A Song for the Unsung

IT’S FEBRUARY 1ST, Monday, and Aman Pahwa, owner of a unit that comes under the umbrella of a micro, small and medium enterprise (MSME), heaves a sigh of relief. Finance Minister Nirmala Sitharaman has just wrapped up reading the 2021-2022 Union Budget and there are no devils there. Pahwa is far from happy though. Covid-19 has taken a toll on his business and even though it’s February and one would imagine things to be returning to normal, his business is nowhere close to pre-pandemic levels.

His plight is not reflected in the booming Sensex. He has vendors and staff to pay but he is not sure if the banks will be willing to lend him even when the business comes back—and he needs capital. Pahwa’s small enterprise, based in Ghaziabad on the outskirts of Delhi in Uttar Pradesh, is engaged in the manufacture of mechanical parts used by steel and automobile makers.

“We are unable to get any credit from any bank if there’s a decline in the turnover in any of the past three years. 2019-2020 was already a low due to the slowdown in the automobile sector and then came Covid. The Budget doesn’t change any of that,” he says.

MSMEs in India have had it tough. Often derided by the elite as a cabal of small-time manufacturers and traders evading taxes, governments for long adopted a piecemeal approach while addressing their concerns—access to cheap capital, labour and raw materials and affordable power. This, when MSMEs contribute about 30 per cent of the country’s GDP and 40 per cent of exports while employing 110 million people, about a quarter of the country’s workforce.

MSMEs began to be noticed only in the 2000s when many credited them for China’s emergence on the world economic map. But stories like Pahwa’s still abound in India where the ground-level reality can be very different from what the noise tells you. Sitharaman’s Budget does attempt to alleviate their sufferings but they remain the unsung, if not the abused, lot.

At the peak of the pandemic and what could be construed as a welcome break from the past, the Reserve Bank of India (RBI) and the Government worked in tandem to lower MSMEs’ cost of borrowing by facilitating cheaper capital to non-banking finance companies, the major lenders to MSMEs. A long moratorium on repayment of loans was also put in place. But Pahwa’s fear points out that the plight is far from over.

“Banks can do much better in showing their respect for the MSME segment, from the current feeling of ‘affirmative action’—both in terms of proactive product development for the sector as well as customer service,” says Mumbai-based independent market commentator Srinath Sridharan.

The Budget attempts to boost the lot of MSMEs in a creditable way. It has doubled the support to the MSME sector from last year’s budgeted estimates by setting aside Rs 157 billion for the next financial year. One may point out the fact that the Government spent only three-fourths of its 2020-2021 budgeted target of Rs 75.72 billion in the ongoing financial year and hence was compelled to set aside a higher amount for the next. Be that as it may, a doubling of the figure is creditable.

The Government, under its ‘Atmanirbhar Bharat Abhiyan’ (self-reliant India programme) launched last year when the pandemic raged, also redefined the parameters to determine an MSME. The idea was to help them grow and compete at a bigger scale. Only domestic firms are now allowed to compete in state tenders worth up to Rs 2 billion to support the Government’s ‘Make-in-India’ initiative to augment domestic production.

According to the new definitions, MSMEs with an investment of Rs 10 million and annual turnover of Rs 50 million will be called micro-units. Units with an investment of Rs 100 million and annual turnover of Rs 500 million will be termed small units while those with an investment of Rs 500 million and annual turnover of Rs 2.50 billion will be classified as medium units. Exports form part of the turnover limit.

When it comes to improving the financials, Sitharaman’s Budget takes a step forward. In line with its objective to bring about discipline on the part of various stakeholders—taxpayers, corporates and lenders—the Budget proposes to set up alternative methods of debt resolution and a special framework for MSMEs.

The new framework could be a gamechanger for both MSMEs and NBFCs as their lives are often intertwined—more and healthier MSMEs means more business for NBFCs. MSMEs, sometimes for little blame of their own, find themselves in a sticky spot with banks and then find it hard to secure loans, as highlighted by Pahwa.

NBFCs with a minimum asset size of Rs 1 billion will now be able recover their loans with greater ease from defaulters, many of whom are MSMEs. Minimum loan size eligible for debt recovery under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) is proposed to be more than halved to Rs 2 million for NBFCs from Rs 5 million. This will help NBFCs chase fly-by-night operators and help clean up the system.

“This is an effective step towards ushering credit discipline and in the long-term will increase the penetration of credit to small businesses,” says Shachindra Nath, executive chairman and managing director of U GRO Capital, a BSE-listed small business lending fintech platform.

But the problems are deeper. Nitin Jain, a garments manufacturer and trader based in the wholesale market of Delhi’s Gandhinagar, laments that Goods and Services Tax (GST) refunds take long and often don’t come, mired in bureaucracy.

Jain laments that the GSTN website, the platform for filing returns and all matters related to GST, is down every time the due date for GST return filing is near. “We are then forced to file later with a penalty,” he says. The GST framework has been in operation for more than three years. These can no longer be called teething problems. The malaise is deeper.

“The entire process has gone physical against the automated system that was intended. Several documents are asked for physical verification,” says Pahwa, adding that the cut in imports duties on steel, as announced by the Budget, would do little to repair the plumbing issues.

Ask him why, he says competition is stiff. “Clients refuse to accept any hike. The moment you ask for an increase, they tell you to send the quote and the next moment, they have another vendor ready to offer their product at the same rates”. Believe it or not, he says his prices have remained the same for clients for the last eight to 10 years.

It’s the woes of such MSME owners that are still to be addressed.

Sridharan has a solution. “One of the thrust areas which could help MSMEs is digital payments. That could bring in ease of getting payments on time as well as with their compliances. This would also enable further and cheaper credit access with better visibility of their financials,” says Sridharan.

The Budget, in doubling the allocation for MSMEs, recognises their potential in creating employment and boosting growth. Steps like the re-definition and a new dispute resolution mechanism are good too. But the road to salvation for MSMEs is long, and still challenged by the bureaucracy. High cost of capital, stiff compliance and unskilled labour are just some others. Unless those are addressed, MSMEs will continue to be seen as one with the begging bowl. That’s not a pleasant sight.

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