The Union Budget 2022-23 highlighted that the Micro Small and Medium Enterprises (MSME) sector is a vital pillar of the country’s economy. It contributes to approximately 45 per cent of India’s total manufacturing output, 40 per cent of exports, and almost 30 per cent of the national GDP. The COVID-19 pandemic proved to be a major blow to the sector, especially to the small enterprises as they were abruptly forced to get on the tech wagon. The unforeseen and instant digitization resulted in mounting costs at a time when they could barely sustain themselves. In light of this, the sector put their faith in the Union Budget for the FY 2022-23 for support, recovery and development.
Expectations of the MSME Sector from the Budget
Previously, the government had introduced the Emergency Credit Line Guarantee Scheme (ECGLS) to provide support to the micro, small and medium enterprises amidst the pandemic. This led to an increase in the expectations of the MSME sector from the 2022 Budget. They anticipated that the government would provide benefits such as simplifying taxation procedures, credit lending, and investment incentives.
Changes in the Credit Framework
Under the aforementioned ECGLS scheme, MSMEs enjoyed a reduction in the interest rates on the loans and an enhancement in the loan procurement process. This was well-received as it helped the MSMEs to recover from the clutches of the pandemic.
It is pertinent to note that occasionally the MSMEs have to extend their credit lines and bear the brunt of delayed payments. This adversely impacts the growth of their business. Due to this, they need measures to facilitate their business decisions by improving the credit lending framework.
Due to the pandemic, a number of MSMEs were unable to utilize the benefits provided by the government. This was primarily because, either the enterprises weren’t registered as MSMEs or they did not have a secured bank account.
The cash flow was also largely impacted by COVID-19. To minimize the challenges put forth by this issue, provisions for banks to lend more to MSMEs were required. This in turn would have ensured a steady supply with the NBFs and would have further enabled them to lend credit to MSMEs.
Further, it was expected that the Special Credit Linked Capital Subsidy Scheme, which was announced in 2021, would extend to enterprises with a turnover of fewer than 5 crores. The institutional credit provided under the scheme would have allowed the smaller enterprises to procure equipment for their technological development. Ergo, certain key changes were expected in the credit framework.
It had also been suggested that retail loans to MSMEs should be treated differently from corporate loans. This suggestion came in light of the Reserve Bank of India’s notification in November, where it clarified its asset classification norms. Under this notification, the RBI asked the lenders to classify the borrower accounts as a Special Mention Account (SMA) and a Non-performing Asset (NPA) as per the day-end process.
The budget was also expected to come to grips with the problem of willful defaulters and rising NPAs in the given sector by introducing appropriate policies.
Reduction of Taxes
The government was expected to provide a considerable reduction in duties and taxes. This would have encouraged the MSMEs to invest more in capital goods and in turn produce more. To further tap the manufacturing capabilities of the MSME sector, it was suggested that the Long Term Capital Gains Tax on Private Equity should be reduced. Additionally, more subsidies should have been introduced on the imports of Capital Goods. The MSMEs also hoped for GST rationalization and some relaxation in the compliance burden. This would have helped in increasing the ease of doing business.
Incentives for Investment
For the inducement of investment in the sector, the MSMEs pinned their hopes on the government to provide incentives such as tax benefits for the angel investors and contrive a policy to ensure that the sector is adequately funded.
Steps Towards Digitization
Furthermore, it was suggested that the government should have aimed to bring the digital revolution in the backward areas as well. For this, the government should have promoted digital payments through certain incentives. Further, it was expected that the government would provide technological solutions to enable the MSMEs to increase their production and compete better.
To address the environmental concerns, steps to promote low carbon manufacturing among the MSMEs were awaited. The 2022 Budget was expected to provide support in this regard. This would have provided the Indian economy to tackle environmental concerns as well as enable the MSMEs to explore innovative solutions.
Budget 2022: A Beacon of Hope for the MSME Sector?
In the 2022 Budget, critical factors concerning MSMEs were targeted. These include raw material, credit access, and input costs. Further, infrastructure and skill development support, digital services support, ease of doing business was assured and facilitation of ease of doing business was announced.
A reduction in the import tariffs on inputs was announced along with an increase in the tariffs on the import of end products. This would protect the MSMEs and make them more competitive. While there was a reduction in tariffs including customs duty and exemptions on input like steel scrap, a 7% duty on finished goods was announced. Further, the import tariffs for industries like textiles, leather products, and handicrafts were also reduced. Lastly, the steel scrap customs duty exemption, which was given last year has been extended for another year, providing relief to MSME steel producers. Moreover, certain anti-dumping and countervailing duty on stainless steel and coated steel flat products, bars of alloy steel and high-speed steel were revoked in larger public interest considering prevailing high prices of metals. On the other hand, customs duty on umbrellas was raised to 20 per cent and exemption to parts of umbrellas was withdrawn.
Removal of exemption on items which are or can be manufactured in India and providing concessional duties on the raw material that goes into the manufacturing of intermediate products will go many a step forward in achieving our objective of ‘Make in India’ and ‘Atmanirbhar Bharat.
Access to Credit
The MSME sector would now be facilitated with an additional credit of Rs 2,00,000 crore under the credit guarantee scheme. The Emergency Credit Line Scheme has been extended till March 2023 and an increase in the guarantee cover has been announced, from Rs 50,000 crore to Rs 5,00,000 crore with an exclusive cover earmarked for hospitality. Moreover, an announcement of the use of the post office infrastructure for 1.5 lakh additional physical banking facilities was made. Additionally, it was announced that 75 remote rural districts would now have digital banking units set up by commercial banks. Credit Guarantee Trust for Micro and Small Enterprises (CGTMSE) scheme will be revamped with funds infusion. This will stimulate additional credit of INR 2 lakh crore for MSEs and boost employment opportunities.
Investments in multi-modal logistics parks and cargo terminals under the Gati Shakti scheme would facilitate domestic as well as global market connectivity. Thus, bringing down the cost of logistics for the sector and boosting export competitiveness.
An announcement pertaining to the rationalization of capital gains surcharge was made, boosting the growth of startups. Individuals and FPOs would now be strengthened through the NABARD initiative.
The national skill qualification framework will be oriented as per the varied industry needs. Hence, a positive initiative to bridge the gap of skilled human resources within the sector.
Digital Services for the MSME Sector
The Union Budget 2022 declares that Udyam, e-Shram, National Career Service (NCS) and Aatamanirbhar Skilled Employee Employer Mapping (ASEEM) portals will be interlinked, and their spectrum will be broadened. They will now serve as portals with live, organic databases, delivering G2C, B2C, and B2B services. These services will relate to credit facilitation, skilling, and recruitment to formalise the economy and improve entrepreneurial opportunities.
Efficiency and Competitiveness
For MSMEs to become more efficient, the Racing & Accelerating MSME Performance (RAMP) program with the outlay of Rs 6000 crore over 5 years will be rolled out, It aims to help the MSME sector to inculcate factors such as resilience, competitiveness and efficiency.
Surety Bonds in Public Procurements
To reduce indirect costs for suppliers and work contractors, the use of surety bonds as a substitute for bank guarantees will be made acceptable in government procurements.
Concessional Corporate Tax
Extension of the concessional corporate tax rate of 15 per cent by one more year — till March 2024 for newly incorporated manufacturing companies has also been rolled out.
PLI for Solar PV Module
Budget 2022 allocated an additional Rs 19,500 crore to boost the manufacturing of solar PV modules under the production linked incentive scheme. This is to facilitate domestic manufacturing for the ambitious goal of 280 GW of installed solar energy capacity by 2030, an additional allocation of Rs 19,500 crore for Production Linked Incentive for manufacturing of high-efficiency modules, with priority to fully integrated manufacturing units from polysilicon to solar PV modules, will be made.
From the above discussion, it can be seen that the 2022 Budget did oblige with the expectations of the MSME Sector. There was an increase in the budgetary allocation for the given sector. The 2022 Budget successfully addressed certain key issues such as the lacuna in the credit framework, deficiency of infrastructure, etc.
However, at the same time, it neglected a number of key issues. It ignored the needs of the unregistered MSMEs, which almost comprise 90% of the sector.Further, there was a reduction in the funds allocated to key schemes. There was no allocation under the 2022 Budget for the Credit Linked Capital Subsidy and Technology Scheme. Further, a cut of 75.56% has been made in the Technology Upgradation and Quality Certification.
The Budget failed to go beyond the schemes while exploring ways to increase the infusion of capital in the sector. In spite of the existing schemes, many enterprises are still struggling to sustain themselves. Therefore, an additional boost should have been provided by the government.
The government also failed to tackle increased unemployment in the sector. No measures were taken to extend the benefits of the Insolvency and Bankruptcy Code to proprietorship firms. This was a serious drawback as the government failed to take the interest of more than ninety per cent of MSMEs into account amidst the pandemic.
Some Hits Some Misses
The pandemic severely disrupted the MSME sector and in effect, the economic output of the country. The 2022 Budget did bring a ray of hope for the sector through schemes and incentives that shall foster a favourable ecosystem for new ventures and businesses. However, it paid little or no attention to the crucial issues that persisted. Failure to infuse funds into the market, absolute abandonment of unregistered MSMEs and schemes aimed at supporting new enterprises while failing to extend plans to revive the existing units are some of the issues that demand a more insightful plan. Even though financial assistance extended during the pandemic did resolve the immediate sustenance issues, mounting loans and additional dues are some issues that need immediate redressal. Thus, it can be seen that India still needs a holistic approach to foster the growth of MSMEs, particularly the ones reeling under the debt of the pandemic.
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The 2022 Budget did bring a ray of hope for the sector through schemes and incentives that shall foster a favourable ecosystem for new ventures and businesses. However, it paid little or no attention to the crucial issues that persisted. Failure to infuse funds into the market, absolute abandonment of unregistered MSMEs and schemes aimed at supporting new enterprises while failing to extend plans to revive the existing units are some of the issues that demand a more insightful plan.