India must clean up its payments
ecosystem (Indian Express)
Mains Paper 3: Economy
Prelims level: Payment system
Mains level: Impact of poor payment system on MSMEs
- Weak economic growth and with a view to strengthen private consumption
and spur private investment, the Monetary Policy Committee cut policy rates
last week — the fifth time in a row.
- The RBI, over the past few months, has continued its accommodative
stance while ensuring that inflation remains well within the target.
Needs to improve payment system
- India suffers from a poor payments culture and has the worst record in
- Government payments are generally delayed, as a result of which
downstream payments to sub-suppliers are affected too.
- The record of the private sector is no better, with payment delays being
the biggest cause of worry for most entrepreneurs.
- The government has amended the laws where payments to MSMEs cannot be
delayed beyond 45 days and a redress mechanism has also been set up.
- This, however, suffers from the critical flaw where the balance of power
is titled in favour of the government or private buyer.
- MSMEs are hesitant to take the redress route as they fear denial of
future orders once a complaint is made.
- This spiral of delayed payments results in higher purchase prices as the
penal interest costs are factored in.
- Globally, India’s reputation for poor adherence to payment terms is
affecting the ‘ease of doing business’ ratings. Due to their sheer size,
MSMEs are the worst affected by delayed payments.
- They have a very small window and sometimes none to cover up the
financial shortfall, considering the high cost of borrowing and less robust
- The government needs to usher in big bang reforms to change this culture
of poor payments.
- The RBI today is flush with reserves and foreign funds are also
available at very low rates.
- The government should create a payment facilitation fund of ₹3 lakh
crore. Of this, ₹1 lakh crore should be for the Central government and an
equal amount for State governments and public sector units, respectively.
- The government can then use the TReDS platform to clear all overdue
payments of the Central/State governments and PSUs with limits for each.
- The release of this ₹3 lakh crore into the economy over the next 60 days
will bring about a big change in sentiment and stimulate growth.
- The cost of this measure will be around ₹12,000 crore annually, assuming
the government will now pay immediately after the work is completed and
certified rather than after six to nine months as per the current practice.
- Since the global economy is awash with liquidity and most government
bonds now fetch sub-zero yields, the borrowing cost for the government will
be insignificant compared to the benefits.
- This one measure will transform sentiments, improve ‘ease of doing
business’ and bring in a culture where the payment terms are respected.
- The payment facilitation fund can be either a balance sheet obligation
or monetised to be paid over the next five years from improved tax
- A significant cause for non-performing assets in the banking sector is
timing mismatches in payments, which can be significantly reduced with this
- Many companies which were otherwise healthy have become sick over the
past few years because of delayed payments from their customers. Several of
these can still be revived if they receive their dues in time.
- An announcement by the government that it is reforming and making
“Swachh” its payment systems will lead to a transformation in business
Q.1) ‘75 Student Satellites Mission 2022’, is an initiative of which of
the following organizations?
A. Indian Technology Congress Association (ITCA)
B. Indian Space Research Organisation (ISRO)
C. Defence Research and Development Organisation (DRDO)
D. University Grants Commission of India (UGC)
Q.1)Delayed payments are hurting MSMEs; fresh infusion of funds to clear dues
can boost sentiment, stimulate growth. Comment.