2023 saw accelerated “formalisation;” MSMEs biggest beneficiaries

2023 saw accelerated “formalisation;” MSMEs biggest beneficiaries

The rapid formalisation of the economy is widely believed to have a short-term adverse effect on small industries and unorganised trade, which account for a pretty large part of India’s industrial output and income generation. But this has made banking services accessible to large segments of the micro, small and medium enterprises (MSMEs), and would produce salutary results in the long term, analysts say.

The formalisation was primarily done through digitising services, and making it accessible to a vast cross-section of people and enterprises, after connecting them to the internet. The Goods and Services Tax that leaves no incentives for businesses to stay out of it also helped.

The Centre had adopted a new definition of MSMEs in June 2020 – based on investments in plant and machinery, and turnover. Following which it had launched the Udyam portal, platform for registration of MSMEs.

Ever since its launch in July 2020, about 21.8 million MSMEs have registered on the Udyam portal so far. The registrations had crossed the 10 million mark on August 2, 2022. And it took less than a year (on June 23) for the registrations to cross 20 million.

The Udyam portal, whose main objective is to provide a mechanism through which MSMEs can obtain loans from banks for their operations, was launched to replace the Udyog Aadhaar Memorandum (UAM) in 2020. As per the MSME ministry’s annual report of FY21, UAM had registered merely 10.2 million enterprises between September 2015 to June 30, 2022 – a figure which Udyam portal surpassed in just around 326 days.

Registration on Udyam provides a formal status to the MSMEs, making them eligible for benefits under priority sector lending and other MSME schemes such as Credit Guarantee Scheme for Micro and Small Enterprises , MSME Samadhaan (for delayed payments) amongst others. This acted as a catalyst for the enterprises as the outstanding credit by banks more than doubled from pre-pandemic levels.

As per Reserve Bank of India’s data, total outstanding bank credit to MSME sector as on October 20 stood at Rs 9.64 trillion, up 14.5% year-on-year and 104.5% higher from its pre-pandemic level. Prior to the formation of Udyam portal, total outstanding credit as on October 25, 2019 was at Rs 4.65 trillion, nearly flat as compared to previous year.

During the pandemic, the government had also launched the Emergency Credit Line Guarantee Scheme (ECLGS) to support the MSMEs in meeting their operational liabilities and restarting their businesses in the backdrop of the disruption caused by Covid-19.

Also, the portal is linked to the databases of the Central Board of Direct Taxes (CBDT) and Goods and Services Tax Network (GSTN), bringing the registered MSMEs under the tax net, and subsequently leading to increase in tax revenue for the government.

The Economic Survey for 2022-23 had noted that the GST paid by MSMEs, after declining in FY21, has been rising since and has now crossed the pre-pandemic level of FY20. According to the data shared in the survey, the GST paid by MSMEs dropped from Rs 5 trillion in FY20 to around Rs 4.7 trillion in FY21 before climbing to around Rs 5.5 trillion in FY22.

Besides, the formalisation efforts have helped in boosting electronic payments, mainly through the use of United Payments Interface (UPI), adding workers to the eSHRAM portal, and reducing currency leakages, say experts.

“The rise in formalisation has supported reduction in currency leakage over the last three years,” said Gaura Sen Gupta, economist, IDFC FIRST Bank. In FY24, about Rs 23,400 crore has returned back to the banking system till November, as compared to a leakage of Rs 1.17 trillion in April-November FY20.

“The change in pattern reflects the impact of Rs 2000 notes and rise in electronic payments,” she said. In the first eight months of FY24, UPI transactions worth Rs 125 trillion took pace, as against Rs 12.8 trillion worth transactions in April-November FY20.

The government’s eSHRAM portal has over 280 million registered unorganised workers, who get the benefit of social security scheme, namely, ‘Pradhan Mantri Shram Yogi Maan-dhan’.

ICICI Securities Primary Dealership’s Senior Economist Abhishek Upadhyay said: “Surge in digitization helps in better tracking of financial transactions, mitigating need for intermediaries, and increasing the opportunity cost of staying informal.”

Going forward, there is a need to relax restrictions for informal business conduct in order to pull informal businesses and their employees into the fold of formality, a government portal ‘Vikaspedia’ said. “A self-help group effort that gathers informal employees can help to foster self-sufficiency and address concerns linked to their working conditions.”

Moreover, technology experts say, the attempt to formalise the economy using Account Aggregators should be stressed upon.

Earlier this year Infosys’ Co-founder Nandan Nilekani had said that digital capital or information collateral, as in the case of the Account Aggregator (AA) model, lays the foundation of increased formalisation of the economy.

AAs are RBI-licensed entities, responsible for enabling the flow of data between Financial Information Providers (FIPs) and Financial Information Users (FIUs) to ensure quick sharing of data for availing credit.

“The ability to avail credit using their data gives people an incentive to join the formal system and improve financial awareness to shift asset holdings from traditional real estate and gold to financial assets,” Nilkena had noted.