Relevance: GS Paper III (Indian Economy)
Why has this issue cropped up?
It is an accepted fact that micro, small and medium enterprises (MSMEs) have been impacted adversely by the twin shocks of demonetisation and goods and services tax (GST).
Significance of MSMEs
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.
How demonetisation and GST impacted MSMEs?
- 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.
Financial crunch of MSMEs
The fact that outstanding gross bank credit to MSMEs has actually shrunk despite refinancing schemes such as Pradhan Mantri Mudra Yojana is proof of formal lending institutions being unable to fill the void.
Recent initiatives to support MSMEs
- The government announced 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”.
- GST, along with digitisation, allows for creation of a database of transactions, bank account statements and tax returns of all firms. That should make it possible for assessing the creditworthiness of any applicant in a reasonably short period.
- The 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.
Reasons to worry about
- Implementation of the provisions announced 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. With these institutions themselves now facing a liquidity squeeze, the danger of credit flows to MSMEs being further affected cannot be ruled out.
