Too little: Modi's sops for small businesses

An indirect admission of a financial crunch that has particularly hurt the micro, small and medium enterprises sector

By The Editorial Board
  • Published 8.11.18, 8:08 AM
  • Updated 8.11.18, 12:06 PM
  • 2 mins read
  •  
Narendra Modi Picture by Prem Singh

The prime minister has announced a number of measures to benefit the micro, small and medium enterprises sector. The announcements signal three distinct issues. First, there is an indirect admission of a financial crunch in the economy that has particularly hurt the MSME sector. The roots of the trouble can be traced to demonetization, the imposition of the goods and services tax and the non-performing assets problem in public sector banks. More recently, the crisis in the Infrastructure Leasing & Financial Services Limited has left the non-bank financial companies dry of cash. Second, the MSME sector creates employment which is vital for the economy, especially with elections coming up soon. The small-business community has been traditionally a political base for the ruling party. The announcements were an indication of the Bharatiya Janata Party’s perceived need to woo it back as a support base. Third, the measures announced also indicate that the government is headed towards a command economy where typical captive institutions like central public sector units are being forced to provide much wanted market opportunities. In short, all these reflect economic as well as political worries for the BJP.

The important measures are basically aimed at providing credit and market outlets for MSME units. Loans up to one crore rupees are to be sanctioned within 59 minutes from a government portal. The units that have GST registration will get a 2 per cent interest rate subvention. Public sector units will now have to procure their purchased resources from MSMEs to the tune of 25 per cent instead of the existing 20 per cent. Of this, 3 per cent will have to be from MSME units run by women. Labour and environmental regulations have also been relaxed for these units. The announcements are not enough. Representatives of the MSME sector have already announced their demand for such measures as the availing of cheap land, subsidies on power tariffs, tax breaks on all kinds of taxes and making inter-state business easier to carry out. It has also been suggested that while a loan of one crore rupees may be adequate for a start-up, a medium-sized enterprise might easily require quick loan sanctions up to Rs 25 crore. The demand for these measures shows that the sector thinks that the measures announced by the government are inadequate. The problem is complicated because there is a deeper crisis in the financial sector which will not go away by announcing populist sops aimed at electoral returns.