By K R Sudhaman
BJP ideologue S Gurumurthi, a stout defender of demonetisation, has described this widely criticized move by economists as necessary to resurrect the economy from the brink of collapse but admitted that the MSME sector that accounted for 85 per cent of jobs in manufacturing and 70 per cent of exports were badly hit by demonetisation and rollout of GST.
Gurumurthi, though defended demonetisation, has now virtually admitted that former Prime Minister Manmohan Singh was right in saying that demonetisation was a monumental mistake. Two years down the line it has been proved that India’s economic growth has dropped by two percentage points as feared by Manmohan Singh.
If farmers are agitated throughout the country, it is because of the fact that cash-driven agriculture was the worst hit by demonetisation; that too at a time when farming was looking up following good monsoon in 2016 after two successive droughts. Indian farmers are yet to recover from the shock.
Now Gurumurthi, after demonetisation having failed to achieve the objective of sucking out Rs 3 lakh crore of money out of the system, wants the economy to be monetized by printing more notes, which would be yet another grave mistake, warn analysts.
The idea Gurumurthi propounded in his speech at Vivekananda International Foundation that the country, which is facing twin balance sheet problem in the corporate and banking sectors, should have the option to consider a central bank-funded government expenditure programme is conceptually correct but practically impossible, argues V Anantha Nageswaran, Dean in IFMR Business School.
In other words, it meant dipping into RBI’s reserves by printing more notes so as to bridge the burgeoning fiscal deficit. Such printing of currency notes by RBI will not be appropriate for emerging economies like India, which has none too comfortable current account deficit.
Former deputy chairman of Planning Commission Montek Singh Ahluwalia goes a step further to say raiding RBI reserves will not be a credible way to cut fiscal deficit and it would only be an accounting trick of the central government to boost fiscal numbers.
More than the monetization issue, the problem faced by MSMEs is a creation of Modi government as it starved the cash-dependent informal sector of funds through demonetisation followed by imperfect rollout of GST, that too at a time when the economy was at a take off stage after years of slowdown due to the 2008 global economic crisis.
MSME exports were hit more by issues related to GST implementation than demonetisation, a RBI report published recently said, This was due to delay in refund of upfront GST and input tax credit affecting cash-driven working capital requirement. There was a marked deceleration of credit growth to MSME sector after demonetisation as a result.
Former NIPFP director M Govinda Rao, who was a member of the 14th Finance Commission, said the government committed two economic blunders of demonetisation and imperfect rollout of GST and this had hit hard the entire informal sector, including MSMEs and agriculture. Now they want to commit yet another mistake.
The entire power sector and banking sector are in doldrums because this government cancelled coal blocks overnight starving thermal power stations of key input and this had a chain reaction of huge NPAs in banks from whom power companies had borrowed heavily. Actions like this without knowing the consequences has put the economy on a tailspin, Rao said.
After IL&FS problem, banks are wary of lending to NBFC on whom the MSMEs depend largely for credit and now increasingly finding it difficult to get loans and the high spirits of the economy looking up after 8.2 per cent growth in the first quarter of this year is evaporating rapidly thereafter with growth dipping every subsequent quarter, Rao rued.
Former MSME secretary Anup Pujari asserted that there are two types of lending to the sector. One is capital expenditure and another is working capital requirement. Capital expenditure like machinery banks do lend as the machinery is hypothecated.
The problem arises with regard to working capital to the sector. Here banks do not lend much and MSMEs depend largely on NBFCs and informal lending, Pujari said adding in the past bank managers used to lend working capital to MSMEs based on the personal rapport and trust.
“Today bank managers are wary of lending working capital to MSMEs as if something goes wrong, there will be immediate enquiry So they play safe by not lending,” he added.
After demonetisation, banks increasingly do not want to lend working capital to MSME with many becoming sick.
With regard to MUDRA scheme, Pujari said he would not like to comment as it being government’s flagship scheme.
According to economist and former chief statistician Pronab Sen, Mudra does not seem to have helped in the growth of MSME sector. If that was the case, household investments would have gone up substantially and available data did not indicate that.
What could be possibly happening is that with the drying up of informal lending after demonetisation, many MSMEs might be shifting to Mudra for working capital requirement.
With the negative effect of demonetisation and GST rollout tapering off, overall MSME credit and especially micro credit to MSMEs, including loans by banks and NBFCs, shows a healthy rate of growth in recent quarters. During the quarter April-June 2018, bank credit to MSMEs increased on average by 8.5 per cent (y-o-y), mirroring the level of growth during April-June 2015, with credit to micro and small enterprises growing at an even healthier rate, the RBI report said.
A Crisil survey called CriSidEx on Tuesday said that sentiment among micro and small enterprises was intact despite headwinds including seasonality, rising crude oil prices, rupee depreciation during the quarter ending September last. (IPA Service)
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