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Alleviating Covid-19 Economic Misery in India – MSMEs & Unorganised Sector hold the Key

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 By SUDHIR K ARORA

The ‘Unorganised’ Sector and MSMEs in India
A feel of the vast scale and relevance of the unorganised and Micro Small and Medium Enterprises (MSME) sector in India can be had from the following statistics: There are nearly 633 lakh MSMEs in the country, with slightly higher proportion of the units being situated in rural areas, accounting for nearly 30% of India’s GDP, covering the manufacturing, trade and service sectors. One of every five MSMEs is owned by a woman; overall the socially disadvantaged groups (Scheduled Castes/Scheduled Tribes/OBCs) own two thirds of the enterprises. They are estimated to employ 11 crore workers, about a third of whom are women (Annual Report 2018-19, Ministry of MSMEs, Government of India).

Given this background, let us take a look the measures that have been put in place to ease the severe and visible distress to this very important segment of the economy as a result of the crisis due to the Covid-19 pandemic.

Government’s Measures to alleviate Economic Pain
Very early, on 27 March, a Rs 1,70,000 crores relief package aimed at the poor was announced by the Central Government – much needed measures like extra food under the PDS, direct cash in the accounts of women, poor senior citizens, widows and the disabled; increase in MNREGA wages; Rs 50 lakhs insurance cover for the brave health workers tackling the Corona crisis; PF payments by the government on behalf of a category of workers in small firms; relief for construction workers, and money for 87 million farmers under the Pradhan Mantri Kisan Yojana.

This was followed by a slew of measures designed to increase availability of funds at lower cost and a moratorium on loan EMIs and interest payments; a package for Mutual Funds to meet immediate and near term redemptions and, as per reports, a Rs 40,000 crores ‘corpus’ for MSMEs is on the cards, but does all this address the larger issue of keeping alive and helping the unorganised sector/MSMEs to ride the storm and live to work another day? It is widely accepted that this sector and the millions of households it represents (both the owner entrepreneurs and employees) has very low ‘staying power’. Millions of firms may be staring at closure and widespread unemployment can result if economic distress in this sector is not urgently addressed.

Ease of Borrowing vs. Subsidies for Immediate Expenses
The measures for business and industry announced to date by Government of India and the RBI are all geared to increasing liquidity in the financial system and improving ease of borrowing. The banking system is now awash with ‘lendable’ funds. Yet, the paradox is that banks, stung by the NPAs crisis, have become averse to handing out loans to businesses that do not have very high credit ratings, thus providing little comfort for the unorganised sector/MSMEs as firms generally have weak balance sheets and thus a very limited ‘cushion’. They may not survive even a limited slowdown/halt in cash flow.

Most of these businesses have paid wages and salaries for March and would be meeting fixed expenses (despite, in most cases, complete shutdown of business) – statutory dues, electricity bills (minimum charges to be paid despite practically no consumption), rentals/lease payments and so on. How many units/firms have the capacity to do so for more than a month or maybe two?

Offering these distressed firms only ‘soft’ loans would not find many takers, especially in product/services segments that are fearfully foreseeing profound changes in buyer behaviour in the near future. Most believe that social distancing is here to stay, with all its consequences upon general mobility and businesses that had people ‘congregating’ – the ‘bazaar’, malls, restaurants, the travel, tourism and entertainment sector (major employers all) – and hence business sentiment is decidedly low. Most believe that extensive re-jigging and re-thinking may be on the cards. For all this to happen, small businesses need to survive. Hence a combination of subsidies in the immediate term and access to low cost funds for the near term may be the way to keep these businesses alive.

Wages & Salaries: The most important measure would be to extend support for wages and salaries. Enabling this for three months is a priority, which the government must consider meeting as an outright subsidy. The government already has verifiable data on wages and salaries expenses of most businesses (all firms with turnover above Rs 1 crore e-file audited data in the income tax returns) and for firms that do not file audited annual statements, data on number of employees is filed with the Labour Department as part of the registration under the Shops and Establishments Act/Factories Act, so basis for subsidy is not be an issue. This would put regular cash in the hands of hundreds of millions of poor and lower middle class individuals. Most importantly, this money would not be hoarded but spent on essentials, mass production goods, hence giving the desperately needed ‘demand push’ to revive the economy. The icing on the cake is that a major chunk in any case would quickly come back to the exchequer as GST, etc.

Fixed costs: Another major outgo is fixed costs like rent and electricity bills. In the case of the latter, while factories and establishments have been shut, sizeable bills are still payable every month due to fixed charges per kilowatt of sanctioned load. This needs reconsideration by the government and a waiver must be considered as the Discoms have not incurred cost by way of power purchase for supply. Consumers are being billed regularly and so this amount can be credited back to the consumer’s account once modalities have been worked out. State Governments, too, have a role to play in providing relief. For example, in terms of rentals, Government of Uttarakhand has shown the way by extending the date for rent/lease payments in SIDCUL (Govt) estates till 30 June 2020, as per newspaper reports.

Such cash transfers/Direct Benefit Transfers have been done repeatedly, as in the case of farm loan waivers. Similarly, it is only when entrepreneurs are confident of riding the immediate cash requirement crisis that they may go for additional borrowings (though repayment of even these may be an issue due to expected sharp drop in profits for the year or even outright losses).

Trade payables: Borrowings/availing of liberal cash credit limits would serve to address the other major issue, suppliers to be paid and thus getting the entire chain moving (despite no revenues due to zero sales in most cases).

A one-time ‘Covid-19 subsidy’ could well serve to ‘prime’ the engine and ‘kick start’ the economy. It would serve to alleviate distress, keep the small, unorganised sector and hence employment alive, as well as generate taxes. A ‘win-win’ for the country and a vast mass of citizens.
The greatest danger in not effectively tacking economic distress in this sector is the possible ‘destruction of capacity’ – units shut, retail outlets closed, skilled labour dispersed or jobless, non- or under-production in the ancillary units that the majors depend upon will result in a body blow to the entire economy.

Conclusion
The Covid-19 pandemic hit the world unawares and within the proverbial blink of an eye has punched countries very hard – some to their knees due to widespread mortality and economic hardship. India took very early and decisive steps to contain the spread – measures lauded and emulated the world over. The clear focus was on saving lives: as the Prime Minister rightly said – “Jaan hai to Jahaan hai”.

With hopes of limited economic activity being allowed in the near future, we urgently need realistic measures specifically targeted at MSMEs/Unorganised sector for realising the next step – “Jaan bhi, Jahaan bhi”, and emerge from this crisis stronger.

(The author can be reached at sudhir.aroraddn@gmail.com)