It gives SMEs a chance to reorient themselves in the face of new realities and expectations and also gives them a chance to request the government for some measures that can help them face the pandemic distress.
Almost all MSMEs want an increase in budgetary outlay to the sector. This, the entrepreneurs say, is urgently needed to combat the growing pandemic triggered business threats that are destabilising their supply chain. Notably, the government’s budget allocation for 2021-22 for MSMEs was Rs 15,700 crore vis-à-vis Rs 7,572 crore in 2020-21. But red tape and bureaucracy niggles, the industry says, keep a significant chunk of the benefits from reaching micro-units, which constitute 99% of all MSMEs.
Industry observers also highlight the need for specific schemes. They say the financial institutions still do not treat them fairly, and the budget should address this.
Rajiv Chawla, Chairman of industry body IamSME of India, says a key demand this time is the removal of prepayment and foreclosure penalty on loans for MSMEs. The government’s flagship Production Linked Incentive (PLI)-scheme is now only for large investors. The government should introduce a similar incentive programme for SMEs, Chawla adds.
The segment cannot be overlooked as it is a growth engine of the Indian economy. It holds immense significance among India’s industrial sectors; employs 40% of the country’s workforce; contributes 30% of GDP and is responsible for 50% of the country’s exports. Moreover, it has numerous informal players. The country’s MSMEs base is also the largest after China’s.
The Federation of Indian Micro and Small & Medium Enterprises (FISME) says there has to be specific measures for Covid-hit MSMEs. The industry body opines that the pandemic has adversely impacted SMEs, and many accounts turned non-performing assets (NPAs) even with an extended NPA classification from 90 days to 180 days. As the security and collateral remains usually fully used in MSMEs, the inability of the promoter to bring in additional security during restructuring becomes a serious handicap. For units impacted during the Covid pandemic, suggests FISME, the government can extend a guarantee cover of 100% for the additional security needed for restructuring.
It also says that while measures like the Emergency Credit Line Guarantee Scheme (ECLGS) helped many MSMEs, several of them have remained outside the support system. This is because decision making in banks has become Excel sheet-based or parameter-driven, claims Animesh Saxena, President, FISME. Therefore, branch managers need to be empowered to decide on restructuring proposals by giving them flexibility to go beyond benchmark norms. Such relaxation is required for deviation from standard benchmark norms on inventory days, receivable days and margin requirements, among others.
According to FISME, international banking regulations issued by the Basel Committee on Banking Supervision have straight-jacketed SMEs. Small businesses are also distraught because banks insist on ratings from credit rating agencies. Saxena says this increases the cost and time of loans.
FISME asks that the pre-pandemic guidelines on rating be suspended for at least three years. While the Reserve Bank of India has said BLR rating norms are not compulsory for accounts with exposure of up to Rs 7.5 crore, banks still insist on them, claim entrepreneurs.
To protect the interests of MSME suppliers under the Insolvency and Bankruptcy Code (IBC), FISME proposes that MSMEs be classified into separate subcategories under the operational creditors category and accorded priority for payment of their dues over the dues of the other operational creditors and other debtors. Also, the dues of MSMEs should be made on a par with those of workmen to a minimum extent of 5% of the total corporate insolvency resolution process or liquidation amount as the case may be for payment, says Saxena.
The industry body also states that mandatory GST registration has kept out millions of women and artisans from selling through e-commerce. “There is a solid case in allowing small businesses to sell without GST registration below a turnover of Rs 40 lakh through physical stores. This facility is not available once the business sells goods online through e-commerce. Inability to handle GST compliance costs has disabled millions of self-employed women/SHGs and artisans from selling their products online, especially during the Covid pandemic. Both the offline and online sellers should be allowed to sell without GST registration below the prescribed threshold,” says Saxena.
FISME also claims “medium enterprises” are under siege in India. “Unfortunately, we have created an entire system of perverse incentives which punishes any unit trying to grow from small to medium.” This must change with this budget, says Saxena. “Medium firms are excluded from the 25% set aside for micro and small enterprises (MSEs) under the government’s public procurement policy. But at least they should be allowed to avail the advantage where no micro or small unit is bidding,” he says. “The medium firms should be allowed to access support from facilitation councils under MSMED Act. Banks exclude medium firms from their code of bank’s commitment to micro and small enterprises and while MSEs cannot be imposed penalty when foreclosing loans, medium enterprises are penalised. The code should be for the entire MSME sector,” he adds.
Pradeep Multani, President of PHDCCI, suggests an extension in the timeline of the ECLGS for another year, until March 31, 2023. The chamber also wants the extension of the reduced rate of performance security at 3% for one more year till December 31, 2022. “We appreciate the reduction in the corporate tax from the peak rate of over 30% to an effective rate of around 25%. However, we suggest a reduction in tax on MSME firms working as proprietorship and partnerships. For such businesses, the maximum tax slab should be brought down to 25%. For the new units, the effective rate is around 17%, so we suggest to enable the entities to take benefit of Section 115BAB the time limit allowed to start manufacturing by a new unit may be extended by at least a period of 24 months — the new unit shall be allowed to start manufacturing by March 31, 2025,” Multani says.
The government spent significant resources on attracting large corporations by way of PLI schemes spread across sectors, says Rakesh Nangia, Chairman of Nangia Andersen India. MSMEs, however, were largely left out of the ambit of such schemes. “Given the broad-based growth and employment challenges we foresee, it would be prudent on the part of the government to incentivise MSMEs to scale up their operations. Some measures would be to ensure that PLI Schemes that are expected to be announced during this financial year have a separate carve-out for MSMEs to enable benefits under said schemes flow to all corporations and not just a select few,” Nangia says.
The Department for Promotion of Industry and Internal Trade has been working on preparing a single-window portal for incorporation and obtaining all relevant approvals. According to the department, 19 central government ministries/departments and 10 states have boarded the national single window system, which has now been soft-launched as a single point of clearance for investor-related issues. Nangia adds the portal should go live soon and if state-level registrations and renewals are also included on the same portal, it could prove to be a game changer by bringing true ease of doing business.
(Edited by Ram Mohan)