GS3: Indian Economy and issues relating to planning, mobilization of resources

 

What is the issue?

  • The RBI-appointed U.K. Sinha-led committee, set up to study the problems faced by MSMEs, submitted its recommendations recently.

BACKGROUND

  • MSMEs are the back born of the Indian job market. Most of the informal jobs are created in the last decade were in this sector.
  • However, various policies such as Demonetisation, GST, sluggish global demand, poor rejuvenation of MSMEs itself has caused negatively on them.
  • Around 63 million MSMEs in India contribute significantly to the country’s economic growth; they account for –
    • about 45% of manufacturing output
    • more than 40% of exports
    • over 28% of gross domestic product
    • More importantly, the MSME sector employs about 111 million people.
    • Worldwide, small businesses account for more than 50% of employment.
  • They are key engines of job creation and economic growth in developing countries.
  • Besides these, the MSME sector is also a true reflection of economics where people really matter.
  • Given its employment share, the sector’s health is crucial to the economy’s vitality and society’s well-being.

DISCUSSION

Challenges faced by MSME sector

  • Fiscal indiscipline combined with bank credit going from Rs 18 lakh crore in 2008 to Rs 54 lakh crore in 2014 converted India from high growth, low inflation economy to low growth, high inflation economy and created our Rs 14-lakh-crore bad-loan problem.
  • MSME sector is facing challenges and does not get the required support from the concerned Government Departments, Banks, Financial Institutions and Corporates which is proving to be a hurdle in the growth path of the MSMEs.
  • Limited capital and knowledge and Non-availability of suitable technology are few critical issues in this sector.
  • Ineffective marketing strategy, Constraints on modernization & expansions and Non-availability of skilled labour at affordable cost are few other concerns surrounding the sector.
  • India’s formal MSME involves a regulatory burden of 60,000+ compliance items, 3,300+ annual filings, and 6,000 changes every year.
  • This subjects them to corruption, grovelling and mental torture from a high-handed, poorly structured and weakly-managed civil service.
  • The average employer in India is not a formal MSME but an informal MSME, fewer than 2 per cent of our 63 million MSME’s are formal.
  • Due to this fact, most of the MSME workers are one way or the other connected with Agro-related business and expect benefits from the government.

Need for the present committee

  • In India, small businesses have been facing a range of disruptions since the demonetisation decision in 2016.
  • This disruptive move was followed by the hasty implementation of the goods and services tax in 2017.
  • Now, there is also the liquidity crunch issue triggered by a series of debt defaults by group companies of Infrastructure Leasing and Financial Services Ltd in 2018.
  • All these have made the smooth functioning and development of the MSME sector very challenging.
  • Given this, in January 2019, the RBI constituted the expert committee on MSMEs to undertake a comprehensive review of the MSME sector.
  • It was tasked to study the problems faced by MSMEs, identify the causes, and propose long-term solutions.

Key recommendations

  • Distressed Asset Fund – The committee has suggested a Rs.5,000 crore stressed asset fund for domestic micro, small and medium enterprises (MSMEs).
  • The creation of a distressed asset fund will be structured to assist units in clusters.
  • This is intended as a relief to small businesses hurt by demonetization, GST and an ongoing liquidity crunch.
  • The fund would go into reviving MSMEs in which a change in the external environment has led to them becoming non-performing asset (NPA).
  • The fund could work in tandem with RBI-mandated restructuring schemes or bank-led NPA revival solutions for MSMEs.
  • The onus of creating this fund would lie with the government.
  • Fund of Funds – The committee suggested forming a government-sponsored Fund of Funds of Rs. 10,000 crore.
  • This is to support venture capital and private equity firms investing in MSMEs.
  • MSME Act – The committee observed that small industries face problems of delayed payments.
  • They hesitate to enforce legal provisions available to them under the MSME Development Act, 2006 due to their weak bargaining power.
  • The committee thus recommended an amendment to the Act.
  • Under this, it calls for all MSMEs to mandatorily upload from time to time all their invoices above an amount (to be specified by the government) to an information utility.
  • This mechanism will entail automatic display of the names of defaulting buyers.
  • This will also act as moral suasion on them to release payment to these suppliers.
  • Also, many Indian start-ups that are at the forefront of innovation are drawn to look overseas.
  • So the new law ought to address the sector’s biggest bottlenecks, including access to credit and risk capital.
  • This will go a long way in prioritizing market facilitation and ease of doing business.
  • SIDBI – The committee has recommended expanding the role of the Small Industries Development Bank of India (SIDBI).
  • It called for SIDBI to deepen credit markets for MSMEs in underserved districts and regions.
  • It emphasised on the role of private lenders such as non-banking financial companies and micro finance institutions in this regard.
  • Further, SIDBI was suggested to develop additional instruments for debt and equity.
  • This would help crystallize new sources of funding for MSMEs and MSME lenders.
  • Loan portal – New entrepreneurs may not necessarily have information like GSTIN, income-tax returns and bank statement.
  • The committee thus suggested that the ‘PSBLoansIn59Minutes.com’ portal also cater to such new entrepreneurs.
  • Besides, obtaining regular sanctions from the banks post in-principle approval had not been smooth for entrepreneurs.
  • It was thus suggested to fix a timeline of 7-10 days for disposal of applications, which have received in-principle approval.
  • The committee also recommended enhancing the threshold of loan up to Rs. 5 crore.
  • Technology – The committee acknowledged the fact that technology, especially digital platforms, having become inevitable.
  • It thus made a case for greater adoption of technology-facilitated solutions to many of the problems encountered by the MSME sector.

Other suggestions include –

  • introduction of adjusted priority sector lending guidelines for banks to specialize in lending to a specific sector
  • doubling the collateral-free loan limit to Rs. 20 lakh
  • providing insurance coverage to MSME employees by the government
  • The committee also suggested to develop group policies for death and accident cover for MSME entrepreneurs.
  • This, it said, should be significantly higher than the cover currently offered by the Pradhan Mantri Suraksha Bima Yojana and Pradhan Mantri Jeevan Jyoti Bima Yojana.
  • Another suggestion entails expediting the integration of information on the Government e-Marketplace (GeM) platform with the Trade Receivables Discounting System.
  • The objective is to boost liquidity at MSMEs.
  • Going forward, the task is now for the RBI and the Centre to act on these recommendations to help actualize the sector’s true economic potential.

Way forward

  • It is very important to empower the SME sector to utilize the limited resources (human & economic) they have in an optimum manner.
  • The SMEs need to be educated and informed of the latest developments taking place globally and helped to acquire skills necessary to keep pace with the global developments.
  • To counter the challenges faced by the SME sector and grab the opportunities in the market, various key strategies need to be adopted to promote and support the SME sector.
  • Thus the only way to create millions of jobs with decent wages is a policy re-imagination of the rights, needs, and treatment of formal MSME entrepreneurs.

 

# Practice Question

  1. Discuss the potential and challenges associated with the growth of MSME sector in India. Suggest some measures to revamp the sector. (250 words)