Union Budget 2021-22 Expectations for MSMEs: The pandemic triggered an unprecedented change in the economic landscape. The MSME sector with an estimated 63 million enterprises in India realized its vulnerability and faced erosion of growth which is yet to return to normalcy. As per World Bank estimates, India’s GDP is expected to contract by 9.6 per cent in the fiscal year and the regional growth is projected to rebound at 4.5 per cent in 2021. The union government, as it braces itself to deliver the most challenging budget by far, is faced with formidable challenges: to manage health and social priorities with stressed resources, roll out positive measures to set in dynamism in the economy, have an inclusive policy framework to address the needs of the most vulnerable groups, strike a balance between short term requirements and the need to initiate long term growth measures, etc. Most of these issues have a bearing on the fate of the MSME sector keeping in view that it accounts for 30 per cent of India’s GDP and is the largest employer after agriculture. A few focused initiatives in the budget could fuel some momentum into the recovery process for the sector.
Formalisation and expansion: While the pandemic halted the growth of businesses, it had a silver lining by way of expediting some of the long-pending reforms. Change of definition of MSME by including the turnover criteria in addition to investment and doing away with the distinction between manufacturing and service sectors is one such measure. While this will go a long way in formalizing the sector, easing the roadblocks for expansion, etc, this has also created a new ‘medium enterprise’ layer that needs focused attention, both in terms of extending the benefits hitherto applicable to small enterprises and also to build their capacities to serve global value chains.
Rationalise cost of doing business: India is consistently improving on the Ease of Doing Business ranking, but there is still large scope in matching the pace with peers on the ‘cost of doing business’ in various areas. There are many other roadblocks that exist that reduce the competitiveness of Indian industries including land, labour, capital, power, and logistics are major factors to increase the cost of doing business. Industries must be unburdened from additional costs in the form of cross-subsidisation at the stake of the industry, as seen in power and freight traffic.
Easing of financing norms: Banks require the flexibility to help businesses to restructure with financial help, suspending Basel norms for few years could be a wise option. The TReDS platforms created to facilitate discounting of MSME receivables should be made mandatory for all big and institutional buyers. Enforcement of the public procurement guidelines mandating 25 per cent procurement from MSMEs is critical at this juncture. The government could also consider enhancing this limit to aid the revival of the sector and incentivise states to adopt the same policy. Despite Insolvency and Bankruptcy Code, 97 per cent of the MSMEs still lack an orderly exit mechanism. In a post-Covid period that would require thousands of businesses to undergo restructuring or closure, the absence of an exit mechanism could be crippling. An announcement for IBC led solutions for firms could be very helpful.
Import substitution and export promotion to be supported together: ‘Atmanirbhar Bharat’ and indigenization announcements are initiatives that would guide the industrial policy imperatives for the next decade, but it is important that the intent is implemented in letter and spirit. The border tensions and an anti-China wave also presents a unique opportunity for the MSMEs to invest in their capacities. Parity with international prices is critical, both from the standpoint of the raw materials and the final products. This would mean relooking at some of the trade barriers, compliances, and regulations to ease imports of raw material.
Extending PLI to MSMEs: The Production Linked Incentives (PLI) announced for 10 sectors highlights a shift from input-based incentives to output-based ones. This is a progressive measure. While the detailed guidelines for the operationalization are slowly emerging, it makes eminent sense to extend the scheme to the MSME sector.
Competitiveness enhancement: The upcoming budget needs to announce sectoral allocations for strengthening the overall ecosystem for 24 champion sectors. This could include measures related to productivity enhancement, technology adoption, skill enhancement, greater industry- institution collaboration, strengthening of infrastructure through support to cluster parks, common facility centres, etc.
The pandemic witnessed many of the MSMEs demonstrating their grit by quickly pivoting to become self-reliant in the manufacturing of PPEs, sanitisers, medical devices/ kits, etc. This spirit of resilience keeps the MSME sector afloat even in the most challenging times. With a focused support package, the MSME sector can not only sustain itself but accelerate the recovery of the entire economy.
Vivek Agarwal is the Partner, Infrastructure Government & Healthcare Practice at KPMG in India. Views expressed are the author’s own.