The Prime Minister Narendra Modi, launched a support and outreach programme for the Ministry of Micro, Small & Medium Enterprises (MSME) sector. Under it 12 key initiatives were unveiled to help the growth of MSMEs across the country. 

There are 5 key categories for facilitating the MSME sector which include: (1) Access to Credit, (2) Access to Market, (3) Technology Upgradation, (4) Ease of Doing Business, and (5) Sense of Security for Employees.About:

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• The 12 initiatives announced will address each of these five categories with special focus on making access to credit easier for MSMEs and reduces their cost of funds.
  
  
• Implementation of this programme will be intensively monitored over the next 100 days.
  
  

List of initiatives:

Why the need to boost lending to the MSME sector?

1. Small businesses had a tough time in the past two years due to the cash crunch caused by the demonetization and the business disruption caused by the launch of
   
   
2. In recent years, Non-Banking Financial Companies (NBFCs) have increased their share of financing MSMEs. However, the fund crunch faced by NBFCs in the aftermath of IL&FS crisis, threatens to cut off credit to a substantial number of MSMEs too.
   
   
3. Boosting MSMEs will help the Indian economy as MSMEs contributes about 30% of the country’s economic output, 40% of total exports and 45% of manufacturing output. About 65 million MSMEs account for about 120 million jobs.
   
   

Thus it is an important credit stimulus package for MSMEs.

Critique/Concerns:

1. The biggest risk of a credit stimulus is the misallocation of productive economic resources.
   
   
2. Public sector banks already have significant NPAs in the MSME sector and a push by the government can increase the risk.
   1. Conceptually, the latest credit scheme is no different from the MUDRA loan scheme,
      
      
   
   
   

which has been troubled by soaring bad loans.

1. In September, former RBI Governor Raghuram Rajan had warned that loans extended under the MUDRA scheme could turn out to be the source of the next financial crisis.
   
   

1. The demand that PSUs must procure a quarter of their inputs from MSMEs could breed further inefficiency in the economy.
   
   
2. Pumping extra credit into MSMEs now may well lead to a temporary boom, but it can lead to a painful bust when the stimulus ends someday.
   
   
3. According to critiques, the recent announcement has political rationales. Politically, the government would like to be seen as supporting MSMEs, as the people engaged in the sector are considered a core constituency of the BJP.
   
   
4. Although government intervention will help the sector, the actual impact for a large number of small firms will remain limited as more than 90% of MSMEs operate in the informal sector who depend informal sources of credit at higher interest rates.
   
   

Way ahead:

1. More lending to MSMEs is all very well, but public sector banks need to ensure better credit assessment so that higher lending now doesn’t translate into NPAs later.
   
   
2. Meanwhile, the government should work to improve the overall regulatory architecture that would incentivize smaller firms to scale up.
   1. Simplification of processes is required so that more firms can access formal finance.
      
      
   2. Small businesses also demand access to land at competitive rates, lower power tariff, easier rules for inter-state business and tax breaks. This should be taken care-off.