Demand V/s Loan

by Khushi Panjabi                           

Contributing to nearly 8% of the country’s GDP, 45% of the manufacturing output, and approximately 40% of the country’s exports, the Indian Micro Small and Medium Enterprises form the backbone of the country. Despite this large share, they are vulnerable, and can quickly ­become unstable and unviable when subjected to external shocks.

Keeping this in mind, the ­finance minister on 13 May 2020 announced the much-awaited relief package for the MSMEs to tide over the Covid-19 lockdown-induced crisis. The goal has been to build a self-reliant India hence the Economic Package was called ‘Atma Nirbhar Bharat Abhiyaan’ wherein the focus was laid on land, labour, liquidity and law.

Before discussing the relief package, we need to note a major change in the defining criterion for MSMEs. Being classified as MSMEs brings certain benefits such as hand holding by the state, priority lending from banks, collateral free loans and many other targeted benefits. Hence, defining the actual beneficiaries for priority schemes like these is an imperative task.

Earlier, Investment in Plant and Equipment for Manufacturing and Services was used as the defining criteria. However, the current definition follows a composite criterion, ­using both Turnover and Investment in Plant and Machinery and also eliminating the difference in investment thresholds between the manufacturing and services sector. Though this has been a long-standing demand from the industry the investment criteria does not offer a level playing field to newer entrants in the market. An older plant can substantially depreciate investments in its book of accounts and qualify as a much smaller unit, while any new entrant that needs similar ­machines would have to make much higher investments. In this sense, the ­annual turnover-based criteria to define the sector might be much more meaningful and transparent, especially now when a large number of MSMEs are under the ambit of the GST.

Taking into account the near complete disruption of economic activities of the MSMEs, the central government decided to act upon the situation and approved a set of measures to help the sector.

  1. Collateral free automatic loans of Rs 3 Lakh Crore over the next five months, fully guaranteed by the government. Unfortunately, the only firms that are eligible for collateral free loans at concessional rates are those that already have an outstanding loan, but what about the MSMEs which don’t have outstanding loans but have been severely affected?  
  2. Rs 20,000 Cr subordinate debt for 2 lakh stressed/ NPA MSMEs and partial credit guarantee schemes; this would’ve been much appreciated in normal circumstances, however in the present times it harbours the possibility of a greater number of firms accumulating stressed assets (non-performing assets) due to inadequate demand.
  3. Funds of Rs 10,000 Cr to provide equity for MSMEs for Stock Exchange Listing. While allocated funds for equity could be a measure to help medium-sized enterprises in normal times,these do not make much sense given the present situation. 

While there is global recognition that this economic ­recession needs a demand-side fix, the government has essentially decided to infuse liquidity, a supply-side solution.

Firms that are in dire need of a fix to their demand problem are asked to borrow more, albeit on easier terms, to tide over the crisis. However, without adequate orders the firms will not be willing to borrow more. The finance minister has also acknowledged that firms were urging banks to not disburse sanctioned loans. Clearly, when millions of people have lost employment and purchasing power in the midst of a pandemic, firms will not want to produce more goods without effective demand. They are well aware that supply does not create its own demand, and hence will not be eager to borrow more, which results in a vicious circle, where lower production leads to a further reduction of employment opportunities and a further compression of demand.

Repayment of dues owed to them by the central government and the private sector that amount to Rs 5 lakh Crore is something that could have actually helped the MSMEs (that suffer from a dearth of working capital as well as delayed payments) in the long run. This could have further been strengthened by expediting the GST refunds to make the units truly ‘Atma Nirbhar’.

Lastly, a public provision that guarantees partial wages to MSME workers until 10-12 weeks after the unlock could have helped the employers and also generated incomes. Without adequate orders, units produce less and employ fewer people. The Supreme Court already ordered that the units that do not pay full wages to their workers during the lockdown cannot be prosecuted. Hence, a wage guarantee program becomes crucial in this context.

Concluding on the note that only infusing liquidity would not help small businesses and could lead to further deterioration of the twin balance sheet crisis that is sure to emerge if demand does not revive.


  1. Berisha, G and J S Pula (2015): “Defining Small and Medium Enterprises: A Critical Review,” Academic Journal of Business, Administration,Law and Social Sciences, Vol 1, N0 1.
  2. Chatterjee, U and R Kanbur (2015): “Non-compliance with India’s Factories Act: Magnitude and Patterns,” International Labour Review, Vol 153, No 3, pp 393–412.
  3. LiveMint (2020): “Full Text of FM Sitharaman’s Pressmeet on Stimulus Package,” 13 May, https://
  4. Magazine, A and A Sasi (2020): “`3 Lakh Crore Relief Package for MSMEs but Governments, Private Firms Owe Them More,” Indian Express,15 May. 
  5. Purohit, D (2020): “Demand First, Please, and Then Loans,” Telegraph, 14 May.
  6. Rautray, S (2020): “SC Says No Action for Now against Employers Who Do Not Pay Full Wages during Lockdown,” Economic Times, 16 May.
  7. Sinha, S (2018): “Strong Opposition Pushes MSME Bill to Backburner,” Hindu BusinessLine, 21 September.

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