Activism Entrepreneurship

Aatmanirbhar – In Theory and Practice 3

Different payment timing results in discrimination against MSME vendors. Because of this rule, and the incentives it generate, Central govt. departments and PSUs would love a foreign supplier or a trader of a foreign supplier. MSME ends up with higher costs and that kills their competitiveness. How will atmanirbhar be achieved with this rule in place?

The third policy is the difference in payment timing. It is very strange how Central government departments, defence establishments and PSUs get away with differential payment terms between foreign and Indian supplier. 

Example of a payment terms showing different time line for foreign supplier and Indian MSME.

For a foreign supplier, the payment by Letter of Credit (LC) is made one month before the item is shipped from their factory. The same product if it is made by an Indian MSME, the same government client would make the payment one month after the product is delivered at their store. 

Difference in timing of payment to foreign vendor and Indian MSME

In the example of the above product with six month timeline for product delivery, there is a three months difference in timeline between payment to a foreign vendor / Indian trading company versus an MSME manufacturer. 

Let’s look at the impact in cost. It must be remembered that for an MSME getting financing is the bigger issue. Only if they can manage to get it, the cost of finance become relevant. The additional financing of three months @ 15% is 3.8 units for MSME. 

Now if we add the additional finance cost for each supplier we get the real cost:

Foreign supplierTraderMSME 10% indigenisationMSME with 50% indigenisationMSME with 100% indigenisation
102.5107.5124.8118.8114.3
Real cost after adding cost of payment timing

Clearly the MSME who thinks of atmanirbhar is having its competitiveness against foreign supplier further lowered by this difference in payment timing.

We have seen how payment timing results in discrimination against MSME vendors. Because of this rule, and the incentives it generate, govt. departments and PSUs would love a foreign supplier or a trader of a foreign supplier. MSME ends up with higher costs and that kills their competitiveness. How will aatmanirbhar be achieved with this rule in place?

Read the first part highlighting the import duty exemption and the issues it generate for MSME.

Read the second part of this article where discrimination due to finance cost is discussed.

Read the fourth part of this article where discrimination due to currency difference is discussed.


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