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MSMEs, India's growth engine, face a Rs 16 lakh crore credit gap

Small businesses in India are characterised by heterogeneity, fragmentation and their proclivity to operate in what is called the ‘informal economy’. The story of small businesses in India is the one characterised by paradoxes: large-scale employment with the least job security, responsible for a large number of policy initiatives, subsidies and a host of protectionist measures. Yet, they are unable to grow in comparison to their peers globally, and importantly, while they are celebrated for their entrepreneurial spirit and energy, they have poor access to new technology and capital. Another paradox is despite the abundance of studies and dialogue available on the subject, there is very little access to credible data or a comprehensive database, as a large number of such businesses operate in the shadow of the formal economy, are funded by friends, relatives, money lenders or informal institutions, who do not maintain proper accounts, often buy and sell in cash, employ casual workers, or rely on family labour. Among other things, demonetisation drive in November 2016 brought a sharp focus on the contributions as well as constraints of micro and small businesses. Largely operating in the cash based economy, many businesses found it hard to keep afloat, when a bulk of the currency in circulation at the time was withdrawn abruptly. This impacted consumers and business owners, but also financial institutions that had exposure to these businesses, resulting in poor portfolio performance and low growth. With the implementation of the Goods and Services Tax (GST) and the continued policy push on increasing the taxpayer base through ‘formalisation’ of the economy, it will be interesting to follow the journey in the coming years and hope that the sector is able to finally resolve the paradoxes and reward entrepreneurship, which would have far-reaching benefits in a nation with a large young population and low rate of job creation in the formal economy. In this paper, we briefly examine the role of public policy, capital and technology and post that after 70 years of independence, 45years of bank nationalisation and priority sector lending norms, 60 years of Khadi and Village Industries Commission (KVIC), more than 30 years of microfinance and cumulatively, centuries of effort, how the needle may move in the next few years. And that may be because of the fundamental shift in the nature of technology. Digital technologies and the super computing power in the hands of consumers as well as service providers by way of mobile phones today, and possibly wearables or Virtual Reality gadgets tomorrow, combined with other innovations such as 3D printing and advances in robotics, will change the nature of workplaces in as fundamental a way as electricity, steam engine, motorcar or personal computers have done in the past. It is reasonable to believe that all these innovations and developments will create ecosystems that are, huge, well-oiled networks of communities, making discovery enjoyable rather than a painstaking business proposition. These technological advances can empower the individual disproportionately as compared to corporations. While corporations, slow and deliberate, will adapt these changes to enhance their processes and effectiveness, individuals will find it much easier to build from ground up, at a scale that works for them. They will be able to access knowledge, network, policy benefits and most importantly, capital. Much of this is already visible in economies such as China, where aggregators and service providers such as Alibaba or Tencent built digital platforms that closed information gaps for many small businesses and empowered them to blossom.