Political economics: credit stimulus for MSMEs

Political economics: credit stimulus for MSMEs

News:

1. The Prime Minister has launched a support and outreach programme for the Micro, Small, and Medium Enterprises (MSME) sector to give a boost to the sector and help generate employment.

Important Facts:

2. Background:

• 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.
• Further, in the aftermath of the IL&FS crisis, which has affected the amount of lending done by NBFCs to the MSME sector, the government would be looking at the scheme as a tool to improve credit flow and the pace of job creation in the economy.
• A study by officials of 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.

3. About the programme: As part of this programme, the Prime Minister unveiled 12 key initiatives which will help the growth, expansion and facilitation of MSMEs across the country.
4. These 12 key initiatives will address the five key aspects of MSME sector as follows:
5. Access to Credit:

• Under this aspect, Centre has launched a web portal which can be used to receive in-principal approval of loans within 59 minutes.
• Each public sector bank has been enrolled on the portal which will assess the entrepreneur’s bank statement, income tax return and GST return to sanction the loan.
• 2 percent interest subvention for all GST registered MSMEs, on fresh or incremental loans.
• For exporters who receive loans in the pre-shipment and post-shipment period, an increase in interest rebate from 3 percent to 5 percent was announced.
• All companies with a turnover more than Rs. 500 crore, must now compulsorily be brought on the Trade Receivables e-Discounting System (TReDS).

6. Access to Markets:

• The public sector companies have now been asked to compulsorily procure 25 percent, instead of 20 percent of their total purchases, from MSMEs.
• To boost the women entrepreneurs, 3 percent out of the 25 percent procurement is mandated from them.
• It will now be mandatory for all central public sector enterprises (CPSEs) to register on GeM and should also get all their vendors registered on GeM.

7. Technology Upgradation:

• Centre announced a Rs 6,000 crore package for development of tool-rooms on a cluster-based
• The Centre will develop 20 technology centres as hubs and 100 centres as spoke to provide training in latest technology.
• Centre presently has only 10 tool rooms in the country where MSME are given lessons in “technical upgradation by providing good quality tooling.

8. Ease of Doing Business:

• The Centre will develop “pharma clusters” in the country and will bear 70 percent of the set-up cost.
• MSMEs would have to file returns under eight labour laws and 10 union regulations only once a year. This would be done once a year against a current practice of twice.
• The inspections of factories in the sectors will be sanctioned only through a computerised random allotment and inspectors will have to upload reports on portal within 48 hours.
• Easing compliance with environmental rules, MSMEs will need single air and water clearance and just one consent to establish a factory.
• The government has amended Companies Act 2013 to decriminalise unintentional and minor errors which can be corrected through simple procedures rather than approaching court.

9. Social Security for MSME Sector Employees:

• Employees working under the MSME sector will compulsorily have to enrol themselves under social security schemes.
• These would be all central government schemes related to insurance, pension, provident fund etc.
• The implementation of this outreach programme will be intensively monitored over the next 100 days.

10. Background:

• According to the Economic Survey 2017-18, data on credit disbursed by banks shows that out of a total outstanding credit, 82.6% of the amount was lent to large enterprises and MSMEs got only 17.4 % of total credit.
• Traditionally banks have hesitated to grant loans to MSME sector due to myriad reasons such as their high risk factor owing to their unorganised nature, lack of eagerness to get themselves rated, their inconsistent cash flow, and so on among others.

Critical Analysis:

• 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 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 MSMEs.
• Also, the demand that PSUs must procure a quarter of their inputs from MSMEs could breed further inefficiency in the economy.