Writers Vijay Sureka – partner – and Nusrat Hassan -Co-Managing Partner – at Link Legal India Law Services in Mumbai speak about the possibility of the MSME sector becoming the new game-changer and the role of Government of India in the same…
L to R: Vijay Sureka, Nusrat Hassan
Much has been said about the micro, small and medium enterprises (MSMEs) in the past few months. And one thing that is becoming increasingly clear is that the Government of India (GoI) has started to take definitive and quick steps to address the challenges being faced by the MSME sector – the challenges that have seen the sector struggling to a large extent. So, is the MSME sector going to be the new supply chain for the larger industry?
The MSME sector is vital for the growth and development of any economy and its strategic importance cannot be overemphasised. According to some estimates, small and medium enterprises account for approximately 90 percent of businesses and more than 50 percent of employment worldwide. In fact, MSMEs have for many years been the backbone of the Indian economy as well, contributing significantly to employment generation, innovation, exports, and inclusive growth of the economy.
There are more than 60 million MSMEs operating throughout the country across various sectors and contribute approximately 30% to India’s GDP and approximately 45% to the overall exports from India. The GoI has set itself a target of ensuring that MSMEs contribute more than 50% to India’s GDP and offer at least 150 million jobs over the next 5 years.
It is obvious that industry depends heavily upon the MSME sector. For instance, the MSME sector contributes 6.11 % to the countrys manufacturing GDP and a large chunk of MSMEs comprise the auto component sector. Further, according to the available data, in the Indian pharmaceutical industry about 60 percent of the manufacturing is contributed by MSMEs.
In fact, not just the private sector, even the GoI depends on the MSME sector to a very large extent.
The public procurement policy of the GoI mandates every ministry, department and public sector undertaking of the GoI to compulsorily procure at least 25% of their total annual purchases from the MSMEs. According to available government data, the total procurement by central ministries and PSUs form MSMEs during the financial year 2019-2020 exceeded Rs. 37,000 crore (USD 4.8 billion).
The sectors that saw the most procurements, included energy, railways, steel, mining, defence and heavy industries and public enterprise. Ministry of Petroleum and Natural Gas alone accounted for INR 20,000 crore (approximately USD 2.6 billion) and energy sector accounted for approximately INR 25,000 crore (approximately USD 3.33 billion).
With the recent announcement made by the GoI to disallow global tenders for government procurement of goods and services worth less than INR 200 crore (approximately USD 26.67 million) and the much needed push sought to be given to the infrastructure sector through the National Infrastructure Pipeline, which estimates an investment of approximately INR 111 lakh crore (approximately USD 1.48 trillion) in the infrastructure sector over the next 5 years, the MSME sector stands to gain tremendously.
Add to this the various financial measures announced by the Government as a part of the Atmanirbhar Bharat programme in the month of May 2020, and it is evident that the GoI means business. Additionally, significant labour reforms have also been proposed by the GoI to consolidate 44 central labour laws into 4 simplified codes, and some States have introduced labour law relaxations considering the ongoing COVID-19 pandemic for up to 3 years, each aimed at aimed at making the environment more conducive to doing business in India.
One of the biggest challenges being faced by the MSME sector is the issue of delayed payments. Most large corporates operate with MSMEs on a credit basis and often there are delays in payment of their invoices.
As a result, MSMEs face a financial crunch in the business. Their interest burden increases, cash flow becomes stressed and the ability of MSMEs to meet their financial obligations, including debt servicing, is severely affected.
Therefore, the likelihood of proceedings being initiated against MSMEs under the Insolvency and Bankruptcy Code, 2016 (IBC) becomes very high. However, the recent move to increase the minimum threshold to initiate insolvency proceedings under the IBC from INR 1 lakh (approximately USD 1,335) to INR 1 crore (approximately USD 133,335) is bound to bring some breather to the beleaguered sector.
Another seemingly small but significant step towards easing the road ahead for the MSME sector is the proposal of the Insolvency and Bankruptcy Board of India (IBBI) to permit the promoters and founders of a stressed MSME to present a resolution plan, should insolvency proceedings be initiated against the MSME. For the uninitiated, IBC prohibits promoters and other connected persons and related parties of a company against whom insolvency proceedings have been initiated, from proposing a resolution plan for the revival of the company.
The list of persons who are not eligible to bid for the distressed company is very wide. Thus, while many a times promoters are willing to revive the unit by pooling in funds from friends and family, the restriction imposed by IBC makes it difficult for promoters even in genuine cases to try and revive the company.
Accordingly, the proposed move by the IBBI to allow promoters to make a bid for their companies in the insolvency process is a step in the right direction which would encourage promoters to pool in their personal resources, in a bid to revive their companies and retain control at the same time.
In February 2020, the Indian finance ministry proposed setting up of an Investment Clearance Cell with the intention of providing ?end to end facilitation and support to create more opportunities and remove roadblocks in obtaining the different approvals required for various purposes.
The idea behind the proposed investment clearance cell is to give investors free investment advisory, land banks and facilitate clearances even at state level. The civil aviation ministry has already set up its single clearance window pursuant to the aforesaid announcement.
The other ministries are expected to follow suit soon.
The policy initiatives announced by the GoI are well calibrated and there is a visible effort on the part of the GoI to further ease doing of business in India, with special emphasis on the MSME sector. The GoIs mindset looks like it is recognizing the strategic importance of MSME sector and that the MSME sector could be the new gamechanger, especially in the post COVID-19 period.
With the tailwind of these government initiatives, favourable demographics and growth in the working-age population, we believe there is a huge potential for the MSME sector waiting to be unlocked in times to come. These reforms are intended to and indeed inspire confidence in the MSME sector, thereby creating an environment of positivity attractive enough for foreign investments to sit up and take a note of this sector, which they have so far ignored.
These sincere efforts of the GoI are bound to yield results and will certainly help the MSME sector not only to reinvent themselves and upscale domestically, but also to create a larger footprint across the globe.
While the GOIs efforts and various reforms are replete with myriad opportunities for the MSME sector, the proof, as they say, is in the pudding.
Thus, we will have to wait and watch whether and to what extent the GoI initiatives would yield the desired results and help in reviving the struggling sector.
However, there is no naysaying that the GoI has gone all out and made genuine efforts to pump life into the sector, and the GoIs efforts should be lauded wholeheartedly.
(Views are personal.)
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