The central government’s decision to do away with high value currency last November would reduce growth rates in the micro, small and medium enterprises during the current financial year, despite the best efforts by industry to bring in cashless transactions.
In a survey conducted by credit-rating and market research agency CRISIL, it has been highlighted that the MSMEs affected the most relate to textiles, agricultural products, consumer durables, steel, construction and automobiles – all of which rely heavily on cash transactions.
The survey goes on to state that enterprises in the unorganized sector (those comprising less than 10 employees) are expected to face a bigger struggle and close to 40 per cent of them could end up reporting receding growth in the second half of the current financial year.
However, in what is likely to be good news for the government, the survey notes that over 40 per cent of the MSMEs surveyed reported a shift to cashless transactions since demonetization. However, most of these companies complained of adverse impact in day-to-day operations.
The survey further pointed out that annual growth is likely to be muted because the sector traditionally does better in the second half of the financial year, known in business circles as the ‘busy season’. Over 30 per cent of those surveyed believe that growth could be muted in the October-March period.
The cash ban has impacted business operations, however, demonetization has spurred a major change in the way MSMEs conduct business. Most of them see only a short-term impact of demonetization, and more than three-fourths believe it will be business as usual by June 2017, the survey found.
"Every fifth MSME surveyed planned to raise additional funding in the coming months, half of it for working capital. Interestingly, with unsecured loans from friends and associates drying up, 3 out of 4 respondents plan to approach banks for loans, while the rest will rely on internal accrual. That opens up a massive opportunity to banks currently awash in liquidity," Manish Jaiswal, Head-SME Ratings, Crisil said in a statement.
Because of greater reliance on cash, sales of MSMEs in smaller towns is expected to be impacted more than in metro and Tier 1 cities. While a third of those in Tier 2 cities and smaller towns expect a decline in revenue in the second half, only a quarter in metros and Tier 1 cities feel similarly.