Govt's PLI Scheme Hasn't Taken Off For MSMEs, Should India Look At How China Helps Small Players?

The government is now looking to carve out employment-linked incentives, especially for the micro, small and medium enterprises sector, which employs about 4.53 crore people. A study by McKinsey Global Institute (MGI) pointed out that in India only 11 per cent of entities categorised at MSMEs in 2000 managed to scale up to the big league, while in Indonesia it was 31, in UK 18 and US 17. This should bother the policymakers.

“Though the government has come up with several schemes and programmes to power the MSME sector, multiple challenges remain. These stunt their growth and force many to wind up,” Anil Bhardwaj, secretary general, the Federation of Indian Micro and Small and Medium Enterprises (FISME) told The Secretariat.

The Challenges Small Businesses Face

Despite Sitharaman’s announcement -  setting up a corpus of Rs 1 lakh crore, offering 50-year interest-free loans, in the interim budget, the  MSME  sector is facing a severe liquidity crunch amid rising raw material prices, and increases in logistics and compliance costs. All of which has been making life tougher for the small businesses.

The Reserve Bank of India’s non-performing assets (NPA) guidelines, mandating banks to raise an early warning alarm on any delayed payment of interest or principal amount has also hurt the MSME sector.  A red flag is raised in case of a delay of 30 days, after which an account is treated as a special mention account (SMA).

That apart, delayed payments from customers along with the geo-political threats have only added to the MSME sector's woes.

Despite several ongoing schemes such as PM Vishwakarma Scheme, Prime Minister’s Employment Generation Programme and Emergency Credit Line Guarantee Scheme, the sector continues to face cash crunch. The Pradhan Mantri Mudra Yojna is also in place to support the non-farm micro and small businesses. However, the acute liquidity crunch has forced a large number of MSMEs to wind up. The immediate fallout of cash crunch is on jobs. The rise in costs along with cash shortage has stunted their growth.

Though MSMEs are considered the backbone of any economy, employing som,e 4.53 crore people and accounting for more than 40 per cent of the country's exports,  the sector is also the most vulnerable. And is “most affected by economic shocks and turbulence, perhaps more than any other companies,” the World Economic Forum noted.

China’s Focus On Small Businesses

Compare India’s MSME sector with China’s. The dragon increased its focus on boosting the country’s small and medium enterprises to power its economic might. Till 2021, about 80 per cent non-governmental employment was provided by the SME enterprises. Though the Covid pandemic dealt a blow to this key sector, the SMEs continue to play one of the most crucial roles in China’s economic story. According to China’s National Bureau of Statistics, in 2018, more than 99 per cent  of businesses in the country were categorised as SMEs.  

Besides, SMEs in China have contributed more than 60 per cent of the GDP and 50 per cent of its tax income. In India, the share of the MSME sector as a share of its GDP is just around 30 per cent.

China has a loan support scheme for smaller businesses along with extensions for loan and interest repayments, as well as credit support. The idea is to make it easier for small businesses to get loans, which used to be difficult as these firms often did not have the required mortgage guarantees.

What Can India Do?

The sector has asked the government to set up a niche MSME bank to aid easy lending, somewhat on the lines of what the Chinese have done. Sources said that the finance ministry is also considering creating a separate fund to tackle the sector's liquidity crunch and help out with working capital requirements.

It is also learnt that the government may more strictly enforce norms for the larger Indian and multinational companies to source inputs from MSMEs.

Last month, Jitan Ram Majhi, MSME Minister launched an initiative facilitating onboarding of 5,00,000 micro and small enterprises on the Open Network for Digital Commerce (ONDC) platform with the aim to provide assistance on cataloguing, account management, logistics, packaging material, and design.

According to North Block sources, the government is set to “deal with the issue of unemployment head-on.”

“We are aware of the problems that the economy is facing and we are committed to resolving them, employment generation being one,” BJP’s economic spokesperson Gopal Krishna Agarwal said.

The government’s flagship Production-Linked Incentive (PLI) scheme has primarily rewarded large companies. However, analysts pointed out that the government must now focus on ways to boost manufacturing among the MSMEs with a thrust on creating jobs.

“There should be incentives for MSMEs to create employment. The thrust should not be on investments but on employment generation. Incentives should be directly linked with the number of jobs created,” Bhardwaj said.  

MSME advocates believe that the finance minister who has managed to garner a bumper RBI dividend of Rs 2.11 lakh crore this year, has enough headroom to provide the much required support to the sector while maintaining the fiscal deficit target of 5.1 per cent.

For India’s growth story to be inclusive, supporting the country’s MSMEs will be crucial.