How GST ensured fast credit
growth to MSMEs
The Finance Ministry has expressed confidence that India's economy
is poised to become the world s third largest within the next three years, with
a projected GDP of $5 trillion up from the current $3.7 trillion. India's
consistent outperformance against market expectations has firmly established it
as one of the fastest-growing economies globally. Integral to maintaining the
country's stability is the banking sector, which is pivotal for economic
growth. However, recent years have witnessed a significant decline in
year-on-year (y-o-y) credit growth in India, largely attributed to the economic
impact of the pandemic. Despite strong credit demand, deposit growth has not
kept pace with loans, leading to a notable increase in the overall
loans-to-deposits ratio.
In January 2024, credit to the industry
expanded by 7.8% y-o-y, down from the 8.7% growth recorded in January 2023.
Similarly, non-food bank credit grew by 16.2% y-o-y in January 2024, compared
to 16.7% in the previous year. On the other hand, credit to Micro, Small, and
Medium Enterprises (MSMEs) experienced a notable surge, with a y-o-y growth of
20%, indicating improved lender confidence and increased credit availability to
this sector.
GST has played a significant role in
driving two key outcomes: increase in MSME registrations and a positive rise in
credit extended to MSMEs. The number of new MSME registrations has surged from
5 lakh in the fiscal year 2017-18 to an impressive 1.5 crore in the fiscal year
2023-24 (Year-to-Date as of December 2024). While GST was introduced to
streamline a convoluted tax system and unify businesses under a single tax
framework to enhance national tax compliance, its implementation has particularly
benefited MSMEs. This is largely due to the adoption of a fully online GST
compliance module, which has regulated a significant portion of the previously
unorganized sector, thereby fostering a favorable environment for MSME growth.
The mandatory reporting under GST has
facilitated a transparent exchange of sales data among buyers, sellers,
government departments, and banks. GSTN data provides insights into tax
compliance behavior and return filing details. Banks have confirmed that
digitalization of GST has enabled them to leverage Artificial Intelligence for
seamless data comparison, error identification, and expedited loan processing
and disbursement. With just a click and/ or an OTP, banks can effortlessly
scrutinize applicant data against the information available on the GST portal,
streamlining their operations and conserving valuable time and resources.
Following current trends, MSMEs are
increasingly opting for GST registration, as larger businesses prefer to engage
exclusively with registered entities to mitigate non-compliance risks.
Moreover, in 2020, the Honorable Prime Minister announced a 2% interest
subvention for MSMEs registered under GST, applicable to both fresh and
incremental loans. Additionally, in September 2023, SIDBI launched an app-based
invoice financing loan platform--GST Sahay. This highlights a clear
correlation between the GST framework and the growth of credit extended to
MSMEs.
Since the implementation of GST, the
MSME sector has experienced a notable surge in credit availability and
accessibility. This expansion underscores how GST has effectively improved
transparency, simplified processes, and alleviated compliance burdens for
MSMEs. Consequently, while overall credit growth may have faltered in recent
years, the robust expansion of MSMEs post-GST implementation demonstrates the
positive impact of the tax reform on the financial ecosystem supporting small
and medium enterprises.
www.economictimes.indiatimes.com
dt. 20.04.2024