Andy Mukherjee has a useful ‘warning’ piece on the potential for India’s sub-prime. We have seen this movie elsewhere in the world and hence, early warnings are fair game. But, disappointing that he engages in a bit of hyperbole, with respect to GST and its impact in TN.
He cites a statistic that TN’s registered Micro, Small and Medium Enterprises (MSME) are down by some 20%. It is true. The information is available here.
Now, this note has no information on why registered MSME’s in Tamil Nadu have declined. We do not have a breakdown of which category of MSME have declined and which of them are GST paying and which have found it difficult to handle GST and hence, closed down.
If their only financial viability case was tax evasion, then I am not even sure if one needs to blame GST introduction for it – messy or orderly implementation of GST is immaterial.
As to the causes behind the reduction in the number of MSME units, there is a news-article in http://www.thenewsminute.com which cites a former President of the Tamil Nadu Small and Tiny Industries Association making some comments about the causes of this decline. To be fair to him, he cites delayed payments by big corporations for goods supplied by MSME as a major issue and not GST.
We know that it is an endemic issue and that is why the answer lies in Factoring and Receivables Exchange being made compulsory for big buyers. Receivables Exchange has to become active and MSMEs have to get working capital released as soon as possible. They do not have money, time and energy to keep chasing dues from big buyers. What big corporate buyers are doing is unconscionable.
Also, if we cast a glance at the MSME statistics, there is an unusual jump in the number of registered MSMEs from 2015-16 to 2016-17. It almost doubled in one year. Something that has not happened before in the data for ten years that the table in pages 3-4 presents. So, may be, there was some problem with the data and the data for 2017-18 is more accurate than the one for 2016-17 and that some cleaning up of the data has happened. In other words, there are myriad possibilities.
In fact, a ‘Times of India’ report on the same matter hints at data issue, citing a Tamil Nadu Government official:
A state government official, however, sought to brush it aside as a case of misinterpretation of data. “If you look at the number of units registered under the Udyog Aadhaar Memorandum (UAM), which is a kind of re-registration of existing units under the new system, it has shot up. This fact was not properly highlighted in the policy note. Further, these are dynamic numbers that keep changing,” a source in the state government told TOI.
Tamil Nadu started the UAM implementation from January 21, 2016. The number of MSMEs in the state has shot up, with nearly 5.27 lakh UAMs filed in Tamil Nadu as on March 31, 2018. As against 1.42 lakh registered MSMEs in the state as on January 21, 2016, it shot up to 2.67 lakh units for 2016-17 and stood at 2.18 lakh units at the end of 2017-18, indicating a drop of nearly 50,000 units. [Link]
The article in ToI cites one more businessman who cites high wages in Tamil Nadu as an additional challenge for MSME in Tamil Nadu.
Causality is important but it is also hard to establish. One has to tread carefully and with rigour. Else, we may expend precious energy finding solutions for non-problems while ignoring the real problems.
So, attributing the decline in Tamil Nadu registered MSMEs to the ‘tardy’ implementation of GST may be a leap (of logic) too many.
But, let me be clear. Warning of real estate loans to ‘sub-prime’ borrowers and their securitisation, even if it appears somewhat premature now, is the right thing to do and Andy has done well to do that. Credit cannot be a substitute for employment and income. The United States and other countries have done that before and the results have not been pleasant. So, Andy’s warning matters regardless of the interpretation of the data with respect to Tamil Nadu.