Politics does not oblige its players to adhere to the truth. But two things are a big no-no and better avoided. The first is trying to meet multiple objectives with one instrument or decision and the second is Tom Sawyer-ing.
Mark Twain’s character had a knack of getting other people to see his own duties, often a punishing task, as an attractive proposition. It works occasionally, but not always.
India’s economic package for MSMEs is far reaching and reformatory. But does the rubber meet the road, as they say?
Most of the FM’s announcements were music to my ears. With the banking sector being risk averse in the face of the twin balance sheet problem , the provision of credit guarantee was required for lending to MSME to gain traction.
Provision of subordinate debt for MSMEs to improve their equity to tide over the debt equity mismatch? Forward looking! Fund of funds at 1:4 for the government and other investors? Even more forward looking!
Credit guarantees for NBFCs and MFIs were also introduced so that they get loans and don’t go belly up. Practical solution after the Reserve Bank of India has enabled liquidity, a worthwhile answer to tide over the reluctance of the bankers.
The next day, it was still better with 50 lakh street vendors to be covered by MUDRA-Sishu loans up to Rs 10,000 as working capital. It’s a small amount, but means a lot to these micro entrepreneurs who borrow at usurious rates from informal sources. The crowning glory however was the change in the way MSMEs were defined, thus allowing them to grow bigger without losing benefits. These are tectonic changes – craved for, but not seen for a long time.
Most jobs are created in small and medium industries in every country. No matter how seductive nano technology, artificial intelligence or IT may sound, they cannot create jobs in the millions – something India requires.
We can sense a great opportunity for lakhs of technically trained persons to start small industries with collateral free loans. Imagine if one lakh small industries get started in India every year, dispersed all over, with each unit employing 10-50 persons. This will generate 2 to 3 million decent jobs and we would be moving towards a more formal economy. They can also become a value chain of several industries for domestic and and export market. Voila! We are on the path to reform.
Historically, Rs 7 lakh crore of bank loans has been invested in MSMEs. Now, it is a huge step up with Rs 3 lakh crore. They account for around 30% of the GDP and 50% of industrial workers. In all, 94% of MSMEs are micro and 94% are unregistered. But only 7% have borrowed from institutions and 83% are self financed.
The announcements could be a game changer, a bold reform on the path to prosperity. That was until I pinched myself – this was not a budget speech, nor is it a peacetime policy announcement. Instead, it is the announcement of a relief package for a coronavirus-induced lockdown where jobs have been lost, factories have been closed and there is no money available to pay salaries, power bills and other losses incurred during this two-month long closure.
Among the problems staring down such businesses are reduction/evaporation of cash flows and mounting payables. Going by a very well reputed Chinese study, we can conjecture similar things happening in India. On cash flow basis, 14% of units after a month and 50% beyond three months can go belly up.
While the package of reforms look great, they are also replete with possible problems. For one, the timeline required for relief is different from the timeline in which the credit will come. Loans being available is not the same as required cash being made available in time. More so, with the credit guarantee and banks not having any skin in it, there is a strong possibility of loaning driven by moral hazard.
Better-off businesses are likely to corner a substantial portion of the loaning portfolio. Cronyism is also a strong possibility. India’s approach hitherto has been disproportionately in favour of incumbent business rather than being pro-market.
The Indian banker is also used to lazy banking. He would not like to deal with too many small people. He would like to deal with a few fancy high-cost loan proposals, which are easy to complete and monitor. Time will show whether cronyism wins the day again.
One hopes that small loans to street vendors does not result in proxy lending which will come back in 12 months, much like co-operative loans are misused by local strong men. An announcement about their continuance could have been made so that the bankers would have been compelled to change their style.
Large targets have a tendency to water down due diligence, increase delinquency and moral hazards.
The bankers know that what the government is doing is a Tom Sawyer-ism and they know how to take care of this.
When multiple objectives are attempted to be achieved with one instrument, there is a tendency to perform sub-optimally. Relief packages are premised upon the factoid that nearly 3.5 crore tiny/small units will close down with no operation for two months, payables and receivables outstanding.
The enablement of long term credit package reflects conflation of relief with reforms. It is unlikely to serve the purpose of short-term and immediate requirements. Both term loans and working capital is to be converted in settling guarantee the fees of electricity boards. Taxes and fees are to be paid to the government. At least the government could have taken steps in giving remission in these.
The relief is required for three purposes vis-a-vis for persons, for an enterprise and basically to bootstrap production and reverse demand slowdown. At an enterprise level, there is no chance of quick reversal of deteriorated finance. As far as a perk up in the demand to reverse the recession goes, it looks distant in the intermediate term. At personal level, everyone will be impoverished – which is an economy wide phenomenon.
Does the package meet the requirement? Does the rubber meet the road? Probably feebly. Maybe another package is in the offing. Tom Sawyer’s epiphany that “all it takes to make someone want something is to make that thing hard to get” holds true, perhaps.
Satya Mohanty is former Secretary to the government of India.