The MSME Conundrum - COVID Troubles for an Already Troubled Sector

Abstract

India is a land of small entrepreneurs. MSMEs in India - comprising over five crore businesses and employing over eleven crore people - sum for nearly half of India’s production. There are around 6.33 crore MSMEs in the country and they manufacture more than 8000 products.MSMEs have faced challenges ranging from inadequate access to markets, poorly skilled manpower, poor technology adoption, high cost of capital, challenges in raw material procurement, and inadequate infrastructure. While the Government of India understands it needs to play a greater role in supporting MSMEs - as is evident from schemes like the Atmanirbhar Abhiyan - more needs to be done.As if these challenges were not enough, MSMEs were hit hard by the COVID outbreak and the resultant lockdowns.In this research paper, we explore the challenges faced by Indian MSMEs and the support that the government can offer them to help take on a future that looks skewed in favor of large enterprises.

Full text

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International Journal of Management
OPEN ACCESS
Manuscript ID:
MGT-2022-10025271
Volume: 10
Issue: 2
Month: October
Year: 2022
P-ISSN: 2321-4643
E-ISSN: 2581-9402
Received: 19.07.2022
Accepted: 28.09.2022
Published: 01.10.2022
Citation:
Dua, Sonali Ahuja. “The
MSME Conundrum - COVID
Troubles for an Already
Troubled Sector.” Shanlax
International Journal of
Management, vol. 10, no. 2,
2022, pp. 49–55.
DOI:
https://doi.org/10.34293/
management.v10i2.5271
This work is licensed
under a Creative Commons
Attribution-ShareAlike 4.0
International License.
The MSME Conundrum - COVID
Troubles for an Already Troubled
Sector
Sonali Ahuja Dua
Associate Professor, Department of Commerce
Gargi College, University of Delhi, India
Abstract
India is a land of small entrepreneurs. MSMEs in India - comprising over ve crore businesses
and employing over eleven crore people - sum for nearly half of India’s production. There are
around 6.33 crore MSMEs in the country and they manufacture more than 8000 products.
MSMEs have faced challenges ranging from inadequate access to markets, poorly skilled
manpower, poor technology adoption, high cost of capital, challenges in raw material
procurement, and inadequate infrastructure. While the Government of India understands it needs
to play a greater role in supporting MSMEs - as is evident from schemes like the Atmanirbhar
Abhiyan - more needs to be done.
As if these challenges were not enough, MSMEs were hit hard by the COVID outbreak and the
resultant lockdowns.
In this research paper, we explore the challenges faced by Indian MSMEs and the support that the
government can offer them to help take on a future that looks skewed in favor of large enterprises.
Keywords: New Denition of MSME, COVID-19 crisis, Revival Strategies.
Introduction
MSMEs Denition - An Indian context
 AccordingtotheMSMEAct,theMSMEsareclassiedintotwoclasses,
i.e. Manufacturing Enterprises and Service enterprises.
 The MSMED Act of 2006 denes MSME as “The organizations
manufacturing products related to any sector specied in the rst schedule
of Industrial Act, 1951. The organizations involved in manufacturing and
provision of services subject to limiting factors of funding in plant and
machinery and other equipment ”.
However, the above criterion has been under the scanner. Recently, with
the onset of COVID-19, the government of India changed the criterion for
deningMSME.ThedenitionofMSMEswasrevised(w.e.f.1stJuly2020)
as follows:
Type of Enterprise Investment Turnover
Micro not more than 1 crore, not more than 5 crores
Small not more than 10 crores not more than 50 crores
Medium not more than 50 crores not more than 250 crores
Source: MINISTRY OF MSME
 In the new denition, both manufacturing and service enterprises
havebeenclubbedtogetherandtheMSMEshavebeendenedintermsof
composite criteria of investment and turnover.

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MSMEs in India - an Overview
MSME is a major contributor to the upward
trajectory of the economy’s development. It is the
spine of the Indian economy. The importance of
MSMEs can be understood by the fact that it absorbs
around forty percent of the laborers.
Nearly 30% of India’s GDP comes from micro,
small, and medium-sized enterprises in the 2019
scalyear.TheGDPgrowthrateofapproximately
13% that year over the year before, represented a
rising contribution to the nation’s GDP in recent
years.
The Graph below Represents the Share of Micro,
Small and Medium Enterprises in the GDP Across
India from the Financial Year 2012 to 2021
Review of Literature
Das, 2008: It is evident from the initial days of the
National Planning Commission that these enterprises
would play a pivotal role in the development of the
economy. Hence , efforts should be made to promote
them on a sustainable basis. Their critical concerns
be addressed.
Ali & Husain, 2014; Eniola & Entebang, 2015:
Development of the MSME sector is a prerequisite
for the upward movement of the Indian economy. It
constitutesabove fty percent of the production of
the economy.
Bhuyan, 2016: Bhuyan mentioned that the MSME
sector had a huge contribution toward employment
generation. The formation of these units would lead
to rural industrialization and thus reduce the regional
disparities.
 Kurien, Bhat, Rao, & Kurapati (2020): In their
research paper focuses on the challenges that have
surfaced for the MSMEs due to the pandemic. The
GovernmentofIndia(GOI)hastakenmanymeasures
to control the epidemic, including the complete
lockdownofthenationtoattentheepidemiccurve
and to reduce the fatality rate. Despite everything
done the MSME faced severe problems and many
had to even shut down their businesses.
 Lalwani(2020)Inthisresearchpapertalksabout
the actions that have been taken to minimize the risk
toSMEs.TheTaxationandOther Laws(relaxed of
certain provisions) agreement was introduced On
31stMarch 2020 theCentralGovernmentextended
the deadlines of the Income Tax Act (1961), the
Central Excise Act (1944), and the Customs Act
(1962),etc.
Sipahi, 2020: In order to stir the economy
forward, countries have to reinforce their enterprises
in the MSMEs sector
Chauhan, 2020; WTO, 2020
The Government has initiated urgent stimulus
and precautionary measures in the interest of the
MSMEs. Measures such as liquidity support to deal
withcashowissues,securityofjobsandcontinuity
of business, as well as measures to expand trade
opportunities have been taken.
Rationale of the Study
Primary objectives of this research paper are:
1. Outline the systemic importance of MSMEs to the
Indian economy in terms of output, employment
opportunities,revenuegeneration,andexports.
2. Examine the traditional (pre-COVID) problems
faced by the MSMEs
3. List the additional challenges from COVID
outbreak and the related lockdowns.
4. The policy initiatives to revive the MSMEs sector
by the government
5. Suggest revival strategy of MSMEs to sustain in
post-pandemic situation
Research Methodology
The data relevant to this research paper has been
gathered mainly from the published sources such as
the annual report of the Ministry of MSMEs.

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Discussion and Findings
MSME - a Sector already in trouble
Technology Lag
One of the biggest problems faced by the
Indian MSMEs is they are generally behind on the
technology adoption curve. The effect of technology
isexponential asithelps withachievingeconomies
of scale, reduces dependence on skilled manpower,
increases productivity, reduces time-to-market, and
so on. Technology - unless developed in house by the
MSMEsthemselves-isgenerallyexpensivetoadopt.
Therefore, by denition, MSMEs struggle to keep
updated with the latest technology when compared
with the larger market players. For MSMEs in India,
theproblemisnotonlythattechnologyisexpensive
to implement, it is also a case that many entrepreneurs
lack awareness of the latest in technology.
High Cost of Credit
Another challenge that the Indian MSMEs have
to face is poor access to credit. The credit-related
challenge has several aspects:
No unsecured credit - Banks seek collateral which
MSMEs may not have and are more comfortable
offering unsecured credit to large enterprises.
Most promoters end up offering personal assets as
collateral and others who do have sufcient assets
are unable to access credit.
High cost of credit - Since MSMEs are deemed
risky, they are charged higher rates of interest on the
credittheyare able toraise.Transactioncosts (like
cost of asset appraisal, loan appraisal, etc.) further
add to the cost of credit for the MSMEs
Delayed access to credit - Even the credit that
MSMEs are able to raise takes time because the
departments(withinbanks / other lenders)working
on MSMEs credit are either overworked (due to
largenumbersofcases)orgenerallyslow.
Complex Legal and Taxation Compliance
Framework
MSMEs are generally overwhelmed with a large
number of compliances including company laws,
labour laws, etc. Additionally, taxation laws have
alwaysbeencomplexinthecountry.Whilethemove
to GST is a step in the right direction, still it has not
fullyeliminatedthecomplexitiesfortheMSMEs.
Burden from Populist Governments
Populist governments who offer freebies to the
poor generally burden businesses (both small and
large)withsubsidies.Oneexampleisthedifference
in the rates of electricity supplied to farmers and
small businesses. While the farmers across states
getasignicantamountofelectricityfreeofcharge
or at nominal rates, small businesses must pay
commercial rates for electricity which are generally
higher, and therefore burdensome. These burdens
hurt the MSMEs a lot more than the large businesses.
Inadequate Infrastructure Facilities
For MSMEs to compete, they need access to
good infrastructure facilities. A simple example of
good infrastructure is an uninterrupted power supply.
If MSMEs can get access to a power supply and not
have to worry about setting up expensive backup
power, they would be far more productive and be in
a position to compete with the big players.
Procurement of Raw Materials
The smooth availability of supplies and resources
is critical for any business. In the case of MSMEs in
India, it is a big concern because it can generally be
done within the local territory to save transportation
costs. This gives the suppliers undue power over the
MSMEs to allow them to overcharge and deliver at
convenience.
Poor Access to Skilled Manpower
Even though India has a large pool of young
population but where it still lags is that the manpower
is not as productive as it could be. The reasons are as
follows:
a. Generally the workforce does not get employed
inthesectorsthatsuittheirprole.Eventhough
the agriculture sector employs a huge number of
people, still this sector is equally guilty of under-
employing the youth as more people are engaged
in generating relatively low economic output.
b. The human force is poorly skilled - Indians have
traditionally looked at education and college
degrees as a way out of poverty. A large number
of college graduates, are generally not employable
in the industry. A set of skilled personnel is
requiredtoworkefcientlyandeffectively

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Lack of Market Accessibility
The most common reasons for lack of market
accessibility are:
• Inadequate capital for marketing
• Inadequate access to marketing tools
• Poor access to government procurement
Additional Challenges by COVID
MSMEs in India were still dealing with the
impact of demonetization and GST implementation
when COVID spread to India. With the number
of COVID infections increasing, the government
implementedalockdownintherstquarterof2020.
This was a total lockdown barring every individual
not on medical services duty, to stay indoors. This
forced nearly all businesses to shut down right away.
Daily wage earners employed by MSMEs were
unable to earn and pay for food, lodging and other
basics and were left with no option but to migrate
back to their respective hometowns. Even salaried
employees saw their salaries stopped or reduced.
Whiletheshutdownofbusinesswasajoltfor the
MSMEs, the unavailability of former employees
hit the MSMEs hard even when the lockdown
restrictions were lifted. In addition, payments and
credit ow choked resulting in an all-round pain
for the sector. The cycle was repeated over every
lockdown implemented by the government resulting
inseveralMSMEssufferingexistentialcrises.
Overcoming the Challenges
Access to Technology
The Government has offered support to upgrade
their technology through the Credit Linked Capital
Subsidy Scheme (CLCSS) to new or existing
MSMEs. CLCSS provides an upfront capital subsidy
of 15% to MSMEs operating in 51 sub-sectors or
products.
However, the government also needs to run
programs to educate the MSMEs and entrepreneurs
on the affordable technologies that will help them
gear up for competition.
Financial Support and Access to Credit
a. The Government of India has set up Credit
Guarantee Fund Trust for Micro and Small
Enterprises(CGTMSE), atrustwhichfacilitates
MSMEs to get credit up to 2 Crores without
any collateral requirements. The scheme offers
further benets in the form of xed guarantee
costs of 0.75% to 1.80% for borrowers who
maintain a good repayment track record.
b. Interest Equalisation Scheme offers interest
equalisation of 5% per annum under pre & post-
shipmentrupeeexportcredittoMSMEexporters.
c. Reimbursements - various reimbursement
schemes can be availed by the MSMEs to get ISO
Certicationfees,CreditRatingfees,andPatent
registration fees reimbursed in part or full.
Industrial Estates for MSMEs
Government can step up its support to MSMEs
by creating Industrial Estates, IT Parks, Trade Zones,
Manufacturing clusters, etc. Creation of such clusters
allows for signicant cost savings in infrastructure
development & transportation. These clusters also
allow for reducing pollution in towns and cities,
engineering reverse migration from overcrowded
cities, etc.
Infrastructure
a. Transportation infrastructure development would
allow for easy access to raw material from all over
the country. This infrastructure covers multi-lane
highways, railway network, waterways, intra-
city and inter-city connectivity, etc.
b. Telecommunication infrastructure covers 5G
network, internet bre network, datacentres,
communication satellites, etc. and their
affordable availability would go a long way in
supporting MSMEs. Government has created this
infrastructure through entities like BSNL, VSNL,
MTNL, etc. but enabling the private sector and
attracting private capital is a more viable route to
creating this infrastructure and, in turn, helping
MSMEs.
c. Power Infrastructure - India’s dependence on
fossil fuels and the increasing pressures of
uctuating import costs and environmental
degradation are rightly forcing the government
of India towards renewable resources of power
generation-notablysolarpower.Withaggressive
focus on enabling the set up of power generation
units, the government can not only help MSMEs
indirectly by providing them uninterrupted
and affordable power, but directly by creating
MSMEs operating in the entire value chain of
renewable power generation.

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d. HazardousWasteDisposalInfrastructure-thisis
animportantinfrastructurethatneedssignicant
work.With more and more digitization, weare
dependent on products that generate hazardous
waste during their manufacture, use and disposal.
Government could mandate MSMEs to take up
this important aspect of infrastructure.
Simplify Legal and Taxation Compliances for
MSMEs
The list of compliances that MSMEs must
comply with are onerous. These are
ROC Compliances - Appointment of Auditor,
Preparation of your Company Financial Statements,
Disclosure of Director’s Interests & Declaration
RegardingDisqualication,RegisteredOfce,Issue
of Share Certicates to Subscribers, maintaining
Statutory Registers, PAN & TAN, MGT 14, etc.
Taxation-related compliances cover - TDS/
TCSpayment, GSTpaymentandGSTling, Other
payments of periodic dues, Filing of quarterly TDS
returns,Advancetax payment, FilingofITreturns,
Filingoftaxauditreports,Taxaudits.
 Theseaccountforasignicantamountoftime,
effort and mindshare and MSMEs with small teams
are simply unable to manage all compliances on their
own.Togetexternalassistanceisnotonlynancially
burdensome, but also risky because non-compliance
with any of the above results in hefty penalties
from the government agencies. Government must
look at all the compliances objectively and work
towards reducing this burden on the resource-starved
MSMEs.
Governments (Both State and Central) must be
Prevented from Burdening MSMEs with Undue
Burdens of Subsidies
 Governmentsnditeasytoburdenthebusinesses
with additional burdens of subsidy support, cess on
income, etc. Among all businesses, the MSMEs due
to their size are hit harder. While in the long run,
governments must move away from subsidies, in
the interim they must take steps to avoid unfairly
burdening the MSMEs with this burden.
Skilled Workforce
Government has undertaken several skilling
programmes with the aim to produce a world class
workforce. Over the last decade, several skilling
programmes and schemes have been rolled out
to fund training of candidates across sectors. The
government has founded organizations like National
Skill Development Corporation (NSDC), NCVET,
Sector Skill Councils, State Skill Development
Missions, etc. to fund and execute programmes to
produce industry-ready skilled workforce. These
organizations are also engaged in generating
awareness of youth to enrol in these skill development
programmes. These organizations are operating on
thePublic-PrivatePartnership(PPP)modelandhave
seen some success in their mission. However, the
wholeskilldevelopment environment needs tond
more optimization to meet industry demand at lower
costs. Ultimately, the government needs to generate
a culture of large corporations funding this training
toindirectlybenettheMSMEs.
Enabling Private (Non-Bank) Capital to Serve
MSMEs through NBFCs
India is currently seeing a signicant growth
in investments in startups and new age companies.
Such private startups and new age companies in
the nancial technology and NBFC space can be
encouraged by the Government and RBI to create
a funding pool for MSMEs. At the same time, both
the Government and RBI need to be conservative
enough to keep these private credit providers on a
tight leash to avoid predatory loans from harming the
nancial health of the borrowing MSMEs who are
generallynotverynanciallysavvy.
B2G Platforms - GeMS Portal
Governments - both central and state - are one
of the largest buyers of products and services in the
country. Government is generally a preferred buyer
for MSMEs because their payments never make it
to “bad receivables” for the vendors. Because of
this, governments have been a victim of corruption
by errant ofcers and connected vendors, leaving
the genuine vendors behind. Therefore, to make
government purchases more transparent and to
provide real time information for potential MSME
vendors (so that they do not miss out on the right
tenders and Requests for Proposal (RFPs), the
government has centralised the entire government
procurement on the GeMS portal. This move will
help the genuine MSMEs to get business from the
government. This will also prevent corruption.

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B2C Portal - ONDC Portal to Democratise
Ecommerce
 TheexponentialgrowthinIndia’secommerce,led
by the likes of Amazon, Flipkart, Myntra, Snapdeal,
Zomato, Grofers, etc. have left the small businesses
behind. For small businesses, their only option to
reach the end customer is through these platforms
as resellers. At the moment, as Amazon and Flipkart
have become so big that the MSMEs have no option
but to become resellers on these platforms. Becoming
a reseller on these platforms subjects these MSMEs
to aggressive margin deductions by the platforms
andunfairprotsharing.
Keeping the plight of MSMEs in mind, the
government has launched the Open Network for
Digital Commerce (ONDC), to serve as an online
commerce platform that provides inclusivity for
small vendors. All vendors - mostly MSMEs will
be able to make their products / services catalogues
visible on ONDC.
This platform will provide an open digital
storefront with catalogs of restaurants, grocers, and
vendors visible to all buyers on platforms to decide
whom to purchase from. Since April 2020, ONDC
has been testing grocery and food delivery in select
cities.
 With aggressive marketing and less predatory
prot sharing, ONDC could be the government’s
way of protecting the MSMEs from being devoured
by the large companies.
Special Schemes to Ease the COVID Pain -
Atmanirbhar Bharat Scheme (ABS)
Non-Financial Support under the ABS:
1. Thereviseddenitionof MSMEs -hasallowed
for a larger number of entities to get covered
underthedenitionofMSMEsandhencegetthe
rightbenets.Underthenewlyreviseddenition
both manufacturing and service sectors are
now considered the same for the classication
based on investment. In addition, the investment
limit for both sectors is increased along with a
new criterion of turnover to help bring in many
new enterprises within the ambit of the MSME
denition to benet from the Government
schemes.
2. Global tenders under Rs 200 crores disallowed:
The government has decided to offer tenders for
any procurement up to Rs. 200 crores to the Indian
MSMEs by disallowing overseas competition.
This will greatly help the Indian MSMEs.
3. Marketing Assistance: Government has taken
steps to provide e-market linkage for MSMEs to
replacephysicaltradefairsandexhibitions.This
stepwillenablecuttingofexpensesandtime.
4. Liquidity Support - The government has
mandated that all MSME receivables from the
government to be released within 45 days. This
will serve to greatly ease the COVID liquidity
woes of this sector.
Financial Support under the ABS
In the line chart given below, the actions taken
by the Government are shown. The budget allocation
for MSMEs has been substantially enhanced in
2021-22 and 2022-23 to facilitate the enterprises in
the duress due to Covid. The employment of funds
has also been depicted.
Source: Ministry of MSME
5. The government has created a Fund-of-Fund of
50,000 Crores of equity infusion for MSMEs.
The initial corpus of this fund-of-funds will be
Rs10,000crores and is expectedtosupportthe
MSMEs to grow in size and reach IPO listings.
6. Subordinate Debt for stressed MSMEs: Another
Rs 20,000 crores of subordinate debt has been
allocated for stressed MSMEs. This fund is
expected to support nearly 2 lakh MSMEs by
helping them to restart their businesses and
secure jobs for their workforce.
7. Rs 3 Lakh Crores Collateral-free loan: The
government has announced a collateral-free loan
fund of Rs 3 Lakh Crores to help boost liquidity
& working capital for MSMEs. This fund is
expectedtotarget nearly 45lakhunitsand help
them resume business activity.
Another interesting piece of data from the
Ministry of MSME shows that the government
(year-to-date)hasofferedcreditguaranteeschemes

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Shanlax
International Journal of Management
to over 4.1 lakh MSMEs and a record high average
of Rs 8.48 lakhs.
Source: Ministry of MSME
In the the above chart, the number for total
numberof caseshasbeen annualisedfromtheve-
month number of 4.11 lakh for 5-months till August
2022 to 9.87 lakh for 12-months till March 2023.
From the chart it is visible that the government’s
credit guarantee scheme for MSMEs has picked up
in the year 2022-23 not just in number of cases of
support but also the average Rupee support per case.
Conclusion
The revised denition of MSME will certainly
encourage more entrepreneurs to set up their own
units and this will result in an increase in output,
employment,productdiversication,investmentand
export.TheimpactofthenewdenitionofMSMEs
on the economic performance is yet to be known.
The above discussion shows that the MSMEs have
to deal with numerous problems which hinder
their growth. The fundamental issues need to be
tackled on a sustainable basis. Therefore timely and
substantial policy measures for the betterment of all
the stakeholders should be taken by the government
to attain the goal of Self Reliant Bharat.
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Author Details
Sonali Ahuja Dua, Associate Professor, Department of Commerce, Gargi College, University of Delhi, India,
Email ID: drsonalidua@gmail.com