How Increased Credit Disbursal For MSME In Upcoming Budget Will Help India's GDP?

In World Bank's projections released last week, India's GDP growth was forecasted at the rate of 7.3 percent for the current fiscal year and at 7.5 percent for the next two years, keeping the country's title as the world's fastest growing economy in the world steady. While external factors like the slow down in economic activities in China in 2018 helped India in its GDP race, there were significant initiatives taken to improve the economy at the micro level.

One such sector that provides a great deal of support to the GDP and overall growth of the economy is the Micro, Small and Medium Enterprises (MSME). It contributes to roughly 17 percent of the GDP, 40 percent of the exports and employs over 110 million people in the country. In the previous Union Budget of 2018-19, Rs 6,552.61 crore was allocated to the MSME sector to boost growth and employment while recognizing the sector as a "major engine of growth and employment generation."

It was the government's first budget after implementation of GST and in 15-months post the new tax system, incremental credit to this segment has been 5 times higher at Rs 1.23 lakh when compared to Rs 25,700 crore in the pre-GST period, said an SBI research report published in December 2018. While increased credit translates to accelerating formalization of the sector and eventually long term benefits, a recent IANS report citing sources said that the RBI has warned the Finance Ministry against the Modi government's flagship scheme "Mudra Yojana" that could turn out to the next big source of NPAs (non-performing assets) as bad loans under the scheme rise to a whopping Rs 11,000 crores. Started in 2015, the Mudra Yojana requires banks to finance micro and small entrepreneurs for up to Rs 10 lakh.

Experts say that there is a requirement for further support to the sector that has remained long ignored. There is an estimated gap of over $200 billion between the credit already supplied and the potential demand from India's MSME finance.

At a time when NPA remains a major concern for the country post-IL&FS and PNB issues, it remains uncertain if the sector will get further significant support in the upcoming Interim Budget 2019.