IMPACT OF COVID-19 ON MSME SECTOR – WHERE TO GO FROM HERE?

Vedant Kumar & Abhishek Tripathi 

COVID-19 pandemic has undoubtably put the world economy into recession. The International Monetary Fund has predicted that the great lockdown’ will be worse than the 2008-09 recession. Indian economy is not immune to a global recession and it has taken a toll due to the preventive measures for containing COVID-19. The Micro, Small and Medium Enterprise (“MSME”) sector is perhaps the worst hit – many of the MSMEs are struggling and face imminent danger of permanent closure even as the sector is saddled with various advisories making it mandatory to pay wages and not terminate employees (more on the same can be read here).

Even though the Reserve Bank of India (“RBI”) was quick to announce some initial reliefs, the same are not enough to keep afloat around 63.4 million units strong sector that contributes around 6.11% of the total Gross Domestic Product. The All India Manufacturer’s Organization has urged the Central Government to release a bailout package and also requested the Government to waive off the bank interest till December 2020.

The disruptions due to lockdown have considerably disrupted supply chains, and reduced manpower availability, and demand. These issues are unlikely to be resolved immediately upon lifting of the lockdown. Given the fact that MSMEs are directly or indirectly dependent on the functioning of other sectors, the pain for the MSMEs is likely to continue for the foreseeable future. Specific measures for the MSME sector from Government of India are awaited. We have already discussed the impact of COVID-19 and the lockdown on contractual obligations (here). In this post, we cover the measures taken already for MSMEs (directly or indirectly) and what further measures can be taken.

Existing Relief Measures for MSMEs

The Ministry of Finance announced a series of relief measures, through relaxation in tax and other corporate regulatory compliances, to ease the compliance burden on the MSMEs during COVID-19. Moreover, the Central Government has promulgated Taxation and other Laws (Relaxation of Certain Provisions) Ordinance, 2020 to extend the timelines under various tax legislations.

RBI has issued various directions offering 3 months’ moratorium period for the repayment of loans falling due between March 1, 2020 and May 31, 2020. The Banks were also directed to defer the interest applied to cash credit and overdraft facilities during this period. The RBI also reduced reverse repo rate to improve liquidity and encourage banks to utilize the surplus amount for investment and for lending more. However, the real impact of these measures particularly on the stressed MSME sector are yet to be seen.

Specific relief has been granted to the enterprises dealing in exports as the RBI has extended the realization and repatriation period of the export proceeds for 15 months for exports made up to or on July 31, 2020. This will give some respite to the exporters to realize their receipts. Recently, RBI also announced a special refinance facility for Rs. 50,000 crores to All India Financial Institutions like National Bank for Agriculture and Rural Development, the Small Industries Development Bank of India (‘SIDBI’) and the National Housing Bank to meet the sector specific requirement. NABARD was allocated Rs. 25,000 crores to refinance the various Regional Rural Banks, Cooperative Banks, and Micro Finance Institutions. SIDBI was allocated Rs. 15,000 crores for refinancing and NHB was granted Rs. 10,000 crores to provide support to the Housing Finance Companies.

SIDBI has launched the SIDBI Assistance to Facilitate Emergency response against coronavirus – SAFE scheme and SAFE plus scheme to grant loans at 5% interest rate within 48-hours to MSMEs which are manufacturing products or providing service to the activities preventing the spread of COVID-19. SIDBI has also opened an additional financial window for healthcare sector under its already existing loan scheme known as SMILE (SIDBI Make in India Soft Loan Fund for Micro Small and Medium Enterprises), with the object to provide soft loans on relatively easier terms to new or existing MSMEs in order to successfully implement Make in India campaign.

On March 25, 2020, the Confederation of Indian Industry (CII) has announced the CII COVID Rehabilitation and Relief Fund in order to counterbalance the effect of the COVID-19 on the MSME sector. Further, the CII has proposed that the government should come up with the contingency plan for three phases in order to revive the sector.

Lessons from Abroad

Canada has recently introduced the Canada Emergency Wage Subsidy scheme which provides 75% wage subsidy to eligible employers in order to fight job losses due to the outbreak of COVID-19 and to encourage employers to re-hire those workers, who are terminated due to the outbreak of COVID-19. On similar lines, New Zealand also launched two schemes –  COVID-19 Wage Subsidy and COVID-19 Essential Workers Leave Support, to assist employers in giving wages to their employees. Tackling the issue of cash liquidity, the Switzerland government has passed an emergency ordinance to enable the companies affected by the COVID-19 to apply to their respective banks for credit facilities. To subdue the effects of the COVID-19, the United States of America has passed Coronavirus Aid, Relief, and Economic Security Act, 2020 (“CARES Act”) to provide relief to individuals and businesses. The CARES Act aims to  provide small business units with almost $350 billions as  partially forgivable loans, along with certain tax benefits. The units severally hit by the COVID-19 can claim tax credit of $ 5,000 for wages paid to their employees. Similar steps have been taken by United KingdomSingapore, Japan and Australia.

Way Ahead

To revive the already stressed MSME sector it is imperative that the Central Government comes up with a sector specific relief package for MSME. The sector needs immediate support for paying the wage bills of its workforce and easily available credit line with at least partial credit guarantee support from the Government. In the absence of credit guarantee, the banks and financial institutions are unlikely to lend despite RBI’s decision to lower reverse repo rate. The Government may also need to consider in consultation with the RBI if it is possible to provide interest waiver to loans to MSME sector for the period of the lockdown.  It may be necessary to trace and identify the units that are severally hit by this pandemic and foster adequate reliefs at the earliest. Keeping in mind the revival of the MSMEs, the Ministry of the Home Affairs has released a list of commercial and private establishment that can operate from 20 April 2020.  It is necessary for the Centre and the State Governments to create awareness regarding the already existing schemes so that the benefits could be reaped by maximum number of enterprises. Genuine efforts should be put in place to revive the ‘Make in India’ campaign, as the same was introduced to predominantly promote the MSME sector.