IS GST DRIVING CREDIT GROWTH TO MSMEs?

Post GST, credit to MSMEs has grown at a faster rate even as overall credit growth has faltered.

- V. Keshavdev

THE IMPLEMENTATION of the Goods and Services Tax (GST) in July 2017 has been a watershed event, reshaping the way businesses, especially small and medium enterprises, operate and access credit in India. An analysis by Fortune India Research shows that introduction of the new tax regime has enabled an increase in credit offtake to micro, small, and medium enterprises (MSMEs) even as overall credit growth took a sharp knock.

For instance, credit growth preGST (FY11 to FY17) clocked a CAGR of 8.92% from ₹16.05 lakh crore to ₹26.80 lakh crore, post-GST (FY18 to 9MFY24), the growth plummeted to 5.23% from ₹26.99 lakh crore to ₹36.65 lakh crore. The sharp deceleration can be attributed to the slowdown in private capex, the impact of the pandemic and the subsequent deleveraging of balance sheets by large corporates. As a result, the robust CAGR of 8.92% in the pre-GST era, fell to 5.23% in post GST.

In contrast, credit growth to emerging enterprises that had shrunk (-1.75%) pre-GST from ₹1.16 lakh crore to 1.05 lakh crore in FY17, saw the highest jumpa CAGR of 18.73% post GST. In the case of micro and small firms over the same time periods, the CAGR moved up only marginally from 9.87% to 11.17%.

Before the advent of GST, there was a complex mosaic of state-specific tax regimes, including value-added tax (VAT), sales tax, and various forms of commercial taxes.

These were filed physically, creating a fragmented and opaque system that made it challenging for financial institutions to assess creditworthiness accurately. "Pre GST, every state had its own tax regime... the data could never be corroborated," says Rajiv Chawla, who runs a ₹100 crore auto component business under the JaiRaj Group and is also the founder of IamSMEofIndia Association, which has over 3,000 members.