The Union Budget 2023 is coming up and it’s hoped that it will support the growth of Micro, Small, and Medium Enterprises (MSMEs) in India, also known as the backbone of India’s economy. The Indian government has implemented various initiatives such as the Make in India program, which aims to increase domestic production and reduce dependence on foreign imports, as well as improved India’s rank on the Ease of Doing Business index, which have been very beneficial for the growth of MSMEs.
The government has also allocated funds to critical schemes like the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) and the Emergency Credit Line Guarantee Scheme (ECLGS) in past budgets to help MSMEs recover from the fallout of the pandemic.
MSMEs are hoping to see certain changes in this year’s budget to help them grow further and support the nation’s economy. Let’s explore 5 significant Budget announcements that have the potential to accelerate MSME growth in the coming year.
The Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) scheme is a valuable effort by the Small Industries Development Bank of India (SIDBI) and the Government of India to provide micro and small businesses with access to unsecured loans by providing guarantee coverage to lending institutions. The objective of this scheme was to bridge the credit gap for these businesses and provide them with access to finance. The scheme was made even more inclusive last year when it was expanded to cover women entrepreneurs, those from Scheduled Castes/Tribes and MSEs located in aspirational districts and also microfinance institutions.
Despite its success, the 18% interest rate cap has been a hindrance in attracting more lending institutions to participate in the scheme. Removing this cap will provide better loan terms to end borrowers, thus attracting more lenders and increasing the access to credit and financing options for MSMEs. This would provide the small businesses with greater financial stability, boosting their growth and success.
The Goods and Services Tax (GST) was introduced as a tax reform aimed at streamlining the tax system and making it more efficient. In fact, early on itself the government had acknowledged the need to support the MSMEs sector and had considered a waiver. MSMEs whose turnover is lower than Rs. 20 lakhs are exempted from the mandatory registration. The upcoming budget should continue to hold the exemption as MSMEs may be the first to be impacted by the rising inflation and any initiatives that encourage cash flow is appreciated.
Having said that, GST has had its share of challenges. Since its implementation, the GST has faced several challenges, such as tax rate fluctuations, poor server connectivity and a lack of support for MSMEs, especially those who are more at ease if communicated in vernacular languages. The quarterly filing that is expected from companies also often creates a panic amongst MSMEs since most of the time they run on thin budgets.
To overcome these challenges, the government should consider simplifying the multiple GST rates into a three-rate structure (low for essentials, standard for most products, and high for luxury goods) and lowering the peak rate of 28%. This would not only increase compliance but also enhance tax revenue.
To improve the implementation of the GST, the government needs to take a proactive approach to ease compliance. By reducing the complexity of the GST system, the long-term compliance burden will come down and entrepreneurs will be relieved of the extra costs they incur while relying on tax practitioners to file their GST returns. Additionally, a simplified GST system will help to increase transparency, promote fairness, and boost the growth of MSMEs in the country.
The Emergency Credit Line Guarantee Scheme (ECLGS) was introduced as a lifeline for MSMEs to keep their businesses afloat during the pandemic crisis. According to the Economic Survey 2022-2023 released by the Government of India, the credit growth to the MSME sector has been remarkably high at over 30.6% on average during Jan-Nov 2022, supported by the extended ECLGS.
A recent CIBIL report (ECLGS Insights, August 2022) showed that the scheme has supported MSMEs in facing the covid shock, with 83% of the borrowers that availed of the ECLGS being micro-enterprises. Among these micro units, more than half had an overall exposure of less than ₹10 lakh thus the scheme is serving the most vulnerable businesses. Furthermore, CIBIL data also shows that ECLGS borrowers had lower nonperforming asset rates (NPAs) than enterprises that were eligible for ECLGS but did not avail of it proving that the scheme served its purpose of keeping businesses afloat as the economy recovered post-pandemic.
In last year’s Union Budget, ECLGS was extended to March 2023 and its guarantee cover expanded from Rs 50,000 crore to a total cover of Rs 5 lakh crore. In Union Budget 2023, the expectation is that the coverage is further expanded and swifter implementation is introduced so that more underserved MSMEs can be supported. To ensure that the ECLGS serves its intended purpose, it is important to address the operational challenges faced during its implementation by shifting from the lengthy and time-consuming process of receiving the guarantee.
Transparent and timely communication is another crucial aspect of the scheme. Keeping the lenders informed about the status of their applications and the terms of the loans will reduce confusion and uncertainty and improve the overall efficiency of the scheme.
The MSME sector plays a crucial role in India’s economy, consuming a significant portion of the country’s imports, particularly raw materials. MSMEs are also a driving force behind India’s export industry, contributing around 50% of the nation’s exports. In 2022, exports from the sector saw a growth of 37% YoY, and it is estimated that MSME exports will reach over $1 trillion by 2028.
As India’s economy continues to grow, MSMEs have a unique opportunity to expand their reach and distribution globally. The increase in exports of these small businesses is also expected to create more jobs and opportunities. The government has already implemented a number of schemes to help MSMEs along. To further develop their competitiveness in the global market, the government should announce changes in the sector’s duty structure for imports and exports in the Union Budget.
The government can reduce tariffs and duties on imports and exports to make it more affordable for MSMEs to participate in international trade. This can be achieved by providing exemptions for MSMEs, reducing tariffs for certain products, or implementing duty drawback schemes to refund some of the duty paid on imported goods. It can also partner with financial institutions, incentivizing them to provide MSMEs with financing at affordable rates, or by setting up a dedicated fund to finance the trade.
The government has already taken various measures to build a robust digital infrastructure to support MSME growth, including launching the Digital India initiative to promote the use of electronic services and internet connectivity across the country; launching the India Stack Application Programming Interfaces (APIs) to facilitate secure and efficient exchange of data among various stakeholders; rolled out the Bharat Interface for Money (BHIM) app for seamless mobile-based digital transactions; eased formalization by creating the Udyam portal; and established e-commerce platforms for MSMEs to facilitate business dealings.
All of these initiatives have helped MSMEs adopt digital transactions and leverage technology to automate processes, streamline operations, and reach new customers. This, in turn, has led to increased productivity, competitiveness, and profitability.
Continued investment in this ecosystem is crucial since it would enable more businesses to take advantage of the benefits of digitization such as increased efficiency, cost savings, and access to wider markets. The government has a critical role to play in ensuring the availability of affordable and accessible digital infrastructure to MSMEs. For instance, to improve digital penetration in semi-urban and rural areas, the government should introduce more offline digital payment products such as UPI 123 and UPI Lite, which can greatly benefit MSME entrepreneurs and their customers who face obstacles like unreliable infrastructure and slow devices in accessing digital services.
Similarly, promising platforms like Account Aggregator will allow MSMEs to securely and easily access and share their financial data with authorized entities like banks and NBFCs in a secure and seamless manner through a central data repository, boosting their access to financial services. By allocating further investments in digital infrastructure, the government can help MSMEs overcome challenges such as limited access to credit, limited market access, and operational inefficiencies, and support their growth and development.
The Indian economy is aiming for the goal of becoming a $5 trillion economy. MSMEs play a crucial role in achieving this target and their growth is dependent on government support.
Last-mile fintech NBFCs such as Kinara Capital are hopeful that Union Budget 2023 will provide a boost to the MSME sector by announcing beneficial measures such as continued support for lending schemes, investment in infrastructure and digitalization, and promoting a supportive environment for MSME development. MSMEs are looking at the budget to address their needs for better access to credit and financing, improved infrastructure and digitization, and a favorable ecosystem for growth.
