The government's zealousness in squeezing expenditure to meet the fiscal deficit target, either by delaying payments or not awarding new contracts, may be hurting those most vulnerable to such tightening - small and micro enterprises, self-employed professionals and the retail trade. Loan demand by these sections has jumped sharply as they scramble for borrowings to make up for a shortage of cash. Small and micro enterprises, hit the hardest by delayed payments in an environment that's already imperilled by a sluggish economy, borrowed 22 per cent more in November than they did a year earlier, according to Reserve Bank of India data. Loans to self-employed professionals climbed 28 per cent. Overall loan growth in the same month was 14.7 per cent. "This might reflect the former's greater dependence on banks for funding working capital loans, given increasing receivable cycles and inventories, since their access to market borrowings is limited," said Saugata Bhattacharya , chief economist at Axis Bank . "However, the government's high expenditure trends suggest that delayed payments might not be due only from the government, but also private corporate supply chains." Finance Minister P Chidambaram has repeatedly said the fiscal deficit 'red line' of 4.8 per cent of gross domestic product will not be breached. With revenue growth falling behind projections, Chidambaram may have to make even deeper cuts in expenditure although he will need to balance rating downgrade worries with the need to avoid risking deeper unpopularity months before general elections. Congress has just suffered heavy losses in recent assembly polls. The Congress -led UPA government has been hit by a series of corruption allegations besides presiding over surging inflation amid an economic slump. Small enterprises rush to take loans due to delayed payments as strapped government tightens belt Still, the government, which has already hit 94 per cent of the fiscal deficit target for the year, may have no choice but to get even more stingy about releasing payments as it fights to prevent a sovereign rating downgrade with three months left for the fiscal to end. This could force companies to borrow more and, in turn, delay payments to their vendors, worsening the payments situation. Anticipating pressure on this front, RBI opened a Rs 5,000-crore refinance window in November that operates through Small Industries Development Bank of India . A few weeks before that, in late October, RBI Governor Raghuram Rajan had expressed concern over the plight that micro, small and medium enterprises (MSMEs) are likely to find themselves in. "I am saying specific entities have tight liquidity conditions, especially MSMEs," he had said. "It is both urging PSU (public sector unit) entities and government that while you are dealing with some of these problems, dealing with the pace of payments is quite important. Why should some poor entity that has supplied you now face distress, because it has not got the payments?" The central bank elaborated on this theme when the window was opened in November. "The liquidity support comes in the wake of slowdown in the economy, which has resulted in liquidity tightness in a large number of micro and small enterprises (MSEs) in the manufacturing and services sector, particularly due to delayed settlement of receivables from large corporate, public sector undertakings and government departments," the Reserve Bank of India said. Retail traders, who need to pay suppliers, face delays in getting money from their customers who are already hit by rising inflation that's taking an increasingly large bite of their income. Borrowing by retail traders from banks jumped 26 per cent in November, according to RBI data. "The trend will continue over the next couple of quarters until the demand situation improves," said Anjan Ghosh , head of corporate sector ratings at ICRA , a unit of Moody's Investors Service . "We have already seen improvement in some exportoriented sectors. In case of industries such as steel and metals, even supply-side issues need to be addressed." Anil Jain , managing director of Jain Irrigation , explained the impact a spending squeeze can have on companies based on his experience of a few years ago. "We suffered as the subsidies took almost a year to reach the farmer, when ideally it should take only a month. As a result, our borrowings two years ago shot up to Rs 1,200 crore , with average interest rates at 15 per cent," Jain said. "We were thus forced to change our business model. We set up an NBFC ( Sustainable Agro-commercial Finance Ltd , or Safal) to cater to farmers in Maharashtra . In the past two quarters, our focus on exports has paid off. We have reduced our borrowings to Rs 500 crore . We have also reduced our exposure in the domestic drip irrigation business," he said. "Because of the delay, we saw a negative growth of 25 per cent last year." The drip irrigation busibusiness is subsidised to the tune of 50 per cent, with 40 per cent funded by the Centre and 10 per cent by the state government.
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