Impact of Fiscal Stimulus on MSME’s

Over the last few days, the honourable Finance Minister of India Nirmala Sitharaman has made announcements regarding a massive fiscal stimulus to stimulate and stabilize the nation’s economy. These announcements coupled with already announced and implemented measures by different bodies will sum up to INR 20 Lakh crores (USD 270 billion). Out of this total 20 Lakh Crore, announcements for benefit to MSME’s account for a good 25%.

GOI’s flagship policy of pandemic economic revival, ATMA-NIRBHAR BHARAT revolves around MSME’s and Entrepreneurship and could result into a massive push for the country to recover fast and achieve its dream of becoming a USD 4-5 trillion economy. To understand why GOI has focused on MSME’s so much in the fiscal stimulus, we need to understand the importance of MSME’s with the context on Indian Economy.

MSME (Micro, Small and Medium Enterprises) is the lifeblood of Indian Economy. Development of MSME has been the most valuable playerof team Indian Economy over last few years on 3 core fronts:

1) Employment

2) Exports

3) Resource Mobilization, Digitalization & Balanced Development

There is a total of 55.80 million MSME’s in India and provide employment to roughly about 125 million Indian’s from different spheres of the society. MSME’s account for 31% of the Indian GDP and 45% of the total Indian exports.

Out of these 55.80 million units, 15% are women led and 56 % are based in rural areas. These facts showcase the strategic importance of MSME’s for India.

A strong MSME sector also brings stability to the nation’s economy during economic downturns, this has been demonstrated by developed countries like US and its Western European counter parts. GOI in last few years have emphasised on flagship policies like “Make in India”&“Startup India” have showcased its clear intention to develop MSME’s and entrepreneurship in India.

GOI in its recent announcement have made the much-needed changes to the definition of MSME’s. With a move from investment driven definition towards revenue driven definition showcases a strategic and structural movement by the regulator.

This change in the definition brings a more holistic picture of MSME’s into the purview with clarity, vision and an increasing beneficiary base. New definition is aligned to the global standards and fast-tracks the Indian MSME’s on the path to growth and scalability.

Under the ATMA NIRBHAR BHARAT ABHIYAAN economic relief package, GOI has brought forward three flagship programmes to provide liquidity and other sources of capital to MSME’s, these are:

1)Rs 3 lakh crore collateral free automatic loans for MSMEs.

2) Rs 50 thousand crore equity infusion through a MSME fund of funds.

3) Rs 20 thousand crore of subordinate debt for stressed or NPA MSME’s.

Under the free automatic loan scheme, around 45 lakh MSME’s will be able to avail loans to kickstart business activities and safeguard jobs. For 2 lakh MSME’s which are considered stressed or considered non-performing assets, GOI will provide subordinate debt to the tune of Rs 20,000 Crore to ensure their survivability.

With the innovative fund of funds scheme, GOI will provide MSME’s with VC style growth capital to catapult Indian MSME’s towards IPO’s. Under this scheme, GOI have created a fund with a corpus of 10,000 Crore Rs and will raise remaining 40,000 Crores from investors and will infuse these funds as equity in MSME’s through different subordinate funds.

Under these schemes MSME’s will be able to avail loans and other forms of cash infusion in their businesses and will be able to survive the recessionary aftershock induced by the pandemic induced lockdown. These schemes will also help the beneficiary to be in a commanding position to compete and capture value once the global supply chain comes back online.

Above mentioned measures taken by the GOI coupled with revolutionary reforms like

• land and labour laws rationalisation
• liquidity support to NBFC’s & other financial institutions
• demand side measures to boost domestic consumption

we can expect a normal to strong resurgence of the Indian economy if all goes accordingly.

One major factor which GOI will have to be watchful, is the damp reception faced by the RBI’s 87 Billion USD monetary stimulus announced in the early days of lockdown.FI’s are reluctant to lend to MSME’s due to their risky profile on their balance sheets and have essentially parked their funds in safe assets.

RBI’s plan for these financial institutions to lend to MSME’s was blemished, predictably didn’t work and barely made an impact. RBI’s step of parking surplus with these FI’s and suggesting them to bear all the credit risk while forwarding these surpluses to MSME’s was an insufficient move and FI’s parked that surplus in highly rated corporate securities.

One more factor that could derail the regulators stimulating stance is the exorbitant rent seeking, free loading and nepotism prevalent in the Indian banking industry. Until and unless a watchdog who keeps a keen vigil on the executing bodies is especially created for this purpose, there’s a high probability that the fiscal stimulus can mount to nothing.

The current fiscal stimulus has kept a long-term perspective and haven’t really focused on the factors currently scorching the Indian Economy.

The current fiscal stimulus can be best described as a low hanging fruit and whether it really impacts the life of the neediest or it just becomes a toy in the hands of powerful citizens only time will tell.

In our next part we will talk about the impact of fiscal stimulus upon startups.

STAY SAFE!