Image by Imam Fathoni on iStock

Today as I sit down to write this blog, I suddenly remember a conversation that I had this afternoon with a seasoned banker and investor from Singapore — Asia’s financial capital. It revolved around MSMEs and how Singapore is striving to achieve a balanced approach to fund them. I was amazed to learn that even a developed economy like Singapore has so many issues to sort out for the MSME sector. India, on the other hand, has a long journey ahead with its diverse and large base of enterprises, significantly devoid of digital footprint and having an unscientific approach to finance and technology.

Parallelly, in western parts of the World, the Fed Bank Governors have just concluded, the first ever virtually held, annual saga of the Jackson Hole Conference. The topic of this year’s conference, “Navigating the next Decade: Implications for Monetary Policy” — seems very interesting. If we go by the themes of this particular conference; which is credited to predict the 2008 global meltdown in advance, due to the subprime crisis, the theme of this year is indicative that we are entering a phase that is economically very challenging.

Heads of the central banks, who spoke, have highlighted the structural implications of the pandemic and its amplifying impact on digitisation, debt, employment and inequality. [1] It seems that even a layman is talking about the same. However, the federal banks are deeply worried that public sentiment emanating out of the pandemic will push the economy into deflation. Interestingly, they also considered taking the exceptional monetary policies announced such as TLTRO (Targeted Long-Term Repo Operation) by the Reserve Bank of India to the public for explanation. They suggested that it would instill confidence in the public about the availability of the financial resources to neutralize the risk of the pandemic and take the economy to an inflationary path. This is an important step. Such disclosures when done by a regulator makes financial institutions more agile to pass on the benefits to the sections of the economy which will trigger growth. Keeping apart Keynesian techniques of economic rejuvenation, we need to look at how we can create more jobs and employment. We need to plug and play various models of development that we have learnt over the last few years to come out of the pandemic deflation spiral.

The creation of enterprises is key to bridge employment gaps, create a regular income stream and reduce inequality. Entrepreneurship by the Bharat segment in India is not yet as fashionable as a startup venture in a metropolitan area. Ideally, both are solving some issue or servicing a particular demand, but lack of support, guidance and a proper roadmap makes the former enterprise a very short-lived initiative. For decades, India has missed accelerating the growth of MSMEs due to various factors. Today we are standing at the door of an opportunity to re-write the economic pillars for our country. MSMEs need to be the structural pillar amongst other sectors such as Agriculture, Services and IT. This will include substantial financial support to the MSME sector when Atma-nirbhar Bharat kicks in a few quarters from now.

MSMEs need to be resilient and create a self-sustainable economy. We need to administer a simpler yet robust credit algorithm for credit assessment of MSMEs, which we set out to achieve through this study. Presence of Goods and Services Tax (GST) and using Machine Learning (ML) will take us closer to funding more MSMEs as this should be proof of the quality of transactions for the Banks or NBFCs looking at understanding the enterprise’s cash flow. This creates financial sustenance for enterprises, which in turn leads to better technology and makes it efficient to compete and bid trade at the national and international level. We have faith this will lead us to self-sustenance or Atma Nirbharata.

References

[1] Remarks by Tiff Macklem, Governor, Fed Reserve Bank of Kansas City at the Jackson Hole Conference, Aug 27, 2020

This research was developed as part of the Bharat Inclusion Research Fellowship.