The Idle Capacity Crisis of Our Small Businesses

Context: Most Micro Small and Medium Enterprises (MSMEs) have restarted work and the Centre’s credit guarantee has helped plug some cash flow gaps, but they’re staring at weak demand. 

Significance of Micro, Small and Medium Enterprises: a sector that employs over 110 million Indians and accounts for roughly one-third of our gross domestic product (GDP).

Measures taken by the Government:

• Atmanirbhar Bharat Package: provision of collateral-free loans of up to Rs 3 trillion.
• So far, loans worth ?1.4 trillion have been sanctioned and ?95,000 crore disbursed, seems to have helped several small units.
• In August, just 55% of MSMEs cited liquidity as a critical concern.

Challenges to the MSMEs

• No Provision of Compensation: to the MSMEs were available in India, unlike in the well-off countries. 
• Lack of Demand: A vast majority are operating well below their capacity.
• For E.g. As of 1 August, three- fourths of our MSME units were producing less than half of what they were capable of.
• They remain strapped for cash, weighed down by logistical challenges, and painfully short of orders.
• Threat of Stagflation: will further depress the demand.
• Increased Desolation among MSMEs: In August, the slice of MSMEs reporting it as a major worry was 17%, up from 13% in June.
• A downward spiral of poor demand and low earnings, which tend to reinforce each other, has been noticed in the first quarter of 2020-21.
• Risk Aversion and Strict Eligibility Norms: has limited the credit coverage.

Way Forward: 

• Go Beyond Credit Disbursal: by offering sector-specific provisions, and think in terms of a broad stimulus.