There are times when good economics is good politics. Such was the case when Indian Prime Minister Narendra Modi unveiled a series of sops on November 2 including quick sanctions of loans, easing of labour laws, easier compliance with environmental rules and changes in company laws, to boost the Micro, Small and Medium Enterprises (MSMEs), the country’s second-biggest employment-generating sector besides being one of the significant contributors to the overall growth of the country’s economy (30 per cent of the Gross Domestic Product).
Taken together, the sops brought cheers for the MSMEs which have been facing issues of funds after the demonetisation two years and introduction of the uniform nation-wide Goods and Services Tax both of which are touted as major economic reforms of the Modi government. Bothe reforms had temporarily disrupted the MSMEs along with several other sectors of the Indian economy. So, Modi’s announcements on November 2 were seen as having ushered Diwali, the festival of lights, for this sector five days in advance.
As India braces for a series of state-level elections in the coming weeks and the national polls in the first half of next year, the slew of steps for the MSMEs has political implications as these enterprises have traditionally been a major support base for Modi-led Bharatiya Janata Party as the MSMEs have faced cash shortage and resentment is brewing in the wake of demonetization in November 2016 and the launch of a country-wide uniform Goods and Services Tax in July 2017.
India’s 65 million MSMEs provide 120 million jobs. But reduced credit flow, sluggish manufacturing and growing competition from imports particularly from China, have hit the sector. The government is facing opposition criticism over “inadequate” job creation due to the slowdown in the MSMEs sector.
Modi’s slew of measures for the sector included fiscal measures–a loan of one crore rupees in just 59 minutes through a new portal. Also, MSMEs will get 2 per cent subvention or rebate on incremental new loans of up to one crore rupees, he said, adding interest subvention on pre- and post-shipment credit for exports by MSMEs has been increased from 3 per cent to 5 per cent.
The credit flow to the MSMEs has taken a big hit after Infrastructure Leasing and Financial Services, a state-owned Non-Banking Financial Company (NBFC), defaulted on its debt obligations which made commercial banks wary of giving fresh loans to NBFCs which are the main source of funds for MSMEs. To rid the MSMEs sector of alleged harassment by inspectors, Modi said inspections of factories in the sector will be sanctioned only through a computerised random allotment and inspectors will have to upload reports on portal within 48 hours. “No inspector can now go anywhere. He will be asked why he went to a factory,” he said. Under easier compliance with environmental rules, MSMEs will need single air and water clearance and just one consent to establish a factory.
On the labour front, the MSMEs will have to file just one annual return on eight labour laws and 10 central rules and an ordinance has been promulgated to simplify levy of penalties for minor offences under the Companies Act. To facilitate greater market access to MSMEs, public sector companies, which were mandated to source 20 per cent of their annual procurement from MSMEs, will now source at least a quarter of their requirement (25 per cent) from the sector, Modi said, adding 3 per cent of sourcing by PSUs would have to be done from MSMEs run by women.
Modi also announced Rs 6,000 crore for creation of 20 hubs and 100 tool rooms for technology upgradation. Clusters for MSMEs in pharma sector will be created to boost production in the sector, he said.
Pallab Bhattacharya is New Delhi Correspondent,