Anushruti Singh
With general elections due in next several months, the Indian government is set to present their last budget on 1 Feb 2024. The upcoming union budget may be an interim budget, yet its significance is paramount in guiding our economic future.
Last year, in the Union Budget 2023-24, Rs 22,137.95 crore was allocated for the MSME ministry, reflecting a 41.6 per cent increase from the previous fiscal year. Anticipation lingers for even higher allocations in the upcoming fiscal year.
Meanwhile, the MSME sector accounted for 29.15 per cent of the country’s gross domestic product (GDP) in the fiscal year 2021-22. Also, for FY 2023-24, up to September 2023, the MSMEs reported that the share of exports from products specified for MSMEs constituted 45.56 per cent of the country’s total exports, showing an increase from 43.59 per cent in 2022-23.
The sectors’ wishlist echoes the need for fostering ease of doing business, reducing tax complexities, and unlocking financial avenues.
Increased access to credit
One major call from the MSME sector is for Finance Minister Nirmala Sitharaman to unveil a special package in the upcoming interim Budget. The aim is to ensure increased access to institutional credit at competitive rates. This initiative is seen as crucial for empowering small and medium enterprises to play a more significant role in India’s journey toward achieving a $5 trillion economy.
“Lack of competition in the banking sector (75 per cent of banks being public sector) and weak regulatory institutions, which have not been very successful in ensuring customer centredness of banks, and near-defunct grievance redressal mechanism (Office of Banking Ombudsman) all coalesce into an unhappy experience for an ordinary MSME owner with the banks — whether private or public,” FISME Secretary General Anil Bhardwaj said.
Reinstating the tax rebate for Foreign Portfolio Investors (FPIs)
A recent report from the RBI underscores a significant threefold surge in credit growth from Non-Banking Financial Companies (NBFCs) to the MSME sector. The NBFC sector, playing a pivotal role in meeting the credit needs of MSMEs, seeks relief to better serve this vital economic segment.
Beyond banks, FPIs are one of the key sources of capital for NBFCs. Hardika Shah, Founder of Kinara Capital, an NBFC player points that how the govt recent move has challenged them in lending money.
“Recently, the government removed the tax rebate extended to FPIs on interest earned on bonds. The 5 per cent tax rate on interest was hiked to 20 per cent. This rise in tax rate is likely to raise borrowing costs by 30-40 basis points for MSME lenders, which in turn, can lead to a liquidity crunch. Restoring the earlier regime will ensure that the cost of borrowing remains unaffected, enabling fintech NBFCs focused on MSMEs lending to bolster capital access for the sector,” she said.
Remove cap on CGTMSE scheme
To further enable last-mile MSME financial inclusion, Shah recommends to remove the cap on the CGTMSE Scheme.
In 2023, the CGTMSE cap was revised to allow for MSME loans to have interest rates not exceeding 21 per cent per annum. While this is an improvement from the previous cap of 18 per cent, it still excludes MSMEs that require unsecured small-ticket loans, restricting financial inclusion at the last mile.
“A reconsideration of the interest rate cap and guarantee cover under the CGTMSE scheme is essential to enable the scheme to deliver its full potential. It will encourage more lenders to come on board and offer loans to even smaller MSMEs, and at the same time improve loan terms for end borrowers,” she pointed.
Encourage gender lens investing
Despite demonstrating their business acumen, women entrepreneurs often get overlooked when it comes to capital access. Financing for women-led businesses is mired by systemic and perception challenges.
Even today, less than 1 per cent of investment goes to women-led businesses, indicating that there is a critical need for focused efforts to be made to bridge this gap, Shah asserted.
“The budget should look at incentivising domestic as well as foreign investors for gender-lens investing in India. It should ease out the regulatory and policy impediments and encourage greater participation of women in the business landscape, as unlocking the power of women entrepreneurs would be crucial for India to achieve its goal of becoming a $30 trillion economy by 2047,” she said.
On the other hand, it is likely that Sitharaman may address some issues which are faced by this sector in the Budget announcement.
Mitigate risks
Deloitte, a consultancy firm, recommended promoting risk mitigation tools such as credit guarantees and insurance schemes to minimise capital flow risks for MSMEs, especially in sectors like automotive, electronics, industrial and electrical machinery, and chemicals. Highlighting that only 6 per cent of MSMEs actively engage in e-commerce, Deloitte stressed the need for the government to reimagine and enhance the digital commerce ecosystem, addressing challenges for stakeholders to foster growth in this sector.
Need for special package
Puneet Kaura, Chairman of CII Delhi State and MD & CEO of Samtel Avionics, emphasised that the MSME sector, vital for employment and manufacturing sector growth, faces a significant challenge in obtaining timely and cost-effective credit. Kaura told PTI this while highlighting the sector’s role as a crucial contributor to employment and export promotion.
“We want Finance Minister Nirmala Sitharaman to come up with a special package for MSMEs in the Interim Budget, so that the small and medium units do not suffer for want of credit. “This sector has the talent and risk-taking appetite and can play a big role in strengthening India’s capabilities even in critical sectors such as semiconductors, space technology, defence, and medical equipment,” Kaura said.
Ease of taxes and resolve payment delay
The upcoming budget is a strategic opportunity for the government to introduce impactful measures like interest subvention and innovative schemes, to unleash the potential of the MSME sector.
EY depicts that the government may consider steps to streamline tax appeals and Alternate Dispute Resolution Mechanisms. Prioritising long-standing cases, setting monthly disposal targets, and creating a technical unit for appeals are some measures to unclog pendency at CIT(Appeals) level.
Praveen Agrawal, Co-Head, India at OakNorth said, “Our hope is for a revision in the minimum GST registration revenue threshold, a decrease in corporate tax rates, and tailored tax incentives for MSMEs,”
Vanesh Naidoo, Founder and Director, SafeCams also hopes for ease of paying taxes, “We hope for changes in taxes that make things easier on new businesses possibly through tax holidays, еxеmptions, or simplifiеd tax filing procеssеs. Thе budgеt should also allocatе funds for promoting tеchnology and innovation within MSMEs, providing incеntivеs for digitalisation, research and development, and tеchnology upgradation,” he said.
Another hope is on the resolution of delayed payments, Agrawal of OakNorth said, “Addressing the critical issue of delayed payments becomes paramount, especially for the MSME sector. The inaccessibility of timely credit support impacts MSMEs not just operationally; but also, it resonates across the economic spectrum. The government’s initiatives, from the Samadhaan Portal to the Trade Receivables Discounting System (TReDS), showcase a commitment to alleviating this challenge,” he said.
Initiative for e-commerce exports
Ashish Gupta, Head of Legal & Government Relations, eBay calls for action to foster e-commerce exports, as India is foreseeing a transformative era for India’s e-commerce sector.
“We’re looking forward to a budget that streamlines business operations, promotes innovation in digital payments, and strengthens the logistics infrastructure, all while keeping a focus on supporting MSMEs through tax benefits and regulatory ease. Building on the success of the previous year’s impactful Foreign Trade Policy, we’re optimistic about a budget that will position India prominently in the global e-commerce exports arena. Envisioning the budget as a catalyst, we aim for export-oriented policies to propel India’s e-commerce onto the global stage, fostering sustainable growth and international competitiveness.” He said.
Ashish Nayyar, Co-Head, India at OakNorth added that bridging the prevailing digital gaps in remote areas through subsidies and embracing e-commerce platforms like Open Network for Digital Commerce (ONDC) can ease collateral requirements, enhance productivity and increase market access for these enterprises. “This focused approach can help the government foster expansion of the MSME sector, thereby contributing substantially to the broader economic landscape.” He said.
