Small businesses play an important role in the economy. Not only do they outnumber large firms considerably, but employ vast numbers of people as well. The International MSME day was initiated in order raise awareness about the importance of supporting the development of small and mid-sized businesses in developing countries.
Definition of an Indian MSME:
An independently owned and operated enterprise that is created for profit and sells products that are needed by customers in the local market is referred to as an MSME (micro, small and medium enterprise), which in Hindi translates to लघु, छोटे और मध्यम व्यापार.
On 13th May 2020, Finance Minister Nirmala Sitharaman added additional criterion of turnover along with investment to define enterprises as MSME. This definition was announced under the Atmanirbhar Bharat Abhiyaan to facilitate MSMEs to grow in size and help them deal with the difficulties brought upon by the pandemic and the ensuing lockdown.
The definition, however, got further revised on June 1, 2020 on representations that the revision is still not in tune with the market and pricing conditions and should be revised upwards. As per the revised definition, medium enterprises got redefined as businesses with up to ₹50 crore in investment and up to ₹250 crore in turnover.
This step will help attract investments and create more jobs in the MSME sector. The following table provides details of the revised limits:
|Category||Old Capital||Old Turnover||New Capital||New Turnover|
|Micro||₹25 Lakh||₹10 Lakh||₹1 Crore||₹5 Crore|
|Small||₹5 Crore||₹2 Crore||₹10 Crore||₹50 Crore|
|Medium||₹10 Crore||₹5 Crore||₹50 Crore||₹250 Crore|
Why is MSME day observed?
Observed on the 27th of June every year, the International Micro, Small and Medium Enterprises (MSME) celebrates the magnanimous contribution of smaller companies in construction of the foundation and growth of the global economy.
In 2017, to recognize the importance of micro, small and medium enterprises in promoting innovation, creativity and employment for all, and to root for achieving the 2030 Agenda for Sustainable Development (focusing on people, planning and prosperity), the United Nations General Assembly declared 27 June as International MSME Day.
Significance of the MSME sector
Micro, Small and Medium Enterprises (MSMEs) play a major role in most economies, particularly in developing countries. They represent about 90% of businesses and generate employment for more than 50% of the world’s population. Moreover, MSMEs contribute up to 40% of the national income (GDP) in developing economies and create 7 out of 10 jobs worldwide. But what hinders MSME growth is access to finance. It cannot be denied that MSMEs largely depend on internal funds, or cash from friends and family, to launch and run their enterprises rather than opting for bank loans. The International Finance Corporation (IFC) estimates that 65 million firms, or 40% of micro, small and medium enterprises (MSMEs) in developing countries, have an unmet financing need of $5.2 trillion every year. The prominent MSME markets are East Asia And Pacific, Latin America and the Caribbean, Europe, and Central Asia.
The MSME Landscape in India:
- There are 42.50 million, registered & unregistered MSMEs in India, this accounts for a staggering 95% of the total industrial units in the country.
- MSMEs in India employ about 106 million people, that is, 40% of India’s workforce – second to the agricultural sector.
- Indian MSMEs produce more than 6000 products.
- They currently contribute around 6.11% of the manufacturing GDP and 24.63% of the service sector GDP.
- MSMEs produce 45% of the total Indian manufacturing output.
- MSME exports are approximately 40% of total Indian exports.
- MSMEs account for 16% of bank lending and their fixed assets total ₹1,471,912.94 crore.
Stimulus packages for MSMEs from across different nations
The Covid-19 relief package for micro, small and medium enterprises are aimed at liquidity infusion at this juncture. Here are the top 5 countries that have announced stimulus packages for MSMEs to help them tide over the COVID-19 lockdown-induced crisis.
Japan: The 31.9 trillion yen budget will fund a 117 trillion yen ($1 trillion) economic stimulus package, that will help fight the economic impact of the novel Coronavirus pandemic. It would be the world’s largest stimulus package of $2.18 trillion for a Coronavirus-hit economy, as they have already spent nearly $1 trillion to restore the adverse effects of the pandemic. The total package would amount to 40% of the country’s Gross Domestic Product.
USA: The House of Representatives in the USA approved a $483 billion stimulus plan on top of a $2.2 trillion package, followed by a half a billion dollar stimulus. This money will back small businesses on the brink of bankruptcy, and hard-pressed hospitals. The package is necessary to ensure that small businesses have access to the resources they need.
Sweden: The central government of Sweden has guaranteed that 70% of new loans banks be provided to the companies experiencing financial difficulty due to the COVID-19 virus. This loan guarantee will primarily target small and medium-sized enterprises. Also, the Swedish National Debt Office will administer the guarantee and it is proposed that each company be allowed to loan up to SEK 75 million, although exceptions can be made.
Germany: A package worth up to 750 billion euros ($808 billion) to mitigate the damage of the Coronavirus outbreak on the economy has been announced. The relief measures by Germany include funds of up to 100 billion euros which can be used to take direct equity stakes in companies as a way to foil foreign takeovers. It also includes another 100 billion Euros in credit to public sector development bank KfW for loans to struggling businesses. The stability fund will offer 400 billion Euros in loan guarantees to secure corporate debt at risk of defaulting, taking the volume of the package to up to 750 billion euros. The extra budget includes a 50 billion Euro program to help small businesses and the self-employed threatened with bankruptcy by the Coronavirus crisis, with direct payments of up to 15,000 euros depending on the size of the firm.
India: The Atmanirbhar stimulus package of ₹20 Lakh Crore is designed to offer fiscal and monetary support to ease running of businesses. Moreover, to save the lockdown-battered economy, the stimulus package includes tax breaks for small businesses and incentivises domestic manufacturing. The combined package works out to roughly 10% of the GDP, making it among the more substantial stimulus packages in the world. (https://www.solvezy.com/indias-rs-20-lakh-crore-covid-19-economic-stimulus-package-impact-on-msme-sector/).
Trends shaping the growth of MSMEs in a post COVID19 world
Over the last few months, the COVID-19 crisis has dealt a severe shock to economies across the world. It has triggered certain trends that will change the way of doing business in the near and long term, and will help shape the growth of MSMEs.
Accelerating trends in the wake of the COVID-19 crisis:
> Digitisation: Digital tools will become popular in both the B2C and B2B space, and there will be a shift of venture capital focus from service centric businesses to deep tech companies. MSMEs and start-ups, therefore, need to build solid digital capabilities and digitise parts of their business model. Besides this, expansion into new sales channels is also the need of the hour. Consumers will require goods even amidst lockdowns. Thus, creating opportunities to serve one’s markets through alternate sales channels, such as expanding to e-commerce via platforms like SOLV and boosting one’s online-marketing efforts is critical. (https://www.solvezy.com/micro-small-medium-enterprises-msmes-covid-19/).
> Rise of the locally produced goods: Reliance upon foreign sources for getting technologies or weapons will see a decline, and the domestic market is expected to surge owing to a decline in global trade. That’s because the decline in global trade due to restrictions on international shipping and travel will see a rise in demand for goods manufactured entirely locally. Manufacturers will also have to look at backward integration of their supply chains.
> Changing consumer demands and expectations: Coming of age, consumers will become more prudent and health conscious, and businesses need to cater to their changing demands and expectations. Operating as earlier won’t suffice.
> Need for upskilling and reskilling: In the post COVID world, MSMEs will need to adopt new technologies and new ways of working in order to survive and compete. Governments will need to develop specialized institutes and training programs to create a pool of skilled resources in order to help local industry.
> Limited availability of finance: Disposable income will be impacted and investors will look for safer and low risk investments. As a result, MSMEs will end up relying on Government-backed funding mechanisms.
In the light of uncertainty, it is important to stabilise and explore. While there is no single path forward for all, MSMEs should follow a few basic tenets:
- Stabilise one’s core offering and explore new adjacent areas to venture into
- Leverage local subsidies, revisit the supply chain, and focus on cash management
- Analyse ways to change the value proposition, delivery channels and target new customer segments