Finance & Economy | News & Insights

Formalisation of the Indian Economy Through Digitisation and Udyam Portal Boosts MSMEs, Banking Services

Published: December 29, 2023

To formalise the Indian economy and bring small industries and unorganised trade under the umbrella of regulation, the government has undertaken measures that have shown both short-term challenges and long-term benefits. The rapid formalisation of the economy, which involved digitising services and connecting people and enterprises to the Internet, was accelerated by implementing Goods and Services Tax (GST) policies.

According to analysts, while small industries and unorganised trade may have experienced adverse effects in the short term, the formalisation has facilitated access to banking services for many micro, small, and medium enterprises (MSMEs). This shift is  expected to bring significant advantages in the long run.

A pivotal aspect of the formalisation initiative was the adopting of a new definition of MSMEs by the Centre in June 2020, which focused on investments and turnover. This change led to the launch of the Udyam portal, a platform for MSME registration. Since its launch in July 2020, the Udyam portal has registered over 21.8 million MSMEs, surpassing the previous Udyog Aadhaar Memorandum (UAM) registrations in around 326 days. The Udyam portal enables MSMEs to seek loans from banks, providing them with a formal status that makes them eligible for various benefits under priority sector lending and MSME schemes.

As a result of the formalisation efforts, outstanding bank credit to the MSME sector has more than doubled from pre-pandemic levels. The Reserve Bank of India’s data shows that the total outstanding bank credit to the MSME sector as of October 20 amounted to Rs 9.64 trillion, a 14.5% year-on-year increase and a 104.5% surge from pre-pandemic levels. The government’s Emergency Credit Line Guarantee Scheme (ECLGS) also supported MSMEs during the pandemic, helping them meet their operational liabilities and restart their businesses.

Furthermore, the Udyam portal's connectivity with the databases of the Central Board of Direct Taxes (CBDT) and Goods and Services Tax Network (GSTN) has brought registered MSMEs under the tax net. This alignment has led to increased tax revenue for the government, as the GST paid by MSMEs has surpassed pre-pandemic levels. Data from the Economic Survey for 2022-23 reveals that the GST paid by MSMEs dropped during FY21 but has been increasing since, reaching around Rs 5.5 trillion in FY22.

Alongside these developments, the formalisation efforts have facilitated the growth of electronic payments, particularly through the United Payments Interface (UPI). The introduction of the eSHRAM portal has added over 280 million registered unorganised workers, who now benefit from social security schemes. Economists and experts have highlighted the positive impact of formalisation, such as the reduction in currency leakages and the opportunity for better tracking of financial transactions.

Looking ahead, stakeholders stress the need to relax restrictions on informal business conduct to embrace further and involve informal businesses and their employees in the formal economy. Technology experts recommend emphasising Account Aggregators, as digital capital and information collateral are essential for the continued formalisation of the Indian economy.

As the digitisation drive and formalisation efforts continue, the economy is expected to reap long-term benefits by creating a robust and inclusive environment for MSMEs and fostering greater economic stability.

Related Posts

Rejection of the levy of anti-dumping duty on MEG, a step in the right direction for the growth of MMF sector