Out of the 1700 plus consumers surveyed by BCG post demonetisation, 22 percent indicated their preference for digital payment methods within six months compared to only 11 percent earlier. In contrast, majority of the 50 plus MSMEs with which BCG conducted a deep discovery interview indicated a preference for reverting to cash.
Given that there are about 50 million MSMEs in the country contributing to over 20 percent of employment and a third of GDP, this is a segment which might make the difference between the success and the failure of the government’s Digital India mission.
Why are MSMEs reluctant to digitise?
The report by BCG has listed five key blocks keeping India’s MSMEs on the other side of the cashless economy.
Concerns on Profitability: Digital payments leave a footprint and many MSMEs underreport their growth to avoid the net of the current tax and regulatory regime which they find highly complex and archaic. Also, the companies in this segment are highly reliant on informal credit which necessitates operating in cash. BCG reports that 75 percent of the credit demand of MSMEs is met by informal sources, which translates into cash lending.
Ease of doing business: While the government has been promoting ease of business as one of its major objectives, MSMEs largely choose cash as a route to avoid unclear compliance laws, complex tax norms as well as harassment by local authorities. BCG states it costs up to 2 percent of MSMEs revenue to comply with existing laws.
Cashless is unattractive: 87 percent of merchants surveyed in the BCG study did not find any apparent benefit of changing the way they conduct their financial transactions.
Low awareness: 77 percent merchants cited a lack of clarity on digital payment methods which lead them to perceive these methods as complex and less convenient.
Poor or unavailable infrastructure: While the government has been pushing the economy towards digitisation, yet the lack of infrastructure to support this massive movement has turned out to be a big roadblock to meet this objective. BCG’s study found that India has only two POS3 terminals per 1000 debit cards compared to 13 in the US and 20 in the UK.
Apart from this, low smart phone penetration, coupled with poor network and other perceived risks are further deterrents. However, the report found out that the current push by the government via UPI, BHIM app and Bharat QR code has alleviated some of these concerns.
The report also suggests a few measures which can be undertaken by the government to specifically attract MSMEs in its digital push.
Incentivising digital transactions: This can be achieved by improving access to formal credit, reducing cost of digital transactions, minimising incentives to transact in cash, introducing a three-year tax holiday specifically for MSMEs, simplifying compliance requirements and last but not least, making registration of MSMEs mandatory. The report details specific measures to achieve all these objectives.
Expanding infrastructure: Large scale promotion of POS, Bharat QR code and procurement of POS terminals will help in dramatically reduce the existing monthly cost of Rs 500-1500 and will help in making digital payments more attractive to MSMEs.
Increase awareness and strengthen enablers: India already has an available banking infrastructure in terms of rural financial institutions, banking correspondents and the report suggests using them to drive financial literacy and awareness of myriad government schemes.
Cyber crimes and frauds are a major deterrent for MSMEs in placing their trust in digital payment platforms and introducing mechanisms to increase the security as well bridging this trust deficit through educating the small businesses are essential measures required to limit financial risks.
(Opinion piece by Chhavi Tyagi)
Source: Economic Times