Budgetary expectations for MSMEs
Credit disbursal under the Mudra scheme hardly addresses the crux of the MSMEs’ financing problem
Demonetisation in November 2016 and the goods and services tax introduced in July 2017 have brought into sharp focus the special attention that may have to be accorded to the “Davids of industry”, namely the micro, small and medium enterprise (MSME) segment. The key challenge for this sector so far has been availability of finance. The Pradhan Mantri Mudra Yojana (PMMY) announced in the 2015 budget and the Mudra loans disbursed under the scheme since 2015-16 were aimed at addressing this challenge of “funding the unfunded” micro and small enterprises and integrating them with the formal financial system. Government data seems to suggest a successful redressal of the sector’s financial needs, with actual disbursements almost achieving targets in the three years since its inception. However, the budgetary approach to spurring this important and politically sensitive sector, which holds the key to India’s larger growth story, will need to be more than merely incremental.
The problem of credit disbursal under the Mudra scheme hardly addresses the crux of the MSMEs’ financing problem. One, such loans are only available to micro enterprises engaged in manufacturing, processing, trading and service sector activities, for small loans of up to Rs10 lakh. Such credit has been provided largely by public sector banks (PSBs) in the form of micro and small loans, which constitute part of their mandatory priority-sector lending. Such credit by PSBs enjoys government guarantees of up to Rs3,000 crore. Such guarantees, as also the goal-oriented nature of priority-sector lending, point to the possibility of creation of non-performing assets for PSBs, exacerbating the government’s fiscal deficit as well. Again, such bank credit cannot be expected to truly foster micro and small enterprises.
Two, credit disbursal under the Mudra scheme has been highly skewed; 47% of Mudra loans sanctioned and disbursed in FY 2017-18 were extremely small loans (i.e. loans of up to Rs50,000) under the Shishu category, while 30% were under the Kishore category (i.e. between Rs50,001 and Rs5 lakh). The remaining 23% of the overall loans disbursed and sanctioned in FY 2017-18 were in the Tarun category, i.e. loans between Rs5 lakh and Rs10 lakh. Moreover, the potential for credit risks is accentuated by the fact that only five states—Tamil Nadu, Karnataka, Maharashtra, West Bengal and Uttar Pradesh—accounted for about 47% of the amount sanctioned and disbursed under the Mudra loan scheme.
Three, the government has not carried out an impact assessment of the PMMY programme, especially on employment generation. Anecdotal evidence suggests that small and medium enterprises (SMEs), especially gen-next, would increasingly prefer to use capital-intensive technologies owing to their positive impact on profitability, as also the problems associated with employing labour. MSMEs have the power of scaling up and being engines of substantial employment generation creation. The true test of the Narendra Modi government will be in the employment-generating nature of this and various other schemes.
Four, the larger financing problem of MSMEs continues to persist. The share of such enterprises in the overall non-food credit from banks has declined since 2009-10, with the share of medium enterprises in overall non-food bank credit declining from 4.36% in 2009-10 to 1.48% in 2016-17.
The financing of MSMEs will need to address all such anomalies. The 2018 budget should focus on introducing schemes to improve the availability of non-food credit to the medium sectors and help them scale up in a labour-intensive fashion in a conducive environment.
Again, interestingly, while the government had announced an increase in the budgetary allocation for the ministry of MSMEs, to Rs64,81.96 crore from the budgeted Rs3,464.77 crore in FY 2016-17, there appear to be two problems with this approach. A perusal of past budget data reveals that the budgets of the ministry of MSME have been lapsing, with a discrepancy between the actual and budgeted spending. Such a discrepancy has been increasing over the years, with the actual spending in 2015-16 being a mere Rs831.69 crore, against the budgeted Rs3,007.42 crore. The government will need to ensure that the budgeted amounts are spent productively. More importantly, even the higher budgeted spending looks minuscule, considering that it is a sector with a significant contribution to output, employment and exports of a $2 trillion economy.
Finally, the budget of 2018 may redress the problem of non-availability of credible data pertaining to this crucial sector for research and policy purposes. Much of the current debate around the MSME sector, especially its productivity, contribution to the gross domestic product and employment, has been taking place in the absence of accurate data and analysis. Such data collection may be facilitated by a nodal agency such as the National Small Industries Corporation (NSIC) through a budgetary allocation. Appropriate incentives may be provided for small and medium enterprises which register with the NSIC and demonstrate a good repayment record, in terms of cheaper credit facilities.
A chump change approach to MSMEs in the 2018 budget will leave them with little or no means to transform. And India, and its prime minister, can ill afford that, economically and politically.
Tulsi Jayakumar is professor of economics and programme head of the postgraduate programme for family managed business SPJIMR, Mumbai.
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