Monday, Nov 28, 2022

Fifty days later

Small and medium enterprises in the rural sector may be grievously hurt by the cash rationing.

demonetisation, demonetisation effects, demonetization india, demonetisation news, india news, demonetisation protests, protests demonetisation Farmers protest against demonetisation and restrictions imposed on cooperative banks, in Surat on Saturday. (Express Photo by Hanif Malek)

In less than a fortnight, the ATM queues in metros and urban centres have started thinning. People in metros and urban centres are being served, because banks and ATMs have a larger presence here. But the story is not really the ATM queues in the big cities. Tedium will set in, and TV will showcase other stories. It will take a while to figure out how 50 days of cash rationing impacts the lives of the micro and tiny units in rural India.

Over the last three decades, after the introduction of the Rs 500 note in October 1987, its demand and possession had become quite secular. The two denominations — Rs 100 and Rs 500 — lubricated the wheels of business, across the agriculture, manufacturing and service sectors. Now, this lubrication has come unstuck, and has jammed the wheels. The Rs 500 and Rs 1,000 notes withdrawn from circulation together accounted for 85 per cent or Rs 14.18 lakh crore of the total value of currency in circulation in March 2016. There were 1,570.75 crore pieces of 500 rupee notes, almost equal to the number of 100 rupee notes (1,577.83 crore). These Rs 500 notes added up to Rs 7.85 lakh crore or 47 per cent of the total value of currency.

For farmers, wages had stagnated due to poor incomes following two consecutive years of drought. A good monsoon in 2016 held out hope. The withdrawal of high denomination notes has frozen transactions in the mandis, and farmers are unable to sell their full produce of fruit and vegetables since buyers don’t have enough cash. With the rabi season kicking in, they have now been allowed to use their old Rs 500 notes to buy seeds. Besides farmers, the people adversely impacted by this note exchange programme have been provided 60 extra days to repay their housing, crop and micro finance loans. Small and medium sector enterprises, too, have been allowed some relaxation in cash withdrawals, overdrafts and repayment of term loans. But these benefits are availed of mostly by enterprises in the urban and metro centres, where bank presence is adequate, networks are well established for faster dissemination of information, and market linkages are robust. The smaller the business, the bigger the problem.

Despite a focus on financial inclusion over the last 10 years, the spatial distribution of banks and ATMs has remained skewed in favour of urban India. One out of every four ATMs in India is in a metro, and one rural-semi urban bank branch has to serve 12,820 people, compared with a metro and urban bank branch which caters to just 5,348 persons. If India’s MSME spread is superimposed over the bank branch and ATM network, the white spaces indicating exclusion would be too large to ignore. The Fourth All-India Census of Micro, Small and Medium Enterprises of 2006-07 reveals that there were 361.76 lakh MSME units in 2006-07. Those that have been registered account for just 4 per cent of the total MSMEs or 15.64 lakh units, of which 45.2 per cent are located in rural India. The rest, 346.12 lakh units, are unregistered, of which almost 60 per cent are rural.

Subscriber Only Stories
UPSC Essentials | Key terms of the past week with MCQsPremium
ExplainSpeaking | A profile of Gujarat’s economy before electionsPremium
Small is good: Mudra loan NPAs at just 3.3% in 7 yearsPremium
Amid uncertainty, falling risk appetite, India fared better than major ec...Premium

Unregistered units are those that do not file business information with the district industries centres in the states. In all, 55.34 per cent of 200.18 lakh units are in rural India. The employment generated by the MSMEs is also significantly higher in the case of rurally concentrated unregistered units. These units employ over 7 crore persons, compared with less than a crore jobs generated by registered units, majority of which are located in urban areas. Nine out of 10 enterprises are proprietary driven and almost 55 per cent entrepreneurs come from the socially backward classes. The reality is, access to finance, technology and other networks is linked to caste in India.

Access to finance has been a hindrance for SMEs all along. There has been little or no innovation to make it viable for small and tiny entrepreneurs to raise funds, either as equity or debt. A major reason for the disappearance of SMEs is lack of funds when they desperately need it. While banks would lend only to credit-worthy SMEs, a large number of MSMEs carry on business either in cash or by borrowing from the informal sector, which is expensive but available without many procedural hassles. Taking liquidity out of the system is akin to snuffing out oxygen for SMEs, and thrusting them into intensive care.

The heterogeneity of MSMEs and exclusion of the rural majority is quite revealing. Sample this: The original value of an unregistered unit’s investment in plant and machinery is just Rs 48,000 and its annual turnover is under Rs 2 lakh. Compare this with the Rs 6.72 lakh investment by a registered unit and Rs 45 lakh in turnover. Remember, 60 per cent of all unregistered MSMEs are in the rural areas. From this data, it can be safely inferred that MSMEs in rural areas have meagre financial demands, explaining why they have preferred to deal in cash. Their money may be unaccountable, but it’s definitely not black. This distinction is lost in today’s black money narrative.


Rural MSMEs deal in cash for two reasons: One, because of the skewed government and RBI policy where banks and technology are yet to reach the hinterland, and two, their past experience with the establishment — the fear of harassment by the tax official and petty bureaucracy in the banks. What is most worrying following the withdrawal of Rs 500 currency notes is the real possibility of a break in the supply chain for the rural MSMEs. Only a small percentage of MSMEs are suppliers to large enterprises or are located in the comfort of clusters. For most others, their capital generally remains deployed or locked either in receivables or the final product, both illiquid. A small loss takes a long time for a micro enterprise to recoup. No revenue for two months can jeopardise the entrepreneur’s livelihood.

First published on: 23-11-2016 at 01:50:36 am
Next Story

For want of cash, undertrial stuck in Mumbai’s Arthur Road jail even after bail order

Latest Comment
Post Comment
Read Comments