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‘Yes, the lockdown is over. We have started operations now. But it’s like walking on one leg,’ says the owner of a small textile unit in Coimbatore. He explained how many of these units are running at only half or one-third of the capacity. It’s true across the country. According to a survey by National Small Industries Corporation(NSCI) in August, 90% of MSMEs have started operations post lockdown, but 75% of them are operating at less than half of their capacity.

A qualified good news is of the situation being better when compared to June: nearly 82% of MSMEs were operating at less than 50% capacity then. However, we cannot take such improvements for granted, because of the way financing system operates. A banker with experience in SME financing explained that risks multiply when the entire economy is not doing well. For example, in normal times, an SME should be able to raise money by pledging assets. But, in a struggling economy, with huge uncertainties, the value of even physical assets come under question. This creates a vicious cycle, leading to bad loans. ‘The problem is we are still faced with huge uncertainty. And under uncertainty, money doesn’t flow as it should,’ he said.

Many business owners want the government to step up their support. The Coimbatore textile unit owner, extending on his analogy of walking on a single leg, said that the businesses need a crutch to tide over the difficulty. Raghuram Rajan, former RBI governor put it more dramatically in an interview. Talking about Indian business in general, he said, ‘We are like a patient who has been in an accident. The first thing is to stabilise the patient because without that there is nothing to work on.’

Over the last few months, the government has announced a number of measures aimed at helping the sector. The numbers sound large. For example, the finance ministry recently announced that banks have already disbursed Rs 1.18 crore to 25 lakh MSMEs under its Emergency Credit Line Guarantee Scheme(ECLGS). Some more funds are in the pipeline, as the total sanctioned amount is Rs 1.63 lakh crore to 42 lakh MSMEs. The scheme itself envisaged Rs 3 lakh crore.

However, MSME owners point out that this primarily helps the businesses that already have banking relationships, and have taken loans from the banks. 99% of MSMEs are micro and small businesses, and they account for only 13% of the credit that banking sector provides to the industry. Recently, Chandrakant Salunkhe, president, SME Chamber of India, pointed out that of the 6.5 crore MSME units in the country, only 40–45 lakh have bank facilities. The others don’t, for various reasons. Another SME owner pointed out that a recent announcement by MSME Minister Nitin Gadkari is — that cooperative banks may be included under its Emergency Credit Line Guarantee Scheme. ‘It’s in the right direction, but we can’t how fast that will happen or how effective that will be. MSMEs need funds now,’ the banker said.

The government has also taken some measures to improve MSME liquidity by speeding up the receivables. Earlier, it had pushed state government agencies and public sector units to clear their dues to MSMEs within 45 days. Now, it has also asked the top 500 private sector companies to do the same. Anothe MSME owner said these measures will help. But we also have to recognise that it will mostly help the MSMEs in the higher tiers of the pyramid. If you do business with top 500 companies in India, you are likely to be paid more promptly than if you do business with the next 500 or 1000 companies. It will also be easier for you to raise working capital based on those receivables. MSMEs who are feeling the brunt are those at the bottom, he said.

Interestingly, a recent government move might have exacerbated the problem. It relaxed the definition of MSMEs: which would allow larger companies to get the tag. According to one analysis, 99% of all businesses in India can be tagged under MSMEs. ‘If the pool becomes bigger, the smaller businesses might get even more marginalised,’ said the MSME owner.

What then is the way out? ‘It will be fair to say all the government initiatives so far will only help the larger ships from sinking. For all boats to rise, the economy has to improve. Demand has to pick up. We don’t see that happening,’ he concluded.

This research was developed as part of the Bharat Inclusion Research Fellowship.