“Aatmanirbhar Bharat” – Making India Self Reliant through India’s MSMEs

The slew of announcements by the Finance Minister Mrs. Nirmala Sitaraman under the “Self Reliant India Movement” hits all the right notes in addressing the economic fall out of the Wuhan Coronavirus, which has brought significant portion of the Indian economy to a virtual standstill. This follows the announcement by Prime Minister Narendra Modi, through the televised address, that the government will be announcing a special package worth ₹20 lakh crores (approximately 10%India’ of the India’s GDP) under the title of “Atmanirbhar Bharat” (Self Reliant India).

A sizeable portion of yesterday’s announcement deals with the Micro Small and Medium Enterprises (MSMEs), which has a vital contribution to the country’s economy and employment opportunities. The Organisation for Economic Co-operation and Development (OECD) commissioned a study post the 2008 Economic Crisis (lead by the sub-Prime lending crisis in the US), and found that many MSMEs across the globe faced higher risk of insolvency primarily due to their inability to obtain short term financing. The short term liquidity was the biggest enemy to this vital sector, in addition to other factors such as lack of diversified business (systemic with their small size).

The salient features of the announcements and the impact they can have on the economy as a whole, and specific sectors is highlighted below.

Definition of MSMEs

Presently, an MSME is identified by the value of investment in the plant and machinery. These limits are also dependant on whether the unit is a manufacturing unit or a service unit. It is sought to be amended to increase the threshold and also add a turnover based condition.

The revised definition by enhancing the investment threshold will ensure that more units come under the category of MSME and the existing ones also are not disincentivized to spend on capital expenditure and improve their production capability (volumes, quality and efficiency).

The removal of distinction between Manufacturing and Service Sector was also a long pending demand. With the Service Sector’s contribution to the Nation’s GDP upwards of 50%, the unrealistically lower investment threshold was limiting them from expanding further for the fear of losing out. The revised limits benefit the Service Sector the most, and should provide necessary fillip to the country’s economy in the recovery process.

No Global Tenders for a Value of Upto Rs.200 Crores

It goes without saying that during these troubled times, it is the Government Expenditure that will give the initial push to kick-start economic activities. And when the Government starts its expenditure, the opportunities though open to all, are not always within the reach of the Indian entrepreneurs. The Indian MSMEs often face unfair competition from their global industry peers, who have years of experience and advantage in handling work orders similar to the ones as per the tenders floated by the Government.

By restricting that only domestic businesses can participate in Government tenders for a value of upto Rs.200 Crores, the Government has addressed two specific points –

• It aids the domestic industry and contributes to the “Make in India” concept. The Indian businesses gets will get enough opportunity. With Government of India projected to directly spend around Rs.4.20 Lakh Crores towards Capex, it is believed that more than ₹1 lakh crore worth of business opportunities will come in the way of Indian MSMEs. Let us remember that Government has mandated that atleast 20% of the annual procurement should be only from MSMEs.
• It also is in line with the “Self Reliant India Movement”. With more opportunities “restricted” only to the Indian businesses, we are creating an enabling environment for the Indian businesses to grow and flourish. With extra exposure, these small units will go a long way in competing with global businesses in the years to come.

Other MSME Related Announcements

• The Government has announced that the dues to the MSME from the government and the Central Public Sector Enterprises will be released within 45 days. This will greatly enhance the liquidity of the units.
• For healthy MSMEs, the government has proposed Rs.3L collateral-free automatic loan with a 4 year tenor, and a 12 month principal moratorium. This will stop MSMEs from slipping down the NPA chart. These are capped at 20% of the entire outstanding credit as on 29^th February 2020. Government is giving 100% Credit Guarantee Cover to the banks and NBFCs. This is set to benefit around 45 Lakh MSMEs.
• For Stressed MSMEs (but functioning ones), the government will facilitate provision of ₹20000 Crores as Subordinated Debt. The Central Government will contribute ₹4000 Crores to the Credit Guarantee Fund Trust For Micro And Small Enterprises (CGTMSE), which will provide partial guarantee to the banks for lending to the promoters of MSME. Promoters can utilize the funds to infuse them as “Equity” into the MSME units.
• A leveraged capital infusion of ₹50,000 Crores is proposed, by a direct equity infusion of ₹10000 Crores. This ₹50,000 Crore will provide equity funding to MSMEs with growth potential and viability. MSMEs need not necessarily chase big ticket Overseas Investment Funds for their equity. This will enable MSMEs to expand in terms of size and their capacity.
• The government also seeks to encourage the MSMEs to get listed on the main board of Stock Exchanges, to unleash the true value of the MSMEs.

Extended Time Lines for Completing Work

With the COVID induced lockdown in place, most of the work under progress has come to a standstill, including works carried out by various contractors for the Central Agencies (Railways, Ministry of Road and Transport, CPWD etc.). Normally, these contracts have a deadline and any breach leads to penalties and liquidated damages on the contractor / vendor. Government has specifically extended all the timelines by 6 months, so that the contractors can perform the obligations within time and without facing the prospect of penalties.

EPF Contribution and Increased Cash Availability for Employees

• Government has set aside ₹2500 Crores under “PM Garib Kalyan Package” towards EPF support for business workers for further three months i.e. June, July and August. This is towards the Employer and Employee’s contribution to Employees Provident Fund of eligible establishment. This will ensure high cash availability in the employees, and lowest cash outgo for the Employer, without compromising on the compliance, benefiting around 73 lakh employees and 3.67 lakh Establishments.
• For establishments which are not eligible for the EPF benefits as above, the contribution has been reduced from 12% to 10% for the next three months, benefiting around 6.5 Lakh Establishments and 4.3 Crore Employees. The fund allocated is around Rs.6750 Crores for the same.

Other Liquidity Enhancing Measures Through Tax Proposals

The government has also tweaked the Income Tax Law and made a slew of announcements focusing on enhancing the liquidity by reducing the withholding taxes by 25%. Typically a consultant gets only 90% of the amount invoiced with the balance 10% going to the government’s coffers directly from the customer. With this proposal, the consultant stands to receive 92.5% of the amount invoiced, and only 7.5% of the invoice amount going towards withholding taxes. This small move will result in almost ₹50,000 Crores of additional cash in the hands of all the vendors whose inflows are subject to the withholding taxes. In a way, government is providing these cash flows, as it is giving up its claim to put more money into the hands of the taxpayers.

Also all the pending refunds to charitable trusts, non-corporate businesses and professions is sought to be released immediately.

With all these economic downturn and lack of cash for sustaining the immediate business, there was a fear of losing out on a settlement scheme for Income Tax offered by the Government of India, whose original due date was 30^th June 2020. With almost ₹9 lakh Crores worth of tax amount being disputed and in litigation, the government had come out with a settlement scheme, which would have brought down the litigation and the amount payable by the Assessee by a chunk. Thoughtfully, the Government has extended the due date to 31^st December.

Summary

With around 6.5 Crore units employing almost 12 Crore plus persons, the MSMEs of India can be called the engines of India’s economy – 45% of the India’s Exports, 6% of India’s Manufacturing GDP and almost 25% of the India’s Service GDP are contributed by MSMEs, and with the coming COVID they were also the ones to suffer the biggest hit.

Talks of cash doles may sound great, and may appear to offer relief and give boost to spending, but they have long term consequences. To draw parallels with other developed economics (such as US or UK or Japan) and the fact that they prefer cash handouts, would be both a tragedy and grave mistake.

If taking countrymen out of poverty is just a matter of putting cash into their hands, then all that a country needs is a currency printing machine. But we should remember that the cash printed is a “Liability” to the government and it will only contribute to hyperinflation, lowering the value proposition by a large scoop. One can read up on how this act also contributed significantly to the Venezuela’s economic collapse. More over cash doles are the exact opposite of what “Self Reliant India Scheme” seeks to achieve.

With these announcements, the government has given the handholding that they truly deserve, without compromising their respect. These measures are far more responsible and economically sensible than what the proponents of cash doles believe. The MSME don’t need one’s sympathies. They just need a more conducive economic environment and a respect for the abilities – and more opportunities and the funding support to exploit the same.

And I am of a considered view that these announcements just do that – that the MSMEs are our country’s pride, backbone and are the engines of our economy. They are the vital cog to the “Self Reliant India Movement”.