Twin Challenges

SMEs and Agriculture could be the 2 big challenges for Modi…

As the Modi government completes 3½ years in power, the preparations for the next general elections in 2019 are already underway. Along the way, there are going to be key state elections in Gujarat, Karnataka, and Rajasthan but the larger picture will be still focused on the general elections. As the discussion centers around its achievements on the economic front, there are two key challenges that the Indian economy will really have to contend with. These are problems we are intuitively aware of and the data has also been broadly suggestive of the problem. But the big worry is that both these have larger economic, social and political implications unless they are addressed on a war footing. The first pertains to agriculture and the second pertains to SMEs and small businesses…

There is a crisis in agriculture…

The government had promised to double farm incomes across India by 2022. What we have seen are the combination of weak agricultural performance and negative pricing implications. To be fair, the government has tried to address the problem at a very macro level by substantially expanding the investment in rural infrastructure and through greater spending on agriculture. That has surely had a trickle-down effect as is evident from the pick-up in demand for consumer goods. But the big issue of agriculture product pricing is still not addressed. Currently, the Mandi (market) price of most of the Kharif cereals and pulses like paddy, maize, and Tur Dal are below the minimum support price. While the government has announced the MSP, there is no mechanism to enforce it. It is estimated that farmer could incur a loss of Rs.36,000 crore due to lower product prices. If the minimum profit assured by the government is considered, the loss to farmers could be as high as Rs.2 trillion. That only means more bank defaults by farmers going ahead. That is an issue that the government must focus on as farms still employ more than 50% of the Indian population.

There is real pressure on SMEs…

That is a big worry as SMEs provide the chunk of the employment in the unorganized sector. The social and political implications could be much larger. It could be partly due to GST and partly due to demonetization. But the numbers speak for themselves. The credit ratio (upgrades/downgrades) has touched a 5-year low of 0.97 in the first half of this fiscal. That is largely due to the pressure on their finances that the SMEs are experiencing. We have already seen delays in repayment by SMEs and measures like GST could only worsen their situation. This is the second sensitive area that the government needs to urgently focus on. At the end of the day, it is all about the mass economy and that is the challenge! ©

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