Examining the Covid-19 Relief Package for MSMEs

The micro, small and medium enterprises (MSMEs) are of immense importance to the Indian economy, in terms of generating employment, output, and exports. Yet, it is a sector that is vulnerable, and can quickly ­become unstable and unviable, particularly in the presence of external shocks. In recognition of these aspects, the ­finance minister announced the much-awaited relief package for the MSMEs on 13 May 2020 to tide over the Covid-19 lockdown-induced crisis. The announcements also included a change in the defining criterion for MSMEs. I discuss what the change means for the sector. The gaps in the response of the state to ensure viability of the MSME sector in the midst of the ongoing pandemic are explored and some specific recommendations are offered.

Defining MSMEs

Any priority sector scheme that seeks to target beneficiaries, includes certain entities and excludes others. Thus, defining these entities becomes important. Being classified as MSMEs provides ent­erprises some handholding by the state, making them eligible for certain benefits. These include priority lending from banks, collateral free loans, mandatory sourcing of 25% of procurements by the central government from micro and small enterprises (MSEs), and a slew of other targeted benefits.

Identifying what qualifies as a small and medium enterprise (SME) has been a contentious issue for decades. Internationally, consensus on a uniform norm has been hard to achieve (Berisha and Pula 2015), and the most accepted ones are from the World Bank and the International Finance Corporation based on the criteria of employment, assets, and turnover, where a unit has to fulfil the employment criteria, and any one of the two financial criteria to qualify as an SME.

In India, MSMEs were defined by the MSME Development Act of 2006 for the first time (Table 1). The act used investment in plant and equipment for manufacturing and in equipment for services (excluding investments in land and building, costs of research and development and pollution control ­devices, etc) as the defining criteria. The recent changes in the definition of ­MSMEs follow a composite criterion, ­using both turnover and investment in plant and machinery (Table 1). They also eliminate the difference in investment thresholds between the manufacturing and services sector.