Mains Paper 3: Economy
Prelims level: MSME
Mains level: Indian Economy and issues relating to planning, mobilization of resources, growth,development and employment. Inclusive growth and issues arising from it.
• MSMEs have been impacted adversely by the twin shocks of demonetisation and goods and services tax (GST).
• Demonetisation made it difficult for these units to pay their contractual labour in cash and access credit, which is again largely through informal channels.
• GST similarly led to an increase in compliance costs, apart from depriving them of the inherent advantages of doing business in cash without leaving a paper trail.
• The fact that outstanding gross bank credit to MSMEs has actually shrunk from Rs 4.71 lakh crore to Rs 4.69 crore between September 2014 and September 2018 despite refinancing schemes such as Pradhan Mantri Mudra Yojana is proof of formal lending institutions being unable to fill the void either.
• This is disconcerting because the MSME sector accounts for an estimated 30 per cent of the country’s GDP, 45 per cent of its manufacturing output and 40 per cent of merchandise exports.
• MSMEs have contributed least to the banking system’s non-performing assets crisis, even while disproportionately bearing the brunt of demonetisation and GST, there is also a moral case to support the sector.
Steps taken by the government to boosting MSMEs
• The Narendra Modi government announcing a 2 per cent interest subvention on both fresh and incremental loans taken by MSMEs having GST registration, besides launch of a portal enabling credit sanctions of up to Rs 1 crore “in just 59 minutes”. The idea by itself is welcome.
• GST, along with digitisation, allows for creation of a database of transactions, bank account statements and tax returns of all firms.
• It should make it possible for assessing the creditworthiness of any applicant in a reasonably short period, even if not “59 minutes”.
• Whether this would work on the ground will, of course, depend on the banks. If demonetisation and GST ultimately leads to an ecosystem, wherein MSMEs are able to obtain better access to formal finance and without fear of harassment by tax/enforcement authorities, the short-term pains may still turn out to be worth having endured.
• The Modi government has also promised that factory inspectors will be permitted to conduct visits through random computerised allotment, with compulsory publication of reports within 48 hours.
• In addition, there would be only a single environmental approval for both air and water pollution.
• The implementation here, too, is dependent mainly on the states concerned.
• The other thing that should be worrying is the state of non-banking finance companies (NBFCs), whose share in total formal credit to MSMEs has almost doubled from around 5.5 per cent in December 2015 to 10 per cent in March 2018.
• These institutions themselves now facing a liquidity
squeeze, following the IL&FS debt defaults.
• The danger of credit flows to MSMEs being further affected cannot be ruled out.