The Growth of MSMEs in India Post Covid

The Micro Small and Medium Enterprises (MSME) sector is considered to be the backbone of the Indian economy. Being labour intensive, it supports the economy by employing at comparatively lower turnover criteria. India’s large population requires ample resources in terms of employment opportunities for sustenance - a need that is well fulfilled by this sector. With a moderate gestation period, MSMEs facilitate a growth cycle through entrepreneurship whilst focusing on a smaller market. Seeing the larger picture, this sector has contributed immensely towards rural development via industrialisation, employment opportunities and allied schemes. MSMEs are also known to have a lower capital-output ratio signalling that even with a lower capital investment they are able to grow significantly. The MSME Act, 2006 defines the enterprises based on ceilings of capital expenditure for plant and machinery or investment in equipment for service-oriented enterprises. As of 2018, they are classified on the basis of their annual turnover.

With India being a growing economy, this sector presents the untapped potential that when utilised will result in promising growth. This is supported by the increase in the number of MSMEs in India by 18.5 per cent from 2019 to 2020. Consistent efforts in the form of policy initiatives and financial assistance programmes are strengthening the sector. These efforts are well recognised, especially in rural India with increased ownership of MSMEs by women, which is an indicator of socioeconomic development at a grassroots level. As per the MSME Annual Report for the year 2020-21, of the 32.48 Mn enterprises in rural India, a major 51 per cent of them are women-owned. These enterprises also contribute significantly to India’s export trade. With a growing foundation of export trade MSME products to total exports stood at 49.5 per cent for the year 2020-21, according to the Directorate General of Commercial Intelligence and Statistics.

Covid posed a greater challenge to the sector as firms had to tackle a catastrophic crisis that affected all their verticals and increased unemployment. Here, financial assistance alongside the need for technological advancement of these enterprises becomes a need. This became crucial during the Covid-19 pandemic as the global crisis meant a disruptive supply chain that negatively impacted production activities. The Emergency Credit Line Guarantee Scheme (ECLGS) under the Union Budget 2022-23, facilitating collateral-free automatic loans for Covid relief, is an important scheme that directs toward the growth agenda of the sector. Additionally, schemes ensuring the smooth functioning of the enterprises are formulated to target the specific needs of the beneficiaries. Such is the Credit Guarantee Scheme for Subordinate Debt (CGSSD) which provides financial assistance through equity infusion to MSMEs which have been classified as Non-Performing Assets (NPAs). These schemes have been crucial for post-Covid recovery of the sector.

The Credit Guarantee Scheme (CGS) has been instrumental in assisting the enterprises within the sector to rebuild their capacity. The scheme witnessed a 52 per cent rise in loan guarantees for FY 2020-21. The ECLGS and CGSSD were formulated as a measure for liquidity infusion in MSMEs. With a target funding of INR 4,500 Bn ($ 62.5 Mn), ECLGS sanctioned loans worth INR 2,370 billion ($ 32.9 Mn) and issued guarantees for 11.4 Mn borrowers between May 2020 and September 2021. In India, since a large number of MSMEs are still unorganised and function on a cash basis, it is a challenge to avail loans. Thus, these initiatives inadvertently make funding accessible to the enterprise owners, who struggled due to the lack of liquidity in their businesses in 2020. An increase in loan guarantees also ensures that these enterprises have the means to utilise the resource towards enhancing their growth capacity.

The schemes reflect well on the recovery of MSMEs in India post-Covid. The Retailers Association of India (RAI) in August 2021 outlined that retail sales were at 88 per cent of pre-pandemic levels, which was a major motivation for the entire sector. While some enterprises such as Quick Service Restaurants (QSRs) were able to recover in limited time; beauty, wellness and apparel businesses were relatively slower in their recovery. In addition to capital building, MSMEs are being encouraged to adapt to e-commerce platforms via Government e-Marketplace (GeM) which is facilitated by the government itself.

As the sector continues to shine, a plan for sectoral growth should be the main focus. Even with adequate funding channels, MSMEs require the means for technological development so as to be on par with the larger competitors. Unorganised MSMEs need to be consolidated and registered. Further, infrastructural development is required to integrate the MSMEs that function as a cluster. These enterprises collectively also require upgradation in storage, warehousing, and logistical functions. These are the challenges that are mainly faced by the pharmaceutical units that operate in clusters. Hence, to address this the government released the guidelines for Strengthening of Pharmaceutical Industry (SPI) to improve the productivity and quality of the pharmaceutical MSMEs in India. With a scheme outlay of INR 500 crores ($ 5 Bn) over five years, this initiative aims to incentivise pharma units to obtain Good Manufacturing Practices (GMP) certification from the World Health Organisation (WHO). This certificate will attest the products are of quality standards and bring more credibility to the Indian pharmaceutical sector. This indicates that post-covid adjustments for businesses will soon be integrated within the various risk controls that may have. This also builds the foundation for upgradation and innovation, whilst motivating the MSMEs to grow exponentially. As the sector recovers completely, there are new heights that these enterprises will achieve in the long term.

This has been co-authored by Karishma Sharma and Kamiya Arya.