Demonetization and MSME Sector

 If our eminent intellectuals and politicians have taught us anything, it is that one can have opinions on anything.

Introduction

One of the oft repeated statements is that Demonetization has broken the backbone of the MSME sector (Micro, Small and Medium Enterprises) and has created a permanent damage in that sector. Considering that MSMEs contribute around 11 cr jobs, i.e. roughly 25% of the overall workforce. Hence, this claim should be strictly analyzed. In this article, we shall examine that claim from the following angles:

  1. Growth in MSME sector
  2. Jobs generated in FY 2016-17 in MSMEs
  3. Jobs generated in FY 2016-17 on an overall basis
  4. NPAs and growth in credit to MSMEs  
Growth in MSME sector

The latest MSME annual report from the ministry gives the following picture. As we can observe the growth of MSME sector’s gross-value added (GVA) has been in the range of 13% post the demonetization years and it has been around 11% during the year of demonetization and the year before that.

Now, if we compare the share of GVA of MSMEs to India’s GDP, we can observe that the share decreased marginally in 2016-17 and increased by 1% in 2018-19. It is a fact that demonetization had a short-term impact on our GDP growth rates for 2 to 3 quarters. If the GVA (as a % of India’s GDP) has fallen in 2016-17 means, MSMEs had a greater short-term impact than the overall economy. However, the impact was short-term since MSMEs have grown faster than the economy subsequently. This is apparent if one observes the increase in share of GVA of MSMEs post 2016-17 in India’s GDP.





Jobs generated in FY 2016-17 in MSMEs

CII Report: As per a survey conducted by Confederation of Indian Industry (CII), a non-governmental organization, in 2019, an annual job creation of 3.3% per year was observed from FY14-15 to FY17-18 in the MSME sector. This data if extrapolated on pan-India level leads to an annual job creation of 13.5-14.9 million jobs from 2014-15 to 2017-18. Whether MSME sector data can be extrapolated to the overall economy is a valid question. Hence, we can assume that this represents jobs created in the MSME sector alone. Considering the total workforce in MSME sector is 1/4th of total workforce, we can safely assume that around 1.35-1.49 cr jobs were created in MSME sector from FY14-15 to FY17-18.

One of the major contributors to the same could have been the PMMY scheme (MUDRA loans) which was started in the year 2015-16 to promote self-employment. The Government had conducted a Survey to look into the number of jobs created due to the PMMY scheme. As per the same, around 1.1 cr jobs were created from 2015-16 to 2017-18. Thus, we can observe that the data points from CII and the Government Survey on Mudra loans broadly corroborate each other. One of the reasons for the faster growth of MSME sector post 2016-17 compared to the overall economy could be because of the pick-up of loans disbursed from PMMY scheme which really started growing from 2016-17 onwards. The cumulative amount of loans disbursed from 2015-16 to 2020-21 is INR 14 Lac crore and the average amount disbursed per year would be INR 2.4 lac crore.

Jobs generated in FY 2016-17 on an overall basis

Employment-Unemployment survey (EUS): As per the EUS, conducted in the year 2016-17 (of which there were 4 months of demonetization), the number of jobs created during the year as per the Survey report is 2 Cr jobs. However, there seems to be some issue with this claim. Independent calculations estimate that around 1 cr jobs were created. If 1 cr jobs were created in a financial year out of which almost 5 months were affected by Demonetization, it at least suggests that demonetization was not as bad from a job creation perspective.  

CMIE: The CMIE data which is available from January 2016 is usually used to speak “Truth to power” and it is often used to suggest that around 30-40 lac jobs were lost during demonetization. However, if we look at a period of 1 year, the total workforce as per their computation increased from 40.5 Cr in 2016 to 40.7 cr in 2017 which is an addition of 2 million jobs while Demonetization should have wiped out many jobs.

Their data however suggests that the number reduced to 40.2-40.3 cr in 2018 and 2019 which is mainly on account of a lower labour force participation. But, the unemployment rate as per CMIE reduced from 8.3% in 2016 to 4.5% in 2017. It further went up to 6% in 2018 and 7.4% in 2019. However, one should note that even the 7.4% of 2019 is 1% lower than the pre-Demonetization trends in 2016 which again suggests there was no significant loss of jobs due to Demonetization as well from a long-term perspective.

NPAs and growth in credit to MSMEs

NPAs are non-performing assets. It simply represents the amount of bad loans (loans which can't be repaid) a bank has provided compared to the total loans of the bank. It is an important metric to understand the performance of a sector. 

As per an RBI report dated 25 June 2019, the NPAs of Micro enterprises decreased marginally from 8.6% in September 2016 to 8.5% in September 2018. For SMEs the NPAs increased from 10.6% to 11.3% from September 2016 to September 2018. On the other hand, the NPAs of medium enterprises and large enterprises increased from 15.2% to 18.4% and 12.9% to 20.0% respectively. This clearly suggests that MSMEs were not as impacted as the larger corporates.



As per the same report, the credit outstanding to MSMEs increased from INR 10.5 tn in September 2016 to INR 14.3 tn in September 2018, a growth of almost 38% in 2 years. On the other hand, the total commercial credit outstanding increased from INR 49.4 tn in September 2016 to INR 58.7 tn in September 2018, a growth of almost 20% in 2 years.       

Conclusion

While any claim suggesting that Demonetization had a short-term impact on the economy and MSME specifically is true, a permanent scarring of MSME sector due to demonetization is certainly not justified. As observed above, MSMEs have shown more growth in the post-demonetization years.

The CII survey on MSME sector suggests 1.35-1.49 cr jobs per year. Indian economy could not have created so many jobs per year on average when addition to labour force is only in the range of 50 lac per year on average. Such massive job creation would have led to significant decline in unemployment levels which is not observed. Assuming our unemployment rate pre-Modi era was 4%, it is almost 2 cr jobless people. With 50 lac additions to workforce every year and 1.4 Cr new jobs being created every year, it would imply that these 2 Cr unemployed would have been employed within a period of 2-3 years and our unemployment rate would have been 0.

Considering the above, the CII data presents a rosier picture of the economy simply because it carried out the survey on the MSME sector. Since the MSME sector was growing faster than the overall economy, the number of jobs created in MSMEs would be faster than overall economy. Thus, any survey conducted in MSME sector, if extrapolated to the overall economy would lead to the presentation of a rosier picture of job creation. Hence, the CII survey on jobs in MSME sector and the Government data on growth of MSME sector corroborate each other.

Besides, the jobs created by the MUDRA scheme also corroborates the jobs created in MSMEs (which includes the year of demonetization and the subsequent year as well).

Surveys conducted by CMIE also indicate a comparatively lower unemployment rates compared to unemployment rates in early 2016.

Finally, if we look at the NPAs and credit growth in the MSME sector and triangulate it with the above observations, it becomes quite clear that MSMEs contributed more to the growth of the economy in the post-demonetization period compared the pre-demonetization period.  

Sources:

https://www.taxmanagementindia.com/visitor/detail_article.asp?ArticleID=9596

https://msme.gov.in/sites/default/files/MSME-ANNUAL-REPORT-ENGLISH%202020-21.pdf

https://www.cii.in/PressreleasesDetail.aspx?enc=FMXV5OWa+OnDs4xBuYxXHeYY8ZR0LoFE0bUqTG84ZKZWkactkBCAcdX2yH/i1/6ZB2j9e79AKiiDA1FUzgrtoQ==

https://www.businesstoday.in/jobs/story/pm-mudra-loans-created-5-1-million-new-entrepreneurs-created-11-2-million-new-jobs-237376-2019-11-07

https://unemploymentinindia.cmie.com/

https://unemploymentinindia.cmie.com/kommon/bin/sr.php?kall=wtabnav&tab=4090

https://www.rbi.org.in/Scripts/PublicationReportDetails.aspx?UrlPage=&ID=924

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