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Supporting
Local Green Enterprises
In the current economic and environmental scenario in developing countries like India, LGEs have a potential to drive the economy towards a sustainable and inclusive developmental path, given their key features. These LGEs have become more relevant in the context of post-COVID economic recovery. It is critical to create an enabling environment for these LGEs to sustain their operations, enable them to adopt greener practices, produce green goods and services and create more local jobs. Among the operational, regulatory and institutional challenges that these formal and informal LGEs are exposed to, access to finance is a significant one. Sufficient availability, timely access to finance, terms of availing the financial support are some of the critical dimensions in this regard. As per a 2018 study, the estimated overall requirement for finance (debt and equity) of MSMEs in India is INR 87.7 trillion. It comprises INR 69.3 trillion of debt demand. Approximately, 84% of this debt demand is met by finance from informal sources. This represents the gaps in access to formal institutional finance, which encompasses both demand and supply side gap. Demand side gaps originate from informal status of the enterprise, demand for informal sources of finance due to better accessibility, dominance of informal networks, higher transaction costs of accessing finance from formal sources due to complex operational processes, stringent terms and conditions, requirement for co-lateral, asymmetric information etc. While these screen out a portion of the potential enterprises from accessing finance from formal sources, the availability of finance from these sources are also not adequate across the country, thereby creating a supply side gap. This is one side of the broader story. The section of MSMEs that are defined as LGEs are not financially incentivised in terms of getting better access to finance for being “green” and “inclusive”. In India, there is an increased need for a financial instrument for increasing investments in these LGEs, and dis-incentivising investment in some of the enterprises that are practicing environmentally and socially harmful practices. Having these kinds of instruments and regulatory mechanisms in place are likely to enable the country to achieve the broader national targets of sustainability, expedite economic recovery and meet global climate commitments.
Hence, given the multi-faceted challenge of the
LGEs and the current economic scenario, the government needs to recognise
the loopholes and gaps in regulations, financial services and information
dissemination. Creation of enabling policies to strengthen the financial
ecosystem for the LGEs would entail provision of legal status and rights to
the informal enterprises, ensuring information access, identification of the
sectoral and regional gaps in access to finance, interventions to minimise
transaction costs of accessing funds from formal financial institutions,
creation of financial instruments to incentivise “green” and “inclusive”
enterprises along with a feedback mechanism and strengthening local and
regional networks of enterprises.
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Satabdi Datta
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