Tag:GS-3|| Economy || Industries || Industrial Policy

What is the issue?

• The lack of liquidity where it is required is a critical factor impeding growth; delayed payments hurt small and medium-sized enterprises.
• Addressing the payment ecosystem to provide consistent duties with fresh funds is important to improve investor sentiment and stimulate growth.

Current liquidity scenario?

• Absence of liquidity
  • Lack of liquidity where necessary is a critical factor that has reduced growth in India in the recent period.
  • This is paired with the volatility of possible returns from new economic opportunities.
  • Paradoxically, undertakings with excess leverage prefer high-yield deposits to park assets.
• Uncertainty about returns
  • They are skeptical about investing in long-stage ventures with much higher risks and unpredictable returns.
• Repayment collections
  • This is compounded by the volatility of collections of payments that impact cash flows and debt repayment obligations.

Concerns with payments?

• Poor payment culture
  • India has a bad payment culture and the worst record in the Asia-Pacific region.
  • Government payments are usually late and sub-suppliers are also impacted by upstream payments.
  • Payment delays still remain a significant cause of concern for most businessmen in the private sector.
• Amendments
  • Legislation has amended regulations where payments to MSMEs cannot be delayed for more than 45 days.
  • There was also a grievance mechanism in place.
  • It, however, suffers from a critical flaw in which the power balance is skewed in favour of the government or private purchaser.
• MSME Sector
  • MSMEs hesitant to take the redress route as they fear denial of future orders once a complaint is made.
  • This cycle of delayed payments results in higher purchase prices as the penal interest costs are factored in.
  • Due to their sheer sizes
  • They have a very small window and sometimes none to cover up the financial shortfall, considering the high cost of borrowing and less robust credit rating.
• Globally, India’s reputation for poor adherence to payment terms is affecting the ‘ease of doing business’ ratings.

 What is a possible measure?

• The government needs to embark on big bang reforms to improve this weak payment environment.
• RBI now has enough reserves and foreign funds are available at very low rates as well.
• A transaction facilitation fund should, therefore, be created by the government.
• The Central Government, the State Governments and the units of the public sector must be given equal shares.
• The government can then use the TReDS system to clear all pending central / state and PSU payments with restrictions.
• The release of this fund into the economy of this fund would bring about a major change in investor sentiment and stimulate growth.

What would the fund’s benefits be?

• The global economy is flooded with liquidity.
• The government’s borrowing costs for the measure will, therefore, be insignificant in comparison with the benefits.
• With the fund, there will be many more companies interested in working with the government, leading to lower prices.
• Such a substantial economic influx will have an immediate and lasting impact on consumption and investment.
• The move would change attitudes, boost’ facility to do business’ and create a culture that values payment terms.
• Timing anomalies in transactions, which can be resolved with the fund, is a major cause of non-performing assets in the banking sector.
• Companies that have become sick over the past few years because of delayed payments from their customers can still be revived if they receive their dues in time.

Additional Information about TReDS

• Trade Receivables Discounting System (TReDS) is a scheme for setting up and operating the institutional mechanism for payments.
• It facilitates the financing of trade receivables of MSMEs from corporate and other buyers through multiple financiers.
• The buyers include Government Departments and Public Sector Undertakings (PSUs).

Mains model question

• MSME sector has immense economic significance for India but lending to them poses acute challenges. Discuss.

References

• https://www.thehindubusinessline.com/opinion/india-must-clean-up-its-payments-ecosystem/article29623578.ece