Political economics: credit stimulus for MSMEs
Mains Paper 3: Economic Development
Prelims level: MSMEs
Mains level: Credit stimulus for MSMEs
The Centre has announced an important credit stimulus
package for micro, small, and medium enterprises (MSMEs).
Among the many sops doled out under the new scheme, Prime
Minister Narendra Modi has promised the sanction of business loans of up to ₹1
crore within a time frame of 59 minutes, in order to encourage faster credit
flow to MSMEs.
These companies will also receive an interest subvention
of 2% under the scheme and support from public sector units, which will now be
mandated to make at least 25% of their overall purchases from MSMEs.
MSMEs contribution in economy
It is worth noting that MSMEs, which account for 30%
of India’s gross domestic product (GDP), were hit hard by the twin shocks of
demonetisation and the implementation of the Goods and Services Tax over the
last couple of years.
In the aftermath of the IL&FS crisis, which has affected
the amount of lending done by non-banking financial companies to the MSME
The government would be looking at the scheme as a tool to
improve credit flow and the pace of job creation in the economy.
The Reserve Bank of India in August 2018, however, showed
that growth in credit flow to MSMEs had recovered to pre-demonetisation levels
by the April-June quarter, just before the liquidity crisis.
Important highlights of this scheme
The scheme has signs of state-led economic planning
written all over it.
The biggest risk of a credit stimulus is the misallocation
of productive economic resources.
Pumping extra credit into MSMEs now may well lead to a
temporary boom and enable a feel-good atmosphere in the run-up to elections, but
it can lead to a painful bust when the stimulus ends some day.
Another unintended consequence is the likely deterioration
in credit standards as financial institutions are pushed to lend aggressively to
Efforts to expedite business loan approvals may be welcome
from the point of view of growth and job creation, but they rarely end well when
motivated by political reasons.
The Prime Minister’s latest credit scheme is no
different from the MUDRA loan scheme, which has been troubled by soaring bad
In September, former RBI Governor Raghuram Rajan had
warned that loans extended under the MUDRA scheme could turn out to be the
source of the next financial crisis.
Care needs to be taken to see that the new MSME loan
scheme does not pose a similar risk in the future.
The demand that PSUs must procure a quarter of their
inputs from MSMEs could breed further inefficiency in the economy.
The MSME loan scheme is yet another example of how bad
economics can make for good politics.
Q.1) With reference to Indian banking system, which of the following comes
under the Priority sector lending?
1. Social Infrastructure
3. Micro, Small and Medium Enterprises(MSMEs)
Select the correct answer using the code given below.
(a) 1 only
(b) 1 and 2 only
(c) 2 and 3 only
(d) 1,2 and 3
Q.1) Why Credit stimulus is so important for MSMEs?