Filling the gap
Mains Paper 4: 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
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
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
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
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.
Q.1) With regard to Trade Related Entrepreneurship Assistance and Development
(TREAD) Scheme for Women, consider the following statements:
1. It is operated under the aegis of Ministry of Skill Development And
2. It envisages economic empowerment for women in non farm activities.
Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2
Q.1) To boosting MSMEs the government must incentivizing the credit inflows.