• Aditya Natani

Presumption of Industries, especially MSMEs easier said than done

Manufacturing industry all over the world is made up of small & medium scale units and large-scale units. Both the segments depend on each other for their successes, but large-scale units are usually at a greater advantage due to greater economies of scale, diversified backward & forward market linkages, effective logistics support and government’s attention to their benefit. Whereas, small and medium scale units are at the behest of these large-scale units and the ruling government. In the scenario where, MSMEs are struggling to cope up with the effects of pandemic mainly due to liquidity crunch and destruction in demand, a multi-national corporation like Coca Cola has not only ensured about no layoffs but also offered salary hike of approximately 7000 direct workers across all its 15 factories throughout the country[1]. Also, MSMEs whose turnover majorly depended on exports are on the verge of winding up.

Following are the major challenges faced by manufacturing industry amid the pandemic:

  1. Liquidity Crunch: Since, compulsory lockdown has been imposed w.e.f. 24th march without any prior notice or consultations with the numerous stakeholders, the economy has come to a complete halt. Payment cycles have been disturbed at such a scale that even large-scale retailer Future Group may have to defer employee salaries for the month of April [2]. MSME units have paid the March month salaries but have a feeling that they will have to either layoff workers, reduce or defer salaries and wages in order to survive. Payments from overseas customers have also been affected due to global lockdown amid fear of spread of coronavirus.

  2. Disturbance in supply chain: Even if a unit is not located in hotspot, it cannot resume to function due to disturbed supply chains. Most of the industries located in hotspots and have not been allowed to resume operations.

  3. Unavailability of labour: Due to sudden unplanned lockdown, numerous migrant labourers fear if they will ever be able to return to their native places. As a result, even if the lockdown is lifted in some areas, labourers may be eager to return to their native places rather than working in the factories. This will result in hiring of locally sourced labourers who might not be as skilled as earlier migrant labour. It is feared that this pandemic is going to impact the labour landscape throughout the country.

  4. Punitive actions under Disaster Management Act: Strict rules for social distancing while reopening are not viable for manufacturing units, especially MSME units that have small premises.[3] CII has sought clarification on guidelines as companies look to re-start factories.[4] Even though government has assured that there are no provisions for imprisonment of CEOs, it shall be made sure that in the name of regulations factory owners are not harassed by the local level authorities.

As per experts, following measures if taken up by the government in timely manner, MSMEs which are on the verge of bankruptcy may revive and thrive again.

  1. Easier credit and extended moratorium: MSMEs’ associations heads have equivocally demanded for extension of moratorium from existing 3 months announced by RBI. Although Indian Bankers’ Association has voluntarily started working on finalising a special restructuring proposal that will allow banks to extend loan tenures without classifying them as nonperforming assets (NPAs). Bankers are of the opinion that companies hit by lockdown will take almost a year to recover and a moratorium of mere 3 months till 31st May 2020 is not enough. The restructuring package planned by IBA may involve providing extension in tenor of term loan repayment by extension of moratorium and in case of working capital loans, interest payment can be extended up to 3 years. However, I believe that assuming bankers can sustain above-mentioned restructuring including extended moratorium periods, then it means that there will be none or very limited scope for new advances especially when the sector is already struggling from poor loan growth rate, which is currently at a 58-year low.

  2. Government guaranteed extended loans: It is believed that enhancing working capital limits with lower collateral with govt guarantee at 4-5% interest, will enable MSMEs to fight cash crunch and remain afloat. Veteran economist and former RBI governor Raghuram Rajan as he says in his book ‘I do what I do’, that instead of supporting struggling MSMEs of this country our banking sector turns hostile whenever such MSME defaults. He has expressed his opinion that MSME with excellent financial track record if struggles to pay instalments on time and it is apparent that the shock to its business is temporary, such MSME shall be supported by providing an extra credit without classifying it as a NPA. Maybe, such extra credit will support it to cope up with the crisis. However, such additional credits shall not be government guaranteed instead should be made available on case to case basis depending mostly on previous financial conduct. If government guarantee is involved there may be misuse of the stimulus package resulting in genuine cases being left over.

  3. Clearing of undisputed GST refunds and government dues: Undisputed GST refunds and government dues which are outstanding for a long period of time should be cleared immediately. Even the claims which are under dispute if possible, by mediation shall be disposed off immediately. It is believed, that if government clears all its dues it may be possible that those units shall not be requiring any further stimulus benefits.

  4. Relaxation from statutory liabilities and penalties: Government should provide relaxation in statutory liabilities and penalties such as filing of GST returns, interest and penalty on late filing of returns or payments of taxes, etc. in order to allow time to MSMEs to bring them back on track.

Governments all over the world have introduced stimulus packages to make sure factories are furloughing instead of laying off their workers. On 23rd April 2020, US senate passed its third economic stimulus package worth $484bn out of which $320bn is allotted for Paycheck Protection Program to help struggling businesses to keep their workers on roll.[5] UK government on 20th April 2020, announced a wage bill scheme named ‘Coronavirus Job Retention Scheme’ for the furloughed employees where the British government will pay 80% of workers’ wages, up to 2,500 pounds per month, if they are put on leave till end of June 2020.[6] Germany’s Kurzarbeit scheme, allows employers to cut working hours for individual employees, and the government will make up the shortfall for reduced working hours, as well as for those who cannot work at all because of the crisis[7]. However, no such job retention scheme has been introduced by the Indian government till date. Union Minister Nitin Gadkari has proposed Rs 1 lakh crore fund (approx. $131bn) insured by government on Friday, 24th April to clear dues to MSMEs but nothing has been finalized yet.[8] Even after more than a month has elapsed from imposition of national lockdown, the govt is yet to work on a formula to arrive at the funding mechanism! The government on March 26, 2020 announced a Rs 1.7 lakh crore relief package under the Pradhan Mantri Garib Kalyan Yojana (PMGKY) enabling the poor to fight the battle against coronavirus under which government proposes to pay the EPF (Employees’ Provident Fund) contribution for next three months of certain categories of employees. In an interview with the Economic Times, Union Minister Nitin Gadkari says that his department is proactively dealing with such issues, but the reality is much different.

[1] Coke’s Unit Gives Salary Hike Amid Covid Chaos by Ratna Bhushan, The Economic Times, 27/04/2020

[2] Future Group may defer employee salaries for April by Aditi Shrivastava, The Economic Times, 23/04/2020

[3] ‘Harsh’ Rules on Resumption Alarm Industry by Kala Vijayraghavan & Satish John, 22/04/2020, The Economic Times (Mumbai)

[4] Don’t Rush to Open Factories’ by Nishtha Saluja, 23/04/2020, The Economic Times (Mumbai)

[5] House Approves $484 Billion Bill to Aid Small Businesses, Hospitals by Andrew Duehren and Siobhan Hughes, The Wall Street Journal, 23/04/2020

[6] Coronavirus Job Retention Scheme up and running, https://www.gov.uk/government/news/coronavirus-job-retention-scheme-up-and-running

[7] How Germany got its furlough scheme right by Justin Huggler, The Telegraph

[8] Rs 1-lakh crore fund in the works to repay pending dues to MSMEs: Nitin Gadkari, 24/04/2020, The Hindu BusinessLine

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