Business loans to Small Enterprises will help in recovery of the economy

The overall slump in World economy caused by Brexit, US elections, threats of war involving countries from the far-east, coupled with the haphazard implementation of Demonetisation and lack of clarity about the procedures involved in implementation of GST has affected the Indian economy to the extent that companies have resorted to job cuts and shut down. This slump, however, is temporary, albeit a bit stretched.

India’s Real GDP slowed down in the last quarter, but overall growth for the Current Fiscal is estimated to rebound to 7.00%, which is far better than that of the competing Developing and Developed countries. One of the major factors stalling the onset of rapid recovery is the lack of Private Investment due to reasons not limited to India alone.

The constant disruptions of Parliament since 2012 for various reasons meant that GST was not implemented at a time when India could afford a temporary slowdown, but rather, at a time when the economy was showing signs of recovery post the disruptions caused by Demonetisation. From a socio-political point of view, the implementation of these reforms could not have been timed more perfectly, as it gave the voters a chance to assess the short-term and long-term impacts fairly, over a period of 24-30 months.

One of the drawbacks of Demonetisation was the slowdown in inflation. From an average Inflation Rate of 6.80% between 2012 and 2017 (reaching a high of 12.17% in November 2013), India’s Consumer Price Inflation came down to 3.28% in September 2017 (reaching an all-time low of 1.54% in June 2017). The other major issue faced by Businesses – big or small – was the Cash Flow Crunch due to delayed payments and increased Inventory + Book Debts Cycle.

In spite of the increase in Public and Private Consumption due to the revival of Rural Demand after a normal-to-exceptional monsoon and the implementation of the 7^th Central Pay Commission, overall demand remained weak due to lack of private investment, and lending. Further, the sharp decline in inflation meant that the value of goods and services consumed did not reflect the actual increase in the quantitative value of consumption. While the public finances remain stable, the contingent liabilities are rising.

Although temporary disruptions caused by Demonetisation and Depressed Food Prices have moderated India’s growth rate in the short term, the Indian Economy is in good shape, looking set to bounce back in the next few quarters, mainly due to the following reasons:

1.    For the first time in almost 2 Decades, a single party came into power at the centre, capable of running the government for a full-term without support of allies. With no threats of instability at the Central Level for at least 18 more months, India remains a hot investment prospect for global investors. The initiatives like Make in India have garnered support world-wide, and India will witness a strong growth in its Manufacturing sector in the next Fiscal, which will also result in creation of jobs. Lack of GST was a major stumbling block for India to attract Foreign Investors, which has already been addressed. India is also seen as the hub of skilled and unskilled labour force, with an abundance of Managerial talent.

2.    It is anticipated that Inflation will bounce back to a level of 6% to 7% in the next few quarters, and external factors will remain stable.

3.   Reforms like Demonetisation and GST were likely to create short-term disruptions, but were guaranteed to have long-term benefits. The only worry was that the Long-term benefits may not be enough to compensate the short-term problems. However, having sustained a spell of down-turns, job cuts, lowered rate of Inflation, etc, it is time for India to reap the long-term benefits of these reforms. Let us reserve our judgement about these reforms until after we have seen the long-term benefits.

4.    The Rupee has been holding steady against the Dollar, and Fiscal Deficit looks set to be reduced to 3.2% as compared to 3.5% in the last year.

5.     India is witnessing a surge in entrepreneurship, with a large number of those feeling underemployed, choosing to start their own Business with the noble idea of creating more jobs, and being one of the catalysts in the growth and economic welfare of the country.

India’s recovery is also largely dependent on the recovery of the MSMEs, which account for almost a third of the GDP. Demonetisation led to an unprecedented increase in the deposits with Banks, which further led to steep rate cuts in the Lending Rate of Interest (with the Industry average benchmark rate – earlier Base Rate, later being changed to Marginal Cost of Lending Rate, MCLR for One year coming down from 10.20% to 8.35% in a space of 36 months). This seemed like an ideal opportunity for small Businesses to expand exponentially with the backing of the Banks. However, the burden of large NPAs (not necessarily in the retail segment) meant that the Banks have not been forthcoming in providing business loans or start-up loans to MSMEs and start-ups respectively.

In such a situation, it is important for small businesses to remember that the Banks cannot decline to provide Business loans for arbitrary reasons. It is always advisable to have a Business plan that reflects the actual position of the enterprise, the short-term and long-term vision, realistic projections subsequent to receipt of Funding at the right time, made with some degree of confidence, and the plan for utilisation of the Funds. Read RBI’s guidelines for MSME loans clearly, before approaching Banks.

Banks are mandated to provide business loans backed by the guarantee of Credit Guarantee Trust for Micro and Small Enterprises to eligible enterprises (Small Businesses and Start ups). Check whether you are eligible to avail a business loan or a startup loan under the CGTMSE Scheme or any other credit-related schemes by visiting https://msmemitra.com/home/schemessubsidies

If you are facing cash crunch and are not sure about your exact Working Capital Eligibility, visit https://msmemitra.com/#widget-mpbf

To avail business loans or start-up loans, or for our assistance in preparation of loan proposals (project reports), contact us at support@msmemitra.com

India’s MSMEs have weathered the storm of 2 historic economic reforms, the biggest since 1991. While some have perished under pressure or due to lack of external support, some have managed to stay afloat. With the right policies in place and a market ready to dig deep into its pockets to spend, the world has its eyes on India to see how it does in the next 18 months, before the next general elections. The MSMEs have the challenge as well as the opportunity of being a key figure in guiding India into a new era of growth and prosperity, by being innovative and disruptive. But the question is, are they up for it?

Thank you for reading.

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Disclaimer:

This write-up has been collated from various publicly available materials and secondary data, and MSMEmitra.com does not have any copyrights over the content, or guarantee its accuracy. The author intends to present an unbiased and an apolitical critical analysis of the current situation, and what is likely to happen in the next few quarters.