If there is a third wave, MSMEs may not recover before 2023, fears PHDCCI's Mohit Jain

Two consecutive COVID-19 pandemic waves have ravaged all the sectors, but it is the micro small and medium enterprises (MSMEs) that have borne the brunt of the coronavirus.

As a result of the pandemic-induced lockdown, the MSME sector is facing a massive liquidity and supply crunch, shortage of labour and non-payment of dues.

In a wide-ranging interview with Moneycontrol, Mohit Jain, Chairperson, MSME Committee, PHD Chamber of Commerce & Industry, shares his outlook on the sector's recovery. He reflects on other aspects as well; could India gain from the anti-China sentiment post-COVID, efforts undertaken by the government to aid MSME recovery, and more.

Edited excerpts:

The MSME sector had barely recovered from the first wave of the pandemic when it was further dented by the second wave and now there are concerns about a third wave. What is your outlook on the recovery of the sector?

The second wave GST collection was a bit better than the first. Yet, as far as MSMEs are concerned, they were seriously affected by the first wave itself, and ended up using all the resources saved up during the first pandemic wave. So, the second wave has been very hard. The GST numbers are not showing, or probably not reflecting on the troubles faced by the MSMEs; GST numbers are probably up because of inflation or increase in the value of diesel and petrol. So, if the third wave is to come, I don't think the MSMEs can recover before 2023! It would take at least another one-and-a-half to two years to recover.

The government has given us some support as financial packages. When the industry was shut down, these financial packages helped MSMEs to survive. But now the moratorium period has also ended. MSMEs still have not come to levels where they can make a profit to be able to pay the first loan and then the extra ones. MSMEs would not be able to come back till 2023.

When they believe that they're back to normal and be able to survive, that too would only be a part of the industry. Some industries have been hit much harder, like restaurants and tourism; they will take a much longer time to revive and many of the smaller vendors and traders, who shut shop during these times, will take a long time because all their cash flows are disturbed and they work from cycle to cycle. Once that cycle is broken, then reviving a backup and creating back the cycle of cash flow is going to be very hard.

The finance minister recently increased the corpus of the ECLGS (Emergency Credit Line Guarantee Scheme). Has it been helpful in aiding MSMEs to recover, and what more can be done? 

The scheme, for sure, gave a band-aid effect to the MSMEs. It gave them relief, helping them to tide over the crisis. Yet, the scheme was not used because of the hurdles the small industries faced during the pandemic. There were many MSMEs who had not taken a loan before, but because of the pandemic, they needed loans. Those who were not able to avail of the scheme were left out and a number of MSMEs, who may have not gone to the bank for loans, took some other traditional loans, from family relatives, for example. So, they never came under the formal scope of government lending.

I would request the government to look at some formula for extending loans to those MSMEs who were not able to avail of the loans with limits, or cutoff dates, which they has already posted. For the extended scheme, I would say, it's too short a period till September 30, with only two months left. I would request that this period be extended to March 31, 2022. So, that it gives a window for people to come forward to avail of this scheme.

The government has called COVID a great opportunity for MSMEs to benefit from the world’s anti-China sentiment. Do you expect any action in terms of investments and contracts from foreign or local enterprises coming to MSMEs post the pandemic?

I would say that the sentiment for India is very strong now. A vast section of the large industry could move to India and if that happens, MSMEs could become ancillaries to them and benefit. The problem is that to compete with China, the units who would be willing to move here, would want India to provide them products, which are economical and at a low cost as compared to China. But currently, if you look at India, our raw material prices have shot through the roof; steel is selling at twice the cost. If it was Rs 35 a ton last year, it is now Rs 70 per ton-plus in the last 6-7 months. Coal and diesel prices in India are up again as compared to the international market, making the cost of interests higher. To be able to get business from China, we have to be economically viable. We have to get our raw material prices under control and logistic costs, too, need to come down. We need to bring down diesel prices if we want to make Indian MSMEs competitive in the market.

The minister for MSMEs has recently called for creation of a ratings system for MSMEs. What is your take on that?

I would appreciate the move of allotting a rating system to MSMEs. But there are problems with the rating system. One, currently the big companies are doing the ratings, as they do in the case of multinationals. If that kind of rating system is going to be used for MSMEs, they will never get a great rating. So, the government has to develop norms for ratings, which suit MSMEs with their credit ratios and asset ratios. It needs a tailor make fit. RBI should make it compulsory for the banks to accept these credit ratings. My understanding is that companies, MSMEs who are less than Rs five crores, do not require credit ratings. If a company, whose credit limits is less than Rs five crores and they get a credit rating from outside, banks won't accept it. They would say that they will do the crediting ourselves. So RBI should instruct and it should be accepted by each and every bank that they will not create their own ratings systems.

Technology penetration is very low among MSMEs. What can be done to speed it up? 

When it comes to changing technology, there's going to be a price. The government is giving a subsidy of 15 percent as technology fund. But that is only up to Rs one crore, a very small sum. The budgetary allocation too is very small. My suggestion would be that Rs one crore be increased to Rs five crore, for the technological up-gradation fund, and also allocate more money. (The Ministry of MSMEs offers the International Cooperation Scheme, which helps fund MSMEs to participate in international exhibitions and events to get access to the latest in technology). It needs to encourage MSMEs to come forward and use these technologies so that they can benefit by way of productivity, lowering the costs and incentivize a better product.

The rise of e-commerce platforms has been huge in recent years. Efforts have also been undertaken to onboard MSMEs on the platforms. Is e-commerce a threat or benefit for MSMEs?  

It's certainly a benefit for MSMEs, because e-commerce is the next wave in the future. E-commerce helps the MSME create market; it also helps a small micro unit to sell at a very cost effective rate. So, any small manufacturer can put up their product very easily on the e-commerce platform and sell. It also broadens the market. It's a great benefit for the industry and for MSMEs. Any negatives, of course, can be streamlined. In the pandemic, if any of us were able to be of any service, it was only because of e-commerce.