What demonetisation means for MSMEs
I happened to attend on February 2 the National Summit on Digital Payment, organised by Assocham, that discussed the significance for MSMEs (Ministry of Micro, Small and Medium Enterprises) of digital payments which have been given a push post the demonetisation of high currency notes in India.
MSMEs are nurseries for entrepreneurship that makes significant contribution to the GDP, manufacturing output, exports and employment. Moreover, growth of MSMEs is imperative for socio-economic equity and inclusion.
Labour reforms, skill development and timely financial assistance are generally advocated for the growth of the sector. However, due to factors like poor financials, lack of experience and collateral, MSMEs are regarded as high risk, which results in their inability to get adequate and timely financial assistance.
Demonetisation marked a paradigm shift in digital payments and has brought substantial change in the entire economic environment, drawing various opportunities for the industry and especially for MSMEs towards a visionary leap for faster and stable growth.
The noteban also worked as a catalyst on which different payment modes, like UPI, USSD (unstructured supplementary service data), Aadhaar pay, and mobile wallets flourished and provided a faster and transparent mode of making transactions, along with reducing the cost attached with such transactions.
The BHIM app has become popular in a short time. All this will help MSMEs seek transparent finance facilities, boost their credit-worthiness and access to digital funding for their various needs.
IDFC and Capital Float mentioned innovative ways of digital financing and even reaching out to Bharat (rural India) by providing last mile financial connectivity. The idea is to use micro-ATMs, mobile money and bring kirana stores into the network of financial nodes.
JAM (Jan Dhan, Aadhaar, Mobile) is being used by the government to strengthen financial reach to people in the hinterland and is also providing a platform to private companies to bring diverse competitive products. Use of digital financing and banking methods will ensure that there is transparency in MSMEs' business operations and an audit footprint that is clean.
There had been issues regarding access to finance because of suppressed balance-sheet, as many of the transactions remained unrecorded. But if the transactions come on record, it will improve the credit-worthiness of these industries.
The benefits also include increasing scale of business to help them grow big, efficient account management, and rational decisions based on transparent records, thereby improving decision-making. Moreover, it will help in increasing revenue under the tax net.
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| India needs to improve internet penetration, which is currently around 19 per cent. (Photo: India Today) |
However, the Indian economy is still predominantly cash-based though the digital push post demonetisaiton has dealt a blow to cash use.
The major factors that perpetuate the use of cash are:
1) High propensity to save and use cash. Savings held in cash ranged from 40 per cent in urban India to 27 per cent in rural, according to Indian Consumer Economy Survey 2013-14. The high acceptance and cash-intensive supply chains among various businesses require merchants to maintain cash balances to meet working capital needs, resulting in preference for cash payments by merchants and people in general as well.
2) A large shadow and informal economy with expansion of contract and wage labour that incentivises payments in cash.
3) Gender imbalance in the use of digital payments. The marginalisation of women in financial decision-making and the labour market has alienated them from the financial system.
4) Lack of trust and a mindset that generates inertia towards use of digital money is also a stumbling block. It is further aggravated by galloping financial illiteracy clubbed with the digital divide.
Therefore, there is need to promote digital money by incentivising consumers. Some kind of tax breaks can be given to them. Similarly, the supply chain can be incentivised along with welcoming GST to use digital money.
Apart from this, efforts should be made to create more good jobs - productive, dignified and safe - in the formal sector, whose share should be increased.
Widespread awareness and literacy campaigns would not only encourage use of digital payments but will also go a long way in securing transactions and bring financial inclusion.
Moreover, the financial space should be made inclusive of all sections, with focus on disadvantaged sections – the poor, disabled, women, low-caste groups and small entrepreneurs.
The digital financial system is also vulnerable to cyber security threats. In October 2016, more than 30 lakh debit cards were feared to have been compromised, showcasing the vulnerability of our cyber security infrastructure. CERT-Fin proposed in the recent Union Budget aim to strengthen the cyber security apparatus. There is also a need to generate awareness among people to follow measures issued by banks to safeguard their credentials.
India can learn from near-cashless economies like Sweden how to incorporate best practices in the Indian environment. Though it's not possible to go cashless in a limited time, efforts can be made to move towards a less-cash economy.
To realise the goal of reducing corruption and making people pay taxes by giving a push to digital economy, the government needs to do well in providing basic services to citizens, such as infrastructure, drinking water, sanitation etc.
There is also the need to improve internet penetration, which is currently around 19 per cent. However, there is huge potential in terms of expected web users reaching around 730 million, second after China, largely driven by rural India.
The need of the hour is to bring smart solutions to the challenges of a digital economy with special focus on accessibility, equality, affordability and most importantly a safe cyber space for building trust among people and MSMEs.