In March 2020, the Centre for Monitoring Indian Economy (CMIE) reported that unemployment had gone to an absolutely unheard-of open unemployment rate of 23.4%.
India’s workforce, by most estimates, is around 434 million people. Over 80% of non-agricultural employment is in India’s micro, small and medium enterprises (MSMEs) who are disproportionately affected by the coronavirus lockdown.
If India does not respond to them in this time of dire need, then when?
Currently almost 67 million MSMEs are operating in the non-agri sector in India, both unorganised and organised together. Nowhere in the world is there such a large number of enterprises. Of these 96.7% are micro or unorganised and likely employ less than 10 workers.
A mere 3.34% of all non-agri enterprises in India employ more than 10 workers, but much of the pink press is full of stories only about this minuscule segment.
The problems of the size structure of India’s enterprises do not even stop there. Of all unorganised units, 84.6% are ‘own-account enterprises’, i.e. individuals working on their own. There are 70.4 million such individuals, whose livelihoods have stopped overnight, thanks to the COVID lockdown. While they will recover, they cannot be assisted officially because there is no record of them in any government office – a subject we return to at the end.
We estimated from the National Service Scheme-unincorporated non-agri enterprise survey in 2015-16, that 67% of unorganised firms are not registered anywhere in government records. They amount to a mind-boggling 43.8 million manufacturing and services units and another 1.3 million construction units, unregistered anywhere.
Now we come finally to SMEs, registered under some act or authority.
The registered ‘small’ sector in 2015-16 (NSS) was a miniscule 2,79,800 or so manufacturing and services units and 5,600 construction units. They constitute only 0.6% of all of India’s non-agri units (showing how small is the share of registered small units in India). So not only is there a ‘missing middle’ for enterprises, there is even a ‘missing small’ among the registered units; that is the meaning of informality being so high in India.
But the registered SMEs are also suppliers to larger firms, and have contracts with them. So while SMEs generate employment, the larger firms contribute a much higher share of output in the economy.
In addition to this disjunction between the employment and output among firms, there are differences between sectors on how many jobs each sector creates. For example, airlines and hotels have a ratio of 1:8 which means 1% of the gross credit this sector receives supports 8 million jobs. Similarly, construction and real estate have a ratio of 1:5, freight and logistics 1:11, manufacturing at 1:3.9 and consumer and retail at 1:4.2.
Hence a balance has to be maintained when thinking of financial allocations between sectors and large, medium and small businesses, without forgetting the micro unregistered units.
The Pradhan Mantri Mudra Yojana (PMMY) offers unsecured loans for MSMEs requiring credit for investments in existing businesses, as well as for new start-ups. Loans up to Rs 50,000 are categorised as ‘Shishu’, from Rs 50,000 up to Rs 5 lakh as ‘Kishore’ and further up to Rs 10 lakh as ‘Tarun’ loans.
Further, by direction from the RBI since 2015, all lending to MSMEs lower than Rs 10 lakhs by scheduled commercial banks is required to be uncollateralised.
Nearly 17.8 crore loans have been given, worth Rs 8.95 lakh crore over 2015-19. A vast majority, nearly seven out of eight loans of the smallest Shishu category had an average loan size of only Rs 27,143, due to which additional income is limited and additional employment is negligible. Over four years, April 2015 to March 2019, loans to new enterprises were only one in 12 (7.52% of total Mudra accounts), because most of MUDRA loans were simply reclassified (earlier loans were renamed MUDRA loans). Only one out of five borrowers was for a woman.
These existing loan products need a redesign. For MUDRA Tarun loans, Rs 5 lakh upwards, the actual average loan size was Rs 4 lakh. To their existing term loan, a second component can be added – a cash credit limit of 50% of the loan amount. Thus the average loan will go up from Rs 4 lakh to about Rs 6 lakh. The 50% working capital limit is justified as these businesses use some machinery and equipment and a vehicle.
But most of their need is for financing inventory of raw material and finished goods. As these businesses often have two or three seasonal peaks and troughs a year, a cash credit is much more suitable than a fixed monthly repayment. The lending banks may insist that all business cash flows of the borrower must be routed through the cash credit account to enable the bank to keep track of the business and ensure repayment.
Most of these businesses have turnover exceeding Rs 20 lakh per annum and thus can be GST registered. These businesses should be willing to share their GST returns with the bank electronically, to enable digital tracking of input purchases and output sales.
For MUDRA Kishore Loans, which is fromRs 50,000 up to Rs 5 lakh, but whose average loan size was Rs 1,47,000 also a second component can be added – a cash credit limit of about 75% of the loan amount. Thus the average loan will go up from Rs 1,47,000 to about Rs 2,57,000. The lending banks may insist that all business cash flows of the borrower must be routed through the cash credit account to enable the bank to auto debit the account on payment due days.
For MUDRA Shishu Loans, up to Rs 50,000 but whose average loan size was Rs 27,000, a second component can be added – a cash credit limit of about 100% of the loan amount. Thus the average loan will go up from Rs 27,000 to about Rs 54,000. The 100% working capital limit is justified as these businesses use very little machinery and equipment and often rent the premises or the manual push cart, etc.
So most of their need is for financing inventory of raw material and finished goods. As these businesses often have two or three seasonal peaks and troughs a year, a cash credit is much more suitable than a fixed monthly repayment. The lending banks may insist that business cash flows of the borrower must be routed through the cash credit account so the bank can ensure repayment.
For those who are even smaller and are not bank borrowers, such as street vendors and domestic workers we can still reach those who have Jan Dhan (basic savings bank deposit or BSBD) accounts. There are over 32.4 crore accounts with over Rs 1 lakh crore deposits.
They are allowed an overdraft of Rs 10,000. The banks must be asked to allow the people to take the overdraft in times of low or no income and in case of sudden expenses. Trouble is only 0.63% of MUDRA loans have overdrafts, showing how limited is the use of this facility. The amount of overdraft on average over the same period was Rs 924, well below the Rs 5000 limit, hence the raising to Rs 10 000 of possible overdraft has less meaning.
Finally, we began by noting that 85% of unorganised sector firms are OAEs (own account enterprises), mostly self-employed. 70% of these firms are not registered under any act or authority. Therefore, the only way such units can be helped is through bank and microfinance loans.
India cannot leave them to the vagaries of the informal credit market. The RBI should require banks to use their excess (beyond statutory requirements) liquidity stash of over Rs 7 lakh crore to lend to the micro sector, ensuring a major part of the credit goes to the most numerous smallest OAE category of units, known in banking parlance as Shishu units.
Santosh Mehrotra is Professor of Economics, Centre for Labour, JNU; Vijay Mahajan is Director of Rajiv Gandhi Centre for Contemporary Studies, and Tuhin Giri is a Phd student at JNU.