Small businesses— both industrial and services— play an extremely important role in meeting the consumption demands of final consumers and supplying intermediate goods to large businesses. There are an estimated eight crore small businesses in the country. These small businesses, or the Micro, Small and Medium Enterprises (MSMEs), employ about 15 crore workers.

The economic lockdown imposed in the country on 23 March shuttered about 70 per cent of the economy for more than five weeks. 50 per cent of the economy is still shuttered after the lockdown was partially relaxed on 4 May.

The MSMEs and the workers employed by them are the worst victims of the economic lockdown. Over 10 crore workers have lost their jobs.

MSMEs produce about 30 per cent of gross value added. If we take 70 per cent of Gross domestic product (GDP) loss for the 40 days period of economic lockdown, India is likely to have lost about one month’s GDP or about 16 lakh crores of GDP. 30 per cent of GDP contributed by MSMEs implies that MSMEs could have suffered losses of at least Rs 5 lakh crores of gross value added.

MSMEs have a larger share of wages in the gross value added. On an average, share of wages forms about 80 per cent of MSME gross value added. This would mean that over 10 crores of MSME workers who lost jobs would have suffered wage loss of about Rs. 4 lakh crores.

The government should offer to pay 50 per cent of the normal wages for the period of shut down subject to a certain maximum, say Rs. 10,000 per worker. As an estimated 10 crore MSME workers are out of the jobs, this will not cost the government more than Rs. 1,00,000 crores.

A lot of these workers will need additional transition support for some more time say until June end. This might cost another cost another 1 lakh crore.

Second package of approximately Rs. 1 lakh crore can be extended to about 8 crore MSMEs to cover a part of their fixed cost (excluding wages) based on some self-certified details of fixed costs they have to bear for the period of shutdown. In all, the MSME Survival Package should be of the order of about Rs 3 lakh crores.

Two credit-based stimulus proposals are being speculated in the media. The first proposal envisages additional credit support of 20 per cent by banks over and above the line of credit currently approved. Banks’ additional exposure is proposed to be secured by a government guarantee.

The second proposal envisages the creation of a Special Purpose Vehicle (SPV) owned by the Government of India. The SPV will leverage government equity to raise debt. The total funds so raised will be used for providing credit support to the MSMEs. These proposals appear to be unsuitable for the needs of MSMEs and quite unworkable for several reasons.

The SPV proposal is a non-starter. Forming such an SPV, staffing, and operationalising it, is impossible in the current circumstances. If the SPV were to only refinance the banks, existing vehicles like MUDRA Bank can do it. 60 per cent of MSMEs have no access to credit from Banks. Any credit-based package will leave these out completely.

Even the MSMEs which have credit lines from banks may not be able to avail additional credit. A good number of MSMEs drawing credit from banks are not really creditworthy in the normal banking parlance. Several MSME loans have formally become non-performing loans. Many other MSME loans are structured accounts without formal classification as non-performing.

A whole lot of MSME businesses have not made their due payments but these accounts continue as standard accounts. Moratorium granted for three months raises a lot of suspicions about the standard nature of such loans.

Banks will be extremely risk-averse to lend to such businesses, even if supported by a government guarantee, especially when their credit standing would have further suffered on account of closure of business in the lockdown period. We have the experience of government-backed financing facility created for addressing liquidity concerns of NBFCs.

The fiscal package for MSMEs can be delivered by taking two institutional actions.

First, we should leverage the strength of our Unique Identification Authority for quickly registering all MSMEs and assigning them as unique business identity. Second, the MSME Ministry can establish a digital system of Registrar of Unincorporated MSMEs for filing a two-pages return which provides key business operations details of MSMEs.

Using the opportunity of distress in the MSMEs caused by the Covid-19 crisis, the Central government can announce survival package conditional upon MSMEs registering for a unique business ID with Unique Identification Authority and filing a return of business operations with the Registrar of Unincorporated MSMEs linked with unique ID.

This system can be converted to serve long term goals of formalising small businesses in India.

Read the full report here.

Subhash Garg

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