India MSME Sector – Credit and Exports Trends

MSME Sector in India

MSME (Micro, Small and Medium Enterprises) sector is the backbone of Indian economy with a vast network of over 63 million units and around 111 million employees. The sector (97% of sector operate in informal manner) account about 30% of India’s GDP, 45% of manufacturing output and around 40% total exports of the country.

International Finance Corporation report on Indian MSME sector 2017 indicated that the sector faces huge credit crunch. The agency estimated that the sector has potential credit demand of USD 370 billion against the current credit supply of USD 139 billion.

We have been witnessing a lot of news these days about falling credit dynamics and poor export performance of the MSME sector. Various media houses and analysts have pointed out that current BJP government’s two shock moves (demonetisation and GST) have led to the downfall of this sector.

But two important facts from a recent survey conducted by SMERA Ratings and SIDBI on MSME sector:

  1. 60% of SMERA survey respondents said that their systems were not ready for GST
  2. SIDBI survey resulted that its credit exposure fell post-demonetisation and post-GST but recovered back since March 2018

RBI’s Recent Mint Street Memo on MSME sector is an eye opener in this regard. The memo has very brilliantly explained the credit and exports trends of the Sector.

Key conclusions from the RBI MSME memo are:

The MSME sector started witnessing fall in credit growth even before demonetisation. The deceleration deepened further during the the period of demonetisation but have started recovering since than.

GST implementation issues such as delay in upfront GST refund and input tax credit were the credible reasons behind the falling exports.

Other insights from the MSME memo are:

  1. Steep rise in NPAs, increased lending scrutiny by banks and overall slowdown in the economy were the prime reasons behind the fall in credit growth during 2014-16.
  2. RBI also indicated that reclassification of food and agro-processing units from MSME category to agriculture sector was also a reason for decline in the credit growth.
  3. After demonetisation, the credit growth declined sharply in the industrial sector. Mirco credit (less than INR 10 lakh fell most during the period of demonetisation, however since September 2017, micro credit lending has risen sharply.
  4. During demonetisation period, the MSME exports fell marginally but the decline accelerated during April to August 2017 period when GST was in the process of implementation.
  5. Private sector banks have been cautious while offering lending to MSMEs since October 2017.

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