4 Has govt’s formalisation push generated headwinds for small business growth and therefore loan demand?
An August 26 story by Bloomberg Quint has reported that the All-india Consumer Products Distributors Federation is protesting against the decision of consumer goods giant
Hindustan Unilever Ltd. to partner with Reliance Industries owned Jiomart to supply products to retail stores. The distributors association’s anxiety is understandable, as a cash-rich company like Reliance can easily capture the market by offering better terms to retailers than the traditional whole-sellers, as the distributers are popularly described in India.
This episode is yet another addition to the ongoing formalisation push – policies such as demonetisation and rollout of GST have played a major role here – in the economy. While the consumer might even gain from such developments; assuming formalisation is not a conduit for eventually developing monopolies, there is bound to be significant (creative) destruction of small businesses and incomes in the process.
A research note dated July 15 by Pranjul Bhandari from
HSBC Securities and Capital Markets had shown that the ratio of unorganised and organised sector employment in the trade, hotel and restaurants sector is the largest among major non-farm sectors in the country. This also means that the costs of formalisation purging informal players out of business would be the largest in this case.
“But formalisation can be a double-edged sword. If it happens at the cost of putting small informal firms out of business, then the disruption in the informal sector can weigh on demand in subsequent periods. In previous research (and also discussed earlier in the report), we found that when urban informal workers without social security lose jobs, many move back to their rural homes. But rural wages are 2.5x lower than urban wages, leading to lower demand and growth over time”, the note says. Bhandari’s warning is worth paying attention to at a time when the government is banking on lending to small business to revive the economy, but small businesses might be facing a squeeze from big capital.