New scheme to boost MSME sector(GS 3,Economy,UPSC IAS Mains)

Why in news?

The central government has launched the ‘Support and Outreach Initiative’ for micro, small and medium enterprises (MSMEs) recently.

What are the proposed measures under it?

  • The government considers five factors required to run a (good) MSME –
  1. Easy access to capital at lower interest rates
  2. Better access to the market
  3. Improved technical assistance
  4. Enhance ease of doing the business
  5. Job security to the sector
  • Capital and cash flow – Businesses with small balance sheets and lower turnover have difficulty in accessing loan.
  • To ease the capital requirements, Centre has launched a web portal which can be used to receive in-principal approval of loans within 59 minutes.
  • Each public sector bank has been enrolled on the portal which will assess the entrepreneur’s bank statement, income tax return and GST return to sanction the loan.
  • The term loans or loans for working capital requirements up to Rs one crore will now be approved either on the designated portal or GST portal.
  • Furthermore, banks will lend loans at “subsidised rates” if applied through GST web portal, which will be less than the normal rate by 2%.
  • Exporters would also be eligible for a subsidised interest rate for pre/post shipment requirements.
  • The loans would cost 5% less than the usual rate for these exporters, which is an additional discount of 2%.
  • For all companies with turnover more than Rs 500 crore, registration on Trade Receivables e-Discounting System (TReDS) will be compulsory.
  • TReDS is an electronic platform that allows auctioning of trade receivable, wherein a seller (Only MSME) gets credit against a bill which is due to him at a later date.
  • MSMEs could upload their supply bills, as proofs, on the web portal to receive loans from banks.
  • Also, if MSMEs continue to face issues with respect to delayed payments from big corporations, they could register their complaints at the Samadhaan portal of the MSME ministry’s website.
  • Women and market – Centre has made it mandatory for state-run units to purchase more goods from the MSME sector.
  • Thus, it will be mandatory for the government sector to buy 25% of their total supply from MSMEs.
  • Even among the mandated 25%, PSUs will now have to buy three percent of their stock from women entrepreneurs.
  • Also, it is mandatory for all central public sector enterprises (CPSEs) to register on GeM.
  • GeM or Government e-Market is a web portal, which provides an electronic market space where buyers and sellers can interact and sell goods.
  • According to government data, there are more than 1.5 lakh suppliers and over 29,000 buyer organisations registered on the portal.
  • By registering on the GeM, MSMEs will get easy access to various e-commerce aggregators.
  • Technical support – The government announced a Rs 6,000 crore package for development of tool-rooms on a cluster-based model.
  • Through this, Centre will develop 20 technology centres as hubs and 100 centres as spoke to provide training in latest technology.
  • Ease of Doing Business – In the pharmaceutical sector, centre will develop “pharma clusters” in the country and will bear 70% of the set-up cost.
  • It further eased operating in India by diluting paper-work and promoting minimal documentation.
  • MSMEs would now have to file returns under eight labour laws and 10 union regulations only once a year against a current practice of twice.
  • Also, inspection at various MSME centres would be done by a person, alloted randomly via an online process.
  • The person in-charge will have to upload the report on the website within 48 hours.
  • Moreover, to make the business environment more conducive, self-attestation of environmental clearances will be promoted.
  • Accordingly, one form for air and water pollution will now be required by MSMEs which will be self-attested.
  • For environmental inspections, only 10% of the Enterprises will be randomly inspected by the government.
  • Also, the government has amended Companies Act 2013 to decriminalise unintentional and minor errors and reduce the burden of approaching courts.
  • Social Security – Employees working under the MSME sector will compulsorily have to enrol themselves under social security schemes.
  • These would be all central government schemes related to insurance, pension, provident fund etc.

What are the concerns?

  • MSMEs which account for 30% of India’s GDP were hit hard by the twin shocks of demonetisation and the implementation of GST over the last couple of years.
  • Further, in the aftermath of the IL&FS crisis, the amount of lending done by non-banking financial companies to the MSME sector has been affected.
  • Hence, the proposed measures serve as a tool to improve credit flow and the pace of job creation in the economy.
  • However, the scheme has signs of state-led economic planning written all over it.
  • The biggest risk of a credit stimulus is the misallocation of productive economic resources.
  • Pumping extra credit into MSMEs now may well lead to a temporary boom, but it can lead to a painful bust when the stimulus ends someday.
  • Another unintended consequence is the likely deterioration in credit standards as financial institutions are pushed to lend aggressively to MSMEs.
  • Efforts to expedite business loan approvals may be welcome from the point of view of growth and job creation, but they rarely end well when motivated by political reasons.
  • Conceptually, the Prime Minister’s latest credit scheme is no different from the MUDRA loan scheme, which has been troubled by soaring bad loans.
  • There are prevailing concerns that loans extended under the MUDRA scheme could turn out to be the source of the next financial crisis.
  • Thus, care needs to be taken to see that the new MSME loan scheme does not pose a similar risk in the future.
  • Also, the demand that PSUs must procure a quarter of their inputs from MSMEs could breed further inefficiency in the economy.
  • Altogether, the MSME loan scheme is yet another example of how bad economics can make for good politics.

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