Two years of demonetisation: Growth back on track, but leaves out MSMEs

The economy seems to be back on track two years after demonetisation. However, micro, small and medium enterprises (MSMEs) — hit hard by the note ban — are yet to recover; their woes compounded by the maze of goods and services tax (GST) procedures, together with the liquidity issues of the financial sector.

Companies with up to Rs2.5 billion of annual turnover are clubbed under MSMEs. Those with up to Rs50 million are micro enterprises. Those with over Rs50 million and up to Rs750 million are small, and the ones with over Rs750 million to Rs2.5 billion are called medium enterprises.

The robust growth figures for the current financial year indicate the impact of demonetisation has mostly petered out. The economy grew 8.2 per cent in the first quarter of this fiscal. Contrast this to the quarter immediately after the note ban — April-June 2017 — which yielded a growth rate of just 5.6 per cent due to the impact of the ban as well as jitters owing to the imminent implementation of the GST. 

The demonetisation quarter of October-December 2016 had itself produced a growth rate of 6.8 per cent. This was because almost half of the quarter was over when the government announced the ban on Rs500 and Rs1,000 notes, which accounted for 86 per cent of the currency in circulation in value terms at that time. 

Today, circulation has stabilised and there is a significant uptick in the growth rate. “Yes, India’s economy is back on track. There was a slight loss in gross domestic product growth rate in the second half of the fourth quarter of 2016 and the first half of the first quarter of 2017. In all, the loss of growth rate was at most half of a per cent in annual terms,” economist Lord Meghnad Desai told Business Standard. He added that India was once again the fastest growing large economy — a trend he expected would continue.

The government had expected the economy to grow 7-7.5 per cent in the current fiscal. The International Monetary Fund (IMF), too, had predicted that a 7.5 per cent growth rate would come only next year. However, the handsome first quarter growth of 8.2 per cent prompted the government to assert that the growth rate would be higher than the 7.5 per cent, as was previously envisaged. 

Now, experts are optimistic that the economy may soon touch an 8 per cent growth rate. 

“We have estimates for four consecutive quarters showing steady acceleration in the growth rate. From 5.6 per cent in the April-June 2017 quarter, the latter has accelerated to 6.3, 7.0, 7.7 and 8.2 per cent in the following four quarters, respectively. This is very steady acceleration and suggests we should soon hit a growth rate of 8 per cent annually,” former NITI Aayog Vice-Chairman Arvind Panagariya said.

Madan Sabnavis, chief economist with CARE Ratings, said it was difficult to say whether the economic effects of demonetisation vanished a year after, or later. Since GST was announced six months down the line and both developments slowed down economic growth, their individual impacts were blurred. However, the impact of demonetisation was all but over, he added.

MSMEs are, however, a different story. Much of the sector has still not come out of the woods. Aditi Nayar, principal economist with Icra, said while economic growth is on an upswing in FY19, some concerns persist in sectors such as small and medium enterprises. This, despite the fact that banks’ credit to businesses has been picking up. 

Non-food credit from banks rose from a low of 5.8 per cent at the end of March 2017 to 10 per cent growth as on March 31, 2018. It rose a further 14.5 per cent in the fortnight ending October 12, 2018. However, advances to MSMEs continue to languish. According to RBI data, bank non-food credit to micro and small enterprises had declined 7.7 per cent and that to medium enterprises 10.1 per cent, on November 25, 2016, which was the month when demonetisation took place. A year later, it rose 4.6 per cent in the case of micro and small units, and declined by 8.3 per cent for medium enterprises. 

The latest RBI figures show credit growth had risen 3.3 per cent for medium enterprises as on September 28 this year, while it declined 1.4 per cent for micro and medium enterprises. Last week, Prime Minister Narendra Modi announced a 12-point package to ease cash flow and business procedures for the MSME sector, which has been further beleaguered by GST hassles. It remains to be seen if the measures bear fruit and the MSMEs can come our of their troubles and prosper once again.

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