India’s MSMEs receive key policy, funding push

India’s micro, small and medium enterprises (MSMEs), a force of economic growth and employment creation, have received critical policy, regulatory and financial support from the Central Government as part of a stimulus programme that is expected to strengthen grassroots businesses

July 8, 2020

The Rs.21 trillion (US$280 billion) programme aims to build an Aatmanirbhar Bharat (self-reliant India) by bolstering the economy and driving development amid the challenges of the COVID-19 pandemic

India’s MSM enterprises have steadily expanded their expertise, capacity, and market, and at end-2019 contributed 29.7 per cent of the national GDP and 49.66 per cent of total national exports

14 years after the introduction of the MSME Development Act, the Government has revised the definition of MSMEs, which will open up avenues of financing and new markets for grassroots entrepreneurs

The Government has put in place a hand holding tool for MSMEs in the name of Champions (www.champions.gov.in). Additionally, e-market linkage for MSMEs will be promoted to improve outreach.

India’s MSMEs receive key policy, funding push

India’s micro, small and medium enterprises (MSMEs), a force of economic growth and employment creation, have received critical policy, regulatory and financial support from the Central Government as part of a stimulus programme that is expected to strengthen grassroots businesses. The Rs.21 trillion (US$280 billion) programme aims to build an Aatmanirbhar Bharat (self-reliant India) by bolstering the economy and driving socio-economic development following the challenges of the COVID-19 pandemic. India’s MSM enterprises have steadily expanded their expertise, capacity, and market, and at end-2019 contributed 29.7 per cent of the national GDP and 49.66 per cent of total national exports. However, a major disruption in economic activities brought up by the pandemic created serious challenges for the survival of many among India’s over 60 million MSMEs. The Government, herein, has tried to alleviate these challenges with several new reforms. These include: 

Fiscal support for MSMEs

Rs.3 trillion Emergency Working Capital Facility for Businesses, including MSMEs

To provide relief to the business, additional working capital finance of 20 per cent of the outstanding credit as of February 2020, in the form of a term loan at a concessional rate of interest will be provided. This will be available to units with up to Rs.250 million outstanding and turnover of up to Rs1 billion whose accounts are standard. The units will not have to provide any guarantee or collateral of their own. The amount will be 100 per cent guaranteed by the Government of India providing total liquidity of Rs.3 trillion to more than 4.5 million MSMEs.

Rs.200 billion Subordinate Debt for Stressed MSMEs

Provision made for Rs.200 billion subordinated debt for 200,000 MSMEs which are NPA or are stressed. The Government will support them with Rs.40 billion to Credit Guarantee Trust for Micro and Small Enterprises (CGTMSE). Banks are expected to provide the subordinate-debt to promoters of such MSMEs equal to 15 per cent of his existing stake in the unit subject to a maximum of Rs.7.5 million.

Rs.500 billion equity infusion through MSME Fund of Funds

The Government will set up a Fund of Funds with a corpus of Rs.100 billion that will provide equity funding support for MSMEs. The Fund of Funds shall be operated through a Mother and a few Daughter funds. It is expected that with leverage of 1:4 at the level of daughter funds, the Fund of Funds will be able to mobilise equity of about Rs.500 billion.

Tax assistance to businesses

The Tax Deduction at Source rates for all non-salaried payment to residents, and tax collected at source rate to be reduced by 25 per cent of the specified rates for the remaining period of FY 2020-21. This will provide liquidity to the tune of Rs.500 billion. Additionally, the due date of all Income Tax Returns for Assessment Year 2020-21 will be extended to November 30, 2020. Similarly, the tax audit due date will be extended to October 31, 2020. And the date for making payment without additional amount under the “Vivad Se Vishwas” scheme will be extended to December 31, 2020.

The MSME reform has also done away with the separation of manufacturing and services enterprises to serve current requirements

New MSME definitions

14 years after the introduction of the MSME Development Act, the Union Ministry of MSME has revised the definition and criteria of MSMEs, which will open up avenues of fresh financing and new markets for India’s grassroots entrepreneurs. 

  • The definition of a micro-manufacturing and services unit was raised to Rs.10 million of investment and Rs.50 million of turnover. 
  • The limit of small manufacturing and services units was raised to Rs.100 million of investment and Rs.500 million of turnover. 
  • The limit of a medium manufacturing and services unit was increased to Rs.500 million of investment and Rs.2.5 billion of turnover.
  • The MSME reform has also done away with the separation of manufacturing and services enterprises to serve current requirements.
  • A new criterion for calculating turnover has been introduced that will exclude exports from turnover to help MSMEs export more. 
  • This is expected to exponentially add to exports from the country leading to more growth and economic activity and creation of jobs.

The Ministry of MSME has put in place a strong handholding mechanism for MSMEs and grassroots entrepreneurs in the name of Champions (www.champions.gov.in). Additionally, e-market linkage for MSMEs will be promoted to act as a replacement for trade fairs and exhibitions. MSME receivables from Government and CPSEs will be released in 45 days. 

Other provisions for MSMEs

  • General Financial Rules (GFR) of the Government will be amended to disallow global tender inquiries in the procurement of Goods and Services of the value of less than Rs.2 billion.
  • A scheme introduced as part of PMGKP under which the Government of India contributes 12 per cent of salary each on behalf of both employer and employee to EPF to be extended to August 2020. Total benefits accrued are about Rs.25 billion to 7.2 million employees.
  • Statutory PF contribution of both employer and employee reduced to 10 per cent each from existing 12 per cent each for all establishments covered by EPFO for the next three months. This will provide liquidity of about Rs.22.5 billion per month.
  • The Government will launch Rs.300 billion Special Liquidity Scheme, liquidity being provided by RBI. The investment will be made in primary and secondary market transactions in investment-grade debt papers of NBFCs, HFCs, and MFIs. This will be 100 per cent guaranteed by the Government.
  • Existing Partial Credit Guarantee scheme is being revamped and will now be extended to cover the borrowings of lower-rated NBFCs, HFCs, and other Micro Finance Institutions (MFIs). The Government will provide 20 per cent first loss sovereign guarantee to Public Sector Banks.
  • Power Finance Corporation and Rural Electrification Corporation will infuse liquidity in the DISCOMS to the extent of Rs.900 billion in two equal installments. This amount will be used by DISCOMS to pay their dues to Transmission and Generation companies. Further, CPSE GENCOs will give a rebate to DISCOMS on the condition that the same is passed on to the final consumers as a relief towards their fixed charges.
  • All central agencies like Railways, Ministry of Road Transport and Highways and CPWD will give an extension of up to six months for completion of contractual obligations, including in respect of EPC and concession agreements.
  • The pending income tax refunds to charitable trusts and non-corporate businesses and professions including proprietorship, partnership, and LLPs and cooperatives shall be issued immediately.

These provisions will drive new opportunities for traders, exporters and investors in India while guiding Indian MSMEs to augment their operations to match the demands of the post-Coronavirus market. The integrated approach is expected to empower all stakeholders in India-led global trade and investment.