A recent study by the Reserve Bank of India (RBI) has noted that the Micro, Small and Medium Enterprises (MSMEs) have been adversely hit by the Goods and Services Tax (GST) roll-out and Demonetisation, which had a significant impact on the overall credit of the sector.
"The MSME sector has witnessed two major recent shocks, viz., demonetisation and introduction of goods and services tax (GST). The introduction of GST led to increase in compliance costs and other operating costs for MSMEs as most of them were brought into the tax net," said the report.
It added that the MSME, however faces operational problems due to its size and nature of business, and is, therefore, relatively more susceptible to various shocks to the economy.
"MSMEs largely operate in the informal sector and comprise a large number of micro enterprises and daily wage earners," added the report while mentioning that share of MSMEs in overall GDP is around 30 per cent (GOI, 2018), and the sector accounts for about 45 percent of manufacturing output and around 40 percent of total exports of the country.
MSMEs play a crucial role in the employment generation, and contribute significantly to overall economic activity, despite which the contribution faces several bottlenecks inhibiting them from achieving their full potential.
"A major obstacle for the growth of MSMEs is their inability to access timely and adequate finance as most of them are in niche segments where credit appraisal is a major challenge," the report said.
It added that about 97 per cent of MSMEs operate in the informal sector, and their share of informal sector in gross output of MSMEs is about 34 percent. As per National Accounts Statistics 2012, the share of informal (unregistered) sector manufacturing MSMEs in total GDP is estimated at around 5 per cent.
"A large number of these firms depend on informal channels because of easy accessibility and availability of credit without any documentation hassles and mortgages, even though the rate of interest on such loans may be very high. The challenges faced by MSMEs in accessing finance are due to lack of comprehensive formal documentation relating to accounts, income and business transactions. As a result, loans are provided to the MSMEs mainly through appraisal of their collaterals rather than assessing their true business potentials," it added.
However, the year-on-year (YoY) growth of bank credit to the MSME sector decelerated gradually during 2015 to 1.6 per cent in April 2016 before exhibiting some recovery till October 2016.
The deceleration in credit growth during 2014-16 was partly due to overall slowdown in economic activity, rising non-performing assets (NPAs) and reclassification of food and agro-processing units from MSME category to agriculture sector (as per the revised priority sector lending guidelines, issued to banks in April 2015).
On the exports front, the report added that the MSME sector contributes around 40 per cent to India's total exports (GOI, 2018). Recognising significant contribution of MSMEs, the Government has put in place several measures in its Foreign Trade Policy (FTP) to promote exports by MSMEs.
"Among various items of MSMEs exports, gems and jewellery, carpets, textile, leather, handlooms and handicrafts items are highly labour intensive and depend heavily on cash for working capital requirements and payment towards contractual labourers. Hence, export shipments of these sectors could have been impacted by demonetization," it added.