Nirmala Sitharaman's economic measures for the MSME sector

With micro, small and medium enterprises (MSME) desperately seeking financial aid after a sharp drop in revenues when India went into lockdown in March 2020, Finance Minister Nirmala Sitharaman rolled out a slew of initiatives in May as part of the Rs 20-lakh crore Aatmanirbhar Bharat stimulus package.

The three policies for MSMEs are a Rs 3-lakh crore collateral-free loan scheme, a Rs 20,000-crore subordinate debt scheme, and a Rs 50,000-crore equity infusion through the Funds of Funds (FoF).

Emergency Credit Line Guarantee Scheme

The Rs 3-lakh crore Emergency Credit Line Guarantee Scheme sought to bring relief for MSME owners struggling to resume business and pay salaries.

The scheme allows MSMEs with up to Rs 25 crore of total borrowing to avail an additional 20 percent of the outstanding loan. This incremental lending is guaranteed by the government.

The scheme’s structure allows only businesses with an existing loan to avail the incremental loan.

Credit Guarantee Scheme for Subordinate Debt

Under this scheme, the government provides a Rs 20,000-crore subordinate debt to stressed MSMEs. The fund for the scheme was operationalised in August.

Subordinate debt is debt that ranks after other debts if an MSME falls into liquidation or becomes bankrupt.

The scheme is valid for MSMEs that are SMA-2 accounts (Special Mention Accounts with principal or interest payment overdue between 61 and 90 days) or non-performing assets, and as on April 30, 2020, eligible for restructuring according to Reserve Bank of India guidelines.

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Fund of Funds worth Rs 50,000 crore

The Rs 50,000-crore Fund of Funds was approved last year, with Rs 10,000 crore of it set to come from the government and the rest from venture capital and private equity firms. The fund will target MSMEs with growth potential and viability, and aims to help them get listed on the stock market, even as they face shortage of equity.

While announcing it in May, Sitharaman said the fund will be operated through a mother fund and a few daughter funds to enable MSMEs to expand in size and capacity, and would encourage them to list on the main board of stock exchanges.

The scheme is intended to help businesses, which are in their nascent and initial stages but have almost no prospects to raise funds through professional corporations or venture capitalists. The scheme proposes to buy up to 15 percent growth capital in high-credit MSMEs.

Measures in Budget 2021

Besides the three schemes to aid economic recovery for MSMEs, in the Budget 2021 speech Sitharaman allocated Rs 15,700 crore to the sector, besides laying a special framework of data analytics, machine learning, and artificial intelligence to assist the sector.  

In the announcement, the Finance Minister said the definition of small companies would be revised by raising the capital base limit to Rs 2 crore from the current Rs 50 lakh and enhancing the turnover threshold to Rs 20 crore from the existing Rs 2 crore. This will benefit two lakh companies in easing their compliance requirements.

The government has committed nearly Rs 1.97 lakh crore over five years starting FY22 for Production Linked Incentive Schemes to create manufacturing leaders for an Aatmanirbhar Bharat. 

Sitharaman also announced a slew of changes in customs duties in a bid to boost local manufacturing. She explained that since last year, the government has been overhauling the structure of customs duties and has eliminated 80 outdated exemptions. Proposing to review more than 400 exemptions this year, she promised to put in place a revised customs duty structure free of distortions.

Pre-COVID announcements

Prior to the COVID-19 pandemic, Sitharaman had announced a range of measures for the MSME sector, including a retail pension benefit scheme for traders and shopkeepers. The government said that under this scheme, all shopkeepers, retail traders, and self-employed people would be assured a minimum monthly pension of Rs 3,000 after attaining the age of 60. 

In a bid to boost lending, Sitharaman had also asked public sector banks to hold loan melas in 400 districts to lend to desirable shadow banks and retail borrowers.