National Council of Applied Economic Research
Opinion: Chetana Chaudhuri and Sanjib Pohit .
A focus on MSMEs as job creators is needed. Their problems with GST and credit need to resolved.
Recently, Arvind Panagariya, the Chairman of the Finance Commission, expressed his view that employment challenge is on account of the country not being able to generate employment in labor-intensive sectors.
The transition from agriculture to other sectors is slow in India. Besides, unlike other countries, the labour force in India is shifting from agriculture to services sector, rather than to manufacturing sector, the principal hub of jobs in other emerging/developing countries.
Indian manufacturing sector is characterised by the existence of a large informal sector, which operates with low capital. Despite this, these small manufacturing units, provide employment to a large section of population. But historically in India, unorganised sector, on an average, flared a lower growth of total factor productivity as compared to organised manufacturing sector.
Hence, higher growth is witnessed in capital-intensive industries rather than labour-intensive industries, despite the latter’s employment generation potential.
This is also reflected in the low share of labour intensive goods in India’s export basket where India’s competes with countries like Bangladesh and Vietnam. So, the right strategy would have been to concentrate on labour intensive manufacturing. But this has not happened in the past. Majority of the policy level reform initiatives focus on organised sector manufacturing. For example, PLI scheme is largely focused on capital intensive industries.
MSMEs and jobs
MSMEs are the backbone of labour intensive industries. According to PLFS 2022-23 data, 74.3 per cent of workers in non-agricultural sector are engaged in the informal sector. The contribution of the Micro, Small and Medium Enterprises (MSMEs) sector to overall GVA was 26.8 per cent in FY21 and its contribution to the manufacturing sector’s GVA is 36 per cent (Economic Survey 2022-23).
MSME performance is dismal; they suffer from limited and costly access to finance. India’s MSMEs tend to remain as MSMEs unlike in other countries where they mature into large companies.
MSMEs often struggle to secure financing from traditional banks due to stringent lending criteria and a complex regulatory framework. Even when financing is available, the interest rates are very high. High cost of capital plagues MSMEs in India, affecting profitability, and hence, financial viability.
GST burden
Moreover, GST is an added burden on the financial stress faced by the MSMEs. For instance, a study on New Zealand, suggests that nearly 60 per cent of the compliance costs of the GST fell on MSMEs. The benefit by these businesses is felt only over a long period of time if those firms survive.
In case of India, it is often found that MSMEs lack access to finance for working or fixed capital.
Thus, if GST indirectly leads to delay in receiving payments from their customers or receiving refunds from government in respect of input credit resulting from submission of GST returns, it would be fatal for the MSMEs.
MSMEs often pay GST even if there is no receipt from the client — to avoid penal charges and other complications. To do so, MSMEs need to block a part of their working capital, which an MSME is always short of.
The GST system’s efficacy depends on the timely compliance of all players in the chain, even from the government if it is a vendor. Of course, this lacuna also applies to medium and large firms, but because of their financial capacity, this is not a serious concern for them.
The Budget announced credit relief for MSMEs through a number of schemes. But these are not focused on changing the regulatory framework which can provide better access to credit, and reduce compliance cost of GST.
The writers are at NCAER. Views expressed are personal.