World Bank Approves $500-Million Programme To Support MSME Sector In India, In Covid-19 Aftermath

The World Bank has approved a $500-million programme to support MSMEs in India to increase liquidity access for viable small businesses impacted by Covid-19.

The MSME sector is the backbone of the country’s economy, contributing 30 per cent of India’s GDP and 40 per cent of exports. Out of some 58 million MSMEs in India, more than 40 per cent lack access to formal sources of finance.

The programme targets improvements in the performance of 555,000 MSMEs and is expected to mobilise financing of $15.5 billion, as part of the Government of India's $3.4 billion MSME Competitiveness — A Post-Covid Resilience and Recovery Programme (MCRRP).

The $500 million Raising and Accelerating Micro, Small and Medium Enterprise (MSME) Performance (RAMP) Programme is the World Bank’s second intervention in this sector, the first being the $750 million MSME Emergency Response Program, approved in July 2020 to address the immediate liquidity and credit needs of millions of viable MSMEs severely impacted by the ongoing pandemic.

To date, 5 million firms have accessed finance from the government programme. With the programme approval, the World Bank's financing towards improving the productivity and financial viability of the MSME sector amounts to $1.25 billion over the past year.

Having supported the immediate liquidity and credit needs of viable MSMEs in the first phase, the RAMP Programme will support the Government of India’s efforts to increase MSME productivity and financing in the economic recovery phase, crowd-in private sector financing in the medium term, and tackle long-standing financial sector issues that are holding back the growth of the MSME sector.

“The MSME sector, a critical backbone of India’s economy, has been hard hit by the Covid-19 pandemic,” said Junaid Ahmad, World Bank Country Director in India.

“The RAMP programme will intensify efforts to support firms to return to pre-crisis production and employment levels, while laying the foundations for longer-term productivity-driven growth and generation of much-needed jobs in the MSME sector,” he added.

The World Bank Group, including its private sector arm — International Finance Corporation (IFC) — will support the MSME sector by strengthening institutional capacity and coordination. At the national level, MSME policies and programmes are implemented across ministries and departments, including key players such as the Reserve Bank of India (RBI) and the Small Industries and Development Bank of India (SIDBI).

There are also myriad state-level initiatives with limited coordination amongst them. There is a need for “convergence” of policies, programmes, and schemes at all levels.

The RAMP programme will provide better access to finance and working capital for MSMEs by strengthening the receivable financing markets, and scale-up online dispute resolution mechanisms to address the problem of delayed payments.

Such efforts are expected to improve the cost-effectiveness, quality, accessibility, impact, and outreach of such schemes.

The programme will promote technology-based solutions, green investments, and access to services for women-headed businesses. It will also build partnerships with the private sector as service providers to reach greater scale.

“The MSME sector in India faces several challenges. There is a need to strengthen access to formal sources of financial and non-financial services, including of women-headed MSMEs, and strengthen coordination in the national and state MSME support programmes. Given the magnitude and geographical spread across the country, direct interventions can be prohibitively costly,” said Peter Mousley, Lead Private Sector Specialist and World Bank’s Task Team Leader for the programme.

“The RAMP programme will support the government’s MCRRP objective of providing a more comprehensive and coordinated Centre-State approach to improve MSME sector productivity, reduce the gender gap, and promote more environmentally sustainable investments.”

In addition to national-level activities, the programme will initiate targeted activities in five “first mover” states — Gujarat, Maharashtra, Punjab, Rajasthan, and Tamil Nadu with the potential of additional states joining the programme going forward.

The $500 million loan from the International Bank for Reconstruction and Development (IBRD) has a maturity of 18.5 years including a 5.5-year grace period.

The MSME sector is dominated by small firms that do not grow with age.
While over 90 per cent of firms have less than five workers, global experience suggests that in the absence of distortions, firms grow with age.

However, in India, the average number of employees in a 40-year-old Indian plant is almost the same as its five-year-old counterpart. These skewed patterns of growth impose huge productivity costs.