Welcome move

But zeal for helping MSMEs should be tempered with caution

Prime Minister Narendra Modi announced a package of 12 initiatives for Micro, Small and Medium (MSME) sector last week. The package includes measures that will help MSMEs enter a new era. In essence, the measures are aimed at not only boosting credit availability to the beleaguered sector but also making it easier for them to conduct business. Over the past two financial years, the MSME sector has suffered considerably by back-to-back policy shocks — demonetisation (in FY17) and the introduction of the goods and services tax (in FY18) — both of which led to a sharp reduction in incomes in this sector. The ongoing crisis in the country’s non-banking financial companies sector, triggered by the weakness in IL&FS, has further restricted the flow of credit to the MSMEs. Given this context, it is indeed welcome that the government is going all out to assist this crucial sector of the economy to achieve its potential.

For providing quick and fast relief from the liquidity crunch, the PM announced the countrywide launch of a web portal to sanction loans of up to Rs 10 million in just 59 minutes. In the first phase, the government will target 78 MSME clusters and officials from five public sector banks will be stationed in these locations to ease the process of the loans. Further, a 2 per cent interest subvention will be provided on incremental and new loans to those MSMEs that have already registered for the GST. The package also provides an increase in interest rebate for exporters who receive loans in pre- and post-shipment periods. Besides easier credit, the package focused on improving business viability by asking all public-sector undertakings (PSUs) to henceforth buy 25 per cent of their inputs from MSMEs, as against 20 per cent earlier. Similarly, all public-sector companies and corporates with a turnover exceeding Rs 5 billion have to mandatorily register on the Trade Receivables Electronic Discounting System portal — a move that will enable entrepreneurs to access credit from banks, based on their upcoming receivables. Moreover, MSMEs will also be given support for technology upgrades. The PM also announced a simplification of procedures with respect to seeking environmental clearances, inspections and filing returns. An Ordinance to amend the Companies Act has been approved as well to reduce harassment and obviate unnecessary litigation.
 

Without a doubt, these measures would go a long way in helping the MSME sector. However, there are valid reasons to be cautious. This is more so because these measures have the backing of the PM — “I will myself do a focused monitoring of the government’s reach-out to small businesses across 100 districts in the next 100 days,” he said — and officials may feel compelled to show short-term results while ignoring potentially adverse long-term consequences. For instance, in the zeal to offer more and quick loans to MSMEs, efforts must be made to ensure that credit discipline does not become a casualty. Reserve Bank of India Deputy Governor N S Vishwanathan has provided a timely warning, albeit in a different context, and it should not be ignored. Similarly, mandating purchase preferences of PSUs, too, is fraught with the risk of encouraging inefficiency in the system.