Financial reforms hold key

Doubling the size of the economy is possible only when every sector is actively engaged in productivity, especially MSMEs which are stifled by access to credit

AuthorPublished: 2nd Jul 2019  12:00 amUpdated: 1st Jul 2019  7:31 pm

Doubling the size of the Indian economy by 2024 is an ambitious target set by Prime Minister Narendra Modi. Making India a $5-trillion economy seems to be the new buzzword. While it is laudable to set ambitious goals and chase big dreams, the key question to be asked is whether the country, currently grappling with a slowing economy, dwindling investments, sluggish exports, growing unemployment and unpredictable external environment, has the wherewithal to achieve the target. Given the present headwinds and global challenges, it is a daunting task but certainly not impossible. At present, the size of the Indian economy is $2.8 trillion and to almost double it would require urgent reforms in the financial sector. One of the key focus areas of this reforms process should be the small and medium enterprises. Increasing lending to MSMEs (micro, small and medium enterprises) would have a multiplier effect on the economy. Though MSMEs employ nearly 40% of the workforce and play a key role in economic growth, job creation and local development, they are stifled by inadequate access to credit. Doubling the size of the economy is possible only when every sector is actively engaged in productivity. Despite successive governments acknowledging the importance of financial inclusion, the situation on the ground has not seen any improvement with banks being unable to lend sufficient loans to small businesses. What is missing in the country is the competitive banking system to lend loans to SMEs.

Though there are over 50 million small enterprises in the country, only 10% gets institutional credit while the remaining businesses borrow at prohibitively high rates of interest. While the interest subvention scheme and targeted loans under Mudra were in the right direction, a system based on targets for public sector banks will not be adequate for what is needed for rapid growth. Small businesses need a competitive banking sector whose core business is to lend to them. Granting banking licences to more private players, putting in place a healthy, well-regulated and transparent NBFC eco-system and developing a robust bond market could be some of the initiatives to unleash lending to small enterprises, which can become the real engines of growth. The share of bank loans to micro and small industries has been declining from 6% in 2008 to less than 5% in 2017-2018. The share of medium enterprises stood at 1.35% in 2017-2018. This is abysmally low compared with international standards. The RBI panel on MSME revival suggested that banks should provide collateral-free loans of up to Rs 20 lakh to small businesses. This recommendation must become the starting point to aggressively push for increased access to credit.

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