Insights into Editorial: Political economics: credit stimulus for MSMEs

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Insights into Editorial: Political economics: credit stimulus for MSMEs


Introduction:

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.

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.

About the MSME sector:

The Indian MSME sector provides maximum opportunities for both self-employment and wage employment outside the agricultural sector

The sector generates around 100 million jobs through over 46 million units situated throughout the geographical expanse of the country

With 28-30 per cent contribution to the nation’s Gross Domestic Product (GDP) and 40-45 per cent share of the overall exports and manufacturing output respectively, the sector plays a key role in our economy

Besides the wide range of services provided by the sector, it is engaged in the manufacturing of over 6000 products ranging from traditional to hi-tech items

 

12 Key Initiatives:

As part of the programme, prime minister unveiled 12 key initiatives which will help the growth, expansion, and facilitation of MSMEs across the country.

 

Modi announced 59-minute loan sanctions, relaxation in labour laws, easier compliance with environmental rules and changes in company laws for small and medium enterprises to give a boost to the nation’s second-biggest employment sector.

Five key aspects of facilitating the MSME sector:

  • Access to credit
  • Access to market
  • Technology upgradation
  • Ease of doing business
  • A sense of security for employees

 

Access to Credit:

Prime Minister announced the launch of the 59 minute loan portal to enable easy access to credit for MSMEs. That loans up to Rs. 1 crore can be granted in-principle approval through this portal, in just 59 minutes. The Prime Minister asserted that in New India, no one should be compelled to visit a bank branch repeatedly.

The Prime Minister mentioned the second announcement as a 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, the Prime Minister announced an increase in interest rebate from 3 percent to 5 percent.

 

The third announcement made by the Prime Minister was that all companies with a turnover more than Rs. 500 crore, must now compulsorily be brought on the Trade Receivables e-Discounting System (TReDS).

Joining this portal will enable entrepreneurs to access credit from banks, based on their upcoming receivables. This will resolve their problems of cash cycle.

 

Access to Markets:

The Prime Minister said that on access to markets for entrepreneurs, the Union Government has taken a number of steps. Fourth announcement, that public sector companies have now been asked to compulsorily procure 25 percent, instead of 20 percent of their total purchases, from MSMEs.

The Prime Minister said his fifth announcement is related to women entrepreneurs. Out of the 25 percent procurement mandated from MSMEs, 3 percent must now be reserved for women entrepreneurs.

 

The Prime Minister said that more than 1.5 lakh suppliers have now registered with GeM, out of which 40,000 are MSMEs.

The sixth announcement is that all public sector undertakings of the Union Government must now compulsorily be a part of GeM. He said they should also get all their vendors registered on GeM.

 

Technology Upgradation:

Coming to technological upgradation, the tool rooms across the country are a vital part of product design. His seventh announcement was that 20 hubs will be formed across the country, and 100 spokes in the form of tool rooms will be established.

Ease of Doing Business:

On Ease of Doing Business, the Prime Minister said his eighth announcement is related to pharma companies. Clusters will be formed of pharma MSMEs. He said 70 percent cost of establishing these clusters will be borne by the Union Government.

The Prime Minister said that the ninth announcement is on simplification of government procedures. He said the ninth announcement is that the return under 8 labour laws and 10 Union regulations must now be filed only once a year.

The Prime Minister said that the tenth announcement is that now the establishments to be visited by an Inspector will be decided through a computerised random allotment.

 

The Prime Minister noted that as part of establishing a unit, an entrepreneur needs two clearances namely, environmental clearance and consent to establish.

The eleventh announcement is that under air pollution and water pollution laws, now both these have been merged as a single consent. That the return will be accepted through self-certification.

 

As the twelfth announcement, the Prime Minister mentioned that an Ordinance has been brought, under which, for minor violations under the Companies Act, the entrepreneur will no longer have to approach the Courts, but can correct them through simple procedures.

 

Social Security for MSME Sector Employees:

The Prime Minister also spoke of social security for the MSME sector employees. He said that a mission will be launched to ensure that they have Jan Dhan Accounts, provident fund and insurance.

 

 

 

The Prime Minister said that these decisions would go a long way in strengthening the MSME sector in India. He said the implementation of this outreach programme will be intensively monitored over the next 100 days.

 

Conclusion:

Conceptually, the Prime Minister’s latest credit scheme is no different from the MUDRA loan scheme, which has been troubled by soaring bad loans.

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

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.