Introduction

• The micro, small and medium enterprises (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.
• Th outstanding gross bank credit to MSMEs has 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, this shrunk is proof of formal lending institutions being unable to fill the void either.

Why MSMEs are important?

• 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.

Steps taken by government

• The 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”.
• 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.
• Whether this would work on the ground will, depend on the banks.
• Central 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. But the implementation here, too, is dependent mainly on the states concerned.

State of NBFCs

• The state of non-banking finance companies (NBFCs) is another thing to worry.
• NBFCs’ 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.
• With these institutions themselves now facing a liquidity squeeze, the danger of credit flows to MSMEs being further affected cannot be ruled out.

Conclusion

• 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.