All posts in the MSME category

Indian Economy – Problems as on Sept 2017, and Way Forward

Published September 4, 2017 by vishalvkale

The enclosed article {Biblio. 1} by Mihir S Sharma, one of the few straight talking Economists on Indian Media, does raise some excellent questions. It is a superb analysis of the shoddy economic management – and also raises the fact that something is indeed broken. The economy requires deep seated reforms at core levels-  not vacant sloganeering grandiose plans. Quite correctly, the need of the hour is attending to the real issues that confront on the Business, Trade and Economic Front; as well as a straightforward analysis of what is wrong, devoid of Jumlaas and vacuous statements.

All Macro-Economic Parameters are in the doldrums, as should be evident to all but the most devoted Bhakt; the time is now ripe for us to rise above narrow parochial statements, and try and get to the root of what ails our nation on an economic front. High NPAs, Low Credit Offtake, Slowing growth for 6 straight quarters, slow export growth and an economy on Government steroids… and many other parameters that we can assess – all point to the facts that this are not right, and there is something wrong somewhere that need correction. What is more, we are already at 93% of the fiscal deficit target for the financial year, and this is just the first week of September.
A glance at the Economy does not inspire much confidence; and this isn’t cyclical in nature. Sure it will turn around on its own – some parameter/s in the external environment are certain to get positive over time – allowing another burst of high growth, which will push the required structural changes into the background. It is just a question of time. Question is -we now have the opportunity, and a clear political mandate, to get some real reform going; can we take advantage of this? This does seem unlikely, as Media and public is once again focusing on the small good news of GST July Returns, which is like celebrating a 4 in an ODI when you require 22 runs an over to win!
The Big Boys of the Indian Economy have no appetite for investment; neither do they have the required resources in their Balance Sheets to take further risk. The small boys, always under-represented in voice in Media, with little or no public imagination behind them, go unnoticed. Their performance, with both Profit and Revenue slippage in 16-17, is also rather worrisome; all in all, a bleak picture. Add to this  the rather unfortunate fact that access to Institutional Credit for these small players is still far from as good as it should be, a fact that goes woefully under-reported. Thus, we arrive at a situation where it is Government spending which is driving growth; rather a sorry state.
Another article, again by Mihir Sharma – kudos to him for a series of stunning analyses – points out : “A recent analysis of listed companies by the Reserve Bank of India showed that companies with paid-up capital of under ~50 lakh saw net profits fall by 23 per cent in 2016-17. Companies with sales of less than ~25 crore saw revenue fall by 44 per cent. This doesn’t look like a sector capable of reviving the supply of jobs. Nor is investment here going to be easy; commercial bank credit has slowed so much, and the government has been so slow to resolve the banking crisis that alternative forms of financing investment will be needed: Corporate bonds, for example. But, naturally, that helps only larger companies. If there’s a revival, it will come at the top end of the scale.” {Refer Bibliography}
Sure – the GST will deliver its benefits over a period of time, be it tax base, regulated transactions, cost savings for businesses et al – but that does nothing the change the fundamental problem – low credit offtake, high NPA, declining sales and investments and so on. The problems of the SMEs will remain as they are – access to credit, low technology adoption, distributed ownership and operations, managerial skill issues and so on. That leaves us two choices – treat this as cyclical, and applaud GST… or push our sleeves and get to task of attending to what is wrong, avoiding grandiose statements and plans.
To make matters more interesting, 233 of 633 districts are monsoon deficient as on date, and adding to this is other detailed analyses of precipitation distribution, making things uncertain, though not a cause for Alarm yet. One can only hope for a decent precipitation September month. Agriculture is just coming out of a long rut, and has seen a spate of loan waivers; further, it is a contributor to only 19% of GDP. Its issues are a debate unto themselves, and are far longer terms horizon solutions, which we do need to take – but that is another story, to be taken up later. The question in this overall backdrop – what can be done, firstly for immediate respite and secondly for longer term improvement?
 At this point, the Bhakts get personal and state – why don’t you suggest a solution? That is a fallacious approach to take, as it  diverts attention from the issues, and shrugs off responsibility from the leaders we have in Parliament, in various think tanks, institutions, and other similar places. It isn’t my place, a part of the public voice, to suggest solutions which require data, and access, and power – neither of which I possess. We have these institutions for a reason – and I can only point out basis hardcore facts and data that things aren’t going smoothly, that a course correction is long overdue. I and people like me can only serve to try and direct public and Media attention towards the right path.
On the longer term, one thing is clear – the SME sector needs to both upskill, upscale as well as get far better institutional support; some changes are being made in that direction, but far more is needed in various support terms from institutions. This is clearly a longer-term solution, and has further deep institutional process and structural reform that will be needed; not an easy thing to attempt, strong politician or not.  And thus, expecting an immediate revival in GDP, Jobs etc from this sector in the short term is expecting a bit too much.

That only leaves us with, as Mihir Sharma correctly points out, the larger boys – the ones who have scale, and established operations. In order that the NPA scenario gets clarified, credit offtake improves, and so on – it is essential we focus on these – or in other words, the domestic environment; rather than chase foreign money and investments, the need is to ensure local money gets mobilized for local investments, demand improvement steps be taken, private investment uptick starts post-haste; for, with the Government already at 93% of its fiscal deficit this year, it has little scope left in its balance sheets for any further activities – and last year, it was government investment that was a key factor in growth!


Budget 17 – Main Analysis of Proposals

Published February 5, 2017 by vishalvkale

So far, I have looked at what could have been in terms of the budget; and the overall Macro-Economic Scenario and the Budget assumptions, and asked myself three questions : namely, in short. Will the budget give a boost to investment, demand and boost agriculture? But, before we move to looking at answering these questions, let me first of all appreciate and point out the most significant changes made from this year onwards :
1.    Merging Railway and Union Budgets
2.    Plan and Non Plan heads done away with, replaced by Capital and Revenue heads
3.    Moving forward of the date of budget presentation and unveiling
4.    This has gone unnoticed : rationalization of schemes, and focus on the key schemes
I would also like to point out that, at least in those articles I read, there was not a sufficient presentation of the viewpoints of both sides, that is, for and against these changes given above. A detailed study of the accompanying budget documents brings out the Government’s viewpoint fully; my article is not meant to analyse these moves – except the 4th. This has been clearly stated in the Fiscal Policy Strategy Statement, pg 18 pt 10 and pg 26 pt 56; and in the Budget Speech Point 18; this rationalization, first begun last year, is being carried forward this year. In my opinion, this deserves a deeper study. That said, off the cuff it can be seen that a more directed and rationalized scheme structure will aid their implementation. This is a truly laudable effort that has been started, and needs to be highlighted. Granted that key will be the selection of schemes but that someone is thinking along a defined implementation ease is laudable.
This year, the budget in the first part focuses on Farmers, Rural Population, Youth, The Poor, Infra, Financial Sector, Digital Economy, Public Service and Prudent Fiscal Management.
1.    Farmers: In my analysis of June 2015 { html}, I had identified the major ills of this sector – please visit link.
a.     PLUSES :  Increase in Ag Credit to 10 Lakh Crore,  up from 9 Lakh Crore : Pg 9 Pt 22; interest waiver 60 days; PACS Computerisation in 3 yrs Pg 9 Pt 23; Focus on Soil Health Pt 25; Long term and Micro Irrigation Funds Pts 26 & 27; Dairy Fund is a good start, though needs more focus Pg 10 Pt 31
b.    COULD HAVE BEEN BETTER : Farmer Realised Price improvement requires a far more focused approach, and tackling Mandis and their power, which has not been done. A start has been made, let us see how this is carried forward {Pts 28-29}. On Insurance, a reduction in provision from RE 16-17 is, in my opinion, hasty a good monsoon notwithstanding – Pt 24
c.     MISSES : The factor of rationalization of Fertilizer Subsidy, and link it to NPK ratio has been totally passed over;  as are the other inputs like seeds etc.
2.    Rural Sector :
a.    MNREGA : {Pg 11 Pts 34-36}  Restrained yet again; kept at nearly the same level as RE 16-17!
b.    For the rest, from Pts 38-45 on Pgs 11-12, the budget speech Rural roads, skill development, electrification, and most critically clean drinking water to 2800 arsenic and fluoride affected habitations. These are all good intentions, and, when implemented will decidedly have a positive impact. But it needs to be noted that the impact will be in the Medium to Long Term!
3.    YouthPgs 12-14 Pts 46-58  : Theonly creditable and far-reaching point I found in this section dealt with focusing on secondary education for 3479 backward blocks; question is the implementation. Do we have requisite funds? And the direction? Still, good that someone has thought of this. For the rest, while the intentions are good – skilling initiatives, online courses – how practical are these? Online courses certainly aren’t the solution; and skill initiatives in both Farming and Rural sector – well, let me just say they cant replace a proper education! Yes, the Incredible India Campaign 2 is a good thought – let us see its implementation
4.    The Poor : Pg 14-16,  Pt 59-70 : Increased allocation by nearly 28,000 Crore for women and children, but this is in comparison with BE, not RE. Another great point – affordable housing, which I analyse separately as it features in several sectors. Action plans for major diseases is also appreciable, as is mention of tertiary health care and specialized doctors, and drug pricing. Excellent!  But the best is the reforms contemplated in labour laws …
5.    INFRASTRUCTURE : The Big One, Pg 16-20, Pts 71- 94 :
a.     This includes the Railway budget, which is pretty standard, though with a welcome focus on clean trains &  solar stations. The part I like the best was the end-to-end solution for some commodities in partnership with logistics players.
b.    While 2.41 Lakh Crore has been allocated as a whole to Rails + Roads + Shipping, I could not find any comparison with RE 16-17 in the budget documents. Allocation for Transport is higher than RE quite significantly, almost 15%, up from 1.07 Lakh Cr to the current 1.24 Lakh Cr.
c.     For Telecom, while allocation is increased, {up 2200 Cr for IT & Telecom}, the plan for the OFC will, when complete, bring rich dividends.
d.    Our effort to develop IT, Telecom and Electronics as a competitive advantage on a national scale continues, with focus again. That said, it is high time we as a nation started thinking of growing up the value chain – from assembly lines to original equipment, own brands and innovation in technology.
6.    FINANCIAL SECTOR : Pg 20-22, Pts 95-110 :
a.    Banking Reforms given a near-total miss
b.    Again, the focus is on elex platforms for commodities – this is good, clearly so. But it requires ground-level reforms, which are still awaited!
c.     Special mention for the Stand Up India scheme in point 110 – a laudable scheme, please see references section of this article for details
d.    Another good thought here is the resolution mechanism for financial firms & the dispute resolution mechanism for infra contracts
7.    DIGITAL ECONOMY : Pgs 22-24, Pts 111-120 : This is the weakest section of the budget; I could not relate to it. While the points are all good, with great intentions, the on-ground reality in terms of connectivity, options and cost has a long way to go. Already, there is indication of a fall in online transactions post remonetisation. Neither is there anything specific in this section…
8.    PUBLIC SERVICE : Pg 24-25 Pts 121-130 : There is nothing specific here; these are all laudable words, but once again, like above, I could not relate. What is this section doing in a budget is beyond my understanding is all I can say here.
9.    PRUDENT FISCAL MANAGEMENT : Pg 25-27, Pts 131-138 : The best part of this section is the increase in capital expenditure by 25.4%, and the increase in capital expenditure to 14.43% of total expenditure. It needs to be noted that this percentage is the highest ever in the past 10 years at least; it was 13.89% in RE 16-17, 14.13% in 15-16, and 13.08% in 10-11.  A standing ovation for managing the CE  @ nearly 14% for two years running, and planning for it for a 3rd straight year! Further, as things are shaping up, we could actually see the Govt Debt at sub-60% of GDP in the next few years!
PART-B – Tax Proposals
For this, before we proceed, The FM’s budget speech pt 140, Pg 28 needs to be highlighted for all of us to read. Of 4.2 Cr organized sector employees, 1.74 Cr file returns. For informal sector, the numbers are 5.6 Cr and 1.81 Cr. Out of the 13.94 lakh companies registered in India upto 31st March, 2014, 5.97 lakh companies have filed their returns for Assessment Year 2016-17. Of the 5.97 lakh companies which have filed their returns for Assessment Year 2016-17 so far, as many as 2.76 lakh companies have shown losses or zero income. 2.85 lakh companies have shown profit before tax of less than ` 1 crore. 28,667 companies have shown profit between ` 1 crore to ` 10 crore, and only 7781 companies have profit before tax of more than ` 10 crores. These are shocking numbers, and full marks for highlighting!

The best part about this section is the treatment to the MSME, which starts by highlighting that 2.85 Lakh companies making profit of less than 1 Cr pay tax @ 30.26%, while the 298 companies making profit of more than 500 Cr pay @ 25.90% {effective rate}. The section then goes on to give a series of measures including reducing income tax to 25% for companies with turnovers upto 50 Cr.
The next good point is the attempt at transparency in electoral funding; while this has been panned by some – at least this is a start. The declaration of Rs. 2000 per person is actually a reduction from the current level of Rs. 20,000. That said, there is some logic in the criticism as well – as stated on BS, Page 10, article “FM Acts Tough on Political Funding” dated 2ndFeb that as long as there is no limit on the number of such transactions,  the impact might just be meaningless!
On personal taxes, I am not in agreement; this could have been done next year, or even in 2019; that would have freed 15500 Cr for other avenues – my personal favourite would be defense.  This is frankly a move I do not support, though it benefits me personally.
This deserves a special mention, since my initial call on it was wrong by a degree of just about 100%! I was initially surprised, a thought that we need other measures to stimulate demand other than housing. Then, I researched the economics behind the housing aspects, going first to a book by Bimal Jalan, and then further studying the examples of Singapore, Turkey and some other places with respect to housing. The research establishes the ability of affordable housing to stimulate demand both up-stream and down-stream, a factor noted in at least two previous examples. And this budget not only focuses on housing, it also focuses on rural housing. The copies of the sources I studied are attached with this article
We started with questions – will it stimulate investment, demand and agriculture? The focus on MSME – which are 40% plus contributors to GDP, is a definite plus, as is the focus on housing, which I have supported with empirical evidence from 2-3 nations. Then you have the increased allocations for Transport, Telecom, increased Agricultural Credit as well as a focus on the Poor and the Farmers. Add to this the fact that the Agricultural plus Unorganised sectors contribute well over 70% to the economy, and we can arrive at a conclusion that there is a definite stimulus to investments as well as demand
But, at the same time, there are misses that we have to account for, some of which I have alluded to above. Fact of the matter is that we are still not focusing on Health Education and Defense as much as we should; this needs to be done. However, given the current macroeconomic challenges that we analysed earlier, this budget does a pretty decent job. That said, my initial views stand vindicated – a bland and safe budget which could have done far more, given that general elections are still 2 plus year away. The biggest challenge is that the measures will take time to stimulate, and in the meantime we have the slowdown and the macroeconomic factors to contend with.
The reason is that the basic assumption that the economy will get better from Q1 2017-18 after a slowing Q3-Q4 of the current fiscal is an assumption. Then you also have the basic challenges mentioned in Pt 6 on Pg 4 of the Budget Speech. Thus, the basic criticism of some people also stands – that the revenue side challenges might remain, and that the fiscal target  undertaken might prove to be a challenge if the assumptions do not pan out as planned. I sincerely hope, for all our sakes, that it does work out, that the stimulus given will be enough… that remains to be seen.



2) An Analysis of the Relationship between Housing and Economic Development

3) Union Budget 2017 is a total miss on banking reforms, economy will pay a price for it

4) Budget 2017 opinion round-up: Scathing criticism and praise for Arun Jaitley

5) Farmer Distress in India – {Self Article}

6) Stand Up India Scheme

7) Pradhan Mantri Mudra Yojana

8) Budget 2017: Can lower cash limit make political funding transparent? Critics divided INDIA Updated: Feb 02, 2017 00:55 IST

9) FM acts tough on political funding

Indian Economy : MSME Problems

Published March 10, 2016 by vishalvkale

This is the 2nd part of my ongoing conversation into the Budget and The Indian Economy with Mr Amitabh D Sinha, carried on from : Comprehensive Vs Bottom Up
We had closed the previous article with a comment on the MSME Sector, and the problems it faces, particularly Credit and its attendant problems. Moving on :

Me : The difficulty of extending credit to the rural sector and the MSME sector is rooted in two problems we face as a people : corruption, and lack of identity papers and formal banking access. These two problems together are creating a scenario of trouble. We are a cash economy, not a banking economy. I recall one of my Sales Officers did not have a bank account, neither any identity papers of any kind, nor any address proof in his own name – and this was in Mumbai. That is the hard reality of our economy.

The aspect of cash in our economy is a well studied and known one. Our industry functions on cash and word {not nescecarily illegal – cash can be used legally as well!}, where the spoken word, the promise carries more weight than a banking instrument, where cash is prefered even in metros – let alone the villages of India!

We are a people for whom a promise to pay is more valued than an actual post-dated cheque, where legal contracts are mere formalities that are conducted after all cultural formalities are dispensed with. That I am aware of personally, having handled two such cases. In this scenario, credit and support to priority and SME segment requires the evolution of norms and rules to suit such an amorphous environment. It requires the ability of capture relevant information of each constituent credit customer which spans his or her relationships as well as documentary records, and the complex cultural underlying reality as well

Secondly, Amitji, I call your approach as a comprehensive approach; while penning our conversation {with credit to you of course} on my blog, a thought occurred to me : is your strategy – which I call a comprehensive approach : doable? I would like your detailed thoughts on this point…

Amitabh Sinha|Expert – Service Culture, Business Strategy Vishal, any problem of this complexity has its own hurdles, some natural, most created. That said, is the holistic approach doable? Yes it is.

The ‘Waterfall’ model of development that is still practiced in many cases and places – the build from the ground up model – has two innate problems. The first being the forced prioritization, which causes other problems (those that are high priority yet not highest priority) to fester & escalate. The second, and to my mind bigger issue is that problem quantum definition is done based on projections from the ‘here & now’ perspective, but by the time one reaches predefined milestones in development, one fins that the problem definition or at least the quantum calculation is off. This makes the model akin to a dog permanently chasing its tail.

The agile scrum model of development or the holistic model builds in a certain flexibility and course correction capability on the fly, because we keep testing the premises as we fly. Coming back o the present scenario, why will it not work? Once we begin from that question and with the attitude that it needs to be made to work without an alternative, I really do not see the problems becoming any bigger than they are now, but I do see solutions coming faster.

Before this very budget, I am sure a huge number of people would have considered it virtually impossible for an Indian FM to refocus the country’s budget to attaining rural priorities right?

Yet in one stroke Mr. Jaitley has cracked open that cage and decided to unshackle a giant. Not just that, he has presented an industry unfriendly budget and forced industry to hail it as a huge directional positive. I am glad he has done this, because he has shown change can be made, even with a completely irresponsible, malafide opposition paralyzing parliamentary proceedings.

He is already moving to re-provision banks. Let us take as granted that whatever credit policy changes he tries to make, the RBI has NO choice but to stay within Basle framework regarding securitization and NPA norms. What does that leave us to work with?

Rationalization of how we assess loans, debottlenecking the application, assessment, disbursement process, creating contemporary perspective and understanding of business and industry with the assessors, efficiency in how we monitor them, early warning and flagging systems, more effective and rational restructuring systems. None of these is rocket science, just needs a little more ownership and a perspective that banks are also business institutions that are in the market to make a profit without unnecessarily escalating risk. More ‘do business’, less ‘cover your ass and toady up to the rich boys’. The gun in his hand is big enough, if he can forget the vested constituencies long enough this is step one.

The next part is focusing on what is the single biggest hurdle to increased competitiveness, productivity and profitability in small business. We keep talking of complicated compliance framework, red tape, absence of infrastructure and tech access.

Sorry, flawed perspective. These are important, but not the most important. The biggest culprit is the liquidity crunch. Cost of doing business in India is becoming untenable for a small business simply because the cash does not turn around fast enough – this also segues back into your observation over preference for cash. That is a huge fallacy. The preference for cash comes from inability to realize timely receipts through instruments.

Over the last 20 years I have myself seen businesses go from a 60 days cycle to more than 210 days now. This needs to be sorted not only by creating the TReDS platform, but also by incentivizing its usage. Money turning round 4 times instead of 1.25 times will deliver a massive boost.

Another attitudinal change that we must make is to work with incentives rather than penalization. I don’t know how many people registered or understood the PM saying he wants a regime that trusts people. That is the signal for a huge change and I hope with all my heart that he can make that happen.

A penalization framework – much like the one we have today – is wasteful and inefficient, because it needs constant watchdogs on the lookout for wrongdoing and gives absolutely no incentive to doing the right thing. A little like old school teachers saying if you do everything right, I won’t slap you. So everyone derived bare minimum required and adhered to it, while some spent their energy looking for loopholes – the same energy they could have used for work if it was worthwhile.

An incentivization framework puts the onus for both performance and reporting on the doer. He needs to do, to document, to organize certification and submit. And he has a reason to raise the bar on performance.

Me : Amitji, First of all, let me extend my appreciation for the wonderful flow of thoughts that you have put forth, very educational and thought provoking.

Moving on, I see no issues in focussing on MSMEs for the perfectly simple reason that they contribute more to any dimension of the economy that you may choose to assess from employment to savings to GDP. This is one of the lesser known facts of the structure of the Indian Economy, which is driven on two pillars – MSMEs and Agriculture, which together account for between 59% – 77% of income and GDP, depending on how you define the MSME and the unorganised sector. Our inability to tap into the resourceful nature of this segment must surely stand second only to our neglect of the farming sector..

Coming to the core question of comprehensive model, I have no doubts as to its inherent superiority; that is a no-brainer. If you can develop several strains and solve several problems by parallel processing, you get faster development. {Think of processer cores, and how parallel computing improved things}

That models assumes enough system maturity to ensure seamless integration at the conclusion point; in the field of economics, it also assumes transparency and building trust – as you rightly pointed out above. Do have the requisite level of systemic competencies in our internal mechanisms to deliver on such a tough task?

In this segment of our mutual interaction, Mr Sinha introduced a series of ideas, some already being thought of and some out-of-the-box that deserve a serious look and contemplation, leading us to re-examine some of the precepts we assume as true. For example – our preference for cash, wherein Mr Sinha is stating that one of the reasons for us preferring cash dealings arises out of the delay in realisation of payments through instruments. Second example is the movement from a penalization framework to an incentivization framework to improve system transparency and reporting.

In the concluding part of this series on the discussion on the Budget and the Economy with Mr Sinha, we will go deeper into the doability of the comprehensive approach, MSME sector, Resource Crunch and the way forward – both from my perspective as well as the perspective of Mr Sinha. At least I can admit without shame that this conversation of ours has already cleared some cobwebs, and has enabled me to think beyond the boundaries, and question some basic assumptions…