Systemic reform not moral suasion

Systemic reform not moral suasion

The government can directly act to help MSMEs.

Is moral suasion the best way to solve the problem of large firms forcing their small-scale suppliers to give them free credit, even as the vendors pay usurious rates of interest on their own debt? Finance minister Nirmala Sitharaman’s call for large companies to clear their backlog of dues to the small and medium sector to the tune of ₹40,000 crore evokes support. But the solution to the problem lies in a more varied and efficient financial system, effective and speedy contract enforcement, greater levels of competition in industry, investment in infrastructure and trade facilitation to let our small producers integrate better into the global market and reform of the goods and services tax (GST) administration. These lie more in the ambit of governmental action and control than the empathetic conduct of large firms.

The government had mandated compulsory listing of all invoices raised by small enterprises on large ones on the Trade Receivables Discounting System (TReDS), where factoring services or bill discounting can be performed. In factoring, the financial institution that buys out the credits of the supplier deals with the big company that owes payments to its suppliers. These large firms would much rather deal with the small suppliers than with the equally large factor, and frown upon suppliers who dare to take their dues to a factor. This appears to be a major reason for TReDS not taking off the way it was intended to. The government must enforce the law on prompt payment to small suppliers. It can provide credit enhancement to bills of small suppliers, to encourage banks to discount them more readily and on better terms.

GST rules can be amended to make reverse charge a standard practice. The large buyer should pay the tax on its purchases from small enterprises directly to the government, instead of the small supplier having to borrow money to pay the tax and then wait for the large supplier to pay for his supplies to service his loan. This would reduce the small players credit crunch, while maintaining the audit trail of value addition to inputs.