Micro, Small and Medium Enterprises (MSME) received prominence in Indian economy with significant contributions to the Gross Value Added (GVA) and employment. In the financial year 2018-19, the share of MSMEs in GVA of India stood at 33.5% and in India’s GDP it had a share of 30.3%.[1] The industry has been registering double digit growth in last few years. Between 2014-15 and 2018-19, the MSMEs witnessed a CAGR of 11.9%.

MSMEs hold importance in the Indian economy as the capital requirement is less compared to large businesses thus providing opportunities to those with limited investment to start off their own enterprise. MSMEs employ a large section of female in the workforce and operate in rural and semi-urban areas apart from urban clusters. This gives them the ability to narrow the spatial income gap. As per latest available data, percentage of MSMEs in urban and rural areas account for 49% and 51% respectively of the total MSMEs. In MSMEs’ total employment – manufacturing, trade and other services account for 32%, 35% and 33% shares respectively.[2] The importance of MSMEs in India’s socio-economic landscape certainly commands an analysis of it. Especially of the impact of COVID 19 and what lies ahead for these enterprises.

To boost the sector, the Government revised the definition of MSMEs recently and bumped up investment limits, added new criterion of turnover and did away with the distinction between manufacturing and service sector. The upward revisions of investment limits are envisaged to incentivise MSMEs to grow.  Accordingly, the new classification of MSME came into being on 1^st Jul’20 which defined MSMEs as:[3]

1. Micro enterprise: Where investment in plant, machinery or equipment is not above Rs.1 crore and turnover not higher than Rs.5 crore.
2. Small enterprise: Where investment in plant, machinery or equipment is not higher than Rs.10 crore and turnover not higher than Rs.50 crore.
3. Medium enterprise: Where investment in plant, machinery or equipment is not higher than Rs.50 crore and turnover not higher than Rs.250 crore.

The MSME segment had to face the pressure of Covid-19 as countries went into lockdowns. This impacted the export dependent MSMEs. The industry faced headwinds from factors of production and in addition demand for discretionary items also came down. Government of India announced various measures to help MSMEs. Government took different initiatives to ensure flow of credit, interest subvention on Mudra Sishu loans[4] , measures for small vendors, etc. to boost the sector. Government’s announcement of “Atmanirbhar Bharat” to boost the economy had several measures for MSMEs. Under this, the Government announced Rs.3 lakh crore collateral free automatic loans to MSMEs. It announced Rs.20,000 crore subordinate debt for the MSMEs, Rs.50,000 crore equity infusion through fund of funds  for MSMEs, partial credit guarantee scheme for NBFCs to help on-lending to MSMEs, etc.

The Reserve Bank of India (RBI) being the central bank of the country announced various measures to support MSMEs during the pandemic. It provided for restructuring credit for MSMEs subject to certain conditions. RBI allowed lending institutions to have zero risk weight on credit extended under the Emergency Credit Line Guarantee Scheme (ECLGS) upto  the level of guarantee coverage. It allowed a moratorium of term loans for specific tenures with certain conditions. RBI also permitted scheduled commercial banks (SCBs) to deduct the amount of credit extended to MSMEs (up to Rs.25 lakh) from their net demand and time liabilities to calculate the cash reserve ratio for a certain period.

A review of some of the initiatives show that as on 4^th Dec’20, under ECLGS, reported banks sanctioned an additional credit of Rs.2,05,563 crore to 80,93,491 borrowers and disbursed Rs.1,58,626 crore to 40,49,489 borrowers.[5] As on 25^th Sept’20, Public Sector Banks reported a portfolio of Rs.16,401 crore under Partial Credit Guarantee Scheme 2.0 for NBFCs, Housing Finance Companies and Micro Finance Institutions for fresh on-lending to MSMEs and individuals.[6] Deployment of gross credit to MSME by SCBs grew by 6.7% YoY in Mar’21 vis-à-vis 1.1% in Mar’20.[7]

Non-Performing Asset (NPA) rates across MSME segments have shown signs of moderation in recent times. One of the reasons for this trend might be the growing denominator on account of ECLGS disbursements. Recent trend shows that NPA rate in MSMEs is a function of ticket size with micro enterprises have lowest NPA ratio.[8]

MSMEs assume importance as the industry requires lower investment, have the ability to create huge employment, make substantial contribution to aggregate output and lead to inclusive industrialisation. The Government provided support to these industries through direct benefit transfers,  helped mobilise additional capital, etc.. The focus of the MSMEs should now be to further up-skill themselves in order to use the state-of-the-art technology that would enable them to compete in international markets. Headwinds faced by the global economy due to surge in Covid-19 cases required hard landing. With the continued monetary and fiscal policy support along with other policy measures, the MSME sector has the potential to emerge as one of the crucial means of inclusive growth.

[1] Annual Report 2020-21, Ministry of Micro, Small and Medium Enterprises, Government of India.

[2] Ibid

[3] Ibid

[4] Under Pradhan Mantri MUDRA Yojana; Micro Units Development and Refinance Agency Ltd (MUDRA) gives refinance support to micro businesses. Mudra Sishu covers loans upto Rs. 50,000.

[5] Press Information Bureau, Government of India as on 13^th December 2020.

(URL: https://pib.gov.in/PressReleseDetailm.aspx?PRID=1680343)

[6] Press Information Bureau, Government of India, as on 1^st October 2020

(URL: https://pib.gov.in/PressReleasePage.aspx?PRID=1660691)

[7] RBI data. Author’s calculation.

[8] MSME Pulse, February 2021, SIDBI and TransUnion CIBIL.