Delayed payments for small firms stifle economic growth

Source: The post is based on an article “Delayed payments for small firm stifle economic growth” published in the Indian Express on 9^th July 2022.

Syllabus: GS 3 Indian Economy and issues relating to Planning, Mobilization of Resources, Growth, Development, and Employment; Inclusive Growth and issues arising from it.

Relevance: Issues linked to Micro, Small, Medium Enterprises (MSMEs)

News: In recent times, it has been reported that small business owners (MSMEs) are facing delays in payments from big companies and public sector units.

Status of payments to MSMEs

As per data, payments worth Rs 6.3-10.7 lakh crore were delayed to MSMEs during 2020-21.

The average days for the delays of payment to micro, small and medium enterprises (MSMEs) were estimated to 194, 68 and 46 days respectively.

What are the implications?

There is an erosion of value, for every day that payment is delayed. It locks in the capital that could have been deployed gainfully. The problem is being largely faced by cash-strapped and credit-starved MSMEs.

Micro and small enterprises borrow at comparatively higher costs and often operate in very competitive environments.

The delayed payment led to the foregoing of business opportunities due to lack of liquidity or disrupted cash flows. This is detrimental to the specific firm or enterprise as well as a deterrent to the overall growth of MSMEs. The firms face uncertainty in terms of planning business cycles.

The other types of costs incurred by such supplier firms include the time spent, and the personnel costs employed to recover payments.

The problem of delayed payments gives buyers an advantage that the economy cannot afford.

It increases the burden on the MSMEs. They are forced to work against the smaller supplier firms. Further, it also cripples economic activity for the vast majority of entrepreneurs in the country.

What are the challenges in resolving such challenges?

(1) Although, the government launched the SAMADHAN platform. But there are gaps in the implementation. There are close to one lakh complaints at present on the portal. But the disposal rate is low.

(2) In addition, there are market-based solutions like TReDS, supply chain financing, and in-time credit to ensure amicable supplier-buyer relations while easing cash flows for MSMEs. But the biggest impediment here is that they rest on two preconditions: (i) heightened formality of practices and (ii) buyers’ intent.

What should be done?

(1) The government should bring regulatory interventions like shifting the onus of timely payments onto the buyer firms. The highest levels of government should issue statements that such delays are not in the nation’s interest.

(2)  Efforts should be made to strengthen associations and credit practices of MSMEs. To quicken this, micro and small businesses need to coalesce and work towards gaining sustainable credit terms.