A model of credit constraint for MSMEs in India
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A model of credit constraint for MSMEs in India Malcolm Athaide
&
H. K. Pradhan
Accepted: 19 March 2019 # Springer Science+Business Media, LLC, part of Springer Nature 2019
Abstract This study examines credit constraints using standard models in the highly constrained micro, small, and medium enterprises (MSMEs) sector in India. The mixed results may not be reflective of MSMEs in India, as the standard models have been developed for much larger firms in western markets having lower information asymmetry than Indian firms. These models are biased toward long-term financing due to the ready availability of short-term credit in western markets, as against limited access to working capital to MSMEs in India. We propose an augmented model of investment sensitivity based on the framework of the Fazzari and Petersen model and Carpenter and Petersen model that includes the often-neglected role of working capital as both a use and a source of funds, and gross fixed asset formation and leverage as drivers of credit constraints, for the information asymmetric MSME firms. The paper finds the augmented model, also called the Financing Deficit Model, robust for ascertaining credit constraints of Indian MSME firms and its variables consistent with available literature. Keywords Micro, small, and medium enterprises . Credit constraints . Working capital . Panel data . Financing deficit . Information asymmetry M. Athaide (*) Mumbai, India e-mail: [email protected] H. K. Pradhan XLRI, Xavier School of Management, Jamshedpur, India e-mail: [email protected]
1 Introduction Micro, small, and medium enterprises (MSMEs) are the engine of economic growth, contribute to employment generation and innovations, and have the ability to cater to specific industry needs and development (Beck and Demirgüç-Kunt 2004; Krasniqi 2007; Kulkarni 2008). Across the world, governments and regulators have focused on the MSME sector due to its contribution to social and employment equity. The MSME sector in India comprises 63.4 million enterprises, employs 120 million persons, and contributes 33% of the manufactured output and 45% of exports (CII 2018). MSMEs are the mainstay of existing and future high growth businesses, with the Government focusing on BMake in India^ initiative to make a significant impact in the area of indigenization. It is important that the MSME segment develops in all sectors such as agriculture, manufacturing, and services in India, as each of these sectors continues to be relevant to the overall GDP growth as well as employment generation. India’s GDP is expected to touch USD 5 trillion by 2025 (KPMG 2018), and the government is focused on significantly increasing the share of MSME contribution to GDP, from 8% in 2018 to 15% by 2025, and generate employment levels to the extent of 50% of the overall employment, more than doubling the current MSME workforce of 120 million across manufacturing and services sectors CII (2018). MSMEs face constraints in access to funds, weak staffing, inability to exploit economies of scale, an
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