MSME sector requires radical policy measures for tangible recovery

Indian MSME sector accounts for 30% of India's GDP and 40% of India's exports. It is a major source of employment in the informal economy of the country. MSME sector was struggling with multiple challenges before Covid-19 crisis, however, the current pandemic only amplified the issues in this sector. 

Current state of MSME sector is primarily due to flawed monetary and fiscal policies of the past and present governments. It all started with import of so-called foreign educated Indian origin economists like Raghuram Rajan, who mindlessly applied western economic theories in Indian context. 

During his tenure as RBI governor, Rajan had adopted self-defeating monetary measures that triggered stress in the MSME sector. For example, increasing interest rates for business loans while reducing the interest rates on saving schemes like Fixed deposits. This single step adversely impacted the earning capacity of small income households which form the core of MSME sector. 

Majority of MSME enterprises are small-scale business entities that are managed by sole proprietors. Monthly earnings of these enterprises are dependent on the level of economic activities during a month. Covid-19 induced lockdown resulted in a complete halt of their business operations. This has put considerable strain on the financial resources of such enterprises.

Lockdown undeniably deepened the stress among MSMEs, which led to the emergence of following issues:

• Limited opportunities for revenue generation
• Higher overheads in the form of factory rent, wages of permanent employees & maintenance of machinery
• Higher cost of procuring funds from formal or informal channels of funding
• Delay in payments on receivables from large companies

The above issues have created a significant liquidity crunch in the MSME sector. Stimulus packages in the form of loan melas & credit guarantees have existed earlier and don't seem to fetch the desired results. Resolution of these issues require out-of-box thinking in government's fiscal and monetary policy measures.

So far, government measures seem subjective that have failed to address the gap between policy and implementation. Such negligence could result in shutdown of business operations of small enterprises. 

Since a large segment of MSME workforce is part of the informal sector, a lot of workers faced the brunt of job losses during lock-down. As the small enterprises were grappling with a changing environment, they were forced to prune their workforce. One more setback to an ailing MSME sector will increase unemployment levels and push a large percentage of unorganized workforce below poverty line. 

Whats the solution?

According to BJP leader Dr Subramanian Swamy, MSME sector can be revived by adopting following measures:

• Lowering interest rates on business loans, which will improve domestic investment levels. 
• Print new currency notes and distribute cash among low-income households through direct cash transfers. 
• This will provide relief to low income groups and also help to stimulate consumer spending. 
• Withdraw GST compliance for one year and abolish income tax to improve sentiment. 

Rescuing MSME sector will help to arrest contraction in demand and restore positive growth in the economy. The government needs to move away from protectionist measures in a challenging business environment, else Indian economy may witness an extended period of low demand.

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Note: 

The above article is inspired by the ideas and suggestions of current BJP leader and eminent economist, Dr Subramanian Swamy. It has also used secondary resources for the purpose of collecting and presenting information.