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MSME exporters' Rs 10,000 cr stuck in GST refunds

Firms facing working capital issues as bank credit not easily available to them

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Liquidity crunch is threatening to severely cripple micro, small and medium enterprises (MSMEs) exporters with their input tax credit (ITC) refunds under the goods and services tax (GST) regime still stuck and raising bank credits proving to be a major challenge.

Ajay Sahai, director general and CEO, Federation of Indian Export Organisations (FIEO), told DNA Money that flow of credit to the MSME sector fell by 48% between April 2017 and April 2018.

He said even though the overall exports has shown healthy growth, some of the MSME exporters were not able to ride on the current wave because they were facing working capital issues.

According to him, even though the GST refund issue of exporters had been addressed to a large extent, close to around Rs 10,000 crore of ITC refunds of the MSME sector were still to be cleared by the government. Most of this amount was blocked due to gaps in the returns filing by the MSME exporters.

Sahai also said it was not easy for these firms, which operate on a very small scale, to raise capital from banks.

"Exports are growing, but certain MSME units are still experiencing a liquidity problem, particularly those dependent on bank finances. Many SMEs do not take credit from the banks. They pool their capital or raise capital from close relatives. For those dependent on bank credits, the situation is also not so good. If the liquidity issue is addressed and the banks extend a helping hand to SME exporters it will give further fillip to our exports growth," he said.

In July, merchandise exports grew at 14.32% against a 3.94% growth in the same month a year ago. It grew by 17.57% in June, 20.2% in May and 5.17% in April. In March, it had slipped by 0.7% after growing at 4.48% in February and 9.1% in January.

M S Mani, partner, Deloitte India, also said since the MSME exporters rely heavily on refunds for their working capital, any delay in them disrupts their exports.

"SMEs are dependent on refunds for their working capital needs as they do not take recourse to formal working capital channels due to the informal nature of their record keeping. Hence delays in refunds severely impact their ability to process customer orders in time," he said.

Another tax consultant with a leading management consultancy firm, who spoke off-the-record, said even though there was an improvement in the refund situation compared to the past, it was "still not ideal".

He said with many of the MSME exporters depending only on refunds for their working capital requirement, their operations have slowed.

According to him, these firms were not able to avail credit from banks as they did not have a strong balance-sheet.

"MSME don't have a strong balance-sheet. They are either a proprietorship or partnership firms and many of them may not even have a proper legal entity. In such a situation, when banks don't lend to them, they are dependent on refund to finance their next input purchase. If they don't get the refund in time, they can't buy their next inputs and if they can't buy the next input they can't do the next manufacturing. If they don't do the next manufacturing, they can't do the next exports. That's the kind of hand-to-mouth existence of many of the MSMEs," he said.

A recent Reserve Bank of India (RBI) paper authored by Harendra Behera and Garima Wahi puts the MSME sector's contribution to India's total exports at 40%.

In their report, they very clearly state that refund delays have hit MSME exports as they are "are largely dependent on daily cash flows for their working capital".

"Even at sectoral level, MSME-dominated export items appear to have been impacted more adversely by GST than by demonetisation. According to a survey (October 2017) by SMERA (SME Rating Agency of India Ltd), the first phase of GST implementation and delays in the refund of the upfront GST hit the exporters in the MSME segment hard as they are largely dependent on daily cash flows for their working capital. Sharp rise in imports along with fall in production of these sectors supports the evidence of supply chain disruptions due to GST implementation rather than the weak demand conditions per se," says the RBI paper written by Behera and Wahi.

The duo said while the GST implementation did not have a significant impact on overall credit to MSMEs, it seemed to have affected the MSME exporters.

"In contrast to credit growth, MSME exports appear to be affected more by GST implementation vis-à-vis demonetisation," Behera and Wahi wrote in their report.

Articulating the hurdles faced by the MSMEs in acquiring bank credits in their report, they said, "Despite significant contribution to economic growth, MSMEs face several bottlenecks inhibiting them from achieving their full potential. A major obstacle for the growth of MSMEs is their inability to access timely and adequate finance as most of them are in niche segments where credit appraisal is a major challenge".

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