Credit Allocation, Sustained Growth of MSMEs and Unorganized Sector: A General Equilibrium Study with Reference to the Less Developed Economies

Abstract

The aspect of economic contrast seen in developing countries shoots primarily from the structure of loan allocation to the micro, small and medium enterprises (MSME) sector, which is essential for job creation and understanding the role of microfinance institutions (MFIs) in meeting the credit demands of the vulnerable but vital sector of less developed economies. The study demonstrates the impact of MSME protection in terms of both fixed and adjustable factor coefficient settings, creating a model of a small open economy with three sectors: a skill-intensive export sector; a capital-intensive import competing sector; and a labour-intensive import competing and intermediate products producing sector. It analyzes the types of protection that aid in the expansion of credit and the alleviation of capital constraints, which further highlights the insufficiencies of tariff protection for the organized sector and simple credit guarantee policies to provide adequate credit flow and thus continued MSME growth. Finally, it considers the importance of priority sector lending policies in ensuring adequate credit distribution to this sector. The results show that protection helps in enhancing flow of credit and thereby works to relax the capital constraint. However, the tariff protection for organized sector may positively or negatively affect the non-traded unorganized sector.

Citation

Bhattacharjee, M., Chakraborty, A. and Ghosh, D. (2023), "Credit Allocation, Sustained Growth of MSMEs and Unorganized Sector: A General Equilibrium Study with Reference to the Less Developed Economies", Das, R.C. (Ed.) Inclusive Developments Through Socio-economic Indicators: New Theoretical and Empirical Insights, Emerald Publishing Limited, Leeds, pp. 97-113. https://doi.org/10.1108/978-1-80455-554-520231008