget, taking the total to ₹5 lakh crore available until March 2023, and Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) scheme, its elder version in operation since 2000, which is expected to provide additional ₹2 lakh crore.

He forgot to mention the third scheme launched through the Budget, ‘Raising and Accelerating MSME Performance (RAMP) programme’, for which ₹6,000 crore is to be provided, over the next five years, to “help the MSME sector become more resilient, competitive and efficient”.

All of these are credit facilities critical to revive the MSME sector badly hit first by the twin shocks of demonetisation and GST and then the pandemic disruptions for a year now. At best, though, they are grossly inadequate to address the serious challenges the sector faces. The Centre hasn’t captured a comprehensive picture of the challenges, like how many have closed shop permanently, how many have been revived through credit supply and what more needs to be done to help since most MSMEs work in informal sector, are self-financed, and outside the institutional credit system.

The above is revealed through a series of answers the Centre provided to the Parliament this month.

No data on MSMEs

On February 3, 2022, the Centre said in response to a question about how many MSMEs were closed down temporarily or permanently during the pandemic: “As MSMEs function in both formal and informal sectors, data regarding temporary and permanent closure of MSMEs are not centrally maintained.” That is, it doesn’t have the relevant information. It could have easily collected this information on its own or sought state governments’ help.

In another response, the same day, to a question about employment generation through MSMEs, it said: “Promotion and development of enterprises is a state subject. The central government supplements the efforts of the state/UT governments through various schemes, programmes and policy initiatives for promotion, development and enhancing the competitiveness of MSMEs and to increase employment opportunities in the country...” Again, there was no attempt to find out the status.

There was, however, another reply which provided some clues.

In response to a specific question about an official survey to assess the impact of the pandemic’s second wave (not the first wave), the Centre admitted that its own entity Small Industries Development Bank of India (SIDBI) carried out a survey during September 2021-January 2022. Based on a sample size of 1,029 units spread across 10 states and two union territories, this survey found: (a) 67% MSMEs were temporarily closed for up to a period of three months (b) more than 50% witnessed a decline of more than 25% in their revenues in FY21 and (c) around 66% reported a decline in profitability on account of stable fixed costs and decline in revenue.

The survey also revealed that (i) about 65% of the MSMEs availed credit under the ECLGS and (ii) about 36% took loans under the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE).

This leaves many critical gaps: How many MSMEs shut shop permanently due to the second wave (not the same as saying how many were temporarily closed)? How many shut shop permanently due to the first wave? How many jobs have been lost permanently? Are ECLGS and CGTMSE adequate to revive the sector?

In short, the SIDBI survey is sketchy at best and presumably, limited to only to those units operating in formal sector, while most MSMEs operate in informal sector.

Credit reached only 15% MSMEs

This is a critical question as industry associations and economists had sought direct cash support to the sector with one private survey of May 2021 even warning that 59% MSMEs and start-ups might be sold off or shut by the end of 2021 due to the pandemic disruptions.

The Economic Survey of 2021-22 provides some answers. It says ₹2.28 lakh crore was disbursed to 95.2 lakh MSMEs under the ECLGS as on November 19, 2021 and ₹59,858 crore under the CGTMSE in FY21 and FY22 (up to November 30, 2021) as “credit/margin money”. It was silent on how many MSMEs received the CGTMSE credit/margin money and whether the beneficiaries were common to both.

On the face of it, credit to 95.2 lakh MSMEs is impressive until it is realised that there are 6.34 crore MSME units in India, as per the MSME ministry’s 2020-21 annual report. That would mean, the credit reached only 15% of MSMEs, leaving 85% out in the cold. It is also important to know that 99.5% of MSMEs are “micro” units, most of whom would have been without credit support.

Centre’s credit lifeline to MSME does not capture a critical aspect of the sector.

Most MSMEs operate in informal sector, are self-financed

Barring very few, most MSMEs, particularly micro units, work in informal sector with little access to institutional credit. IIM-Bangalore published a paper on the sector’s challenges amidst the 2020 pandemic. It said “more than 81% of MSMEs are self-financed with only 7% borrowing from formal institutions and government sources”; “94% are unregistered with the government” and hence, credit market interventions “may not benefit this sector directly”.

The paper argued that since most MSMEs primarily operate on cash, many being small, household-run business, they require direct cash support to cope with adverse events and since 10 states account for 75% of MSMEs, a joint effort of the Centre and states is critical to alleviate the pain in the sector.

As per the MSME ministry’s Udyam registration portal, as on February 10, 2022, the registered MSME units stood at 70,97,708. Since the total number of MSMEs is 6.34 crore (as per the ministry’s latest annual report), this means only 11% MSMEs are registered and have access to formal institutional credit support.

Considering that the ECLGS covered 15% of MSMEs (as per the Economic Survey), this is a commendable development, except 85% are left in the cold. How does the Centre reach out to them? The Budget gives no clue, nor does the NITI Aayog vice chairman.

What are the real challenges MSMEs face?

To devise a comprehensive response, the Centre must first collect relevant data – which it has not done since the 2016 demonetisation that first paralysed MSMEs and the entire informal economy for months as cash was sucked out overnight and rationed in small trenches.

Several studies by the Azim Premji University, CMIE and Ashoka University, have shown that the jobs crisis has pushed more people to informal economy and a large number of job loss in formal sector has swelled the ranks of self-employment, many of who could be struggling to set up and run businesses. It is, therefore, essential to know how the ground realities have changed over the years, particularly in informal sector because of the three massive shocks – demonetisation, GST and pandemic – in which most MSMEs operate.

For example, as per the MSME ministry’s 2014-15 annual report, 55.3% MSMEs were in rural areas and 44.7% in urban area. Its 2020-21 annual report says, the distribution has changed. Now 51% of MSMEs are in rural areas and 49% in urban areas. If growth rate is compared over this period, rural MSMEs grew by 62%, while urban MSMEs by 91%.

Why this skewed trend, particularly in the time of migration of workers from urban to rural areas in recent years? Is it due to lack of infrastructure and finance in rural areas or something else? No answer is available.

Reverse migration is not just a product of the pandemic disruptions. It happened during the prolonged pre-pandemic slowdown too. The Ashoka University-CMIE study of 2021 covering five years of FY17-FY21 showed: (a) manufacturing jobs nearly halved (fall of 46%) (b) agricultural jobs increased by 4% (taking agriculture’s share in employment from 36% to 40%) and (c) overall employment fell by 7% during the period (from 407 million in FY17 to 378 million in FY21). This clearly shows reversing of the earlier trend of jobs moving away from agriculture to industry and services.

These findings are confirmed by the Economic Survey of 2021-22 (which calculated the unit-level data of PLFS reports) too. It said, in 2019-20, the agriculture’s share in employment went up to 43.5% – from 40.7% in 2018-19.

Both the findings indicate a structural change in which the pressure is increasing on rural economy – both informal agriculture and rural MSMEs. There is a need to push MSMEs in rural areas and reverse the trend that MSME ministry’s annual reports indicate.

A year ago, RBI Governor Shaktikanta Das described MSMEs as “growth engine of the economy”, citing their huge contribution to the economy – “contributing 30% of our nominal gross domestic product (GDP) and 48% to exports”. It also provides 25% of total jobs.

Surely, the Centre could do more to revive MSMEs.