Demonetisation, GST hit MSMEs: RBI study

The MSME sector has witnessed "two major recent shocks" — demonetisation and introduction of goods and services tax (GST) — says a new RBI study.

The study, called Mint Street Memos, notes  contractual labour in both the apparel and gems and jewellery sectors suffered as payments from employers became constrained after demonetisation.    
The controversial note ban imposed on 8 November 2016 has worsened the already falling credit to the MSME sector, notes the study. 
The GST rollout, it says, has deeply dented the exports of MSMEs.
The MSME sector constitutes a vast network of over 63 million units and employs around 111 million people. Its share to the overall GDP is around 30 per cent, as per the government's own 2018 figures. 
The sector accounts for about 45 per cent of manufacturing output and around 40 per cent of total exports of the country. However, the sector is more susceptible to various shocks to the economy, due to its size. 
Moreover the sector largely operate in the informal sector and comprises a large number of micro enterprises and daily wage earners.
The credit disbursal to the MSME sector has, however shown a minor recovered since the lows of 2017 to reach the mid-2015 level, notes the report. 
Though micro-credit, including loans by banks and NBFCs to the sector has grown in recent quarters, its exports have been hit badly since the GST implementation.
In a recent survey conducted by MSME  credit rating agency SMERA, more than 60 per cent of respondents felt that their systems were not ready for the new tax regime. 
The sector has been under pressure over the last few quarters with low capital availability and demand. The credit offtake to the MSME sector at banks, as on August 2017, has been below the previous year's level. 
"The general business confidence levels have not been encouraging and the lack of hiring plans reported by a majority of the MSMEs" that SMERA surveyed, reflected this weakness.
A major obstacle for 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 International Finance Corporation estimates the potential demand for MSME finance at around $370 billion as against the current credit supply of $139 billion, resulting in a finance gap of $230 billion or 11 per cent of Indian GDP.
About 97 per cent of MSMEs operate in the informal sector, contributing about 34 of the gross output. As per National Accounts Statistics, the share of informal sector manufacturing MSMEs in total GDP is around 5 per cent.
Credit growth to the sector fell significantly and turned negative during November 2016-February 2017. Therefore, it seems that demonetisation accentuated the slowdown in credit growth, particularly to industrial sector. However, credit growth to the sector recovered after February 2017 to reach an average of 8.5 per cent in January-May 2018.
The share of credit to MSMEs in overall bank credit declined steadily to around 14 per cent by end-March 2018 from about 17 per cent in 2007, partly due to over-lending to large corporates, now stressed loans, in the second half of 2000s.