Efforts to offset GST, demonetisation impact on MSMEs a bit late2 min read . Updated: 04 Jan 2019, 07:11 AM IST
Many MSME units suffered severe hardships, including shutdowns and employee layoffs, due to demonetisation and introduction of a flawed GST regime
If desires are truly nourished by delays, then the government’s overdue, albeit tacit acknowledgement of the havoc wreaked by demonetisation, communicated via a flurry of remedial measures announced over the past couple of weeks, should definitely gladden the hearts of millions of small-scale units that bore the brunt of this unprecedented and unilateral action. But that might be wishing for too much, besides being, perhaps, a bit too late.
Clubbed under the umbrella definition of micro, small and medium enterprises (MSMEs), many of these units suffered severe hardships due to the twin impact of demonetisation and introduction of a flawed goods and services tax (GST) regime. This double whammy led to distress and defaults on bank loans. As a corollary, many of these units shut down and numerous others were forced to lay off employees. The government, in conjunction with the Reserve Bank of India (RBI), has now launched a series of measures to alleviate their distress.
First was a press note shackling the operations of e-commerce giants Flipkart and Amazon, a move designed to please the ubiquitous mom-and-pop stores, some of which qualify as MSME units, and provide the core of the Bharatiya Janata Party’s (BJP) voter base; these establishments have been vocal about the competitive threat from e-commerce growth. The second measure, though designed only as a feel-good gesture, involved setting up of an export promotion cell within the MSME ministry, but sadly lacking any concrete strategy.
Then came the blockbuster RBI announcement: a one-time restructuring for existing stressed MSME loans below ₹ 25 crore. Concurrently, the RBI also set up a panel under former Securities and Exchange Board of India (Sebi) chairman U.K. Sinha to suggest long-term structural and institutional changes to catalyse MSME growth. Finally, RBI governor Shaktikanta Das has also promised to meet with MSME sector representatives to get a clearer idea of their problems.
This grab-bag of measures might be well-intentioned but, to repeat the cliché, is too little and too late. For one, such a burst of activity so close to the 2019 Lok Sabha elections is bound to generate scepticism. Two, these measures are being announced after many units have shut down or are beyond repair. The remedial measures should have been executed right after demonetisation, instead of living in denial. Three, after farm loan waivers and MSME loan restructuring, ignoring demands for similar regulatory forbearance from other politically influential groups will be difficult and can be disastrous for the economy. Four, there is no initiative to reform or provide more moxie to the trade receivables discounting system, or TReDS platform, which has financed MSME receivables of only ₹ 2,400 crore till October 2018.
It is well known that most MSME units are umbilically attached to the supply chain of large corporations and are subject to their capricious payments records, leading to lengthening working capital cycles and an uncertain bank-loan repayment record. It is, therefore, surprising that the government has opted to sidestep this problem, which alone would have helped in restructuring a large chunk of MSME loans.
According to data from the Directorate General of Commercial Intelligence and Statistics, the export value of MSME-related products in 2017-18 was $147.4 billion, or 48.5% of total exports. This alone, and not impending elections, should provide the compelling rationale for structural reforms in the sector.