The lopsided rural-urban spread of ATMs and bank branches has snuffed out economic activity in rural India, with micro, tiny and small enterprises finding it impossible to get cash in 100-rupee notes for their daily operations.
Consider this statistic: every bank branch in a rural and semi-urban centre caters to more than double the number of people in an urban and metropolitan centre. According to a December 2015 Reserve Bank of India report on “financial inclusion in India”, each rural and semi-urban bank branch serves 12,863 people compared with an urban and metropolitan branch which serves just 5,351 people. The spread of ATMs too is skewed in favour of urban centres. Delhi, for instance, has 9,070 ATMs, more than Rajasthan, the largest state in terms of size.
Now, juxtapose this with the spatial distribution of micro, small and medium enterprises. The data on MSMEs, as per the latest available Fourth Census of MSME, 2006-07, reveal there are 200.18 lakh unregistered rural sector units, and they make up over 55 per cent of such enterprises in India. Urban SMEs are 161.58 lakh. The data from 2007-08 to 2014-15, compiled from the Entrepreneurs Memorandum filed by MSMEs in District Industries Centres, suggests that 22.10 lakh units were added during this period. It doesn’t say if they are rural or urban, but even if they were evenly spread, it does not change the broad picture.
Abhitabh Meshram, an entrepreneur in Nagpur, who supplies potable water in bulk to enterprises including government departments, says there is difficulty in paying cash to even hawkers for intra-city transport and workers, who are paid weekly. “I have another agri-based business, but in mandis, they wouldn’t supply large quantities of onion or garlic without cash.”
Zoom out to a particular state, for instance, Tamil Nadu. It has a million-plus tiny and small units. “There will be no production for a month-and-a-half. Many units in Chennai are still recovering their losses from the previous year when the city was flooded during the monsoon. While it is certain we will not register any sale, it is even more certain banks will debit the EMI from bank accounts on existing loans,” said C Babu, President, Tamilnadu Small and Tiny Industries Association, an umbrella organisation that represents such units, which employ over 15 million workers in all.
“Inadequacy of bank branches is one primary reason why cash dominates small businesses. Many rural branches are open for just a day or two in a week. People consider bank postings in rural India as a punishment,” says Anil Bhardwaj, Secretary-General, Federation of Micro and Small & Medium Enterprises (Fisme). “The smaller the enterprise, the bigger the problem. Anecdotal reports suggest that manufacturing value addition has come to a standstill,” he says.
The RBI report suggests that between 2001 and 2015, the number of bank branches in urban and metropolitan centres more than doubled from 20,713 to 43,716. In rural and semi-urban centres, it has increased, but not at such pace. During the period, the number of branches in rural and semi-urban centres has risen from about 44,905 to 82,358. In 2015, there were 7.8 branches for one lakh people in rural India, but 18.7 branches in urban India, proving Bhardwaj’s argument.
The biggest problem, according to V K Agarwal, former president of Fisme, is that the fine distinction between unaccounted cash and black money is lost. “Money that is derived from illegal activity is harmful, but money circulated in small businesses only adds to economic activity,” he says.
Bulk of the MSMEs in India have turnovers in just a few lakhs of rupees. Within MSMEs, medium sized enterprises do not account for even one per cent of the segment. Agarwal, whose mid-sized company Shashi Cables Ltd manufactures transmission line conductors, says he is not affected because he makes payments through RTGS. Moreover, he has staff who can stand in line to withdraw and deposit cash.
“Medium sized enterprises can easily tide over the cash crunch. But most tiny and micro enterprises are proprietor-owned and are managed by just one person. They are in terrible shape,” Agarwal says. While it is difficult to say if jobs are being lost yet, those associated with the MSME segment say economic activity has definitely dropped.
“MSME is a very heterogenous sector. In the unorganised MSME segment, it takes a long time to even realise that businesses are being shut. It is too late by then,” says Bhardwaj, Secretary-General, Fisme. While the sector appreciates the need to move to a cashless economy, it needs time. “How can you move to Paytm in a week or a fortnight? It will take a couple of years,” he says.
“The government must realise that the small-scale sector will certainly pick it up (move to e-payments). But it is a gradual process. Also, it is important to acknowledge that money generated in business is not irregular. Certain issues cannot be pushed so much that the system chokes and the outcome is distorted,” says Agarwal.