Covid-19 and MSMEs: The ‘identification’ problem

  • Blog Post Date 20 April, 2020
  • Perspectives
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Radhika Pandey

National Institute of Public Finance and Policy

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Amrita Pillai

National Insitute of Public Finance and Policy

A recent survey of 5,000 MSMEs (micro, small, and medium enterprises) found that 71% of them could not pay salaries to their workers in March 2020 due to the Covid-19 lockdown in India. The government has announced that a stimulus package focused on the MSME sector is in the offing. In this post, Pandey and Pillai explain the issue of identification of beneficiaries in the absence of a comprehensive dataset on MSME units, and suggest potential mechanisms for targeted relief delivery.


The micro, small, and medium enterprises (MSMEs) are perhaps one of the hardest hit due to the Covid-19 lockdown in India. At present, the sector provides employment to 114 million people and contributes 30% of India's GDP (gross domestic product), not to mention close to half of the country’s exports come from products and services within this sector. With severe supply-chain disruptions, especially for those businesses that do not manufacture or provide essential services, the capacity to continue paying workers (without any reductions) during the lockdown, as per government directives, looks bleak. A recent survey of 5,000 MSMEs, conducted by the All India Manufacturers’ Organisation (AIMO), has found 71% of them could not pay their worker salaries in the month of March. Reports from across the country raise similar alarm bells for how these businesses are unable to meet immediate capital requirements.

The government has announced that a stimulus package focused on the MSME sector is in the offing. It is important however that such a package focus not just on providing temporary relief through short-term liquidity infusions, but also go beyond, to address medium- and long-term issues that will test their resilience. Current interventions to help the sector include business continuity measures announced by the Reserve Bank of India (RBI); emergency credit lines introduced by Public Sector Banks (PSBs); a concessional interest rate loan announced by the Small Industries Development Bank of India (SIDBI) specifically for MSMEs engaged in manufacturing goods or providing services related to Covid-19; and deferring GST (goods and services tax) payments until June 2020. While these are good steps to be taken to ease short-term liquidity concerns, the stimulus package focussed on the MSME sector will have to be more far-reaching.

Governments across the world have been introducing a range of measures to infuse more confidence and credit into their small business lines. These measures include short-term liquidity providing ones as are being offered in India currently, but also involve wage support/subsidy (capped) for a period of three to six months, direct subsidies to one person businesses and micro units, deferral of rent and utility payments, compensation for decrease in turnover during lockdown periods, etc. While India must consider introducing such financial and safety net measures as well, the real challenge will lie in identifying these 63.4 million unincorporated MSMEs, of which 99% are micro-enterprises that remain largely informal.

Where informality thrives

Informality in the MSME sector exists in both the nature of businesses and the relationships that businesses and workers share. The number of enterprises in the unorganised sector (unregistered) is estimated to be 99.7% of all unincorporated non-agricultural enterprises (excluding construction). What is also pertinent to note is that 84.17% of this universe of unincorporated businesses are the owner-managed/self-employed firms (with characteristic features of household enterprises), and the next highest share is of units that employ up to five workers (micro units). These two categories thus together form 97.4% of informal businesses in this country. Various government sources cite different levels of informal employment what is agreed on however is that it has persistently hovered well past the 90% mark.

With respect to arrangements between businesses and workers, the conditions of employment look grim. The most recent Periodic Labour Force Survey (2017-18) notes that even among regular wage/salaried employees in the non-agriculture sector, 71.1% had no written job contract, 54% were not eligible for paid leave, and 49.6% were not eligible for any social security benefit. The International Labour Organization (ILO) has specifically highlighted how economies with large informal sectors will need to acknowledge and act on the fact that workers in such sectors have no income replacement and are directly affected by lockdown measures – the worst affected group being the self-employed, street vendors, hawkers, construction, transport and domestic workers, to name a few.

This then is the grim background to understanding the magnitude of the foreground problem here – the issue of identification of beneficiaries.

Issues in identification

The lack of a comprehensive dataset on MSME units and their employment profiles will exacerbate issues of targeted relief delivery in this crisis situation. Absent a dedicated census for this sector in the last 13 years – the fourth and last census on Indian MSMEs was conducted as far back as 2006-07 – information regarding these enterprises is presently known to be scattered across datasets such as the Udyog Aadhaar Memorandum (UAM), MSME Databank, and the Goods and Services Tax Network (GSTN). The first two datasets contain self-certified, voluntary information provided by businesses that wish to register on these portals, while the GSTN has a statutory requirement that only businesses with a turnover of more than Rs. 4 million need to be registered on it. An RBI Expert Committee on MSMEs, in June 2019, has also noted the absence of reliable (and updated) information on this key sector of the economy.

In the event that the government decides to directly aid workers in micro-businesses or provide a separate set of relief measures for say self-employed/owner-managed enterprises, it will have to first figure a way to ensure the relief reaches its target. With no end in sight by when the virus spread will be contained and the lockdown eased, it is clear that only currently available structures/mechanisms can be utilised to identify MSMEs and drive home relief measures. Some of these measures are discussed briefly here.

Targeted relief delivery for MSMEs: Potential mechanisms

The SIDBI, a financial institution set up for the promotion and development of the MSMEs, must herald the cause of targeted loan delivery. The Bank has already announced emergency assistance loans and must ramp up efforts in financing and refinancing this sector. This assumes more importance in light of the fact that as per RBI’s data on sectoral deployment of non-food credit, the MSMEs’ share in total outstanding bank credit has fallen to 5.37%, as of February 2020 (it clocked 5.58% share in March 2019). Coupled with a dwindling share in bank credit is another troubling fact – the weighted average lending rate to the MSMEs is 11.24% – the second highest amongst different segments. The need to push cheaper credit to these enterprises cannot be overstated, and SIDBI will be the ideal institution to drive this agenda, given its vast network and experience in this sector.

There have been serious concerns around the MUDRA scheme in the recent past, in terms of these collateral-free loans coalescing into NPAs. However, information about enterprises that have availed this scheme will be vital to general enterprise identification in this crisis. A bulk of these loans are known to be sanctioned in the Shishu category, that is loans up to Rs. 50,000, with a majority of these beneficiaries being women. Around 13 million accounts have received these loans as of FY (fiscal year) 2018-19, and 10 million enterprises are reported to avail this scheme each year, since roll-out. Financial institutions should be able to draw up information about MUDRA beneficiaries and their employment profile to establish potential firm size, sector and employment profile, location, and other such details.

The UAM and the MSME Databank, as mentioned in the previous section, are also additional avenues to identify enterprises better. While they do not contain verified information, the voluntary and self-certified information provided by business units may prove useful; the UAM registration portal for instance, captures an indicative figure for ‘persons employed’ by these units. The UAM portal records 12 million registrations as of date while the MSME Databank is seen to have much fewer registrations at 160,000. It is unclear whether there are overlaps between these two datasets. Irrespective, basic information on 10 million MSMEs can be assumed to be readily available with the MSME Ministry.

The Jan Dhan, Aadhaar, and Mobile (JAM)1 trinity is being utilised to push direct cash transfers provided under the first stimulus package that the government announced days into the lockdown. While state-wise presence on JAM varies, it might be a good mechanism for wage support transfers to daily wage and casual workers, who have been unable to collect payments (in cash) from their employers due to the lockdown affecting movement. If wage support is rolled out for labour/workforce in MSMEs, the JAM would be ideal to use as a transfer mechanism. The importance of a wage (and incentives) support programme also comes highly advocated by the ILO a recent report mentions that countries such as India, Brazil, and Nigeria, with a ‘lion’s share of the workforce in the informal sector’, will need to introduce such wage support to thwart increase in poverty in working classes.

It is critical to note that while tax cuts may be necessary for larger businesses, such measures will exclude the informal sector where employment and turnover will not meet minimum thresholds required to pay income tax or to be registered under the GST. Relief for informal workers and tiny micro-enterprises with 5-10 workers, will need to be targeted such that it reaches them, in time to save their lives and livelihoods. The role that trade unions and other labour market institutions in India can play in identifying these businesses and workers, should also be encouraged. The government will need to collaborate with manufacturing and retail trade associations, and pay heed to the findings from surveys they have been conducting with their member businesses.

Permanent structures to support the informal sector have been long overdue, and the hope is that these will be set up immediately post crisis recovery. For now, it is clear that money is not the real challenge, choosing the ideal mechanism to direct relief to the targeted vulnerable group will be.


  1. Jan Dhan Yojana is the National Mission for Financial Inclusion to ensure access to financial services, namely banking savings and deposit accounts, remittance, credit, insurance, and pension in an affordable manner. This financial inclusion campaign was launched in August 2014. Aadhaar is a 12-digit individual identification number issued by the Unique Identification Authority of India (UIDAI) on behalf of the Government of India. It captures the biometric identity of every resident, and is meant to serve as a proof of identity and address anywhere in India.

By: john mayer

Thanks for sharing such an informational blog which will, surely be a big help to the people who have small medium business

By: Siddani Gangadharam

Until unless there are inclusive discussions and mandatory guidelines for the bigger players both in manufacturing and construction industry the issues of MSMEs will remain. For this to happen the big players in both sectors shall be provided incentive's so that they will be offset the price difference between cheap imported products vs expensive domestic products. There shall be list of items which can be produced shall not be allowed to import at any cost

By: Kushal Bhowmik

By the time identification process of finding out genuinely distressed MSMES is complete , not an insignificant number of these would disappear for good. Immediate relief , before 1st June , be made available to those units ( MSMES) as have already availed of cash credit facility under MUDRA and successfully ran operation till lock down. Moratorium on interest is no relief at all as in terms of cost it will further compound stress. Waiving off interest for at least 2 months and automatic enhancement of existing cash credit limit by 25 percent for MSMES at a substantially reduced rate of interest would be needed to provide meaningful relief to small businesses.

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