What’s in the bag for MSMEs

CHENNAI: In the 2023 Union Budget speech, Finance Minister Nirmala Sitharaman acknowledged MSMEs are the growth engines of our economy. Accounting for 26.8% of overall Gross Value Addition (FY21), 36% of manufacturing GVA, a little over 40% of exports, and large scale employment, MSMEs are indeed the vanguards of India’s economic growth story.

Reeling from the impact of the Covid pandemic, the sector was looking for more sops from the Budget. Given their significance in terms of output, employment and exports, it is important to understand what this year’s Budget had to offer for the MSME sector.

Most of the MSME related headlines post Budget focused on the revamped credit guarantee scheme coming into effect from April 1, 2023, with an infusion on Rs 9,000 crore into the corpus. For MSMEs which have been ailing without access to finance for eternity, the need for finance has gained even more prominence since the on-set of the pandemic. In this regard, the infusion of funds through this scheme is desirable. Moreover, the cost of funds will also come down for MSMEs with a 1% reduction. This measure certainly intervenes at one side of the spectrum, where access to formal finance is a perennial issue for the MSMEs.

On the other side is the issue of delayed payments. According to the information on MSME SAMADHAAN portal (as on February 3), close to 1.4 lakh applications received, roughly 25 per cent are under consideration, while only 9 per cent have been mutually settled. Moreover, 22 per cent of them are yet to be viewed. Clearly, delayed payment has been a challenge for MSMEs, especially for micro and small segments. In this regard, the Budget proposed that buyers can now make claims on deduction only after having made payments to MSMEs. This is another step in improving liquidity, but the success of this measure depends on ensuring pending settlements are dealt with in a speedy manner.

In a similar vein, for instance, input services such as logistics garner a tax of 18 per cent, which implies that working capital for MSMEs gets accumulated and blocked as input tax credit, making the already credit-constrained firms struggle even more. It is also important to note that services such as input services and logistics are crucial for the e-commerce presence of firms. Hence, such roadblocks limit the extent of digital adoption, and thus their presence on virtual marketplaces.

A key aspect of MSMEs in the Indian economy is their integration with global markets, especially that of global valuechains (GVCs). Participating in GVCs provide a multitude of benefits, from access to foreign markets, productivity improvement, and technology spillovers. In this regard, manufacturing MSMEs can use lower cost inputs to their advantage. Especially, with reduction in import duties, exports become competitive and could help MSMEs’ transition from making for India to making for the world.

Furthermore, leveraging the current wave of digitalisation is important for MSMEs to establish linkages with global firms. Integration of MSMEs into GVCs would also be a catalyst in transforming India as a global manufacturing hub. In this regard, the Production-Linked Incentives (PLI) scheme is aimed at facilitating improved global performance.

However, even though more than 100 MSMEs have been beneficiaries of PLI, increased penetration of PLI is the need of the hour. With over 633.9 lakh MSMEs in the country, the announcement of increasing the coverage of PLI schemes to more sectors for MSMEs will aid in India’s GVC integration - though the important aspect here would be to see the extent to which such benefits flow to MSMEs in the years ahead.

Another key announcement for the sector was that in case an MSME failed to execute contracts during the pandemic period, the government would return 95% of the forfeited amount. This comes as a major relief for MSMEs that are often plagued by credit issues. However, a major facet of the MSME segment is that it operates as an unorganised segment. Hence, credit policies for the unorganised segment would have made this an ideal budget for MSMEs.

For instance, as a part of the COVID relief package, small, informal businesses and street vendors were given 2% subsidy on loans for a year of Rs 50,000, and street vendors to the tune of Rs 10,000. Extension of similar policies would have resulted in easing liquidity constraints for micro enterprises which represent 95% of the overall MSMEs in the country. Furthermore, along similar lines, the slew of announcements affecting input costs and financial help are limited in scope, as close to 90 per cent of MSMEs falls under the unorganised sector.

Ketan Reddy is an Assistant Professor of Economics at the Indian Institute of Management Raipur and a Visiting Research Fellow of the India Institute, King’s College London. Subash S is Professor of Economics at Indian Institute of Technology Madras. Views are personal.