Union Budget 2021: Job creation, skill development, converging GST, and disinvestments will push growth of MSMEs
Revival of MSMEs is going to be the fulcrum of upcoming budget because of their mammoth share in the GDP. Hence, government should design a budget which not only stimulates growth in MSMEs but also resurrects them.
Anushruti Singh January 22, 2021
MORE IN Finance
Indian economy was already in dire straits since past few years as country’s real GDP had plummeted by 7.7 per cent from the growth rate of 4.2 per cent in the previous financial year, according to new government estimates. Industries are now expecting economy to gain some momentum as we enter a new year. The impending rollout of vaccine also brings a ray of hope among various sectors as numerous opportunities unveil for them.
The resurrection of MSMEs totally depends on the upcoming union budget 2021 and industries in this arena have high hopes from it. Commenting on the upcoming budget and expectations of MSMEs, RP Yadav, Chairman and Managing Director, Genius Consultants Ltd claims that the Indian Budget 2021 is going to be a unique budget this year as it will be presented in the backdrop of an on-going global health crisis.
Revival of MSMEs is going to be the fulcrum of upcoming budget because of their mammoth share in the GDP (30 per cent in 2020). Almost 122 million lost their jobs and around 420 million informal labourers faced severe consequences last year due to the lockdown. Keeping all these issues in mind government should design a budget which stimulates growth in MSMEs.
“Post the severe effect and a stark dip in the overall economy due to the stringent lockdown implemented by our government for COVID-19, the upcoming budget should focus on the revival of small and medium businesses, employment generation, and overall wellbeing of the economy and individuals,” feels Yadav.
Dr Arun Singh, Chief Economist at Dun & Bradstreet is of opinion that despite the succour provided by stimulus package and schemes, there is still a lot of room for further measures to revive the sector. “Given the severity of the impact that COVID-19 inflicted on the MSMEs, we expect the government to take further measures to help them in recovering from the sharp slowdown,” he comments.
Advocating the thought, Uday Shankar, President of FICCI asserts that the upcoming budget is an opportunity to add catalysts to the process of economic revival. “It is time to take things forward and build on the country’s growth agenda so that we return to the path of high growth as soon as possible. We expect the government to introduce more growth-oriented measures in the next budget,” he added.
Many experts are also of opinion that need for further stimulus remains, but the main challenge lies in spotting risks and tracking the performance of various sectors and clusters. According to them, MSMEs sector need innovative measures to accelerate growth and stimulate demand and hence they are expecting favourable announcements in the union budget.
Growth-oriented measures required to recuperate
Analysts have forecasted a V-shaped recovery for the economy during this year. Sectors such as manufacturing, sales, energy consumption are showing a steady growth. According to an estimate of Dun & Bradstreet, only 30 per cent of active businesses in India were disrupted at the end of November 2020 compared to 95 per cent in April 2020. Witnessing this gradual recovery, FICCI recommends that this momentum needs to sustain and therefore growth-oriented measures should be prioritised.
This can be achieved by accelerating the pace of infrastructure investments.
Dr Arun Singh says, “National Infrastructure Pipeline is a five-year plan. We should look at front-ending the projects under NIP and try and complete at least 40-50 per cent of projects in the next two years. When the infrastructure sector moves, it pulls along more than 200 other sectors. It is also a key driver of unskilled employment generation.”
Yadav of Genius Consultants recommends that present regime must keep the fiscal deficit to at least an additional of 1-2 per cent so that they have enough funds to spend on expansion of travel or medical tourism, healthcare, research infrastructure, and defence. He opines, “This will help in creation of employment opportunities and provide companies with the opportunity to improve their revenue and margins. Additionally, the government must execute all pending tax reforms and pay all the pending GST to states for goods and services.”
Favourable changes in GST
The current GST regime according to industry mavens is most convoluted than ever. “With the introduction of the decentralised registration process, the cost of compliance and business process development has increased by manifolds. It is recommended that the concept of centralized registration for services as prevalent in the erstwhile service tax regime should be contemplated under the GST regime as well,” recommends FICCI in a statement.
The industry body also recommends converging GST rates into three slabs. Currently, there are seven slabs for goods and five rate slabs for services which add compensation cess on selective goods. The statement further adds, “Government should consider converging the existing band of GST rates to three in line with international standards. This will help in resolving interpretation issues, complexity, and probability of disputes.”
Acceleration of disinvestments programmes
There is a sharp decline in revenue collections due to the inevitable economic slowdown. Further, bankrupt organisations are just adding NPAs in banks. Hence, federation of industry chambers of commerce and industry strongly suggests disinvestment and monetisation of assets to avoid the process of accumulation of non-performing assets (NPA) which are adversely impacting the credit growth.
Sources tell that talks to reduce the number of public sector banks (PSBs) to four from the current twelve are going on. This most likely will become a part of the government’s new strategic disinvestment policy. This also is likely to include the insurance sector. Adding to it, government is already in talks to sell loss making Air India along with profitable PSUs BPCL and Shipping Corp.
Arvind Panagariya, a renowned economist has explained his views in an opinion editorial piece. According to him, the government was slow to act on NPAs in its first term and the economy paid a high price for it. He further writes that credit growth at PSBs collapsed during 2016-17 and with the weakening of non-bank financial companies in quick succession, growth slowed down to 6.1 per cent in 2018-19 and 4.2 per cent in 2019-20.
Recurrence of similar outcome needs to be avoided, especially when the coronavirus crisis has debilitated the economy. He also recommends that the government can avoid any adverse fiscal implications of recapitalisation by swapping debt for equity with PSBs. In the Union Budget for FY21, the government had set a disinvestment target of Rs 2.1 lakh crore. However, the target was described as ambitious by many.
Though privatisation is already in the cards, Yadav confesses that it is not speedy. He says, “The government must prioritise privatisation of the public sector particularly the ones which are in loss or are stagnant. This will bring revenue for the administration to spend more in the infrastructural and evolving areas with brighter scope.” According to him, it will also help the banks in creating a strong buffer.
Provision of more liquidity for MSMEs
Vikram Wadhawan, Founder and CEO, Vasitum, an AI based hiring platform catering to MSMEs opines, “With the upcoming union budget, we are looking forward for steps by government to boost vigour in the start-up ecosystem and MSMEs. These are one of the biggest growth drivers of the economy.”
He points that one of the major issues for MSMEs is the availability of working capital. He hopes that finance ministry will give emphasis to curb this challenge. “One of the major problematic areas for them is the availability of the working capital. Thus, a framework which can mobilize funding for start-ups and MSME will be a great initiative and will drive serious growth for both sectors.”
Adding in the recommendations, economist Dr Singh suggests that increasing the limit on collateral free loans can help MSMEs. “To boost the flow of funds to MSMEs, we expect the government to enhance the collateral-free loan limit which currently stands up to Rs 2 crore,” advices Dr Singh.
He also adds that developing the Intellectual property finance ecosystem in India and bringing act to mandate timely payments by the government and other large companies will also address the cash flow problems of the MSMEs. In addition, SMEs are anticipating the government to focus on extending credit facilities by re-levelling banks and NBFCs.
Job creation and skill development
The year that passed took away numerous jobs especially in the informal sector which mostly belong to MSMEs. The Centre for Monitoring Indian Economy (CMIE) states that India’s unemployment again increased in December to 9.1 per cent which is highest since the recovery started.
It infers that markets are still dull in terms of job generation although sectors are opening gradually. Experts remark that dull job sentiments directly relate to the economic conditions. Therefore, creation of jobs is of paramount importance in the current scenario. Industries expect a stimulus for investments in infrastructure that can provide a fillip to creation of jobs.
Speaking about this, Wadhawan tells, “We are expecting the government to introduce new policy incentives that will accelerate the business growth of start-ups and MSMEs. It will thereby help them to expand, hire resources, generate employment opportunities, and hence contribute to the GDP.”
Yadav recommends implementation of the redesigned labour reforms in 2021-22. “It will improve the well-being of large number of informal labourers as they will come under the purview of a formal workforce. It will also aid in employment generation and expand the databank of government,” confesses Yadav.
In addition to this, sectors also want to enhance skill development initiatives to generate skilled manpower. “All the skilling initiatives taken by various states and central government should inculcate digital skills amongst MSMEs. Through this, they can optimise their web presence and launch their products on a digital platform,” says Dr Singh. CII suggests raising the cap on emoluments up to Rs 50,000 per month to encourage employment.
Boosting export to fuel economic growth
Analysts also recommend that government should prioritise pushing exports. There should be a significant tariff reduction for this. Yadav suggests, “The upcoming budget must commit to a fixed tariff reduction particularly for the automobile, textile, and clothing sectors for ideal results and progress.”
Currently, average tariff level is 14 percent. Economists such as Panagariya also recommend that it should be reduced in a phased manner to 10 per cent by 2024. This is the only effective way for India to exploit and benefit from the vast global markets. Lately, India is looking at pushing exports but it is also protectionist on the trade front. The government has been increasing duties and it is not a right step towards enhancing exports.
Our economic history also supports cutting duties in past as a result of which exports were boosted after 1991. For instance, average tariff rate in 1990 stood at 56.4 per cent and it came down to 6.34 per cent by 2013. With this, exports peaked to 25.18 per cent of GDP in FY14. However, the export to GDP ratio has stumbled over past few years.
According to the World Bank collection of development indicators, export of goods and services (percentage of GDP) in India were reported at 18.41 per cent in 2019. It reached all-time low of -61 per cent in April 2020 due to nationwide lockdowns. Currently, India’s trade balance recorded a deficit of USD 15.7 billion in December 2020.
Adding to it, industry body CII suggests that competitive import tariff over three years was lowest or nil from the slab between zero to 2.5 per cent for raw materials, was highest for 5 to 7.5 per cent for finished goods and was 2.5 to 5 per cent for intermediates.
As per the CII officials, proposed road map is to encourage domestic manufacturing in alignment with global trade as these trends would boost India’s export competitiveness as per shifting global value chains in the next three to five years. “This will help Indian industry integrate into the global value chain while becoming competitive with its goods and services in the world markets,” the statement by industry body said.
Besides these recommendations, Dr Singh expects the government to announce set of measures to support MSMEs in a holistic manner. He reiterates, “Measures to support MSME exporters could include making export income tax free for micro and small enterprises for three years. Furthermore, the local supply chains should be made stronger and more resilient. Incentives to help MSMEs becoming part of the global value chain should also be encouraged.”
Year 2020 proved to be a rollercoaster ride for the Indian economy. Now industries are expecting a speedy recovery for the losses incurred. Hence, the key reforms introduced last year such as agricultural bills, new codes of labour laws, amendments in GST, and enhanced digitisation are now expected to pave India’s way to an early economic revival.