Payment Delays Hurt MSMEs

Large corporations exploit a structural vulnerability by leveraging delayed payments. This diverts vital cash flow from MSMEs, hindering their ability to invest, expand, and create jobs.

The Scale of Delayed Payments

As of March 2024, an estimated ₹7.34 lakh crore is tied up in unpaid MSME invoices. This significant amount drains working capital, often consuming 70-80% of a small business's funds. Payment cycles frequently exceed 90 days, forcing MSMEs to delay their own payments, reduce orders, or take costly short-term loans. Interest rates in informal credit markets can surge to 3-5% monthly. Arun Poojari, CEO of Cashinvoice, notes that large companies essentially use MSME suppliers for interest-free working capital, shifting liquidity pressure down the supply chain.

Policy Efforts Face Challenges

Section 43B(h) of the Income Tax Act, effective April 1, 2024, requires companies to pay MSMEs within 45 days (or 15 days if no agreement is set) to claim the payment as a tax-deductible expense in the same financial year. This law aims to discourage late payments by raising the tax burden for companies that pay late. The Trade Receivables Discounting System (TReDS) is seeing more use. By FY 2025, total invoice discounting on TReDS platforms exceeded ₹1.9 lakh crore. Platforms like RXIL and M1xchange report substantial yearly growth, showing greater adoption of digital invoice financing. Financiers on TReDS offer competitive rates, averaging 5%-8% per annum. However, these measures face significant challenges. Some large companies have reportedly cancelled orders from MSMEs registered under Section 43B(h) or moved business to unregistered suppliers to bypass the new rule. The core problem of unequal bargaining power remains, where MSMEs often face 'take it or leave it' terms, cementing late payments in supply chains.

Economic Impact and Credit Gaps

The widespread issue of delayed payments significantly slows India's economic growth. Some estimates suggest that this lack of liquidity at the base of the economy could reduce GDP growth by 1-2%. The MSME sector is vital, contributing about 31% to India's GDP and employing over 320 million people. Formal credit access is improving for MSMEs, with credit growth exceeding that of large industries and guarantee schemes like CGTMSE supporting collateral-free loans. However, a large credit gap persists, estimated at ₹30 lakh crore. Informal lenders charge rates nearly double those of formal sources. Using informal credit, while addressing immediate needs, severely cuts into MSME profit margins.

Risks From External Shocks

Large corporations' dependence on MSMEs for working capital creates inherent risks. Unequal negotiation power means terms are dictated, not agreed upon, leaving smaller firms to absorb financial shocks. This dependency is especially dangerous when the global economy weakens. Recent global supply chain disruptions, geopolitical events, and rising shipping costs have extended payment cycles from 30-40 days to 90-120 days in some sectors. Higher war risk insurance premiums have increased logistics costs, further straining MSME cash flows. Tariffs from major trading partners, such as the US's 50% duty on certain Indian goods, have sharply reduced export orders for labor-intensive MSME sectors like textiles and chemicals. This has led to factory closures and job losses. The combined impact of delayed payments, rising input costs, and external shocks leaves MSMEs in a precarious financial state, limiting their resilience and growth potential.

Outlook and Enforcement Needs

Despite policy efforts and a growing digital financing ecosystem, large firms' reliance on MSMEs for working capital will likely continue without stronger enforcement and a better balance of bargaining power. The ongoing reliance on informal credit markets by businesses unable to access timely formal finance highlights the gap between policy goals and real-world execution. The overall economic consequence is clear: if MSMEs continue to absorb liquidity pressure, their capacity to drive India's economic growth will remain limited, creating a systemic drag on national development goals.